10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC. 20549

FORM 10-Q

(Mark One)
x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2003
or
o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from______to_________

Commission File Number 0-24085

AXT, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	94-3031310
(State or other jurisdiction of	(I.R.S. Employer
Incorporation or organization)	Identification No.)

4281 Technology Drive, Fremont, California
(Address of principal executive offices) 94538
(Zip code)

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x       NO o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES o      NO x

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at September 30, 2003
Common Stock, $.001 par value		22,931,338

1

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Qualitative and Quantitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
EXHIBIT 10.16
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

AXT, INC.

TABLE OF CONTENTS

			Page
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets at September 30, 2003 and December 31, 2002		3
		Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2003 and 2002		4
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002		5
		Notes To Condensed Consolidated Financial Statements		6-14
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-34
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		34
	Item 4.	Controls and Procedures		34-35
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings		35
	Item 6.	Exhibits and Reports on Form 8-K		36
		Signatures		37
		Exhibits

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AXT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share data)

				September 30			December 31,
				2003			2002
				(Unaudited)
Assets:
	Current assets
		Cash and cash equivalents		$	21,486		$	13,797
		Short-term investments			14,010			8,205
		Accounts receivable			4,953			7,195
		Inventories			26,095			37,598
		Prepaid expenses and other current assets			1,804			4,002
		Income tax receivable			72			8,783
		Assets held for sale			1,000			5,957
			Total current assets		69,420			85,537
	Property, plant and equipment				22,730			39,982
	Other assets				4,773			5,341
	Restricted deposits				9,402			11,150
	Long-term investments				2,406			3,657
			Total assets	$	108,731		$	145,667
Liabilities and Stockholders’ Equity:
	Current liabilities
		Accounts payable		$	1,899		$	4,228
		Accrued liabilities			9,483			11,407
		Current portion of long-term debt			1,765			965
		Current portion of capital lease obligation			—			3,562
			Total current liabilities		13,147			20,162
		Long-term debt, net of current portion			10,874			13,289
		Long-term capital lease, net of current portion			—			4,847
		Other long-term liabilities			1,583			1,712
			Total liabilities		25,604			40,010
	Stockholders’ equity:
		Preferred stock, $.001 par value per share; 2,000 shares authorized; 883 shares issued and outstanding			3,532			3,532
		Common stock, $.001 par value per share; 70,000 shares authorized; 22,931 and 22,495 shares issued and outstanding			154,937			154,485
		Accumulated deficit			(76,813	)		(52,197	)
		Other comprehensive income (loss)			1,471			(163	)
			Total stockholders’ equity		83,127			105,657
		Total liabilities and stockholders’ equity		$	108,731		$	145,667

See accompanying notes to these unaudited condensed consolidated financial statements.

3

AXT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)

			Three Months Ended						Nine Months Ended
			September 30,						September 30,
			2003			2002			2003			2002
Revenue			$	8,529		$	11,726		$	25,583		$	36,362
Cost of revenue				8,029			12,885			24,135			35,505
Gross profit				500			(1,159	)		1,448			857
Operating expenses:
	Selling, general and administrative			2,654			3,495			7,973			11,108
	Research and development			301			486			1,048			1,742
	Property, plant and equipment impairment loss			—			542			—			14,632
		Total operating expenses		2,955			4,523			9,021			27,482
Loss from operations				(2,455	)		(5,682	)		(7,573	)		(26,625	)
Interest expense				145			105			368			362
Other (income)/expense, net				(3	)		(308	)		1,035			8,183
Loss before income tax benefit				(2,597	)		(5,479	)		(8,976	)		(35,170	)
Income tax provision				—			10,673			—			4,433
Loss from continuing operations				(2,597	)		(16,152	)		(8,976	)		(39,603	)
Discontinued operations:
	Loss from operations			(1,591	)		(19,533	)		(6,165	)		(32,149	)
	Gain /(loss) on disposal			1,625			—			(9,475	)		—
	Income tax (benefit)			—			(7,012	)		—			(8,103	)
Gain /(loss) from discontinued operations				34			(12,521	)		(15,640	)		(24,046	)
Net loss			$	(2,563	)	$	(28,673	)	$	(24,616	)	$	(63,649	)
Basic and diluted loss per share:
	Loss from continuing operations			(0.11	)		(0.72	)		(0.39	)		(1.76	)
	Loss from discontinued operations			0.00			(0.56	)		(0.69	)		(1.07	)
	Net loss			(0.11	)		(1.28	)		(1.08	)		(2.84	)
Shares used in per share calculations:
	Basic			22,857			22,478			22,727			22,443
	Diluted			22,857			22,478			22,727			22,443

See accompanying notes to these unaudited condensed consolidated financial statements.

4

AXT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

					Nine Months Ended
					September 30
					2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss:				$	(24,616	)	$	(63,649	)
	Adjustments to reconcile net loss to cash provided by operations:
		Depreciation				4,583			7,498
		Amortization				279			299
		Deferred income taxes				—			3,259
		Loss on disposal				9,475			—
		Impairment write-down on investments				—			9,160
		Impairment write-down on property, plant and equipment				—			39,086
		Non-cash (gain)\loss on marketable equity securities				1,320			(251	)
		(Gain) loss on disposal of property, plant and equipment				(11	)		323
		Stock based compensation				28			—
		Changes in assets and liabilities:
			Accounts receivable			1,576			3,816
			Inventories			9,529			5,017
			Prepaid expenses			1,988			(2,341	)
			Other assets			(139	)		(125	)
			Accounts payable			(2,329	)		1,959
			Accrued liabilities			(4,306	)		(3,336	)
			Income taxes			8,711			(5,031	)
			Other long-term liabilities			(129	)		294
				Net cash provided by (used in) operating activities		5,959			(4,022	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of property, plant and equipment					(1,911	)		(10,412	)
	Proceeds from sale of property, plant and equipment from discontinued opto-electronics business					9,600			—
	Proceeds from sale of property located in Fremont, California					5,172
	Purchases of marketable securities					(3,305	)		(16,366	)
	Proceeds from sale of marketable securities					5,700			15,570
	Increase in restricted cash					(4,012	)		—
				Net cash provided by (used in) investing activities		11,244			(11,208	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from (payments of):
		Issuance of common stock				424			850
		Capital leases payments				(8,409	)		(4,620	)
		Long-term debt borrowings				—			637
		Long-term debt payments				(1,615	)		(6,699	)
				Net cash used in financing activities		(9,600	)		(9,832	)
Effect of exchange rate changes						86			171
Net increase (decrease) in cash and cash equivalents						7,689			(24,891	)
Cash and cash equivalents at the beginning of the period						13,797			37,538
Cash and cash equivalents at the end of the period					$	21,486		$	12,647
Non cash activity:
	Purchase of PP&E through financing				$	—		$	577

See accompanying notes to these unaudited condensed consolidated financial statements.

5

AXT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

     The accompanying condensed consolidated balance sheets as of September 30, 2003 and December 31, 2002, the condensed consolidated statements of income for the three and nine months ended September 30, 2003 and 2002, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2003 and 2002 have been prepared by AXT, Inc. (“AXT” or the “Company”) and are unaudited. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary to present fairly the financial position, results of operations and cash flows of AXT and its subsidiaries for all periods presented.

     Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ materially from those estimates.

     The results of operations are not necessarily indicative of the results to be expected in the future or for the full fiscal year. It is recommended that these condensed consolidated financial statements be read in conjunction with the Company’s consolidated financial statements and the notes thereto included in its 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 21, 2003.

     As a result of the significant revenue declines experienced over the past eight quarters, the Company has taken cost reduction measures and continues to pursue additional alternatives to reduce costs and increase cash flows. At September 30, 2003, the Company had available cash, cash equivalents and liquid short and long-term investments of $35.2 million. The Company believes that its existing cash and liquid investments, cash generated from operations, coupled with additional efforts to reduce expenditures in support of the continuing substrate business will be sufficient to meet working capital expenditure requirements for the next 12 months. However, existing cash and liquid investments could decline during the remainder of 2003 due to a continued or further weakening of the economy or changes in our planned cash outlay.

     If the Company’s sales continue to decrease, the ability to generate cash from operations will be adversely affected which could impact its future liquidity, requiring it to use cash at a more rapid rate than expected, and require it to seek additional capital. There can be no assurance that such additional capital will be available or, if available, on terms acceptable to the Company.

     Certain reclassifications have been made to the prior years consolidated financial statements to conform to current period presentation.

Note 2. Discontinued Operations

     On June 24, 2003, the Company’s Board of Directors approved management’s plan to exit the Company’s unprofitable opto-electronics business. On September 27, 2003 the Company completed a sale of substantially all of the assets of its opto-electronics business to Lumei-Optoelectronics, Corporation and Dalian Luming Science and Technology Group, Co., Ltd. for the RMB equivalent of $9.6 million. The company retains a building located in Monterey Park, CA, that it expects to sell in 2004. This asset is classified as Held for Sale on the Company’s consolidated balance sheet at September 30, 2003. One million dollars of the sale proceeds will be held in escrow for up to one year and accordingly, has been excluded from the determination of gain/(loss) on disposal.

6

     The Company recorded a gain on disposal of $1.6 million due to excess proceeds received over net carrying value of assets sold.

     The Company’s financial statements have been presented to reflect the opto-electronics business as a discontinued operation for all periods presented. Operating results of the discontinued operation are as follows:

			Three months ended						Nine months ended
			September 30,						September 30,
			2003			2002			2003			2002
Revenue				227			3,222			7,246			14,557
Cost of revenue				854			5,606			9,973			15,736
Gross profit (loss)				(627	)		(2,384	)		(2,727	)		(1,179	)
Operating expenses:
	Selling, general and administrative			761			1,498			2,297			3,745
	Research and development			107			822			814			2,014
	Impairment costs			—			14,565			—			24,454
		Total operating expenses		868			16,885			3,111			30,213
Loss from operations				(1,495	)		(19,269	)		(5,838	)		(31,392	)
Interest expense				96			264			327			757
Loss before benefit for income taxes and loss on disposal				(1,591	)		(19,533	)		(6,165	)		(32,149	)
Income tax (benefit)				—			(7,012	)		—			(8,103	)
Gain/(loss) on disposal				1,625			—			(9,475	)		—
Net income/(loss)				34			(12,521	)		(15,640	)		(24,046	)

     The carrying value of the assets and liabilities of the discontinued opto-electronics business included in the consolidated balance sheets are as follows:

			September 30,			December 31,
			2003			2002
Current assets:
	Cash		$	352		$	336
	Accounts receivable, net			322			3,224
	Inventories			—			3,439
	Assets held for sale			1,000			—
	Other current assets			—			2,482
		Total current assets		1,674			9,481
Property, plant and equipment				—			14,854
Other assets				200			200
		Total assets	$	1,874		$	24,535
Current liabilities:
	Accounts payable		$	98		$	1,975
	Accrued liabilities			1,778			2,806
		Total liabilities		1,876			4,781
Net assets				(2	)		19,754
Total liabilities and net assets			$	1,874		$	24,535

     Assets held for sale, at managements estimated fair value less costs to sell, totaling $1.0 million at September 30, 2003 consist of a building.

7

Note 3. Accounting for Stock Options

     The Company records compensation expense for employee stock options based upon their intrinsic value on the date of grant pursuant to Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees.” Because the Company establishes the exercise price based on the fair market value of the Company’s stock at the date of grant, the options have no intrinsic value upon grant, and therefore no expense is recorded. Each quarter, the Company reports the potential dilutive impact of stock options in its diluted earnings per share using the treasury-stock method. Out-of-the-money stock options (i.e., the average stock price during the period is below the strike price of the option) are not included in diluted earnings per share.

     As required under Statement of Financial Accounting Standards No. 123 (SFAS 123), “Accounting for Stock-Based Compensation,” and Statement of Financial Accounting Standards No. 148 (SFAS 148), “Accounting for Stock-Based Compensation Transition and Disclosure,” the pro forma effects of stock-based compensation on net income and net earnings per common share have been estimated at the date of grant using the Black-Scholes option-pricing model.

     The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a free trading market. Black-Scholes does not consider the employment, transfer or vesting restrictions that are inherent in the Company’s employee options. Use of an option valuation model, as required by SFAS 123, includes highly subjective assumptions based on long-term predictions, including the expected stock price volatility and average life of each option grant. Because the Company’s employee options have characteristics significantly different from those of freely traded options, and because changes in the assumptions underlying the option-pricing model can materially affect the Company’s estimate of the fair value of those options, in the Company’s opinion, the existing valuation models, including Black-Scholes, are not reliable single measures and may misstate the fair value of the Company’s employee options.

     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 123 using the following assumptions:

	Nine Months Ended
	September 30,
	2003			2002
Risk free interest rate		2.7	%		3.0	%
Expected life (in years)		5.0			5.0
Dividend yield		0.0	%		0.0	%
Volatility		117.0	%		101.0	%

     The weighted average fair value of options as of the date of grant granted during the nine months ended September 30, 2003 and 2002 were $1.15 and $7.85 respectively.

8

     Had compensation cost for the Company’s options been determined based on the fair value at the grant dates, as prescribed in SFAS 123 and SFAS 148, the Company’s pro forma net income and net income per share would have been as summarized below (in thousands except per share data):

				Three Months Ended						Nine Months Ended
				September 30,						September 30,
				2003			2002			2003			2002
Net loss:
		As reported		$	(2,563	)	$	(28,673	)	$	(24,616	)	$	(63,649	)
		Pro forma option expense			(1,996	)		(2,269	)		(5,562	)		(6,928	)
		Pro forma net loss		$	(4,559	)	$	(30,942	)	$	(30,178	)	$	(70,577	)
	Net loss per share as reported:
			Basic and diluted	$	(0.11	)	$	(1.28	)	$	(1.08	)	$	(2.84	)
	Pro forma net loss:
			Basic and diluted	$	(0.20	)	$	(1.38	)	$	(1.33	)	$	(3.14	)
	Shares used in per share calculations:
			Basic		22,857			22,478			22,727			22,443
			Diluted		22,857			22,478			22,727			22,443

Note 4. Asset Held for Sale

     During the fourth quarter of 2002, the Company began to market its property located at 4281 Technology Drive, Fremont, California, and in November of 2002, entered into a contract to sell the property to a third party. On March 11, 2003, the Company completed the sale of its property located at 4281 Technology Drive, Fremont, California, for $6.3 million. Net cash proceeds from the sale were $5.2 million. Under the terms of the sale agreement, the Company has agreed to lease back the property for a five-year period. Accordingly, on March 11, 2003, the company signed an operating lease for 4281 Technology Drive through March 2008. Annual rent under this operating lease is approximately $600,000.

Note 5. Investments

     The Company classifies its investment securities as available-for-sale as prescribed by Statement of Financial Accounting Standards No. 115 (SFAS 115), “Accounting for Certain Investments in Debt and Equity Securities.” All investments are carried at fair market value, which is determined based on quoted market prices, with net unrealized gains and losses included in comprehensive income, net of tax. The components of investments at September 30, 2003 are summarized below (in thousands):

			Aggregate		Unrealized
Available for sale	Cost		Fair value		Gain/(loss)
Money market	$	8,628	$	8,628		—
Corporate bonds		13,748		13,831		83
Government agency bonds		4,503		4,507		4
Corporate equity securities		1,115		2,688		1,573
	$	27,994	$	29,654	$	1,660
Recorded as:
Cash equivalents	$	8,628
Short-term investments		14,010
Restricted deposits		4,610
Long-term investments		2,406
	$	29,654

9

Note 6. Inventories

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

		September 30,		December 31,
		2003			2002
Inventories:
	Raw materials, net	$	9,190		$	12,396
	Work in process, net		12,119			16,651
	Finished goods, net		4,786			8,551
		$	26,095		$	37,598

Note 7. Net Loss Per Share

     Basic earnings per common share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common and common equivalent shares include the dilutive effect of common stock equivalents outstanding during the period calculated using the treasury stock method. Common stock equivalents consist of the shares issuable upon the exercise of stock options.

     A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations is summarized below (in thousands except per share data):

			Three Months Ended						Nine Months Ended
			September 30,						September 30,
			2003			2002			2003			2002
Numerator:
	Net loss		$	(2,563	)	$	(28,673	)	$	(24,616	)	$	(63,649	)
	Less: Preferred stock dividends			(44	)		(44	)		(133	)		(133	)
	Net loss available to common stockholders		$	(2,607	)	$	(28,717	)	$	(24,749	)	$	(63,782	)
Denominator:
	Denominator for basic earnings per share - weighted average common shares			22,857			22,478			22,727			22,443
	Effect of dilutive securities:
		Common stock options		—			—			—			—
Denominator for dilutive earnings per share				22,857			22,478			22,727			22,443
Basic and diluted net loss per share			$	(0.11	)	$	(1.28	)	$	(1.09	)	$	(2.84	)
Options excluded from diluted net income per share as the impact is antidilutive				2,361			2,757			2,411			2,845

10

Note 8. Comprehensive Loss

     The components of comprehensive loss are summarized below (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2003			2002			2003			2002
Net loss	$	(2,563	)	$	(28,673	)	$	(24,616	)	$	(63,649	)
Foreign currency translation gain (loss)		131			(33	)		86			171
Unrealized gain (loss) on available for sale investments		871			(1,123	)		1,548			(1,201	)
Comprehensive loss	$	(1,561	)	$	(29,829	)	$	(22,982	)	$	(64,679	)

Note 9. Segment Information

     The Company has two reportable segments: substrates and discontinued opto-electronics.

     Selected industry segment information is summarized below (in thousands):

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2003			2002			2003			2002
Substrates Division
	Net revenues from external customers	$	8,529		$	11,726		$	25,583		$	36,362
	Gross profit		500			(1,159	)		1,448			857
	Operating loss		(2,455	)		(5,682	)		(7,573	)		(26,625	)
	Identifiable assets		106,857			138,776			106,857			138,776
Discontinued Opto-electronics Division
	Identifiable assets	$	1,874		$	24,158		$	1,874		$	24,158
Total
	Net revenues from external customers	$	8,529		$	11,726		$	25,583		$	36,362
	Gross profit (loss)		500			(1,159	)		1,448			857
	Operating loss		(2,455	)		(5,682	)		(7,573	)		(26,625	)
	Identifiable assets		108,731			162,934			108,731			162,934

     The Company sells its substrates to customers located in the United States and in other parts of the world. In addition, the Company maintains operations in Japan and China. Revenues from continuing operations by geographic location based on the country in which the customer is located were as follows (in thousands):

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2003		2002		2003		2002
Net revenues:
	United States	$	3,030	$	6,232	$	8,947	$	21,050
	Canada		40		71		147		982
	Europe		1,621		1,549		4,661		3,990
	Japan		1,080		1,299		2,866		2,270
	Taiwan		1,405		1,436		4,549		3,267
	Asia Pacific and other		1,353		1,139		4,413		4,803
	Consolidated	$	8,529	$	11,726	$	25,583	$	36,362

11

Note 10. Corporate Affiliates

     The Company’s investments in its corporate affiliates are summarized below (in thousands):

	Investment		Investment
	Balance		Balance
	September 30,		December 31,		Accounting	Ownership
Affiliate	2003		2002		Method	Percentage
Xilingol Tongli Ge Co. Ltd.	$	794	$	773	Equity		25	%
Emeishan Jia Mei High Pure Metals Co., Ltd.		605		614	Equity		25	%
Beijing Ji Ya Semiconductor Material Co., Ltd.		959		1,071	Consolidated		51	%
Nanjing Jin Mei Gallium Co., Ltd.		510		616	Consolidated		88	%
Beijing BoYu Manufacturing Co., Ltd.		409		409	Consolidated		70	%

     The investment balances for those affiliates accounted for under the equity method are included within “Other assets” in the consolidated balance sheets.

     Undistributed retained earnings relating to the Company’s corporate affiliates were $739,000 at September 30, 2003 and $986,000 at September 30, 2002. Net loss recorded from the Company’s corporate affiliates was $54,000 and $121,000 for the three and nine months ended September 30, 2003 respectively. Net income recorded for the Company’s corporate affiliates was $25,000 and $256,000 for the three and nine months ended September 30, 2002 respectively.

     The Company invested in these companies because each provides materials that are important to the Company’s substrate business, each can supply products generally at lower cost than other suppliers, and each has a market beyond that represented by sales to the Company. At September 30, 2003, the Company had no obligations to make further investments in any of these companies, although it may choose to do so under certain conditions.

Note 11. Commitments and Contingencies

     The Company has entered into contracts to supply several large customers with GaAs wafers. The contracts guarantee the delivery of a certain number of wafers between January 1, 2001 and December 31, 2003 with a current contract value of $2.2 million. The contract sales prices are subject to review quarterly and can be adjusted in the event that raw material prices change. In the event of non-delivery of the determined wafer quantities in any monthly delivery period, the Company could be subject to non-performance penalties of between 5% and 10% of the value of the delinquent monthly deliveries. The Company has not received any claims for non-performance penalties due to non-delivery. Partial prepayments received for these supply contracts totaling $1.1 million are included in accrued liabilities at September 30, 2003. As of September 30, 2003, the Company has met all of its delivery obligations under these contracts and expects to do so for the remainder of the contract terms.

     In the ordinary course of business, the Company is subject to claims and litigation, including claims that it infringes third party patents, trademarks and other intellectual property rights. Although the Company believes that it is unlikely that any current claims or actions will have a material adverse impact on its operating results or financial position, given the uncertainty of litigation, we can not be certain of this. Moreover, the defense of claims or actions against the Company, even if not meritorious, could result in the expenditure of significant financial and managerial resources.

     On April 15, 2003, Sumitomo Electric Industries, Ltd., (SEI) filed a complaint in the Tokyo District Court, Civil Division against us and our Japanese distributor alleging patent infringement of two patents held by SEI in Japan. The suit seeks penalties from AXT in the amount of $1.67 million plus interest and court costs and the cessation of AXT’s sales of gallium arsenide substrates in Japan. AXT intends to defend itself vigorously in these lawsuits and continues to sell its products in Japan.

     On June 11, 2003, Cree, Inc. filed a complaint in the United States Court for Northern District of California against us alleging patent infringement. The complaint seeks damages and injunction against infringement. On July

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23, 2003, we filed a counter complaint in the United States Court for Northern District of California, denying any patent infringement and alleging that Cree’s actions were intentionally designed to interfere with our prospective business relationships. A court hearing is scheduled for late February 2004.

Note 12. Recent Accounting Pronouncements

     In November 2002, the FASB issued FASB Interpretation No. 45 ( FIN 45 ), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN No. 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities. The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements of FIN No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. Our adoption of FIN No. 45 did not have a material effect on our consolidated financial statements.

     In January 2003, the FASB issued FASB Interpretation No. 46 ( FIN 46 ), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003. Our adoption of FIN No. 46 did not have a material effect on our consolidated financial statements.

     In March 2003, the Emerging Issues Task Force, or EITF, reached a consensus on EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 requires revenue arrangements with multiple deliverables to be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. The arrangement’s consideration should be allocated among the separate units of accounting based on their relative fair values. Applicable revenue recognition criteria should be considered separately for each unit. The provisions of EITF Issue No. 00-21 are effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Our adoption of EITF Issue No. 00-21 did not have a material effect on our consolidated financial statements.

     In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. Our adoption of SFAS No. 149 did not have a material effect on our consolidated financial statements.

     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for an issuer to classify and measure certain financial instruments with characteristics of both liabilities and equity. This Statement requires an issuer to classify a financial instrument that meets certain characteristics as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Our adoption of SFAS No. 150 did not have a material effect on our consolidated financial statements.

Note 13. Foreign Exchange Contracts and Transaction Gains/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

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certain trade accounts receivable denominated in Japanese yen. The change in the fair value of the forward contracts is recognized as part of the related foreign currency transactions as they occur. As of September 30, 2003, the Company had no outstanding commitments with respect to foreign exchange contracts.

Note 14. Related Party Transactions

     Since January 2002, 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.

     The Company entered into an operating lease for warehouse space in Fremont, CA with 4160 Business Center, LLC, a real estate holding company, in which Davis Zhang, the president of our substrate division, is the sole shareholder. Lease payments to 4160 Business Center, LLC were approximately $121,000 for the three months ended March 31, 2003. In April of 2003, Mr. Zhang sold this warehouse to a party unrelated to the Company. The Company began leasing this warehouse from the new owner on the date of sale. Mr. Zhang will continue to hold a $3.7 million note on the property through April 2005.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements made pursuant to the provisions of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based upon management’s current views with respect to future events and financial performance, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Such risks and uncertainties include those set forth under “Risks Related to our Business” below. Forward-looking statements may be identified by the use of terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” and similar expressions. Statements concerning our financial position, business strategy and plans or objectives for future operations are forward-looking statements. These forward-looking statements are not guarantees of future performance. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and the condensed consolidated financial statements included elsewhere in this report.

Overview

     We were founded in 1986 to commercialize and enhance our proprietary vertical gradient freeze (VGF) technique for producing high-performance compound semiconductor substrates. We currently have two divisions: our substrate division and our discontinued opto-electronics division. We made our first substrate sales in 1990 and our substrate division currently sells gallium arsenide (GaAs) and indium phosphide (InP) substrates to manufacturers of semiconductor devices for use in applications such as fiber optic and wireless telecommunications, light emitting diodes (LEDs) and lasers. We also sell germanium substrates for use in satellite solar cells.

     On June 24, 2003, we announced the discontinuation of our opto-electronics division, which we established as part of our acquisition of Lyte Optronics, Inc. in May 1999. Accordingly, the results of operations of the opto-electronics division have been segregated from continuing operations and are reported separately as discontinued operations in our statements of income (see Note 2 to our consolidated financial statements for details regarding the accounting for discontinued operations). The discontinued opto-electronics division manufactured high-brightness light emitting diodes (HBLEDs) for the illumination markets, including full-color displays, wireless handset backlighting and traffic signals, and also manufactured vertical cavity surface emitting lasers (VCSELs) and laser diodes for fiber optic communications and storage area networks.

     On September 27, 2003 the Company completed a sale of substantially all of the assets of its opto-electronics business to Lumei-Optoelectronics, Corporation and Dalian Luming Science and Technology Group, Co.,

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Ltd. for the RMB equivalent of $9.6 million. The company retains a building located in Monterey Park, CA, that it expects to sell in 2004. This asset is classified as Held for Sale on our consolidated balance sheet at September 30, 2003. One million dollars of the sale proceeds will be held in escrow for up to one year and accordingly, has been excluded from the determination of gain/(loss) on disposal.

     The Company recorded a gain on disposal of $1.6 million due to excess proceeds received over net carrying value of assets sold.

Critical Accounting Policies and Estimates

     We have prepared our consolidated financial statements in accordance with accounting principals generally accepted in the United States of America. As such, we have had to make estimates, assumptions and judgments that affect the amounts reported on our financial statements. These estimates, assumptions and judgments about future events and their effects on our results cannot be determined with certainty, and are made based upon our historical experience and on other assumptions that are believed to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. The discussion and analysis of our results of operations and financial condition are based upon these statements. We have identified the policies below as critical to our business operations and understanding of our financial condition and results of operations. A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. They may require us to make assumptions about matters that are highly uncertain at the time of the estimate, and different estimates that we could have used, or changes in the estimate that are reasonably likely to occur, may have a material impact on our financial condition or results of operations.

     We believe that the following are our critical accounting policies:

Revenue Recognition

     We recognize revenue upon shipment of products to our customers provided that we have received a signed purchase order, the price is fixed or determinable, title has transferred, collection of resulting receivables is probable, product returns are reasonably estimable, there are no customer acceptance requirements and there are no remaining obligations. We assess the probability of collection based on a number of factors including past history with the customer and credit worthiness. We provide for future returns based on historical experience, current economic trends and changes in customer demand at the time revenue is recognized. Except for sales in Japan and some sales in Taiwan, which in both cases are denominated in Japanese yen, we denominate and collect our international sales in U.S. dollars. We do not provide for warranty related exposure as such exposure has historically been immaterial.

Allowance for Doubtful Accounts

     We periodically review the likelihood of collecting our accounts receivable balances and provide an allowance for doubtful accounts receivable primarily based upon the age of these accounts. We provide a 100% allowance for U.S. receivables outstanding in excess of 90 days and for foreign receivables outstanding in excess of 120 days. At September 30, 2003, our accounts receivable balance was $5.4 million net of an allowance for doubtful accounts of $5.9 million.

Inventory

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

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ultimate sale to our customers. If we determine that the value of any items in ending inventory exceeds the sales value less any related selling costs, a reserve is established for the difference.

Impairment of Long-Lived Assets

     We review the carrying value of our long-lived assets and investments in order to identify any impairment. Long-lived assets are written down to their current fair market value when the carrying value of an asset exceeds their related undiscounted future cash flows. To determine the fair market value of our long-lived assets, we obtain appraisals from outside consultants.

Investments

     We classify our investments in marketable securities as available-for-sale securities as prescribed in Financial Accounting Standard No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” All investments are carried at fair market value, which is determined based on quoted market prices, with net unrealized gains and losses included in comprehensive income, net of tax. If a decline in fair value is judged to be other than temporary, the cost basis of the individual security is written down to fair value as a new cost basis with the amount of the write down included in other income and expense, net. We recorded an impairment charge of $1.3 million in Q2 of 2003 to write down our investment in two US companies.

Income Taxes

     We account for deferred income taxes using the liability method, under which the expected future tax consequences of timing differences between the book and tax basis of assets and liabilities are recognized as deferred tax assets and liabilities. Valuation allowances are established when necessary to reduce net deferred tax assets when management estimates, based on available objective evidence, that it is more likely than not that the future income tax benefit represented by the net deferred tax asset will not be realized. At September 30, 2003, a full valuation allowance has been recorded against our net deferred tax asset.

Voluntary Stock option exchange program

     On May 27, 2003, we announced a voluntary stock option exchange program for our employees. Under the program, our option holders, excluding our executive officers and independent directors, had the opportunity to cancel outstanding options with an exercise price in excess of $2.10 per share in exchange for new options to be granted at a future date that is at least six months and one day after the date of cancellation, which was June 30, 2003. The number of shares of common stock subject to the new options will be equal to 75% of the number subject to the exchanged options. Under the exchange program, options to purchase an aggregate of 738,027 shares of our common stock, representing approximately 48% of the options that were eligible to be tendered in the Offer as of May 27, 2003, were tendered and cancelled. The new options will vest at the same rate as the exchanged options and will have an exercise price equal to the fair market value of our common stock at the new grant date, which is expected to be on or after December 31, 2003. Subject to the terms and conditions of the offer, the Company will grant options to purchase an aggregate of 553,520 shares of our common stock in exchange for such tendered options. We do not expect to incur accounting charges as a result of this stock option exchange program.

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Results of Operations

     The following table sets forth certain information relating to our operations expressed as a percentage of total revenues for the periods indicated:

			Three Months Ended						Nine Months Ended
			September 30,						September 30,
			2003			2002			2003			2002
Revenues				100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenues				94.1			109.9			94.3			97.6
Gross profit				5.9			(9.9	)		5.7			2.4
Operating expenses:
	Selling, general and administrative			31.1			29.8			31.2			30.5
	Research and development			3.5			4.1			4.1			4.8
	Property, plan & equipment impairment loss			—			4.6			—			40.2
		Total operating expenses		34.6			38.5			35.3			75.5
Loss from operations				(28.7	)		(48.4	)		(29.6	)		(73.1	)
Interest expense				1.7			0.9			1.4			1.0
Other (income)/expense, net				—			(2.6	)		4.0			22.5
Loss before income tax benefit				(30.4	)		(46.7	)		(35.0	)		(96.7	)
Income tax provision				—			91.0			—			12.2
Loss from continuing operations				(30.4	)		(137.7	)		(35.0	)		(108.9	)
Discontinued operations:
	Loss from operations			(18.7	)		(166.6	)		(24.1	)		(88.4	)
	Gain/(loss) on disposal			19.0			—			(37.1	)		—
	Income tax (benefit)			—			(59.8	)		—			(22.3	)
Gain/(loss) on discontinued operations				0.3			(106.8	)		(61.2	)		(66.1	)
Net loss				(30.1	)%		(244.5	)%		(96.2	)%		(175.0	)%

Three months ended September 30, 2003 compared to three months ended September 30, 2002

     Revenue from continuing operations. Revenue from continuing operations decreased $3.2 million, or 27.3%, to $8.5 million for the three months ended September 30, 2003 compared to $11.7 million for the three months ended September 30, 2002.

     Total GaAs substrate revenue decreased $2.2 million, or 24.0%, to $6.9 million for the three months ended September 30, 2003 compared to $9.1 million for the three months ended September 30, 2002. Sales of 5” and 6” GaAs subtrates decreased $1.3 million, or 43.0%, to $1.7 million for the three months ended September 30, 2003 compared to $3.0 million for the three months ended September 30, 2002. InP substrate revenue decreased $588,000, or 54.2%, to $496,000 for the three months ended September 30, 2003 compared to $1.1 million for the three months ended September 30, 2002. The decrease in GaAs and InP substrate revenue is due to decreased volume and lower average sales prices as a result of the slowdown in our target markets including telecommunications, high speed electronic devices, and short wavelength lasers, and the introduction of VGF like substrates from our competitors that caused some customers to purchase substrates from our competitors.

     International revenue increased to 64.5% of total revenue from continuing operations for the three months ended September 30, 2003 compared to 46.9% of total revenue from continuing operations for the three months ended September 30, 2002. The increase was primarily due to a greater share of our GaAs substrates being used in opto-electronics applications and the majority of our customers for these applications being in Asia.

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     Gross margin. Gross margin increased to 5.9% of total revenue for the three months ended September 30, 2003 compared to negative 14.0% of total revenue for the three months ended September 30, 2002. The increase was primarily due to reduced costs associated with moving most of our production to China.

     Selling, general and administrative expenses. Selling, general and administrative expenses decreased $841,000, or 21.4%, to $2.7 million for the three months ended September 30, 2003 compared to $3.5 million for the three months ended September 30, 2002. The decrease in selling, general and administrative expenses is the result of our efforts to adjust costs in line with our current business. As a percentage of total revenue, selling, general and administrative expenses were 31.1% for the three months ended September 30, 2003 compared to 29.8% for the three months ended September 30, 2002.

     Research and development expenses. Research and development expenses decreased $185,000, or 38.1%, to $301,000 for the three months ended September 30, 2003 compared to $486,000 for the three months ended September 30, 2002. As a percentage of total revenue , research and development expenses were 3.5% for the three months ended September 30, 2003 compared to 4.1% for the three months ended September 30, 2002. Although we reduced research and development expenses as part of our effort to adjust costs in line with our current business, we believe that continued investment in product development is critical to attaining our strategic objectives of maintaining and increasing our technology leadership, and as a result, we expect research and development expenses to remain at current levels or increase in future periods. Research and development efforts during the third quarter of 2003 were focused primarily on improving the yield and surface quality of our GaAs substrates.

     Interest expense. Interest expense increased $40,000, or 38.1%, to $145,000 for the three months ended September 30, 2003 compared to $105,000 for the three months ended September 30, 2002 due to prepayment penalties incurred in Q3 2003 for paying off all equipment loans.

     Other income and expense, net. Other income decreased $305,000, to $3,000 for the three months ended September 30, 2003 compared to income of $308,000 for the three months ended September 30, 2002.

     Provision for income taxes. Due to our continuing operating losses and uncertainty regarding future profitability, we recorded a full valuation allowance against our net deferred tax assets of $31.2 million in 2002. As a result, our effective tax rate decreased to 0.0% for the three months ended September 30, 2003

Nine months ended September 30, 2003 compared to nine months ended September 30, 2002

     Revenue from continuing operations. Revenue from continuing operations decreased $10.8 million, or 29.6%, to $25.6 million for the nine months ended September 30, 2003 compared to $36.4 million for the nine months ended September 30, 2002.

     Total GaAs substrate revenue decreased $5.5 million, or 21.1%, to $20.9 million for the nine months ended September 30, 2003 compared to $26.4 million for the nine months ended September 30, 2002. Sales of 5” and 6” GaAs subtrates decreased $3.9 million, or 51.1%, to $3.8 million for the nine months ended September 30, 2003 compared to $7.7 million for the nine months ended September 30, 2002. InP substrate revenue decreased $4.2 million, or 72.9%, to $1.6 million for the nine months ended September 30, 2003 compared to $5.8 million for the nine months ended September 30, 2002. The decrease in GaAs and InP substrate revenue was due to decreased volume and lower average sales prices as a result of the slowdown in our target markets including telecommunications, high speed electronic devices, and short wavelength lasers, and the introduction of VGF like substrates from our competitors that caused some customers to purchase substrates from our competitors.

     International revenue increased to 65.0% of total revenue from continuing operations for the nine months ended September 30, 2003 compared to 42.1% of total revenue from continuing operations for the nine months ended September 30, 2002. The increase was primarily due to a greater share of our GaAs substrates being used in opto-electronics applications and the majority of our customers for these applications being in Asia.

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Gross margin. Gross margin increased to 5.7% of total revenue for the nine months ended September 30, 2003 compared to 2.4% of total revenue for the nine months ended September 30, 2002. The increase was primarily due to reduced costs associated with moving most of our production to China.

     Selling, general and administrative expenses. Selling, general and administrative expenses decreased $3.1 million, or 28.2%, to $8.0 million for the nine months ended September 30, 2003 compared to $11.1 million for the nine months ended September 30, 2002. The decrease in selling, general and administrative expenses is the result of our efforts to adjust costs in line with our current business. As a percentage of total revenue, selling, general and administrative expenses were 31.2% for the nine months ended September 30, 2003 compared to 30.5% for the nine months ended June 30, 2002.

     Research and development expenses. Research and development expenses decreased $694,000, or 39.8% to $1.1 million for the nine months ended September 30, 2003 compared to $1.8 million for the nine months ended September 30, 2002. As a percentage of total revenue, research and development expenses were 4.1% for the nine months ended September 30, 2003 compared to 4.8% for the nine months ended September 30, 2002. Although we reduced research and development expenses as part of our effort to adjust costs in line with our current business , we believe that continued investment in product development is critical to attaining our strategic objectives of maintaining and increasing our technology leadership, and as a result, we expect research and development expenses to remain at current levels or increase in future periods. Research and development efforts during the first nine months of 2003 were focused primarily on improving the yield and surface quality of our GaAs substrates.

     Interest expense. Interest expense increased $6,000, or 1.7%, to $368,000 for the nine months ended September 30, 2003 compared to $362,000 for the nine months ended September 30, 2002 due to prepayment penalties incurred in Q3 2003 for paying off all equipment loans offset by a reduction of rates on our variable interest rate debt.

     Other income and expense, net. Other expense decreased $7.2 million to $1.0 million for the nine months ended September 30, 2003 compared to $8.2 million for the nine months ended September 30, 2002. Other expense for the nine months ended September 30, 2003 includes a $1.3 million charge to write down our investment in two US companies. Other expense for the nine months ended September 30, 2002 includes a $9.2 million charge to write down our investment in marketable equity securities.

     Provision for income taxes. Due to our continuing operating losses and uncertainty regarding future profitability, we recorded a full valuation allowance against our net deferred tax assets of $31.2 million in 2002. As a result, our effective tax rate decreased to 0.0% for the nine months ended September 30, 2003.

Liquidity and Capital Resources

     Cash and cash equivalents increased $7.7 million to $21.5 million at September 30, 2003 compared to $13.8 million at December 31, 2002.

     Net cash provided by operating activities of $6.0 million for the nine months ended September 30, 2003 was comprised primarily of our net loss adjusted for non-cash items of $15.7 million, consisting primarily of a loss on disposal from our discontinued opto-electronics division of $9.5 million and depreciation expense of $4.6 million, and by a $14.9 million net change in assets and liabilities. The net change in assets and liabilities resulted primarily from decreases in accounts receivable, inventory and income tax receivable offset by a decrease in accrued liabilities.

     Accounts receivable decreased $1.8 million, or 24.6%, to $5.4 million at September 30, 2003 compared to $7.2 million at December 31, 2002. The decrease includes $700,000 net write-down of opto-electronics accounts receivable through loss on disposal. Inventories decreased $11.5 million, or 30.6% to $37.6 million at September 30, 2003 compared to $37.6 million at December 31, 2002. The decrease in inventory is a result of our continued effort to minimize cash outflows utilizing more effective inventory management policies. The decrease also includes a $1.4 million net write-down of opto-electronics inventory through loss on disposal, and $600,000 of inventory sold

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through the asset sale of our discontinued opto electronics division. We expect our inventory to continue to decrease throughout the remainder of 2003.

     Net cash provided by investing activities of $11.2 million for the nine months ended September 30, 2003 includes net proceeds from the sale of property and equipment of $14.8 million and purchases of equipment of $1.9 million. It also includes $3.3 million in purchases of high grade investment securities with maturities of less than two years offset by $5.7 million in sales of these securities, as well as an increase in restricted cash of $4.0 million.

     We do not have any plans to initiate any major new capital spending projects during 2003. We are currently completing certain projects at our China facilities and are continuously constructing minor improvements to our existing production facilities in China and the United States. We expect to invest an additional $400,000 in capital projects throughout the remainder of 2003. We believe that our existing and planned facilities and equipment are sufficient to fulfill current and expected future orders.

     In February 2003, our Board of Directors authorized the repurchase of up to 2 million shares of our common stock over a one-year period. To date we have not repurchased any shares. If repurchased, repurchased shares will be retired. We expect to sell shares of common stock of Finisar Corporation to fund our stock repurchase program.

     Net cash used in financing activities of $9.6 million for the nine months ended September 30, 2003 includes proceeds of $424,000 from the sale of common stock through our employee stock compensation programs, offset by payments of $1.6 million on long-term debt and to settle all equipment loans and $8.4 million to settle all capital leases.

     Our main Fremont, California manufacturing facility is financed by long-term borrowings, which were refinanced by taxable variable rate revenue bonds in 1998. These bonds mature in 2023 and bear interest at a variable rate that was 1.35% at September 30, 2003. 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 September 30, 2003, $8.6 million was outstanding under these bonds.

     At September 30, 2002 the credit facility maintained by us with a bank included a letter of credit supporting repayment of our industrial bonds with an outstanding amount of $8.6 million. The Company has pledged and placed cash and certain investment securities with the trust department of the bank as additional collateral for this facility. We have also pledged cash for a credit facility for our workers compensation insurance as well as $1 million of the proceeds from the sale of the assets of our discontinued opto-electronics division held in escrow. As a result, $10.4 million of cash and our long-term investments are restricted.

     At September 30, 2003, we had available cash, cash equivalents and liquid short and long-term investments of $35.2 million. We believe that our existing cash and liquid investments, cash generated from operations, coupled with additional efforts to reduce our expenditures in support of our substrate business, will be sufficient to meet our working capital expenditure requirements for the next 12 months. However, our existing cash and liquid investments could decline during the remainder of 2003 due to a continued or further weakening of the economy or changes in our planned cash outlay.

     If our sales continue to decrease, our ability to generate cash from operations will be adversely affected which could adversely affect our future liquidity, require us to use cash at a more rapid rate than expected, and require us to seek additional capital. There can be no assurance that such additional capital will be available or, if available it will be at terms acceptable to the Company. Cash from operations could be affected by various risks and uncertainties, including, but not limited to those set forth below under “Risks Related to Our Business.”

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Risks Related to Our Business

The disposal of our opto-electronics business may fail to result in the benefits we anticipate.

     We may not obtain the benefits we expect as a result of discontinuation of our opto-electronics business, such as greater strategic focus on our core businesses. We may be required to return to the buyer some or all of the $1 million held in escrow should the buyer successfully claim that we breached one of the representations or warranties made to it. The buyer may not reimburse us for the limited set of continuing services and leases that we are providing. Our building in Monterey Park may not be sold for the $1 million at which we are carrying it on our balance sheet. We may incur additional costs associated with the discontinued operations which could materially reduce our short term earnings.

We may be required to raise additional capital in the future, which may not be available.

     We anticipate that our existing cash resources will fund any anticipated operating losses, purchases of capital equipment and provide adequate working capital for the next twelve months. However, our liquidity is affected by many factors including, among others, the extent to which we pursues additional capital expenditures, the level of our production efforts, and other factors related to the uncertainties of the industry and global economies. Accordingly, there can be no assurance that events in the future will not require us to seek additional capital, or, if so required, that such capital will be available on terms acceptable to us, if at all.

     Much of our cash resources are denominated in Chinese reminbi and held in accounts in China and, under some circumstances, may not be easily exchanged for US dollars. The value of our Chinese cash holdings are also subject to changes in the exchange rate between Chinese reminbi and US dollars. If our US dollar commitments exceeded the cash we have available in the United States, we may be unable to access cash held in China to satisfy these commitments.

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

     As a supplier to the semiconductor industry, we are subject to the business cycles that characterize the industry-the timing, length and volatility of these cycles are difficult to predict. The semiconductor industry has historically been cyclical because of sudden changes in demand for semiconductors and capacity requirements, including capacity utilizing the latest technology. The rate of changes in demand, including end demand, is accelerating, and the effect of these changes upon us is occurring sooner, exacerbating the volatility of these cycles. These changes have affected the timing and amounts of customers’ capital equipment purchases and investments in new technology. These industry cycles create pressure on our net sales, gross margin and net income.

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

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marketing, research and development and engineering at the levels we believe are necessary to maintain our competitive position. Our failure to make these investments could seriously harm our business.

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

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

A reoccurrence of Severe Acute Respiratory Syndrome (SARS) may adversely impact our manufacturing operations and some of our key suppliers and customers

     The majority of our substrate manufacturing activities are conducted in China. In addition, we source key raw materials, including gallium, from our joint ventures in China. The SARS outbreak was most notable in China. One employee at our LED production facility in China contracted SARS in late April prompting us to close the facility for ten days. There was no significant impact to our ability to fill customer orders. If there were to be another outbreak of SARS and if our employees contracted the disease, we may be required to temporarily close our manufacturing operations. Similarly, if one of our key suppliers is required to close for an extended period, we may not have enough raw material inventory to continue manufacturing operations. In addition, while we possess management skills among our China staff that enable us to maintain our manufacturing operations with minimal on-site supervision from our US-based staff, our business could also be harmed if travel to or from Asia and the United States is restricted or inadvisable, as it was earlier in 2003. None of our substrate competitors is and few of our opto-electronics competitors are as dependent on manufacturing facilities in China as we are. If our manufacturing operations were closed for a significant period, we could lose revenue and market share during that period which would depress our financial performance and could be difficult to recapture. Finally, if one of our key customers is required to close for an extended period, we may not be able to ship product to them, our revenue would decline and our financial performance would suffer.

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

     Our operating results can vary significantly based upon the impact of changes in global economic conditions on our customers. More specifically, the macro-economic environment that we faced in the second half of 2001 and continued to face in 2003 is more uncertain than in prior periods, has lasted longer than expected and has materially and adversely affected us and our operating results and may continue to do so. The revenue growth and profitability of our business depends on the overall demand for our substrates, and we are particularly dependant on the market conditions for the wireless, fiber optics and telecommunications industries. Because our sales are primarily to major corporate customers whose businesses fluctuate with general economic and business conditions, a softening of demand for products that use our substrates, caused by a weakening economy may result in further or prolonged decreased revenues. Customers may find themselves facing excess inventory from earlier purchases, and may defer or reconsider purchasing products due to the downturn in their business and in the general economy.

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

     We have not over the past year been able to sustain growth, and may not be able to return to historic growth levels in the current economic environment. Our net loss in 2002 is the largest in our history and our losses have continued during 2003. We have and may continue to experience significant fluctuations in our revenue and earnings. Our quarterly and annual revenue and operating results have varied significantly in the past and may vary significantly in the future due to a number of factors, including:

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• decline in general economic conditions or downturns in the industry in which we compete;

• fluctuations in demand for our products;

• expansion of our manufacturing capacity;

• expansion of our operations in China;

• limited availability and increased cost of raw materials;

• the volume and timing of orders from our customers, and cancellations, push outs and delays of customer orders;

• fluctuation of our manufacturing yields;

• decreases in the prices of our competitors’ products;

• costs incurred in connection with any future acquisitions of businesses or technologies;

• increases in our expenses, including expenses for research and development; and

• our ability to develop, manufacture and deliver high quality products in a timely and cost-effective manner.

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

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

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

     If the economy recovers and we are again in a period of high demand for our products, we may be unable to expand our manufacturing capacity quickly enough to meet increased demand, and we may be unable to lower our costs or increase revenue.

     Although we are currently in a period of overcapacity, reduced sales, and decreased margins, if the economy recovers, demand may increase rapidly as it has in prior years after other cyclical downturns in the economy and the industries in which we operate. If this happens, in order to meet increased demand and maintain our market share, we may need to increase production, which could require us to build new facilities, expand and modify our existing facilities, purchase additional manufacturing equipment, and add qualified staff. If we are not at that time able to expand our manufacturing capacity, we will be unable to increase production, which may adversely impact our ability to meet increased production demand while reducing unit costs, margins and improving our operating results.

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

• unforeseen environmental or engineering problems;

• unavailability or late delivery of production equipment;

• delays in completing new facilities;

• delays in bringing production equipment on-line;

• work stoppages or delays;

• inability to recruit and train qualified staff;

• unanticipated cost increases and restrictions imposed by requirements of local, state or federal regulatory agencies in the United States and China.

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

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

     We must manage our inventory of component parts and finished goods effectively to meet changing customer requirements, while keeping inventory costs down and improving gross margins. Some of our products and supplies have in the past and may in the future become obsolete while in inventory due to changing customer specifications, or become excess inventory due to decreased demand for our products and an inability to sell the inventory within a foreseeable period. Furthermore, if current costs of production increase or sales prices drop below the standard prices at which we value inventory, we may need to take a charge for a reduction in inventory values. We have in the past had to take inventory valuation and impairment charges. If we are not successfully able to manage our inventory, we may need to write off unsaleable, obsolete or excess inventory, which could adversely affect our results of operations. On October 1, we implemented a new inventory control system that may experience unexpected difficulties as we use it to develop reporting information for the fourth quarter of 2003.

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 and product features that incorporate leading technology and respond to technological advances. In addition, our new products must meet customer needs and compete effectively on quality, price and performance. The life cycles of our products are difficult to predict because the markets for our products are characterized by rapid 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. During the past year, we have seen our competitors selling more substrates manufactured using a crystal growth technology similar to ours, which has eroded our technological differentiation. 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 or VGF derived products are

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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.

     Some of our competitors have developed a crystal growth technique similar to our VGF technology. Furthermore, some customers have reduced their orders from us until our surface quality is as good and consistent as that offered by competitors. As a result, some customers are now allocating their requirements for VGF grown substrates across more competitors and we believe that we have lost revenue and market share as a result of these customer decisions, which we may be unable to recover. If we are unable to retain our market share, our revenue and performance will decline.

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

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

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

• greater experience in the business;

• more manufacturing experience;

• extensive intellectual property;

• broader name recognition; and

• significantly greater financial, technical and marketing resources.

     Our competitors could develop new or enhanced products that are more effective than the products that we have developed or may develop.

     The level and intensity of competition has increased over the past year and we expect competition to continue to increase in the future. Competitive pressures caused by the current economic conditions have resulted in reductions in the prices of our products, and continued or increased competition could reduce our market share,

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require us to further reduce the prices of our products, affect our ability to recover costs or result in reduced gross margins.

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

     Our products are manufactured using complex technologies, and the number of usable substrates 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 but our costs would change little, if at all. 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, as have quality control problems experienced on our substrate products. 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 larger diameter substrates.

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

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

• the competition our customers face in their particular industries;

• the technical, manufacturing, sales and marketing and management capabilities of our customers;

• the financial and other resources of our customers; and

• the inability of our customers to sell their products if they infringe third party intellectual property rights.

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

     As a result of current levels of demand and inventory, some of our customers have reduced sales of their products, causing them to reduce purchases of our products for both production and research and development purposes. As a result, our revenues have declined and may fail to recover until the overcapacity has been depleted and demand for our customers’ products once again increases and their expenditures for research and development increase.

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

     We depend on a limited number of suppliers for certain raw materials, components and equipment used in manufacturing our products, including key materials such as 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 or equipment to us. If we lose any of our key suppliers, our manufacturing efforts could be significantly hampered and we could be prevented from timely producing and delivering products to our customers. We have experienced delays obtaining critical raw materials and spare parts, including gallium, due to shortages of these materials. We may experience delays due to shortages of materials and may be unable to obtain an adequate supply of materials. These shortages and delays could result in higher materials costs and cause us to delay or reduce production of our products. If we have to delay or reduce production, we could fail to meet customer delivery schedules and our revenue and operating results could suffer.

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

     We are subject to federal, state and local environmental and safety laws and regulations in all of our operating locations. These laws, rules and regulations govern the use, storage, discharge and disposal of hazardous chemicals during manufacturing, research and development and sales demonstrations. If we fail to comply with applicable regulations, we could be subject to substantial liability for clean-up efforts, personal injury and fines or suspension or cessation of our operations. In March 2001, we settled a claim made by the California Occupational Safety and Health Administration, or Cal-OSHA, in an investigation primarily regarding impermissible levels of potentially hazardous materials in certain areas of our manufacturing facility in Fremont, California for $204,415. Although we have put in place engineering, administrative and personnel protective equipment programs to address these issues, our ability to expand or continue to operate our present locations could be restricted or we could be required to acquire costly remediation equipment or incur other significant expenses. 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. Five customers accounted for 29.7% of our total revenue for the three months ended September 30, 2003 and 35.7% for the three months ended September 30, 2002. One customer accounted for 12.4% of our revenue for the three months ended September 30, 2003. 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, and during the past year, we have experienced slower bookings, significant push outs and cancellation of orders. In addition, due to the difficult economic environment, several of our previously large customers have stopped operations entirely. If we lose a major customer or if a customer cancels, reduces or delays orders, our revenue would decline. In addition, customers that have accounted for significant revenue in the past may not continue to generate revenue for us in any future period. Any delay in scheduled shipments of our products could cause net sales to fall below our expectations and the expectations of market analysts or investors, causing our stock price to decline.

Defects in our products could diminish demand for our products.

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

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

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

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

As our business matures, we may need to upgrade our systems.

     In the past, periods of rapid growth and expansion has strained our management and other resources. The expansion of our manufacturing capacity and the shift of manufacturing operations to China placed and continue to place a significant strain on our operations and management resources, and we are in the process of upgrading our inventory control systems and may implement additional systems relating to consolidation of our financial results. If we fail to manage these changes effectively, our operations may be disrupted.

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

     If necessary, we will spend substantial sums to support our future growth and shift to China and to comply with the reporting and attestation requirements of the Sarbanes-Oxley Act of 2002. We 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.

     We anticipate that our existing cash resources will fund any anticipated operating losses, purchases of capital equipment and provide adequate working capital for the next twelve months. The Company’s liquidity is affected by many factors including, among others, the extent to which the Company pursues additional capital and business acquisition expenditures, the level of the Company’s production efforts, and other factors related to the uncertainties of the industry and global economies.

If we fail to manage periodic contractions, we may utilize our cash balances and our existing cash and cash equivalent balances could decline.

     If we fail to manage our contractions successfully we may continue to draw down our cash reserves, which would adversely affect our operating results and financial condition, reduce our value and may impinge our ability to raise debt and equity funding in the future, at a time when we may be required to raise additional cash. As part of our effort to reduce costs, we may lose key staff, production resources, and technology that we will need to grow when end markets recover. These events could reduce our ability to grow profitably as markets recover.

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

     In connection with our efforts to streamline operations, reduce costs and bring staffing and structure in line with current demand for our products, we implemented a corporate restructuring beginning in 2001 and reduced our workforce, shifted production activities to China, reduced capital expenditures, and discontinued our opto-electronics business. Our restructuring may yield unanticipated consequences, such as attrition beyond our planned reduction in workforce and loss of employee morale and decreased performance. In addition, the recent trading levels of our stock have decreased the value of our stock options granted to employees under our stock option plan. As a result of these factors, our remaining personnel may seek employment with larger, more established companies or companies that they perceive as having less volatile stock prices. Continuity of personnel can be very important factors in the sales and production of our products and completion of our research and development efforts.

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. 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 in May 1999, including the assumption of approximately $10.0 million of debt, which was subsequently repaid, resulting in a decline of cash available. We have also incurred consistent operating losses for the business since the acquisition, and have recently discontinued all operations acquired in our acquisition of Lyte Optronics.

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

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

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

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

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

     We believe our future success will also depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing, finance and manufacturing personnel. The competition for these employees is intense 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 two of our competitors have begun to ship GaAs substrates produced using a process similar to our VGF technique. Our competitors may also develop and patent improvements to the VGF technology upon which we rely, and thus may limit any exclusivity we enjoy by virtue of our patents or trade secrets.

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

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

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

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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 64% of our total revenue for the three months ended September 30, 2003 and 54% for the three months ended September 30, 2002. We expect that sales to customers outside the U.S. will continue to represent a significant portion of our revenue, particularly sales to customers in Asia.

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

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

• changes in tariffs, import or export 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, cash flows and financial condition could be adversely affected.

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

     As part of our planned reduction of our cost structure, 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 reduce the costs of our products 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

31

expected cost savings once our expansion is complete in China, our margins may be negatively impacted and our operating results may suffer.

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

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

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

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

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

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

     Our stock price has fluctuated significantly since we began trading on the Nasdaq National Market. For the three months ended September 30, 2003, the high and low closing sales prices of our common stock were $3.12 and $1.20, respectively. 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.

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

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

     Further, on April 24, 2001, our board of directors adopted a preferred stock purchase rights plan intended to guard against certain takeover tactics. The adoption of this plan was not in response to any proposal to acquire us, and the board is not aware of any such effort. The existence of this plan could also have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. In addition, certain provisions of our certificate of incorporation may have the effect of delaying or preventing a change of control, which could adversely affect the market price of our common stock.

Legislative actions, higher insurance costs and potential new accounting pronouncements are likely to cause our general and administrative expenses to increase and impact our future financial position and results of operations.

     In order to comply with the newly adopted Sarbanes-Oxley Act of 2002, as well as proposed changes to listing standards by Nasdaq, and proposed accounting changes by the Securities and Exchange Commission, we may be required to increase our internal controls, hire additional personnel and additional outside legal, accounting and

33

advisory services, all of which will cause our general and administrative costs to increase. Insurers are likely to increase premiums as a result of the high claims rates incurred over the past year, and so our premiums for our various insurance policies, including our directors’ and officers’ insurance policies, are likely to increase. Proposed changes in the accounting rules, including legislative and other proposals to account for employee stock options as a compensation expense among others, could materially increase the expense that we report under generally accepted accounting principles and adversely affect our operating results.

Item 3. Qualitative and Quantitative Disclosures About Market Risk

Foreign Currency Risk

     We use short-term forward exchange contracts for hedging purposes to reduce the effects of adverse foreign exchange rate movements. We have purchased foreign exchange contracts to hedge against certain trade accounts receivable denominated in Japanese yen. The change in the fair value of the forward contracts is recognized as part of the related foreign currency transactions as they occur. As of September 30, 2003, we had no outstanding commitments with respect to foreign exchange contracts.

Interest Rate Risk

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

						Current			Proforma			Proforma
	Balance		Current			Interest			10% Interest			10% Interest
	September 30,		Interest			Income/			Rate Decline			Rate Increase
Instrument	2003		Rate			(Expense)			Income/(Expense)			Income/(Expense)
Cash and cash equivalents	$	21,486		1.80	%	$	387		$	348		$	425
Bonds		8,550		1.35	%		(115	)		(104	)		(127	)
						$	271		$	244		$	298

Equity Risk

     We also maintain minority investments in private and publicly traded companies. These investments are reviewed for other than temporary declines in value on a quarterly basis. Reasons for other than temporary declines in value include whether the related company would have insufficient cash flow to operate for the next twelve months, significant changes in the operating performance and changes in market conditions. On June 30, 2003, we recorded $1.3 million charge to other expense to write down our investment in two US companies. As of September 30, 2003, the minority investments we continue to hold totaled $5.3 million. In 2000, we recorded a $27.3 million non-cash gain as a result of acquiring Finisar Corporation common stock in connection with Finisar Corporation’s acquisition of Demeter Technologies, a company in which we held warrants to purchase preferred stock. In 2001 and 2002, we determined that this investment had suffered a decline in market value that was other than temporary and accordingly recorded a $15.6 million and $10.8 million non-cash loss respectively, as a result of writing down our investment in Finisar Corporation common stock to market value. These gains and losses were included in other expense.

Item 4. Controls and Procedures

(a)  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on their evaluation, our principal executive officer

34

and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b)  As required by Rule 13a-15(d), our management, including our principal executive officer and principal finance officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report. It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system will be met.

PART II         OTHER INFORMATION

Item 1. Legal Proceedings

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

     On April 15, 2003, Sumitomo Electric Industries, Ltd., (SEI) filed a complaint in the Tokyo District Court, Civil Division against us and our Japanese distributor alleging patent infringement of two patents held by SEI in Japan. The suit seeks penalties from AXT in the amount of $1.67 million plus interest and court costs and the cessation of AXT’s sales of gallium arsenide substrates in Japan. AXT intends to defend itself vigorously in these lawsuits and continues to sell its products in Japan.

     On June 11, 2003, Cree, Inc. filed a complaint in the United States Court for Northern District of California against us alleging patent infringement. The complaint seeks damages and injunction against infringement. On July 23, 2003, we filed a counter complaint in the United States Court for Northern District of California, denying any patent infringement and alleging that Cree’s actions were intentionally designed to interfere with our prospective business relationships. A court hearing is scheduled for late February 2004.

Item 2. Changes in Securities and Use of Proceeds

     None

Item 3. Defaults upon Senior Securities

     None

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

     None

Item 5. Other Information

     None

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Item 6. Exhibits and Reports on Form 8-K

a. Exhibits

3.1	(1)	Restated Certificate of Incorporation
3.2	(2)	Certificate of Designation, Preferences and Rights of Series A Preferred Stock, as filed with the Secretary of State of the state of Delaware on May 27, 1999 (which is incorporated herein by reference to Exhibit 2.1 to the registrant’s Form 8-K dated May 28, 1999)
3.3	(3)	Second Amended and Restated Bylaws
4.1	(4)	Registration Rights Agreement dated as of May 27, 1999, by and among American Xtal Technology, Inc., Lyte Optronics, Inc. and Keith Halsey and Robert Shih
4.2	(3)	Rights Agreement dated as of April 24, 2001, by and between AXT, Inc. and Computershare Trust Company
10.14	(5)	Second Modification to Credit Agreement between U.S. Bank National Association and AXT, Inc. dated September 30, 2002
10.15	(6)	Reimbursement Agreement between Wells Fargo Bank National Association and AXT, Inc. dated April 7, 2003
10.16		Asset purchase agreements dated September 4, 2003 by and between Dalian Luming Science and Technology Group Co., Ltd and AXT, Inc., and by and between Lumei Optoelectronics Corp., AXT, Inc., Lyte Optoelectronics, Inc., Beijing Tongmei Xtal Technology and Xiamen Advanced Semiconductor Co., Ltd.
31.1		Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)	Incorporated by reference to the Exhibit of the same number filed with our Annual Report on Form 10-K for the year ended December 31, 1998.
(2)	Incorporated by reference to the Exhibit number 3.1 filed with our Form 8-K on June 14, 1999.
(3)	Incorporated by reference to the Exhibit number 3.4 filed with our Form 8-K on May 30, 2001.
(4)	Incorporated by reference to the Exhibit of the same number filed with our Annual Report on Form 10-K for the year ended December 31, 1999.
(5)	Incorporated by reference to the Exhibit of the same number filed with our Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2002.
(6)	Incorporated by reference to the Exhibit of the same number filed with our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2003.
b.	Reports on Form 8-K
	None.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	AXT, INC.
Dated: November 13, 2003	By:	/s/  Morris S. Young
		Morris S. Young
		Chief Executive Officer
Dated: November 13, 2003	By:	/s/  Donald L. Tatzin
		Donald L. Tatzin
		Chief Financial Officer
Dated: November 13, 2003	By:	/s/  John Drury John Drury Corporate Controller

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INDEX TO EXHIBITS

Number	Description
3.1(1)	Restated Certificate of Incorporation
3.2(2)	Certificate of Designation, Preferences and Rights of Series A Preferred Stock, as filed with the Secretary of State of the state of Delaware on May 27, 1999 (which is incorporated herein by reference to Exhibit 2.1 to the registrant’s Form 8-K dated May 28, 1999)
3.3(3)	Second Amended and Restated Bylaws
4.1(4)	Registration Rights Agreement dated as of May 27, 1999, by and among American Xtal Technology, Inc., Lyte Optronics, Inc. and Keith Halsey and Robert Shih
4.2(3)	Rights Agreement dated as of April 24, 2001, by and between AXT, Inc. and Computershare Trust Company
10.14(5)	Second Modification to Credit Agreement between U.S. Bank National Association and AXT, Inc. dated September 30, 2002
10.15(6)	Reimbursement Agreement between Wells Fargo Bank National Association and AXT, Inc. dated April 7, 2003
10.16	Asset purchase agreements dated September 4, 2003 by and between Dalian Luming Science and Technology Group Co., Ltd and AXT, Inc., and by and between Lumei Optoelectronics Corp., AXT, Inc., Lyte Optoelectronics, Inc., Beijing Tongmei Xtal Technology and Xiamen Advanced Semiconductor Co., Ltd.
31.1	Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)	Incorporated by reference to the Exhibit of the same number filed with our Annual Report on Form 10-K for the year ended December 31, 1998.
(2)	Incorporated by reference to the Exhibit number 3.1 filed with our Form 8-K on June 14, 1999.
(3)	Incorporated by reference to the Exhibit number 3.4 filed with our Form 8-K on May 30, 2001.
(4)	Incorporated by reference to the Exhibit of the same number filed with our Annual Report on Form 10-K for the year ended December 31, 1999.
(5)	Incorporated by reference to the Exhibit of the same number filed with our Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2002.
(6)	Incorporated by reference to the Exhibit of the same number filed with our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2003.

38 EX-10.16 3 f94445exv10w16.txt EXHIBIT 10.16 EXHIBIT 10.16 ASSET PURCHASE AGREEMENT by and between DALIAN LUMING SCIENCE AND TECHNOLOGY GROUP CO., LTD. and AXT, INC. Dated September 4, 2003 TABLE OF CONTENTS

Page ---- 1. Definitions and Usage........................................................... 1 1.1 Definitions............................................................ 1 1.2 Usage.................................................................. 4 2. Sale and Transfer of Assets; Closing............................................ 5 2.1 Purchase and Sale of Assets............................................ 5 2.2 Consideration.......................................................... 5 2.3 Liabilities............................................................ 6 2.4 Closing................................................................ 7 2.5 Closing Obligations.................................................... 7 3. Representations and Warranties of Seller........................................ 7 3.1 Due Incorporation...................................................... 7 3.2 Enforceability; Authority; No Conflict................................. 8 3.3 Title To Transferred Assets; Encumbrances.............................. 9 3.4 Litigation............................................................. 9 3.5 Patents................................................................ 9 4. Representations and Warranties of Buyer......................................... 9 4.1 Due Incorporation...................................................... 10 4.2 Enforceability; Authority; No Conflict................................. 10 4.3 Compliance with Applicable Laws........................................ 11 4.4 Litigation............................................................. 11 5. Additional Covenants............................................................ 11 5.1 Confidentiality........................................................ 11 5.2 Public Disclosure...................................................... 11 5.3 Conveyance Taxes....................................................... 11 5.4 Negative Covenant...................................................... 12 5.5 Subsequent Sale of Transferred Assets by Buyer......................... 12 5.6 Additional Documents and Further Assurances............................ 12 6. Conditions to Closing........................................................... 12 6.1 Conditions to Each Party's Obligation to Consummate the Acquisition.... 12 6.2 Conditions to Obligations of Buyer..................................... 13 6.3 Conditions to Obligations of Seller.................................... 13 7. Termination, Amendment and Waiver............................................... 14 7.1 Termination............................................................ 14 7.2 Amendment.............................................................. 15 7.3 Extension; Waiver...................................................... 15 7.4 Notice of Termination.................................................. 16

i TABLE OF CONTENTS (continued)

Page ---- 8. Indemnification and Escrow...................................................... 16 8.1 Indemnification........................................................ 16 8.2 Claims................................................................. 18 8.3 ARBITRATION OF DISPUTES................................................ 18 8.4 Third-Party Claims..................................................... 19 9. General Provisions.............................................................. 20 9.1 Expenses............................................................... 20 9.2 Notices................................................................ 20 9.3 Jurisdiction; Service of Process....................................... 21 9.4 Waiver; Remedies Cumulative............................................ 21 9.5 Entire Agreement and Modification...................................... 22 9.6 Assignments, Successors and No Third-Party Rights...................... 22 9.7 Severability........................................................... 22 9.8 Construction........................................................... 22 9.9 Time of Essence........................................................ 22 9.10 Governing Law.......................................................... 22 9.11 Execution of Agreement................................................. 22

ii LIST OF EXHIBITS AND SCHEDULES Exhibit A List of Patents Included in Transferred Assets Exhibit B Form of Patent Assignment Agreement Exhibit C Form of Seller's Counsel Opinion Schedule 5.4 Identified Person Seller Disclosure Schedule Buyer Disclosure Schedule ASSET PURCHASE AGREEMENT This Asset Purchase Agreement ("Agreement") is dated as of September 4, 2003, by and between Dalian Luming Science and Technology Group Co., Ltd., a corporation organized under the laws of the People's Republic of China ("Buyer"), and AXT, Inc., a Delaware corporation ("Seller"). RECITALS WHEREAS, Seller wishes to sell certain assets used by Seller in the development and production of light-emitting diodes ("LED") products, Fabry Perot laser diodes ("LD") products, and high-speed vertical cavity surface-emitting lasers ("VCSEL") products (the "Optoelectronics Business"); and WHEREAS, Buyer wishes to purchase from Seller, and Seller wishes to sell to Buyer, the Transferred Assets (as defined herein) for the purchase price and subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises set forth above and the respective covenants, agreements, representations and warranties hereinafter set forth, Buyer and Seller hereby agree as follows: 1. Definitions and Usage. 1.1 Definitions. For purposes of this Agreement, the following terms and variations thereof have the meanings specified or referred to in this Section 1.1: "Acquisition" means all of the transactions contemplated by this Agreement. "AXT" is as defined in the recitals to this Agreement. "AXT Tongmei" means Beijing Tongmei Xtal Technology, Ltd., a corporation organized under the laws of the People's Republic of China. "AXT Xiamen" means Xiamen Advanced Semiconductor Co., Ltd., a corporation organized under the laws of the People's Republic of China. "Business Day" means any day other than (a) Saturday or Sunday or (b) any other day on which banks in California are permitted or required to be closed. "Buyer" is as defined in the first paragraph of this Agreement. "Buyer Disclosure Schedule" is as defined in Section 4. "Buyer Indemnified Persons" is as defined in Section 8.1(b)(i). "Closing" is as defined in Section 2.5. 1 "Closing Date" means the date on which the Closing actually takes place. "Code" means the Internal Revenue Code of 1986. "Damages" is as defined in Section 8.1(b). "Effective Time" means the effective time of the Closing, which will be midnight California time on the Closing Date. "Encumbrance" means any charge, claim, community or other marital property interest, condition, equitable interest, lien, option, pledge, security interest, mortgage, right of way, easement, encroachment, servitude, right of first option, right of first refusal or similar restriction, including any restriction on use, voting (in the case of any security or equity interest), transfer, receipt of income or exercise of any other attribute of ownership. "Governmental Entity" means any United States federal, state, local, or foreign court, administrative agency or commission, or other governmental entity or instrumentality (including a stock exchange or other self-regulatory body). "Indemnified Party" is as defined in Section 8.4. "Indemnifying Party" is as defined in Section 8.4. "Knowledge" means such party's actual knowledge after reasonable inquiry of officers, directors, and other employees of such party reasonably believed to have knowledge of such matters; "Laws" means all applicable United States federal, state, provincial and local laws, ordinances, rules, statutes, regulations, all Orders or awards, and all applicable laws of the People's Republic of China. "Legal Proceedings" means any actions, suits, arbitrations, regulatory or other proceedings, litigation, or governmental investigations by or before any court, arbitration or Governmental Entity. "Liabilities" with respect to any Person means all Indebtedness, obligations and other liabilities of such Person (whether absolute, accrued, contingent, asserted, unasserted, fixed or otherwise, known or unknown, or whether due or to become due). "Loss" means liabilities, losses, costs, claims, damages, penalties, and expenses (including attorneys' fees and expenses and costs of investigation and litigation). "Lumei" means Lumei Optoelectronics Corp., a California corporation. "Lumei Agreement" means that certain Asset Purchase Agreement entered into concurrently with this Agreement by and among Lumei, Seller, Lyte, and solely as to the transfer of the assets held in their respective names, AXT Tongmei and AXT Xiamen. 2 "Lyte" means Lyte Optronics, Inc., a Nevada corporation and wholly-owned subsidiary of Seller. Any reference to any event, change, condition or effect being "material" with respect to any entity or group of entities means any material changes, conditions or effects related to the financial condition, properties, assets (including intangible assets), liabilities, business, operations or results of operations of such entity or group of entities. "Material Adverse Effect" means an adverse effect on the business, operations, assets, liabilities, or condition (financial or otherwise), of the Optoelectronics Business or the Transferred Assets, taken individually or as a whole, to Seller or Buyer as applicable, that results in a liability of in excess of $20,000, except to the extent that any such effect primarily results from (i) changes in general economic conditions or changes affecting the industry generally in which such entities operate (provided that such changes do not affect such entities in a disproportionate manner), or (ii) the announcement or pendency of the Acquisition (including resulting losses, deferrals, delays or cancellations of customer orders). Notwithstanding any other provision of this Agreement, actions taken that are expressly contemplated by this Agreement, and the directly intended effects thereof shall not be deemed to constitute a Material Adverse Effect. "Notifying Party" is as defined in Section 8.4 "Officer's Certificate" is as defined in Section 8.2. "Optoelectronics Business" is as defined in the opening recital. "Order" means any order, injunction, judgment, decree, ruling, assessment or arbitration award of any Governmental Entity or arbitrator. "Patent" is as defined in Section 2.1. "Person" means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a Governmental Entity. "Proceeding" means any action, arbitration, audit, hearing, investigation, litigation or suit (whether civil, criminal, administrative, judicial or investigative, whether formal or informal, whether public or private) commenced, brought, conducted or heard by or before, or otherwise involving, any Governmental Entity or arbitrator. "Purchase Price" is as defined in Section 2.2. "Representative" means with respect to a particular Person, any director, officer, manager, employee, agent, consultant, advisor, accountant, financial advisor, legal counsel or other representative of that Person. "RMB" means Renminbi, the sole legal tender of the People's Republic of China. "RMB Account" is as defined in Section 2.2(b). 3 "Seller" is as defined in the opening paragraph to this Agreement. "Seller Indemnified Person" is as defined in Section 8.1(b)(ii). "Sellers" means collectively Seller, Lyte, AXT Tongmei and AXT Xiamen. "Tax" means any income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental, windfall profit, customs, vehicle, airplane, boat, vessel or other title or registration, capital stock, franchise, employees' income withholding, foreign or domestic withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, value added, alternative, add-on minimum and other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever and any interest, penalty, addition or additional amount thereon imposed, assessed or collected by or under the authority of any Governmental Entity or payable under any tax-sharing agreement or any other Contract. "Termination Date" is as defined in Section 7.1(b). "Third Party Rights" is as defined in Section 8.1(c). "United States Account" is as defined in Section 2.2(b). 1.2 Usage. (a) Interpretation. In this Agreement, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are not prohibited by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually; (iii) reference to any gender includes each other gender; (iv) reference to any agreement, document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof; (v) reference to any Law means such Law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder, and reference to any Section or other provision of any Law means that provision of such Law from time to time in effect and constituting the substantive amendment, modification, codification, replacement or reenactment of such Section or other provision; (vi) the words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation;" (vii) the table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement; and (viii) all references to dollars or $ herein will mean United States dollars. (b) Legal Representation of the Parties. This Agreement was negotiated by the parties with the benefit of legal representation, and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against any party shall not apply to any construction or interpretation hereof. 4 (c) English Language Version Prevails. Should this Agreement, any exhibit or schedule hereto, or any ancillary document, agreement or instrument executed in connection herewith be translated into any language other than the English language, the English language version of such document, agreement or instrument shall prevail and be the official version of such document, agreement or instrument. 2. Sale and Transfer of Assets; Closing. 2.1 Purchase and Sale of Assets. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, but effective as of the Effective Time, Seller shall sell, convey, assign, transfer and deliver to Buyer, and Buyer shall purchase and acquire from Seller, free and clear of any Encumbrances, the patents and pending patent applications listed on Exhibit A attached hereto and incorporated herein and all associated know how, show how and intellectual property rights therein (the "Patents"). All of such assets listed above are defined as the "Transferred Assets." Seller will deliver to Buyer appropriate assignments, conveyances and other instruments of sale and/or transfer in forms satisfactory to Seller and Buyer in order to convey to Buyer good title to the Transferred Assets. No other assets of any kind are sold or transferred to Buyer by Seller hereunder. 2.2 Consideration. (a) In consideration of the purchase of the Transferred Assets, Buyer will, at the Closing Date, pay to Seller the sum of Three Million Seven Hundred Fifty Thousand dollars ($3,750,000) (the "Purchase Price"). (b) In order to remit the Purchase Price, on the Closing Date, Buyer shall cause to be transmitted by wire transfer to Seller, the RMB equivalent of $3,750,000 to the bank account in China identified by Seller (the "RMB Account"). Thereafter, Buyer shall obtain approvals to convert the RMB equivalent of $2 million within four months after the Closing Date, and to convert an additional RMB equivalent of $1,750,000 within four months and two weeks after the Closing Date, as follows. All interest earned on funds deposited into the RMB Account will be for the account of Seller. Within four months after the Closing Date, and upon Seller being notified by Buyer that Buyer has received the approvals required to convert RMB into $2 million, and Seller has received $4 million converted from RMB under the Lumei Agreement, Seller shall transfer the RMB equivalent of $2 million (at the exchange rate in effect as of the Closing Date) from the RMB Account into the bank account in China designated by Buyer. Within two weeks of its receipt, Buyer will cause the conversion of this RMB payment into $2 million and wire transfer the full $2 million into Seller's designated bank account in the United States (the "United States Account"). Within two weeks of Seller receiving the first $2 million payment into the United States Account, Seller shall, upon being notified by Buyer that Buyer has received the approvals required to convert RMB into $2 million, transfer the remaining RMB equivalent of $1,750,000 (at the exchange rate in effect as of the Closing Date) from the RMB Account into the bank account in China designated by Buyer. Within two weeks of its receipt, Buyer will cause the conversion of this second RMB payment into $1,750,000 and wire transfer the full $1,750,000 into the United States Account. 5 (c) Should either Buyer or Seller fail to obtain the necessary approvals within four months after the Closing Date to effect the above transfers, or fail to carry out their respective obligations as described above, such defaulting party shall pay to the other party the sum of $30,000 per month for each month, or part thereof, that such party remains in breach of its obligations described above. If the full RMB equivalent of the Purchase Price has not been converted to United States dollars and transferred to the United States Account within one year after the Closing Date, through no fault of Seller, Buyer shall be liable for, and shall pay or reimburse Seller, for the Tax incurred by Seller in China for their use of the RMB up to an aggregate amount of $9,600,000. (d) Seller shall provide reasonable and good faith assistance to Buyer in its efforts to convert RMB to United States dollars. Any gains or losses incurred as a result of the currency exchanges resulting from all transfers shall be for the account of, and all gains and Losses incurred as a result thereof be borne by, Buyer or its subsidiary. 2.3 Liabilities. (a) Assumed Liabilities. On the Closing Date, but effective as of the Effective Time, Buyer shall assume and agree to discharge only the following Liabilities of Seller (the "Assumed Liabilities"): (i) any Liability related to or arising from the ownership or use of the Transferred Assets from and after the Effective time; and (ii) all obligations of Buyer under this Agreement or the Patent Assignment Agreement. (b) Retained Liabilities. The Retained Liabilities shall remain the sole responsibility of and shall be retained, paid, performed and discharged solely by Seller, its successors or assigns. "Retained Liabilities" shall mean every Liability of Seller, its successors or assigns, other than the Assumed Liabilities, including, but not limited to: (i) except as otherwise provided in this Agreement or in the Lumei Agreement, any Liability related to or arising as a result of Seller's operation of the Optoelectronics Business, or the operation of the Optoelectronics Business by Seller's subsidiaries or affiliates, or ownership, use or operation of the Transferred Assets prior to the Effective Time; (ii) any Liability of Seller, its subsidiaries, affiliates, successors or assigns for transfer, sales, use or similar Taxes payable by Seller as a result of the transfer of the Transferred Assets to Buyer; (iii) all obligations of Seller under this Agreement or the Patent Assignment Agreement. Each party shall be liable for its own costs and expenses incurred in connection with the negotiation, execution and delivery of this Agreement as set forth in Section 9.1 below. 6 2.4 Closing. The purchase and sale provided for in this Agreement (the "Closing") will take place at the offices of Seller's counsel at Gray Cary Ware & Freidenrich LLP, 2000 University Avenue, East Palo Alto, CA 94303-2248 commencing at 10:00 a.m. (local time) on September 15, 2003, or as soon as practicable thereafter, unless Buyer and Seller otherwise agree. Subject to the provisions of Article 9, failure to consummate the purchase and sale provided for in this Agreement on the date and time and at the place determined pursuant to this Section 2.4 will not result in the termination of this Agreement and will not relieve any party of any obligation under this Agreement. In such a situation, the Closing will occur as soon as practicable, subject to Section 7. 2.5 Closing Obligations. In addition to any other documents to be delivered under other provisions of this Agreement, at the Closing: (a) Seller shall deliver to Buyer: (i) assignments of the Patents in the form of Exhibit B (the "Patent Assignment Agreement"), executed by Seller; and (ii) a certificate executed by Seller as to the accuracy of its representations and warranties as of the date of this Agreement and as of the Closing in accordance with Section 6.2(b) and as to its compliance with and performance of the covenants and obligations to be performed or complied with by Seller at or before the Closing in accordance with Section 6.2(a). (b) Buyer shall deliver to Seller: (i) The Purchase Price by wire transfer in accordance with Section 2.2(b) above; and (ii) a certificate executed by Buyer as to the accuracy of its representations and warranties as of the date of this Agreement and as of the Closing in accordance with Section 6.3(b) and as to its compliance with and performance of its covenants and obligations to be performed or complied with at or before the Closing in accordance with Section 6.3(a). 3. Representations and Warranties of Seller. Seller represents and warrants to Buyer as follows, except as disclosed in a document of even date herewith and delivered by Seller to Buyer on the date hereof referring to the representations and warranties in this Agreement (the "Seller Disclosure Schedule"). The Seller Disclosure Schedule will be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Section 3, and the disclosure in any such numbered and lettered section of the Seller Disclosure Schedule shall qualify only the corresponding subsection in this Section 3 and any other section hereof where it is reasonably clear, upon a reading of such disclosure without any independent knowledge on the part of the reader regarding the matter disclosed, that the disclosure is intended to apply to such other section. 3.1 Due Incorporation. Seller is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of organization, with all requisite 7 corporate power and authority to own, lease, and operate its properties and to carry on its business as now being conducted. Seller is qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the nature of its properties owned, leased, or operated by it and the business transacted by it require such qualification, except where the failure to be so qualified would not reasonably be expected to have a Material Adverse Effect on the Optoelectronics Business. 3.2 Enforceability; Authority; No Conflict. (a) Seller has full corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution, delivery, and performance by Seller of this Agreement has been duly and validly approved by the Board of Directors of Seller, and no other actions or proceedings on the part of Seller is necessary to authorize this Agreement and the transactions contemplated hereby. Seller has duly and validly executed and delivered this Agreement. This Agreement constitutes the legal, valid and binding obligation of Seller, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization, or other laws from time to time in effect which affect creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (b) The execution and delivery of this Agreement by Seller does not, and the performance by Seller of its obligations hereunder and the consummation of the transactions contemplated hereby, will not conflict with, result in a violation or breach of, constitute (with or without notice or lapse of time or both) a default under, result in or give to any person any right of payment or reimbursement, termination, cancellation, modification or acceleration of, or result in the creation or imposition of any lien upon any of the assets or properties of Seller under any of the terms, conditions or provisions of (i) the certificate of incorporation or bylaws of Seller, or (ii) subject to the taking of the actions described in paragraph (b) of this Section 3.2, (x) any Laws applicable to Seller or any judgment, decree, order, writ, permit, or license of any Governmental Entity applicable to Seller or any of its assets or properties, or (y) any contract, agreement, or commitment to which Seller is a party or by which Seller or any of its assets or properties is bound, excluding from the foregoing clauses (x) and (y) conflicts, violations, breaches, defaults, terminations, modifications, accelerations, and creations and impositions of liens, which, as to any of the foregoing, would not reasonably be expected to have a Material Adverse Effect on the Optoelectronics Business or would not result in the inability of Seller to consummate the transactions contemplated by this Agreement. (c) No consent, approval, order, or notice to or authorization of, or registration, declaration, or filing with, any Governmental Entity or other third party is required to be made or obtained by Seller (i) in connection with the execution and delivery of this Agreement or (ii) the consummation by Seller of the transactions contemplated hereby, the failure to obtain any of which would reasonably be expected to have a Material Adverse Effect or prevent or materially delay the consummation of the transactions contemplated hereby, other than such consents, approvals, orders, notices or authorizations, or registrations, declarations or filings as may be required to effect the provisions of Section 2.2. 8 3.3 Title To Transferred Assets; Encumbrances. Seller is the sole owner of and has full power and authority to transfer all of its right, title and interest to the Transferred Assets. Seller has good title to all of the Transferred Assets, free and clear of all Encumbrances or restrictions on transfer. Seller has not assigned, transferred, licensed or pledged any of the Transferred Assets to any third party, nor entered into any agreement to do so other than this Agreement. At the Closing, Seller will sell, convey, assign, transfer and deliver to Buyer good title and all its right, title and interest, in and to all of the Transferred Assets, free and clear of all Encumbrances. 3.4 Litigation. (a) Except as disclosed in Section 3.4 of the Seller Disclosure Schedule, there are no claims or Legal Proceedings that are now pending or, to Seller's Knowledge, threatened (in writing) against or affecting Transferred Assets, this Agreement or in connection with the transactions contemplated hereby. Except as disclosed in Section 3.4 of the Seller Disclosure Schedule, Seller is not currently subject to any order, judgment, decree, injunction, stipulation, or consent order of or with any court or other Governmental Entity concerning the Transferred Assets. Seller has not entered into any agreement to settle or compromise any Legal Proceeding pending or threatened against the Transferred Assets, other than pursuant to the Lumei Agreement. 3.5 Patents. (a) All of the issued Patents are currently in compliance with formal legal requirements (including payment of filing, examination and maintenance fees and proofs of working or use), and are not subject to any maintenance fees or taxes or actions falling due within ninety (90) days after the Closing Date. No Patent has been or is now involved in any interference, reissue, reexamination, or opposition Proceeding. Except as set forth in Section 3.5 of the Seller Disclosure Schedule, to Seller's Knowledge, none of the issued Patents is infringed by any third party or, to Seller's Knowledge, has been challenged or threatened in any way, and except as disclosed in Section 3.5 of the Seller Disclosure Schedule, to Seller's Knowledge none of the issued Patents infringes or is alleged to infringe any patent or other proprietary right of any other Person. (b) No license or royalty agreement included in the Transferred Assets to which Seller is a party, is in material breach or default by Seller or, to Seller's Knowledge any other party thereto, or the subject of any notice of termination given or, to Seller's Knowledge, threatened. All license, royalty and other fees under each license or royalty agreement regarding the Transferred Assets have been fully and timely paid. (c) There are no exclusive licenses, exclusive distributorship agreements, or noncompetition agreements with respect to the use of any Transferred Assets, or any other material restrictions regarding the right of Seller to fully exploit any Transferred Assets anywhere in the world. 4. Representations and Warranties of Buyer. Buyer represents and warrants to Seller as follows, except as disclosed in a document of even date herewith and delivered by Buyer to 9 Seller on the date hereof referring to the representations and warranties in this Agreement (the "Buyer Disclosure Schedule"). The Buyer Disclosure Schedule will be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Section 4, and the disclosure in any such numbered and lettered section of the Buyer Disclosure Schedule shall qualify only the corresponding section in this Section 4, and any other section hereof where it is reasonably clear, upon a reading of such disclosure without any independent knowledge on the part of the reader regarding the matter disclosed, that the disclosure is intended to apply to such other section. 4.1 Due Incorporation. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of organization, with all requisite corporate power and authority to own, lease, and operate its properties and to carry on its business as now being conducted. 4.2 Enforceability; Authority; No Conflict. (a) Buyer has full corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution, delivery, and performance by Buyer of this Agreement has been duly and validly approved by the Board of Directors of Buyer, and no other actions or proceedings on the part of Buyer are necessary to authorize this Agreement and the transactions contemplated hereby. Buyer has duly and validly executed and delivered this Agreement. This Agreement constitutes the legal, valid and binding obligation of Buyer, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization, or other laws from time to time in effect which affect creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (b) The execution and delivery of this Agreement by Buyer does not, and the performance by Buyer of its obligations hereunder and the consummation of the transactions contemplated hereby, will not conflict with, result in a violation or breach of, constitute (with or without notice or lapse of time or both) a default under, result in or give to any person any right of payment or reimbursement, termination, cancellation, modification or acceleration of, or result in the creation or imposition of any lien upon any of the assets or properties of Buyer under any of the terms, conditions or provisions of (i) the organizational documents of Buyer, or (ii) subject to the taking of the actions described in paragraph (b) of this Section 4.2, (x) any Laws applicable to Buyer or any judgment, decree, order, writ, permit, or license of any Governmental Entity applicable to Buyer or any of its assets or properties, or (y) any contract, agreement, or commitment to which Buyer is a party or by which Buyer or any of its assets or properties is bound, excluding from the foregoing clauses (x) and (y) conflicts, violations, breaches, defaults, terminations, modifications, accelerations, and creations and impositions of liens, which, as to any of the foregoing, would not reasonably be expected to have a Material Adverse Effect on its business, or would not result in the inability of Buyer to consummate the transactions contemplated by this Agreement. (c) No consent, approval, order, or notice to or authorization of, or registration, declaration, or filing with, any Governmental Entity is required to be made or 10 obtained by Buyer in connection with the execution and delivery of this Agreement or the consummation by Buyer of the transactions contemplated hereby, the failure to obtain which would reasonably be expected to have a Material Adverse Effect or prevent or materially delay the consummation of the transactions contemplated hereby, except for such filings, authorization, orders and approvals as may be required of state and local Governmental Entities. 4.3 Compliance with Applicable Laws. To Buyer's Knowledge, Buyer is not in violation of any law, ordinance or regulation of any Governmental Entity, except for possible violations, which individually and in the aggregate do not have a Material Adverse Effect on its business. 4.4 Litigation. There are no claims or Legal Proceedings pending or, to Buyer's Knowledge threatened (in writing) by or against Buyer with respect to this Agreement or in connection with the transactions contemplated hereby. 5. Additional Covenants. 5.1 Confidentiality. The parties acknowledge that Lumei and Seller have previously executed a Letter of Intent dated August 8, 2003, which includes confidentiality provisions therein (the "Non-Disclosure Agreement"), which Non-Disclosure Agreement is incorporated herein by this reference and will continue in full force and effect in accordance with its terms against Seller and against Buyer with Buyer assuming the same obligations thereunder as Lumei, as if Buyer were Lumei. 5.2 Public Disclosure. Unless otherwise permitted by this Agreement, Buyer and Seller will consult with each other before issuing any press release or otherwise making any public statement or making any other public (or non-confidential) disclosure (whether or not in response to an inquiry) regarding the terms of this Agreement and the transactions contemplated hereby, and neither will issue any such press release or make any such statement or disclosure without the prior approval of the other (which approval will not be unreasonably withheld), except as may be required by law or by obligations pursuant to any listing agreement with any national securities exchange or with the NASDAQ Stock Market (in which case the disclosing party will, to the extent practicable within the time available to comply therewith, use its reasonable efforts to obtain the consent of the other party prior to such disclosure). 5.3 Conveyance Taxes. Both parties will use commercially reasonable efforts to cooperate in good faith with the other party in connection with such other party's preparation, execution, and filing of all returns, questionnaires, applications, or other documents regarding any property transfer or gains, sales, use, value added, stock transfer, and stamp Taxes, any transfer, recording, registration, and other fees or any similar taxes that become payable in connection with the transactions contemplated by this Agreement that are required or permitted to be filed. Except as otherwise provided in this Agreement, each party will pay any such Taxes or fees imposed on it by any taxing authority (and any penalties and interest with respect to such Taxes and fees) that become payable in connection with the transactions contemplated by this Agreement. 11 5.4 Negative Covenant. Except as otherwise expressly permitted herein, between the date of this Agreement and the Closing Date, Seller shall not, without the prior written consent of Buyer, (a) transfer or license to any person or entity any rights to the Transferred Assets; (b) sell, lease, license or otherwise dispose of or encumber any of the Transferred Assets; or (c) enter into any compromise or settlement of any litigation, proceeding or governmental investigation relating to the Transferred Assets. 5.5 Subsequent Sale of Transferred Assets by Buyer. Should Buyer, its subsidiaries, affiliates, successors or assigns, or Lumei or any Person designated pursuant to Section 2.12 or 2.13 of the Lumei Agreement, sell, (whether such sale is effected by sale, lease, transfer, or exchange), any of the Patents as described herein and other Transferred Assets identified in Section 6.6 of the Lumei Agreement, used primarily in order to manufacture VCSEL products, to any third party, other than Lumei or the Persons designated in Section 2.12 or 2.13 of the Lumei Agreement, within six (6) months following the Closing Date, Buyer shall pay to Seller fifty percent (50%) of the value Buyer receives in connection with such sale. Should the sale of such Patents be to the Person identified by Seller on Schedule 5.5 attached hereto, fifty percent (50%) of the value received by Buyer in connection with such sale shall be paid to Seller regardless of the date that the sale occurs. 5.6 Additional Documents and Further Assurances. Each party hereto, at the request and expense of the other party hereto, shall use all reasonable efforts to take, or cause to be taken, all actions necessary to effectuate the Acquisition and make effective the other transactions contemplated by this Agreement in accordance with the terms hereof. Each further agrees that it shall, and shall cause each of its affiliates to, from time to time, execute and deliver to the other such additional instruments, documents, conveyances or assurances and take such other action as shall be necessary or otherwise reasonably requested to confirm and assure the rights and obligations of Buyer to the Transferred Assets as provided for in this Agreement, and effectively to vest in Buyer beneficial and record title to the Transferred Assets. At any time and from time to time after the Closing, at Buyer's request and without further consideration, Seller shall promptly execute and deliver (or shall cause to be executed and delivered) such instruments of sale, transfer, conveyance, assignment and confirmation, and take all such other action as Buyer may reasonably request to effect the transfer, conveyance and assignment of the Transferred Assets to Buyer, to assist Buyer in exercising all rights with respect to the Transferred Assets and otherwise to carry out the full purpose and intent of this Agreement, provided, however, that Buyer shall be responsible for any and all incidental or of pocket fees or costs incurred by Seller as a result. 6. Conditions to Closing 6.1 Conditions to Each Party's Obligation to Consummate the Acquisition. The respective obligations of each party to consummate the Acquisition will be subject to the satisfaction on or prior to the Closing Date of the following conditions, except that, to the extent permitted by applicable law, such conditions may be waived in writing by the joint action of the parties hereto. (a) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction, or other order issued by any court of competent 12 jurisdiction or any other Governmental Entities, or other legal or regulatory restraint or prohibition preventing the consummation of the Acquisition will be and remain in effect, nor will there be any action taken, or any law, statute, rule, regulation, decree or order been enacted, adopted, entered, enforced, or deemed applicable to the Acquisition, which remains in effect and which makes the consummation of the Acquisition illegal. (b) Legal Proceedings. There will not be pending any Legal Proceeding by any Governmental Entity or other person: (i) challenging or seeking to restrain or prohibit the consummation of the Acquisition; (ii) Except for the Cree Litigation, relating to the Acquisition and seeking to obtain from Buyer or Seller any damages or other relief that would be material to either Buyer or Seller; (iii) which would materially and adversely affect the right of Buyer to own or use the Transferred Assets; or (iv) seeking to compel Buyer or Seller or any of their controlled affiliates to dispose of or hold separate any material assets. 6.2 Conditions to Obligations of Buyer. The obligations of Buyer to consummate the Acquisition and the transactions contemplated under the Agreement will be further subject to the satisfaction, at or prior to the Closing, of the following conditions, except as may be waived by Buyer in writing: (a) Compliance With Agreements and Covenants. Seller will have performed and complied in all material respects with all of its covenants, obligations and agreements contained in this Agreement to be performed and complied with on or prior to the Closing Date. (b) Representations and Warranties. The representations and warranties of Seller contained herein (i) will be true and correct in all material respects on and as of the date of this Agreement, and (ii) will also be true and correct, on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, except for such inaccuracies which in the aggregate do not constitute, and are not reasonably expected to result in, a Material Adverse Effect (disregarding for purposes of evaluating whether subsection (b)(ii) of this condition is satisfied, any "material adverse effect" or other materiality qualifications contained in such representations and warranties). (c) Closing Certificate. Buyer will have received a certificate signed by the Chief Executive Officer, Chief Financial Officer and President of the Optoelectronics Division of Seller, dated the Closing Date, certifying that the conditions set forth in Section 6.2(a) and 6.2(b) have been satisfied. (d) Opinion of Counsel. Seller shall have delivered the opinion of counsel in the form as is attached hereto as Exhibit C. (e) Other Closing Documents. Buyer will have received the executed Patent Assignment Agreement, and such other closing and transfer documents as Buyer will reasonably request to effect and consummate the Acquisition and the transactions contemplated hereby, in each case in form and substance reasonably satisfactory to Buyer and its counsel. 6.3 Conditions to Obligations of Seller. The obligations of Seller to consummate the Acquisition and the transactions contemplated under this Agreement will be 13 further subject to the satisfaction, at or prior to the Closing, of the following conditions except as may be waived by Seller in writing: (a) Compliance with Agreements and Covenants. Buyer will have performed and complied in all material respects with all of its covenants, obligations and agreements contained in this Agreement, to be performed and complied with on or prior to the Closing Date. (b) Representations and Warranties. The representations and warranties of Buyer contained herein (i) will be true and correct on and as of the date of this Agreement in all material respects, and (ii) will also be true and correct on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, except for such inaccuracies which, in the aggregate, do not constitute and are not reasonably expected to result in, a Material Adverse Effect (disregarding for purposes of evaluating whether subsection (b)(ii) of this condition is satisfied, any "material adverse effect" or other materiality qualifications contained in such representations and warranties). (c) Closing Certificate. Seller will have received a certificate signed by the Chief Executive Officer and Chief Financial Officer of Buyer, dated the Closing Date, certifying that the conditions set forth in Section 6.3(a) and 6.3(b) have been satisfied. (d) Purchase Price. Seller will have received payment of the Purchase Price in accordance with Section 2.2(b). (e) Due Diligence. Seller's Representatives shall have completed to Seller's satisfaction a due diligence review of the Buyer; provided, however, that should Seller agree to the Closing, Seller will be deemed to have determined that this condition has been fully met to its satisfaction or waived by Seller. (f) Other Closing Documents. Seller will have received the executed Patent Assignment Agreement, and such other closing and transfer documents as Seller will reasonably request to effect and consummate the Acquisition and the transactions contemplated hereby, in each case in form and substance reasonably satisfactory to Seller and its counsel.. 7. Termination, Amendment and Waiver. 7.1 Termination. This Agreement may be terminated at any time prior to the Closing by any of the following actions taken or authorized by the Board of Directors of the terminating party or parties: (a) By mutual written consent of Buyer and Seller; (b) By either Buyer or Seller, if the Closing shall not have occurred on or before September 30, 2003 (the "Termination Date"); provided, however, that the right to terminate this Agreement under this Section 7.1(b) will not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before the Termination Date; 14 (c) By either Buyer or Seller, if any Governmental Entity (i) shall have issued an order, decree or ruling or taken any other action (which the parties shall have used their reasonable commercial efforts to resist, resolve or lift, as applicable) restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such order decree, ruling or other action shall have become final and nonappealable or (ii) shall have failed to issue an order, decree or ruling or to take any other action, and such denial of a request to issue such order, decree, ruling or to take such other action shall have become final and nonappealable (which order, decree, ruling or other action the parties shall have used their reasonable commercial efforts to obtain); provided, however, that the right to terminate this Agreement under this Section 7.1(c) will not be available to any party whose failure to use their reasonable commercial efforts has been the cause of such action or inaction; (d) By Buyer if (i) any of Seller's representations and warranties shall have been inaccurate as of the date of this Agreement or shall have become inaccurate as of a date subsequent to the date of this Agreement (as if made on such subsequent date), such that the condition set forth in Section 6.2(b) would not be satisfied or (ii) any of Seller's covenants contained in this Agreement shall have been breached such that the condition set forth in Section 6.2(a) would not be satisfied; provided, however, that if an inaccuracy in the representations and warranties of Seller arising as of a date subsequent to this Agreement is curable by Seller by the Termination Date and Seller is continuing to exercise all reasonable efforts to cure such inaccuracy, then Buyer may not terminate this Agreement under this Section 7.1(d) on account of such inaccuracy; or (e) By Seller if (i) any of Buyer's representations and warranties shall have been inaccurate as of the date of this Agreement or shall have become inaccurate as of a date subsequent to the date of this Agreement (as if made on such subsequent date), such that the condition set forth in Section 6.3(b) would not be satisfied or (ii) if any of Buyer's covenants contained in this Agreement shall have been breached such that the condition set forth in Section 6.3(a) would not be satisfied; provided, however, that if an inaccuracy in the representations and warranties of Buyer arising as of a date subsequent to this Agreement is curable by Buyer by the Termination Date and Buyer is continuing to exercise all reasonable efforts to cure such inaccuracy, then Seller may not terminate this Agreement under this Section 7.1(e) on account of such inaccuracy. In the event of termination of this Agreement and abandonment of the Acquisition pursuant to this Section 7, no party hereto (or any of its directors or officers) will have any liability or further obligation to any other party to this Agreement, except that nothing herein will relieve any party from liability for any breach of this Agreement. 7.2 Amendment. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties. 7.3 Extension; Waiver. At any time prior to the Closing, the parties may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other party, (b) waive any inaccuracies in the representations and warranties contained in this Agreement or in any document delivered pursuant to this Agreement, or (c) waive compliance with any of the agreements or conditions contained in this Agreement. 15 Any agreement on the part of a party to any such extension or waiver will be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise will not constitute a waiver of such rights. 7.4 Notice of Termination. Any party wishing to terminate this Agreement under Section 7.1 will deliver written notice to the other party, setting forth the paragraph under Section 7.1 pursuant to which the Agreement is being terminated and, unless obvious from the nature of the termination clause, a description of the facts and circumstances forming the basis for such termination; provided, that any failure to provide such additional details will not affect the validity of the termination. Any such termination notice will be delivered in accordance with Section 9.2 of this Agreement. 8. Indemnification and Escrow. 8.1 Indemnification. (a) All representations and warranties made by Seller or Buyer herein shall survive the Closing and continue in full force and effect until the date that is the one year anniversary of the Closing Date. Neither Seller nor Buyer has made any representations or warranties to the other, other than as set forth herein. (b) Subject to the limitations set forth in this Section 8, (i) Seller will indemnify and hold harmless Buyer and its subsidiaries, officers, directors, agents, attorneys and employees, and each person, if any, who controls or may control Buyer within the meaning of the Securities Act (hereinafter referred to individually as a "Buyer Indemnified Person" and collectively as "Buyer Indemnified Persons") from and against any and all Losses, costs, diminution of value, damages, liabilities and expenses and from any and all claims, demands, actions and causes of action, including reasonable legal fees (collectively, "Damages"), arising out of (A) any misrepresentation or breach of or default in connection with any of the representations, warranties, covenants and agreements given or made by Seller in this Agreement or in any exhibit or schedule to this Agreement, and (B) the Retained Liabilities. (ii) Buyer will indemnify and hold harmless Seller and its respective officers, directors, agents, attorneys and employees, and each person, if any, who controls or may control Seller within the meaning of the Securities Act (hereinafter referred to individually as a "Seller Indemnified Person" and collectively as "Seller Indemnified Persons") from and against any and all Damages arising out of (A) any misrepresentation or breach of or default in connection with any of the representations, warranties, covenants and agreements given or made by Buyer in this Agreement or in any exhibit or schedule to this Agreement, and (B) the Assumed Liabilities. (iii) In the absence of fraud or intentional misrepresentation, and except as otherwise provided in this Agreement, indemnification pursuant to the provisions of this Section 8 shall be the sole and exclusive remedy of Seller, Buyer and the other Indemnified Parties for any breach of any representation, warranty or covenant contained in this 16 Agreement. The maximum liability of either party to the other for any breach of the representations and warranties set forth herein is limited to the sum of $1,000,000; provided, however, that in no event shall the liability of Sellers to Buyer, Lumei, or any Buyer Indemnified Person (as defined in this Agreement and in the Lumei Agreement), individually or collectively, for any breach of the representations and warranties set forth in this Agreement and in the Lumei Agreement, exceed in the aggregate of $1,000,000. Buyer shall first exhaust all remedies for Damages hereunder against the Escrow Fund. Unless otherwise limited by a provision of this Agreement, any other liability of Sellers or Buyer to the other party arising in connection with this Agreement shall be limited to the sum of $9,600,000; provided, however, that in no event shall the liability of Seller to Buyer, Lumei, or any Buyer Indemnified Person (as defined in this Agreement and in the Lumei Agreement), individually or collectively, pursuant to this Agreement or to the Lumei Agreement, exceed in the aggregate the sum of $9,600,000. Furthermore, in no event shall the liability of Buyer or Lumei, individually or collectively, pursuant to this Agreement or to the Lumei Agreement, to Sellers or any Seller Indemnified Person (as defined in this Agreement and in the Lumei Agreement), exceed in the aggregate the sum of $9,600,000. (iv) Any breach of or default under this Agreement by Buyer or Seller shall also be and cause a breach of or default by such party under the Lumei Agreement. Any breach of or default under the Lumei Agreement by Lumei or by Sellers shall also be and cause a breach of or default under this Agreement. (c) General provisions regarding indemnification rights: (i) A party entitled to indemnification hereunder will take all reasonable steps to mitigate all Damages upon and after becoming aware of any event which could reasonably be expected to give rise to Damages that are indemnifiable hereunder. (ii) No party will be entitled to indemnification to the extent any Tax or other benefits result from, or which may be claimed as a result of the facts and circumstances related to, any indemnifiable claim. (iii) If any Damages are covered by insurance or subject to other third party recoveries (collectively, "Third Party Rights"), Buyer and AXT will use reasonable commercial efforts to recover the amount of coverage or claim from the insurer or such third party, which recovery (after deduction for costs of collection) will reduce any related Damages hereunder. Each of Buyer and Seller agrees to assign all third party rights to the other and to appoint the other as its limited agent and attorney-in-fact for seeking such recovery to the extent that such party fails to recover. Each party also agrees to cooperate with the other in connection therewith. Such appointment as limited agent and attorney-in-fact is coupled with an interest and is irrevocable. (iv) To the extent that an indemnifying party discharges any claim for indemnification hereunder, the indemnifying party will be subrogated to all rights of the indemnified party against third parties. 17 8.2 Claims. Upon receipt by Seller or Buyer of a certificate signed by any officer of the other party (an "Officer's Certificate") stating that with respect to the indemnification obligations of such party set forth in Section 8.1(a)(i) or (ii), Damages exist and specifying in reasonable detail the individual items of such Damages included in the amount or estimated amount so stated, the date each such item was paid, or properly accrued or arose, and the nature of the misrepresentation, breach of warranty, covenant or claim to which such item is related, Seller or Buyer will, as the case may be and subject to the provisions of this Section 8, pay to the other, as promptly as practicable, an amount in cash in value equal to such Damages. 8.3 ARBITRATION OF DISPUTES. (a) Within 30 days of receipt by Buyer or Seller, as the case may be, of an Officer's Certificate, Buyer or Seller, as the case may be, may object in writing to any claim or claims by Buyer or Seller, as the case may be, made in any Officer's Certificate. Buyer or Seller, as the case may be, will have thirty days to respond in a written statement to the objection of the other party. If after such 30 day per period there remains a dispute as to any claims, then Buyer and Seller will attempt in good faith for 60 days to agree upon the rights of the respective parties with respect to each of such claims. To the extent no agreement can be reached after good faith negotiation between the parties, either Seller or Buyer may, by written notice to the other, demand arbitration of the matter unless the amount of the Damages is at issue in pending litigation or dispute with a third party, in which event arbitration with respect to the specific portion of the claim at issue in the pending litigation or dispute shall not be commenced until such amount is ascertained or Seller and Buyer agree to arbitration; and in either such event the matter will be settled by arbitration conducted by one arbitrator. Seller and Buyer will agree on the arbitrator, provided that if Seller and Buyer cannot agree on such arbitrator, either Seller or Buyer can request that JAMS select the arbitrator. The arbitrator will set a limited time period and establish procedures designed to reduce the cost and time for discovery while allowing the parties an opportunity, adequate in the sole judgment of the arbitrator, to discover relevant information from the opposing parties about the subject matter of the dispute. The arbitrator will rule upon motions to compel or limit discovery and will have the authority to impose sanctions, including attorneys' fees and costs, to the same extent as a court of competent jurisdiction in law or equity, should the arbitrator determine that discovery was sought without substantial justification or that discovery was refused or objected to without substantial justification. The decision of the arbitrator will be written, will be in accordance with applicable law and with this Agreement, and will be supported by written findings of fact and conclusion of law, which will set forth the basis for the decision of the arbitrator. The decision of the arbitrator as to the validity and amount of any claim in an Officer's Certificate will be binding and conclusive upon the parties to this Agreement, and notwithstanding anything in this Section 8, the parties will be entitled to act in accordance with such decision. (b) Judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction. Any such arbitration will be held in Alameda County or Los Angeles, California, as may be mutually agreed by the parties, under the commercial rules then in effect of the American Arbitration Association. The non-prevailing party shall be as determined by the arbitrator. The non-prevailing party to an arbitration will pay the fees of the arbitrator and any administrative fee of JAMS, and the reasonable attorneys fees, costs of suit and disbursements of the other party. 18 NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY. WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL ARBITRATION. Buyer's Initials___________ Seller's Initials___________ 8.4 Third-Party Claims. As used herein, an "Indemnified Party" will refer to a Buyer Indemnified Party, or a Seller Indemnified Party, as applicable, the "Notifying Party" will refer to the party hereto whose Indemnified Parties are entitled to indemnification hereunder, and the "Indemnifying Party" will refer to the party hereto obligated to indemnify such Notifying Party's Indemnified Parties. In the event that any of the Indemnified Parties is made a defendant in or party to any action or proceeding, judicial or administrative, or is the recipient of any order or directive in connection with any Environmental Laws, instituted by or received from any third party for the liability or the costs or expenses of which are Damages, the Notifying Party will give the Indemnifying Party prompt notice thereof. The failure to give such notice will not affect any Indemnified Party's ability to seek reimbursement unless such failure has materially and adversely affected the Indemnifying Party's ability to defend successfully a claim. The Indemnifying Party will be entitled to contest and defend such claim; provided, that the Indemnifying Party (i) has a reasonable basis for concluding that such defense may be successful and (ii) diligently contests and defends such claim. Notice of the intention to so contest and defend will be given by the Indemnifying Party to the Notifying Party within twenty (20) business days after the Notifying Party's notice of such claim (but, in all events, at least five (5) business days prior to the date that an answer to such claim is due to be filed). Such contest and defense will be conducted by reputable attorneys employed by the Indemnifying Party. The Notifying Party will be entitled at any time, at its own cost and expense (which expense will not constitute Damages unless the Notifying Party reasonably determines that the Indemnifying Party is not adequately representing or, because of a conflict of interest, may not adequately represent, any interests of the Indemnified Parties, and only to the extent that such expenses are reasonable), to participate in such contest and defense and to be represented by attorneys of its or their own choosing. If the Notifying Party elects to participate in such defense, the Notifying Party will cooperate with the Indemnifying Party in the conduct of such defense. Neither the Notifying Party nor the Indemnifying Party may concede, settle or compromise any claim without the consent of the other party, which consents will not be unreasonably withheld or delayed. Notwithstanding the foregoing, (i) if a claim seeks equitable relief or (ii) if the subject matter of a claim relates to the ongoing business of any of the Indemnified Parties, which claim, if decided against any of the Indemnified Parties, would have a Material Adverse Effect on the 19 ongoing business or reputation of any of the Indemnified Parties, then, in each such case, the Indemnified Parties alone will be entitled to contest, defend and settle such claim in the first instance and, if the Indemnified Parties do not contest, defend or settle such claim, the Indemnifying Party will then have the right to contest and defend (but not settle) such claim. 9. General Provisions. 9.1 Expenses. Except as otherwise provided in this Agreement, each party to this Agreement will bear its respective fees and expenses incurred in connection with the preparation, negotiation, execution and performance of this Agreement and the Acquisitions, including all fees and expense of its Representatives; provided, however, that in any suit properly brought pursuant to the terms of Section 9.3 below, upon final determination in such proceeding, the prevailing party as determined by a court of law shall be entitled to reasonable attorneys fees, costs of suit and disbursements in addition to any other remedies or damages which may be properly awarded by the court. 9.2 Notices. All notices, consents, waivers and other communications required or permitted by this Agreement shall be in writing and shall be deemed given to a party when (a) delivered to the appropriate address by hand or by nationally recognized overnight courier service (costs prepaid); (b) sent by facsimile or e-mail with confirmation of transmission by the transmitting equipment; or (c) received or rejected by the addressee, if sent by certified mail, return receipt requested, in each case to the following addresses, facsimile numbers or e-mail addresses and marked to the attention of the person (by name or title) designated below (or to such other address, facsimile number, e-mail address or person as a party may designate by notice to the other parties): (a) if to Seller, to: AXT, Inc. 4281 Technology Drive Fremont, California 94538 Attention: Donald L. Tatzin Fax: (510) 438-4793 Tel: (510) 683-5900 with a copy to: Gray Cary Ware & Freidenrich LLP 2000 University Circle East Palo Alto, California 94303-2248 Attention: Sally J. Rau, Esq. Fax: (650) 833-2001 Tel: (650) 833-2000 20 (a) if to Buyer, to: Dalian Luming Science and Technology Group Co., Ltd. 10 Houju Road Qixianling Industrial Base High-tech Zone Dalian, P. R. China 116025 Attention: Mr. Zhiguo XiaoFax: ( ) Tel: (86) 411-4791492 with a copy to: The Corporate Law Group Waterfront Plaza, Suite 120 500 Airport Boulevard Burlingame, California 94010 Attention: Paul D. Marotta, Esq. or Jennifer Chen, Esq. Fax: (650) 227-8001 Tel: (650) 227-8000 9.3 Jurisdiction; Service of Process. Except for claims subject to arbitration as provided in Section 8.3 above, any Proceeding arising out of or relating to this Agreement or any Acquisition may be brought in the courts of the State of California, County of Alameda or of Los Angeles as the parties may mutually agree, or, if it has or can acquire jurisdiction, in the United States District Court for the Northern District of California or the Southern District of California, as the case may be, and each of the parties irrevocably submits to the exclusive jurisdiction of each such court in any such Proceeding, waives any objection it may now or hereafter have to venue or to convenience of forum, agrees that all claims in respect of the Proceeding shall be heard and determined only in any such court and agrees not to bring any Proceeding arising out of or relating to this Agreement or any Acquisition in any other court. The parties agree that either or both of them may file a copy of this paragraph with any court as written evidence of the knowing, voluntary and bargained agreement between the parties irrevocably to waive any objections to venue or to convenience of forum. Process in any Proceeding referred to in the first sentence of this Section may be served on any party anywhere in the world. 9.4 Waiver; Remedies Cumulative. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither any failure nor any delay by any party in exercising any right, power or privilege under this Agreement or any of the documents referred to in this Agreement will operate as a waiver of such right, power or privilege, and no single or partial exercise of any such right, power or privilege will preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or any of the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of that party or of the right of the party giving such 21 notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. 9.5 Entire Agreement and Modification. This Agreement supersedes all prior agreements, whether written or oral, between the parties with respect to its subject matter (including any letter of intent and any confidentiality agreement between Buyer and Seller) and constitutes (along with the Seller Disclosure Schedule, Buyer Disclosure Schedule and other documents delivered pursuant to this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended, supplemented, or otherwise modified except by a written agreement executed by the party to be charged with the amendment. 9.6 Assignments, Successors and No Third-Party Rights. No party may assign any of its rights or delegate any of its obligations under this Agreement without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement any legal or equitable right, remedy or claim under or with respect to this Agreement or any provision of this Agreement, except such rights as shall inure to a successor or permitted assignee pursuant to this Section 9.6. 9.7 Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 9.8 Construction. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Sections" refer to the corresponding Sections of this Agreement. 9.9 Time of Essence. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence. 9.10 Governing Law. This Agreement will be governed by and construed under the laws of the State of California without regard to conflicts-of-laws principles that would require the application of any other law. 9.11 Execution of Agreement. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. The exchange of copies of this Agreement and of signature pages by facsimile transmission shall constitute effective execution and delivery of this Agreement as to the parties and may be used in lieu of the original Agreement for all purposes. Signatures of the parties transmitted by facsimile shall be deemed to be their original signatures for all purposes. 22 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. Buyer: Seller: DALIAN LUMING SCIENCE AND TECHNOLOGY GROUP AXT, INC., a Delaware corporation CO., LTD., a corporation organized under the laws of the People's Republic of China By: /s/ Zhiguo Xiao By: /s/ Morris S. Young -------------------------------------- ----------------------------------- Zhiguo Xiao Morris S. Young Chairman and Chief Executive Officer Chairman and Chief Executive Officer By: /s/ Chuanxin Xu By: /s/ Donald L. Tatzin -------------------------------------- ----------------------------------- Chuanxin Xu Donald L. Tatzin Chief Financial Officer Chief Financial Officer 23 ASSET PURCHASE AGREEMENT by and among LUMEI OPTOELECTRONICS CORP., AXT, INC. LYTE OPTRONICS, INC. Beijing Tongmei Xtal Technology and XIAMEN ADVANCED SEMICONDUCTOR CO., LTD. Dated September 4, 2003 TABLE OF CONTENTS

Page ---- 1. Definitions and Usage........................................................................ 1 1.1 Definitions......................................................................... 1 1.2 Usage............................................................................... 7 2. Sale and Transfer of Assets; Closing......................................................... 8 2.1 Purchase and Sale of Assets......................................................... 8 2.2 Transfer of Assumed Contracts....................................................... 9 2.3 Excluded Assets..................................................................... 9 2.4 License to Use Trademarks........................................................... 10 2.5 Sale and Lease of Real Property..................................................... 11 2.6 Consideration....................................................................... 12 2.7 Liabilities......................................................................... 14 2.8 Sale of Inventory................................................................... 16 2.9 Allocation.......................................................................... 16 2.10 Closing............................................................................. 16 2.11 Closing Obligations................................................................. 17 2.12 License of MOCVD Equipment.......................................................... 18 2.13 China Equipment..................................................................... 19 2.14 Grant of Security Interest.......................................................... 19 3. Representations and Warranties of Sellers.................................................... 20 3.1 Due Incorporation................................................................... 20 3.2 Enforceability; Authority; No Conflict.............................................. 20 3.3 Sufficiency Of Transferred Assets................................................... 21 3.4 Title To Transferred Assets; Encumbrances........................................... 21 3.5 Condition Of Real Properties........................................................ 22 3.6 Inventories......................................................................... 22 3.7 Environmental, Health and Safety Matters............................................ 23 3.8 Litigation.......................................................................... 24 3.9 Employees........................................................................... 25 3.10 Labor Disputes; Compliance.......................................................... 25 3.11 Intellectual Property Assets........................................................ 25 3.12 Permits and/or Approvals............................................................ 27 3.13 Insurance........................................................................... 27 3.14 Assumed Contracts................................................................... 28 4. Representations and Warranties of Buyer...................................................... 28 4.1 Due Incorporation................................................................... 28 4.2 Enforceability; Authority; No Conflict.............................................. 28 4.3 Compliance with Applicable Laws..................................................... 29 4.4 Litigation.......................................................................... 29

i TABLE OF CONTENTS (continued)

Page ---- 5. Covenants Prior to Closing................................................................... 29 5.1 Access and Investigation............................................................ 29 5.2 Operation of the Optoelectronics Business........................................... 29 5.3 Negative Covenant................................................................... 30 5.4 No Negotiation...................................................................... 30 5.5 Inventory of Exhibit A-1 Assets..................................................... 30 6. Additional Covenants......................................................................... 31 6.1 Employees and Employee Benefits..................................................... 31 6.2 Confidentiality..................................................................... 31 6.3 Public Disclosure................................................................... 31 6.4 Conveyance Taxes.................................................................... 31 6.5 Fees and Costs for Cree Litigation.................................................. 32 6.6 Subsequent Sale of Transferred Assets by Buyer...................................... 34 6.7 Reimbursement of Operating Expenses................................................. 34 6.8 Removal of Encumbrances............................................................. 36 6.9 Real Property Taxes and Other Expenses.............................................. 36 6.10 Payments Under Open Purchase or Sales Orders........................................ 36 6.11 Additional Documents and Further Assurances......................................... 37 6.12 Mutual Covenant Not to Compete and Not to Solicit................................... 37 6.13 Construction at Telstar Facility.................................................... 39 6.14 Release of Encumbrances on Telstar Facility......................................... 39 7. Conditions to Closing........................................................................ 39 7.1 Conditions to Each Party's Obligation to Consummate the Acquisition................. 39 7.2 Conditions to Obligations of Buyer.................................................. 40 7.3 Conditions to Obligations of Sellers................................................ 41 8. Termination, Amendment and Waiver............................................................ 41 8.1 Termination......................................................................... 41 8.2 Amendment........................................................................... 43 8.3 Extension; Waiver................................................................... 43 8.4 Notice of Termination............................................................... 43 9. Indemnification and Escrow................................................................... 43 9.1 Indemnification..................................................................... 43 9.2 Escrow Fund......................................................................... 45 9.3 Claims.............................................................................. 45 9.4 ARBITRATION OF DISPUTES............................................................. 45 9.5 Third-Party Claims.................................................................. 46 10. General Provisions........................................................................... 47 10.1 Expenses............................................................................ 47

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Page ---- 10.2 Notices............................................................................. 47 10.3 Jurisdiction; Service of Process.................................................... 48 10.4 Waiver; Remedies Cumulative......................................................... 49 10.5 Entire Agreement and Modification................................................... 49 10.6 Assignments, Successors and No Third-Party Rights................................... 49 10.7 Severability........................................................................ 49 10.8 Construction........................................................................ 50 10.9 Time of Essence..................................................................... 50 10.10 Governing Law....................................................................... 50 10.11 Execution of Agreement.............................................................. 50

iii LIST OF EXHIBITS AND SCHEDULES Exhibit A-1 List of Transferred Assets Exhibit A-2 Description of Patents Included in Transferred Assets Exhibit B List of Assumed Contracts Exhibit C Trademark License Agreement Exhibit D Grant Deed Exhibit E Form of Bill of Sale Exhibit F Form of Assignment and Assumption Agreement Exhibit G Form of Patent Assignment Agreement Exhibit H Form of Escrow Agreement I-1 and I-2 Forms of Buyer's and Sellers' Counsel Opinions Exhibit J The LED Equipment Schedule 2.9 Allocation Schedule 2.12 MOCVD Equipment Schedule 6.6 Identified Person Schedule 6.8 Encumbrances to be Released Schedule 6.12 Identified Employees Seller Disclosure Schedule Buyer Disclosure Schedule ASSET PURCHASE AGREEMENT This Asset Purchase Agreement ("Agreement") is dated September 4, 2003, by and among Lumei Optoelectronics Corp., a California corporation ("Buyer"), AXT, Inc., a Delaware corporation ("AXT"), and Lyte Optronics, Inc., a Nevada corporation and wholly-owned subsidiary of AXT ("Lyte"), and solely as to the transfer of the Transferred Assets held in their respective names, Beijing Tongmei Xtal Technology, Ltd., a corporation organized under the laws of the People's Republic of China ("AXT Tongmei") and Xiamen Advanced Semiconductor Co., Ltd., a corporation organized under the laws of the People's Republic of China ("AXT Xiamen" and, where applicable, together with AXT, Lyte and AXT Tongmei, the "Sellers"). RECITALS WHEREAS, Sellers wish to sell certain assets used by Sellers in the development and production of light-emitting diodes ("LED") products, Fabry Perot laser diodes ("LD") products, and high-speed vertical cavity surface-emitting lasers ("VCSEL") products (the "Optoelectronics Business"); WHEREAS, Buyer wishes to purchase from Sellers, and Sellers wish to sell to Buyer, their respective interests in the Transferred Assets (as defined herein) for the purchase price and subject to the terms and conditions hereinafter set forth; and WHEREAS, concurrently with the execution of this Agreement, AXT has entered into an agreement (the "Luming Agreement") with Dalian Luming Science and Technology Group, Co., Ltd. ("Luming") for the transfer and sale of certain patents used in the Optoelectronics Business. NOW, THEREFORE, in consideration of the premises set forth above and the respective covenants, agreements, representations and warranties hereinafter set forth, Buyer and Sellers hereby agree as follows: 1. Definitions and Usage. 1.1 Definitions. For purposes of this Agreement, the following terms and variations thereof have the meanings specified or referred to in this Section 1.1: "Accounts Receivable" means (a) all trade accounts receivable and other rights to payment from customers of Sellers and the full benefit of all security for such accounts or rights to payment, including all trade accounts receivable representing amounts receivable in respect of goods shipped or products sold or services rendered to customers of Sellers, (b) all other accounts or notes receivable of Sellers and the full benefit of all security for such accounts or notes and (c) any claim, remedy or other right related to any of the foregoing. "Acquisition" means all of the transactions contemplated by this Agreement. 1 "Assignment and Assumption Agreement" is as defined in Section 2.11(a)(ii). "Assumed Contracts" is as defined in Section 2.2. "Assumed Liabilities" is as defined in Section 2.7(a). "AXT" is as defined in the opening paragraph. "AXT Tongmei" is as defined in the opening paragraph to this Agreement. "AXT Xiamen" is as defined in the recitals to this Agreement. "Bill of Sale" is as defined in Section 2.11(a)(i). "Business Day" means any day other than (a) Saturday or Sunday or (b) any other day on which banks in California are permitted or required to be closed. "Buyer" is as defined in the first paragraph of this Agreement. "Buyer Disclosure Schedule" is as defined in Section 4. "Buyer Indemnified Persons" is as defined in Section 9.1(b)(i). "Certification of Transferred Assets" is as defined in Section 5.5. "China Equipment" is as defined in Section 2.12(b). "Closing" is as defined in Section 2.10. "Closing Date" means the date on which the Closing actually takes place. "Code" means the Internal Revenue Code of 1986. "Contract" means any agreement, contract, lease, consensual obligation, promise or undertaking (whether written or oral and whether express or implied), whether or not legally binding. "Copyrights" is as defined in Section 3.11(a)(ii). "Cree Litigation" is as defined in Section 6.5. "Cree Reimbursement Obligation" is defined in Section 6.5(d). "Damages" is as defined in Section 9.1(b). "Effective Time" means the effective time of the Closing, which will be midnight California time on the Closing Date. 2 "Encumbrance" means any charge, claim, community or other marital property interest, condition, equitable interest, lien, option, pledge, security interest, mortgage, right of way, easement, encroachment, servitude, right of first option, right of first refusal or similar restriction, including any restriction on use, voting (in the case of any security or equity interest), transfer, receipt of income or exercise of any other attribute of ownership. "Environmental Claim" means any and all administrative, regulatory, or judicial actions, suits, demands, demand letters, directives, claims, liens, investigations, proceedings, or notices of noncompliance or violation by any person or entity (including any Governmental Entity) alleging liability or potential liability (including, without limitation, potential responsibility for or liability for enforcement costs, investigatory costs, cleanup costs, containment measures, governmental response costs, removal costs, remedial costs, natural resources damages, property damages, personal injuries, fines or penalties (collectively "Environmental Costs")) arising out of, based on or resulting from (A) the presence, or Release or threatened Release into the environment, of any Hazardous Materials at any location, whether or not owned, operated, leased, or managed by AXT; (B) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law; or (C) any and all claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation, or injunctive relief resulting from the presence or Release of any Hazardous Materials. "Environmental Laws" mean all applicable federal, state, local, and foreign laws, rules, regulations, and requirements of common law relating to public health and safety and worker health and safety, pollution, or protection of the environment (including, without limitation, ambient air, surface water, groundwater, land surface, subsurface air, or subsurface strata), as it relates to Hazardous Materials, including, without limitation, laws and regulations relating to Releases or threatened Releases of Hazardous Materials, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of Hazardous Materials. "Environmental Permits" is as defined in Section 3.7(b). "Escrow Agent" is as defined in Section 9.2. "Escrow Agreement" is as defined in Section 2.11(a)(vi). "Escrow Fund" is as defined in Section 2.6(a). "Escrow Termination" is as defined in Section 9.2. "Excluded Assets" is as defined in Section 2.3. "GAAP" means generally accepted accounting principles for financial reporting in the United States. "Governmental Entity" means any foreign or United States federal, state, local, county, city, or provincial court, administrative agency or commission, or other governmental entity or instrumentality (including a stock exchange or other self-regulatory body). 3 "Grant Deed" is as defined in Section 2.5. "Hazardous Materials" means (a) any petroleum or petroleum products, radioactive materials, asbestos, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid containing polychlorinated biphenyls ("PCBs") in regulated concentrations; (b) any chemicals, materials, or substances which are now defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," or words of similar import, under any Environmental Law; (c) any other chemical, material, substance, or waste, which is regulated under any Environmental Law in a jurisdiction in which AXT operates; and (d) any buildings or parts thereof, technical installations or warfare agents buried in the ground. "Improvements" means all buildings, structures, fixtures and improvements located on the Telstar Facility or included in the Transferred Assets, including those under construction. "Indemnified Party" is as defined in Section 9.5. "Indemnifying Party" is as defined in Section 9.5. "Intellectual Property Assets" is as defined in Section 3.11(a). "Inventories" means all inventories of Sellers, wherever located, including all finished goods, work in process, raw materials, spare parts and all other materials and supplies to be used or consumed by Sellers in the production of finished goods sold by Sellers in the Optoelectronics Business. "Knowledge" means such party's actual knowledge after reasonable inquiry of officers, directors, and other employees of such party reasonably believed to have knowledge of such matters. "Laws" means all applicable United States federal, state, provincial and local laws, ordinances, rules, statutes, regulations, all Orders or awards, and all applicable laws of the People's Republic of China. "Legal Proceedings" means any actions, suits, arbitrations, regulatory or other proceedings, litigation, or governmental investigations by or before any court, arbitration or Governmental Entity. "Liabilities" with respect to any Person means all Indebtedness, obligations and other liabilities of such Person (whether absolute, accrued, contingent, asserted, unasserted, fixed or otherwise, known or unknown, or whether due or to become due). "Licensed Intellectual Property" is as defined in Section 3.11(d). "Loss" means liabilities, losses, costs, claims, damages, penalties, and expenses (including attorneys' fees and expenses and costs of investigation and litigation). 4 "Luming" is as defined in the recitals to this Agreement. "Luming Agreement" is as defined in the recitals to this Agreement. "Lyte" is as defined in the opening paragraph. Any reference to any event, change, condition or effect being "material" with respect to any entity or group of entities means any material changes, conditions or effects related to the financial condition, properties, assets (including intangible assets), liabilities, business, operations or results of operations of such entity or group of entities. "Material Adverse Effect" means an adverse effect on the business, operations, assets, liabilities, or condition (financial or otherwise), of the Optoelectronics Business or the Transferred Assets, taken individually or as a whole, to Sellers or Buyer as applicable, that results in a liability of in excess of $20,000, except to the extent that any such effect primarily results from (i) changes in general economic conditions or changes affecting the industry generally in which such entities operate (provided that such changes do not affect such entities in a disproportionate manner), or (ii) the announcement or pendency of the Acquisition (including resulting losses, deferrals, delays or cancellations of customer orders). Notwithstanding any other provision of this Agreement, actions taken that are expressly contemplated by this Agreement, and the directly intended effects thereof shall not be deemed to constitute a Material Adverse Effect. "MOCVD Equipment" is as defined in Section 2.12. "Monterey Park Facility" is as defined in Section 2.5(b). "Monterey Park Lease" is as defined in Section 2.5(b). "Name" is as defined in Section 2.4. "Notifying Party" is as defined in Section 9.5 "Officer's Certificate" is as defined in Section 9.3. "Optoelectronics Business" is as defined in the opening recital. "Order" means any order, injunction, judgment, decree, ruling, assessment or arbitration award of any Governmental Entity or arbitrator. "Patent" is as defined in Section 2.1. "Permits and/or Approvals" means all permits, licenses, certificates of authority, authorizations, approvals, registrations, franchises and similar consents granted or issued by any Governmental Entity. 5 "Permitted Encumbrances" means liens for Taxes not yet due and payable, and with respect to the Telstar Facility, items 1-9, 15 and 17 on the Chicago Title Company Preliminary Report No. 31058048 dated August 22, 2003. "Person" means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a Governmental Entity. "Proceeding" means any action, arbitration, audit, hearing, investigation, litigation or suit (whether civil, criminal, administrative, judicial or investigative, whether formal or informal, whether public or private) commenced, brought, conducted or heard by or before, or otherwise involving, any Governmental Entity or arbitrator. "Property Expenses" is as defined in Section 6.9. "Purchase Price" is as defined in Section 2.3. "Real Property Taxes" is as defined in Section 6.9. "Reimbursed Construction Costs" is as defined in Section 6.13. "Release" means any release, spill, emission, leaking, pumping, pouring, dumping, emptying, injection, deposit, disposal, discharge, dispersal, leaching or migration on or into the Environment or into or out of any property. "Representative" means with respect to a particular Person, any director, officer, manager, employee, agent, consultant, advisor, accountant, financial advisor, legal counsel or other representative of that Person. "RMB" means Renminbi, the sole legal tender of the People's Republic of China. "RMB Account" is as defined in Section 2.6(b). "Second Quarter" is as defined in Section 3.3. "Secured Assets" has the meaning set forth in Section 2.14. "Sellers" is as defined in the first paragraph of this Agreement. "Seller Indemnified Person" is as defined in Section 9.1(b)(ii). "Shared Legal Fees" is as defined in Section 6.5(a). "Tax" means any income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental, windfall profit, customs, vehicle, airplane, boat, vessel or other title or registration, capital stock, franchise, employees' income withholding, foreign or domestic withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, value added, alternative, add-on minimum and other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever and any interest, penalty, addition or additional amount thereon imposed, assessed or collected by or 6 under the authority of any Governmental Entity or payable under any tax-sharing agreement or any other Contract. "Tax Return" means any return (including any information return), report, statement, schedule, notice, form, declaration, claim for refund or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Entity in connection with the determination, assessment, collection or payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Laws relating to any Tax. "Telstar Facility" means that building and facilities located at 9650 Telstar Avenue, El Monte, California 91731. "Termination Date" is as defined in Section 8.1(b). "Third Party Rights" is as defined in Section 9.1(c). "Title Company" is as defined in Section 2.5(a). "Title Report" is as defined in Section 2.5(a). "Tongmei Facility" is as defined in Section 2.5(d). "Tongmei Lease" is as defined in Section 2.5(d). "United States Account" is as defined in Section 2.6(b). "WARN Act" is as defined in Section 3.9(a). "Xiamen Facility" is as defined in Section 2.5(d). 1.2 Usage. (a) Interpretation. In this Agreement, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are not prohibited by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually; (iii) reference to any gender includes each other gender; (iv) reference to any agreement, document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof; (v) reference to any Law means such Law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder, and reference to any Section or other provision of any Law means that provision of such Law from time to time in effect and constituting the substantive amendment, modification, codification, replacement or reenactment of such Section or other provision; (vi) the words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation;" (vii) the table of contents and headings contained in this Agreement are for reference purposes only 7 and shall not affect in any way the meaning or interpretation of this Agreement; and (viii) all references to dollars or $ herein will mean United States dollars. (b) Legal Representation of the Parties. This Agreement was negotiated by the parties with the benefit of legal representation, and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against any party shall not apply to any construction or interpretation hereof. (c) English Language Version Prevails. Should this Agreement, any exhibit or schedule hereto, or any ancillary document, agreement or instrument executed in connection herewith be translated into any language other than the English language, the English language version of such document, agreement or instrument shall prevail and be the official version of such document, agreement or instrument. 2. Sale and Transfer of Assets; Closing. 2.1 Purchase and Sale of Assets. (a) Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, but effective as of the Effective Time, Sellers shall sell, convey, assign, transfer and deliver to Buyer, and Buyer shall purchase and acquire from Sellers, free and clear of any Encumbrances other than Permitted Encumbrances, (i) all of the Sellers' respective right, title and interest in and to all of those assets owned by each of them and listed on Exhibit A-1 attached hereto and incorporated herein; (ii) the patents and pending patent applications listed on Exhibit A-2 attached hereto and incorporated herein and all associated know how, show how and any intellectual property rights thereto (the "Patents"); (iii) the Intellectual Property Assets (as defined below), used by Sellers in the Optoelectronics Business (provided, that to the extent that any of such Intellectual Property Assets comprising know-how, technical information, data, or process technology are also used by Sellers in the manufacture of substrates in its existing substrate business, Sellers will retain the right to use itself, but not to sell, transfer, assign, license or disclose to any third party, such Intellectual Property Assets); (iv) a complete, current, historical and prospective list of the customers of the Optoelectronics Business, including identification of designated sales people of Sellers responsible for such customers, customer contact information, and to the extent existing in Sellers records, order, shipment and payment history and such other information that AXT has that it reasonably believes will help Buyer, its subsidiaries, affiliates, successors or assigns retain or gain such customers; (v) Inventory equal to at least $1,500,000, net of reserves, of the LD, LED and VCSEL products on hand at Sellers' facilities as of August 7, 2003, less any Inventory sold pursuant to the terms of Section 2.8 below, comprising all raw material, semi-finished goods and finished goods of the LED and VCSEL products; (vi) the Telstar Facility; and (vii) all such records, files and documents relating to the Transferred Assets, other than financial books or records, employee records, records relating to the Excluded Assets, and any records required to be retained by AXT by Law. All of such assets listed in subsections (i) through (vii) above are defined as the "Transferred Assets." (b) Sellers will deliver possession or control of the Transferred Assets to Buyer or Buyer's designee upon or promptly following the Effective Time at the locations at 8 Sellers' premises at which such Transferred Assets are currently located, and will further deliver to Buyer appropriate assignments, bills of sale, conveyances and other instruments of sale and/or transfer in forms satisfactory to AXT and Buyer in order to convey to Buyer good title to the Transferred Assets. (c) In the event that any assets held by Sellers or their subsidiaries or affiliates following the Effective Time are within the definition of Transferred Assets, and have been part of or previously used in connection with the Optoelectronics Business by Sellers or their subsidiaries or affiliates, other than such assets as are sold or transferred to Luming pursuant to the Luming Agreement, Sellers shall, or shall cause such subsidiaries or affiliates to, promptly assign, transfer, convey and deliver such assets (or cause such assets to be assigned, transferred, conveyed and delivered) to Buyer, or any Person designated by Buyer. Subject to the limitations set forth in Section 2.1(iii) above and to the terms of Sections 2.12 and 2.13 below relating to the MOCVD Equipment and China Equipment referenced therein (provided that Sellers shall not use, and shall cause their subsidiaries, affiliates, Representatives, successors or assigns not to use, the MOCVD Equipment or the China Equipment in the operation of their ongoing business), Sellers shall not use any of the Transferred Assets after the Effective Time, and shall cause their subsidiaries, affiliates, Representatives, successors and assigns not to use any of such Transferred Assets. 2.2 Transfer of Assumed Contracts. Upon the terms and subject to the conditions set forth in this Agreement, effective as of the Effective Time, Sellers shall assign to Buyer, and Buyer shall assume from Sellers, all of Sellers' respective rights and obligations under the contracts listed on Exhibit B attached hereto and incorporated herein (the "Assumed Contracts"). Except as specifically set forth to the contrary herein, subject to and upon the terms and conditions of this Agreement, effective as of the Effective Time, Buyer shall assume from Sellers and thereafter pay, perform and/or otherwise discharge in accordance with the terms of such Assumed Contracts all liabilities and obligations relating to and arising out of the Assumed Contracts insofar as (and solely to the extent that) such performance, payment or other obligations mature, become due or are to be performed after (but not before) the Effective Time. 2.3 Excluded Assets. Notwithstanding anything to the contrary contained in Section 2.1 or elsewhere in this Agreement, the following assets of Sellers (collectively, the "Excluded Assets") are not part of the sale and purchase contemplated hereunder, are excluded from the Transferred Assets and shall remain the property of Sellers after the Closing: (a) except for the right to use the facility as described in Section 2.5(b) or (c), below, any right, title or interest in or to the buildings and facilities, or to the structures, fixtures and improvements thereon or therein, located at the Monterey Park Facility, or Tongmei Facility or any other real property occupied by Sellers or any of their affiliates other than the Telstar Facility; (b) all Accounts Receivable, cash, cash equivalents and short-term investments and the accounts in which these assets are held; (c) all minute books, stock records, corporate seals, employee records and financial records (other than fixed asset records, customer lists and data relating to inventory, 9 which shall be part of the Transferred Assets, but which Sellers shall be entitled to retain copies of for the purposes of preparing or filing any reports, financial statements or other required documents with any Governmental Entity or required in order to fulfill their obligations hereunder or as to the Retained Liabilities); (d) those rights relating to deposits and prepaid expenses and claims for refunds and rights to offset in respect thereof; (e) all insurance policies and rights thereunder; (f) any Contracts not listed on Exhibit B hereto; (g) except for the license as provided in Section 2.4 below, all trademarks, trade names, and service marks of Sellers; (h) all assets related to Sellers' prior consumer products division and all assets used by Sellers in transactions with Finisar Corporation, or licensed, leased or otherwise provided to Finisar Corporation, other than the portion of the Telstar Facility and associated tenant improvements previously leased by Sellers to Finisar Corporation; (i) all personnel records and other records that Sellers are required by law to retain in its possession; (j) all claims for refund of Taxes and other governmental charges of whatever nature; (k) all applications for and the resulting Environmental Permits, environmental monitoring data and reports, business licenses and operating permits, employee training programs and training records, and similar information related to public health and safety and worker health and safety; (l) all rights in connection with and assets of any employee benefit plans maintained by Sellers; and (m) all rights of Sellers under this Agreement, the Bill of Sale, the Assignment and Assumption Agreement, the Patent Assignment Agreement, the Grant Deed, the Trademark License Agreement, the Monterey Park Lease, the Tongmei Lease, and the Escrow Agreement. 2.4 License to Use Trademarks. AXT hereby grants to Buyer a non-exclusive, royalty-free, fully paid up, non-transferable and worldwide license to use (without any right to sublicense) the name "AXT" (the "Name") in connection with the sale of LDs, LEDs and VCSELs after the Closing Date, for a period of twelve (12) months, pursuant to and in accordance with the terms of a license agreement in the form of Exhibit C attached hereto (the "Trademark License Agreement"). Buyer acknowledges that, except for the license granted to Buyer pursuant to the terms and conditions of the Trademark License Agreement, all right, title, and interest in and to the Name shall remain with Sellers. During the term of this Agreement and of the Trademark License Agreement, Buyer will not contest Sellers' exclusive right, title and 10 interest in and to, or the validity of, the Name. In addition, Buyer will not in any manner represent that it has any interest in the Name, except for the limited license provided herein. Nothing contained herein shall be construed as creating any agency, partnership, or other form of joint enterprise between the parties. The relationship between the parties shall at all times be that of independent contractors. Neither party shall have authority to contract for or bind the other in any manner whatsoever. 2.5 Sale and Lease of Real Property. (a) Sellers shall sell to Buyer the Telstar Facility pursuant to a recordable grant deed (the "Grant Deed"), in the form of Exhibit D attached hereto. Sellers have provided Buyer with (i) a title report for the Telstar Facility (the "Title Report") prepared by Chicago Title Company (the "Title Company") and (b) copies of documents referenced in the exceptions set forth in the Title Report, and Buyer hereby approves of all Permitted Encumbrances shown therein. Transfer taxes shall be borne and paid by Sellers, the costs of any title insurance premium shall be borne and paid by Buyer, and escrow fees and any other closing costs shall be allocated between Buyer and Sellers in accordance with the custom of the county in which the Telstar Facility is located. Buyer and Seller will each deposit the funds necessary to close the escrow for such sale. (b) AXT will grant Buyer the exclusive use of the building and facilities located at 2019 Saturn Street, Monterey Park, CA 91754 (the "Monterey Park Facility") for a period of up to eight (8) months after the Closing Date pursuant to the terms of the real estate lease to be agreed between Buyer and AXT (the "Monterey Park Lease"). Buyer shall comply with all Laws, including all Environmental Laws, solely applicable to its occupancy or use of the Monterey Park Facility during the term of the Monterey Park Lease, and shall indemnify, defend and hold AXT harmless for any Losses or Damages that AXT may incur as a result of Buyer's occupancy or use of the Monterey Park Facility during the term of the Monterey Park Lease. AXT shall comply with all Laws, including all Environmental Laws, applicable to its ownership of the Monterey Park Facility, and shall indemnify, defend and hold Buyer harmless for any Losses or Damages that Buyer may incur as a result of AXT's ownership of the Monterey Park Facility. Buyer shall not pay Base Rent to AXT under the Monterey Park Lease, but shall pay Additional Rent and any other charges (if any) that are set forth in the Monterey Park Lease, during the eight-month period of this lease. Buyer may terminate the Monterey Park Lease on thirty (30) days' prior written notice to AXT. In addition, so long as Buyer is occupying the Monterey Park Facility, AXT shall maintain property and casualty insurance covering the ownership of the Monterey Park Facility, Buyer shall maintain property and casualty insurance covering its personal property at and its operations conducted at the Monterey Park Facility, and each party shall name the other party as an additional insured under its respective insurance policy. AXT may, upon prior notice to and consent of Buyer as to the time of each visit, such consent not to be unreasonably withheld, conduct clean up work in the Monterey Park Facility during the term of the Monterey Park Lease so long as and to the extent that such work does not interfere with the normal activities of Buyer at the Monterey Park Facility or materially increase the operating costs of the Monterey Park Facility to Buyer. (c) Sellers shall also grant Buyer or its designated subsidiary the exclusive use of that portion of the building and facilities located at Tongmei, China that was 11 used by Sellers or a subsidiary or affiliate of Sellers for the operation of the Optoelectronics Business (the "Tongmei Facility") for up to twelve (12) months after the Closing Date, at a charge of $900 per month, pursuant to the terms of a real estate lease to be agreed between Buyer and AXT (the "Tongmei Lease"). Buyer may terminate the Tongmei Lease at any time upon thirty (30) days' prior written notice. Buyer and the designated subsidiary occupying the Tongmei Facility shall comply with all Laws, including all Environmental Laws, applicable to its occupancy or use of the Tongmei Facility, and shall indemnify, defend and hold Sellers and any Seller Indemnified Person (as defined in Section 9.1(b)(ii) below) harmless for any Losses or Damages that Sellers or such Seller Indemnified Person may incur as a result of Buyer's or such subsidiary's occupancy or use of the Tongmei Facility. Sellers shall comply with all Laws, including all Environmental Laws, applicable to its ownership of the Tongmei Facility, and shall indemnify, defend and hold Buyer or any Buyer Indemnified Person (as defined in Section 9.1(b)(i) below) harmless for any Losses or Damages that Buyer or such Buyer Indemnified Person may incur as a result of Sellers' ownership of the Tongmei Facility. In addition, so long as Buyer or its designated subsidiary is occupying the Tongmei Facility, Sellers shall maintain property and casualty insurance covering its ownership of the Tongmei Facility, and Buyer or such designated subsidiary shall maintain property and casualty insurance covering its personal property at and its operations conducted at the Tongmei Facility, if and to the extent that such insurance coverage is available in China. Should a claim for damages arise at the Tongmei Facility that is covered by one party's insurance, such party shall collect the proceeds paid under the insurance policy and reimburse the other party its proportionate amount of the total damages incurred and paid. (d) Sellers shall terminate the lease for the facility located in Xiamen, China (the "Xiamen Facility") as soon as possible after the Closing. Buyer shall negotiate its own lease for the Xiamen Facility directly with the landlord. 2.6 Consideration. (a) In consideration of the purchase of the Transferred Assets and the assignment of the Assumed Contracts, Buyer will, at the Closing Date, (i) pay to Sellers the sum of Five Million Eight Hundred Fifty Thousand dollars ($5,850,000) (the "Purchase Price") and (b) assume the Assumed Contracts, in accordance with Section 2.6.(b) below. One million dollars ($1,000,000) of the Purchase Price will represent funds to be paid to the escrow agent (the "Escrow Fund") as provided in subsection (b) below, and pursuant to the Escrow Agreement. The Escrow Fund shall be beneficially owned by AXT, but shall be held in escrow and shall be available to compensate Buyer for certain damages as provided in Section 9 and in the Escrow Agreement. To the extent not used for such purposes, the Escrow Fund shall be released to AXT, all as provided in Section 9 and in the Escrow Agreement. (b) In order to remit the Purchase Price, on the Closing Date, Buyer shall cause to be transmitted by wire transfer to Sellers, the RMB equivalent of $5,850,000 to the bank account in China identified by AXT (the "RMB Account"). Thereafter, Buyer shall obtain approvals to convert the RMB equivalent of $2 million within three months after the Closing Date, to convert an additional RMB equivalent of $2 million within three months and two weeks after the Closing Date, and to convert an additional RMB equivalent of $1,850,000 within five months after the Closing Date, as follows. All interest earned on funds deposited into the RMB 12 Account will be for the account of AXT. Within three months after the Closing Date, and upon AXT being notified by Buyer that Buyer has received the approvals required to convert RMB into $2 million, Sellers shall transfer the sum of the RMB equivalent of $2 million (at the exchange rate in effect as of the Closing Date) from the RMB Account into the bank account in China designated by Buyer. Within two weeks of its receipt, Buyer will cause the conversion of this RMB payment into $2 million and wire transfer the full $2 million into Sellers' designated bank account in the United States (the "United States Account"). Two weeks after AXT receives the first $2 million United States dollar payment into the United States Account, Sellers shall, upon being notified by Buyer that Buyer has received the approvals required to convert RMB into $2 million, transfer the RMB equivalent of another $2 million (at the exchange rate in effect as of the Closing Date) from the RMB Account into the bank account in China designated by Buyer. Within two weeks of its receipt, Buyer will cause the conversion of this second RMB payment into $2 million and wire transfer the full second $2 million into the United States Account. Within four weeks of the wire transfer of the second $2 million to the United States Account, and upon AXT being notified by Buyer that Buyer has received the approvals required to convert RMB into $1,850,000, and only if Sellers have received wire transfers of $3,750,000 under the provisions in Section 2.2 of the Luming Agreement, Sellers shall transfer the sum of the RMB equivalent of $1,850,000 (at the exchange rate in effect as of the Closing Date) from the RMB Account into the account in China designated by Buyer. Within two weeks of its receipt, Buyer will cause the conversion of this final RMB payment into $1,850,000 and wire transfer $1,850,000 to the Escrow Agent who shall place $1 million into the Escrow Fund and wire $850,000 into the United States Account once the Escrow Agent has received confirmation from AXT that AXT has released its security interest in the Telstar Facility, including the filing of all documents or instruments necessary to record the release of the security interest and deed of trust. The final RMB wire transfer shall be made by Sellers no later than five months and two weeks following the Closing Date, so long as Sellers have received, by such date, no less than the aggregate sum of $7,750,000 into the United States Account, under both this Agreement and the Luming Agreement. (c) To secure Buyer's obligations set forth in this Section 2.6 and Luming's obligations set forth in Section 2.2 of the Luming Agreement, AXT is hereby granted a security interest in the Telstar Facility up to the amount of $2,000,000, to be perfected by the filing a deed of trust on the Telstar Facility in form and substance agreed between Buyer and AXT. As soon as Buyer has fully complied with the payment terms set forth herein and in the Luming Agreement, AXT shall release its lien on the Telstar, provided that if Buyer has, solely by its own fault, defaulted in any of the terms of this Section 2.6(b), AXT shall release such lien within 90 days following receipt of full payment of all amounts required herein or in the Luming Agreement, in which case the Escrow Agent will continue to hold the final $850,000 otherwise transferable to AXT (but in a separate account and not part of the Escrow Fund) until the Escrow Agent receives confirmation that the lien has been released after such 90-day period has elapsed. If Sellers, solely by their own fault, have defaulted in any of the terms of this Section 2.6, AXT's lien on the Telstar Facility shall be automatically terminated, unless such default is cured within ten business days of the default. AXT shall not foreclose on the deed of trust until the earlier of (i) three months after a default hereunder by Buyer, and Buyer has not within such three month period made a required payment in United States dollars into the United States Account or returned the RMB equivalent of such payment to AXT to the China Account, or (ii) upon receipt 13 by AXT of reasonable evidence that Lumei, Luming or a significant subsidiary of either will become subject to an Event of Default of the type defined in Section 2.14 below. (d) Should either Buyer or Sellers fail to obtain the necessary approvals within three months after the Closing Date to effect the above transfers, or fail to carry out their respective obligations as described above, such defaulting party shall pay to the other party the sum of $30,000 per month for each month, or part thereof, that such party remains in breach of its obligations described above. If the full RMB equivalent of the Purchase Price has not been converted to United States dollars and transferred to the United States Account within one year after the Closing Date, through no fault of Sellers, Buyer shall be liable for, and shall pay or reimburse Sellers, for the Tax incurred by Sellers in China for their use of the RMB up to an aggregate amount of $9,600,000. (e) AXT shall provide reasonable and good faith assistance to Buyer in its efforts to convert RMB to United States dollars. Any gains or losses incurred as a result of the currency exchanges resulting from all transfers shall be for the account of, and all gains and Losses incurred as a result thereof be borne by, Buyer or its subsidiary. 2.7 Liabilities. (a) Assumed Liabilities. On the Closing Date, but effective as of the Effective Time, Buyer shall assume and agree to discharge only the following Liabilities of Sellers (the "Assumed Liabilities"): (i) any Liability related to or arising from the ownership or use of the Transferred Assets from and after the Effective time; (ii) any Liability of Sellers or Buyer arising after the Effective Time under any Assumed Contract; (iii) any Liability arising out of or relating to products of the Optoelectronics Business to the extent manufactured or sold by Buyer or any of its subsidiaries, affiliates, successors or assigns after the Effective Time, or sold by Sellers or any of their subsidiaries, affiliates, successors or assigns beginning on and from August 29, 2003; (iv) any Environmental Claims or permitting requirements arising out of or relating to the operation of the Optoelectronics Business by Buyer, its subsidiaries, affiliates, successors or assigns after the Effective Time, or to Buyer's ownership, occupation or use of or operations at the Telstar Facility, or the occupation or use of or operations at the Telstar Facility by Buyer's subsidiaries, affiliates, successors or assigns from and after the Closing Date, or Buyer's leasing of or operations at the Monterey Park Facility or Tongmei Facility; provided, however, that Buyer shall not be liable to Sellers or any Seller Indemnified Person for Environmental Costs for any Environmental Claim relating to conditions existing prior to the Effective Time at the Monterey Park Facility, Tongmei Facility, or the Telstar Facility; (v) any Liability for Taxes arising as a result of Buyer's operation of the Optoelectronics Business, or the operation of the Optoelectronics Business by 14 Buyer's subsidiaries, affiliates, successors or assigns or ownership, use or operation of the Transferred Assets after the Effective Time; and (vi) all obligations of Buyer under this Agreement, the Bill of Sale, the Assignment and Assumption Agreement, the Patent Assignment Agreement, the Grant Deed, the Monterey Park Lease, the Tongmei Lease, the Trademark License Agreement, the Escrow Agreement, the MOCVD Equipment Lease and the China Equipment Lease. (b) Retained Liabilities. The Retained Liabilities shall remain the sole responsibility of and shall be retained, paid, performed and discharged solely by Sellers, their successors or assigns. "Retained Liabilities" shall mean every Liability of Sellers, their successors or assigns, other than the Assumed Liabilities, including, but not limited to: (i) except as otherwise provided in this Agreement or in the Luming Agreement, any Liability related to or arising as a result of Sellers' operation of the Optoelectronics Business, or the operation of the Optoelectronics Business by Sellers' subsidiaries or affiliates, or ownership, use or operation of the Transferred Assets prior to the Effective Time; (ii) any Liability arising out of or relating to products of Sellers to the extent such products were manufactured and shipped by Sellers, or any of their respective subsidiaries or affiliates prior to August 29, 2003; (iii) any Liability for Taxes arising as a result of Sellers' operation of their respective businesses, or the operation by Sellers' subsidiaries or affiliates of their respective businesses, or the ownership, use or operation of the Transferred Assets prior to the Effective Time and any deferred Taxes of any nature; (iv) any Liability of Sellers, their subsidiaries, affiliates, successors or assigns for transfer, sales, use or similar Taxes payable by Sellers as a result of the transfer of the Transferred Assets to Buyer; (v) any Liability under any Contract not assumed by Buyer under Section 2.7(a); (vi) any Environmental Claims, including any Environmental Costs as set forth in Section 2.7(a)(iv), or permitting requirements arising out of the operation of the Optoelectronics Business by Sellers, their subsidiaries or affiliates, or relating to Sellers' leasing, ownership, occupation, use or operation of the Real Properties prior to the Effective Time; (vii) any Liability under any employee benefit plans maintained by Sellers or their subsidiaries relating to payroll, vacation, sick leave, workers' compensation, unemployment benefits, pension benefits, employee stock option or profit-sharing plans, health care plans or benefits or any other employee plans or benefits of any kind for current or former employees of Sellers or their subsidiaries relating to services performed on behalf of Sellers or their subsidiaries, whether before or after the Effective Time, other than such Liability relating to services performed on behalf of Buyer after the Effective Time; 15 (viii) any Liability under any employment, severance, retention or termination agreement entered into between Sellers and any employee of Sellers; (ix) all obligations of Sellers under this Agreement, the Bill of Sale, the Assignment and Assumption Agreement, the Patent Assignment Agreement, the Grant Deed, the Monterey Park Lease, the Tongmei Lease, the Trademark License Agreement, the Escrow Agreement, the MOCVD Equipment Lease and the China Equipment Lease; and (x) any Liability of Sellers for the unpaid taxes of any Person under Reg. Section 1.1502-6 of the Code (or similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise. Each party will be liable for such portion of any judgment rendered in and any settlement of the Cree Litigation as is set forth in Section 6.5 below. Each party shall also be liable for its own costs and expenses incurred in connection with the negotiation, execution and delivery of this Agreement as set forth in Section 10.1 below. 2.8 Sale of Inventory. Sellers shall be entitled to continue to sell Inventory during the period from the date of this Agreement through the Closing Date, up to a maximum amount equal to $450,000 without the prior written consent of Buyer. To the extent that Sellers sell any of such Inventory after August 7, 2003 up to the Closing Date, all proceeds from the sale of the Inventory up to $200,000 will be split 12.5% to AXT and 87.5% to Buyer, and any proceeds exceeding $200,000 shall belong to Buyer, with the proceeds payable to Buyer at the Closing Date and only if the Closing occurs, net of any costs reimbursed to Sellers pursuant to the terms of Section 6.7(b) below. Payment to Buyer by AXT of any amounts due pursuant to the foregoing, net of any amounts payable to Sellers under Section 6.7(b) below, shall be made in United States dollars. 2.9 Allocation. The Purchase Price shall be allocated in accordance with Schedule 2.9, which the parties consider to be fair. After the Closing, the parties shall make consistent use of the allocation, fair market value and useful lives specified in Schedule 2.9 for all Tax purposes and in all filings, declarations and reports with the IRS in respect thereof, including the reports required to be filed under Section 1060 of the Code. In any Proceeding related to the determination of any Tax, Buyer and Sellers shall not contend or represent that such allocation is not a correct allocation. 2.10 Closing. The purchase and sale provided for in this Agreement (the "Closing") will take place at the offices of AXT's counsel at Gray Cary Ware & Freidenrich LLP, 2000 University Avenue, East Palo Alto, CA 94303-2248 commencing at 10:00 a.m. (local time) on September 8, 2003, or as soon as practicable thereafter, unless Buyer and Sellers otherwise agree. Should the Closing not occur by September 15, 2003, Buyer shall be responsible for payment of the operating expenses incurred by Sellers in accordance with Section 6.7 below. Consummation of the transfer of the Telstar Facility shall occur through a real property sales escrow established with the Title Company, concurrent with the closing of the sale of the other Transferred Assets. Subject to the provisions of Section 8, failure to consummate the purchase and sale provided for in this Agreement on the date and time and at the place determined pursuant to this Section 2.10 will not result in the termination of this Agreement and will not 16 relieve any party of any obligation under this Agreement. In such a situation, the Closing will occur as soon as practicable, subject to Section 8. 2.11 Closing Obligations. At the Closing: (a) Sellers shall deliver to Buyer: (i) a bill of sale for all of the Transferred Assets that are Tangible Personal Property in the form of Exhibit E (the "Bill of Sale") executed by Sellers; (ii) an assignment and assumption of the Assumed Contracts in the form of Exhibit F, which assignment shall also contain Buyer's undertaking and assumption of the Assumed Contracts (the "Assignment and Assumption Agreement"), executed by Sellers; (iii) assignment of the Patents in the form of Exhibit G (the "Patent Assignment Agreement"), executed by Sellers; (iv) a duly executed recordable grant deed in substantially the form attached here as Exhibit D, conveying the Telstar Facility to Buyer, subject only to the Permitted Exceptions; (v) a certification and affidavit, duly executed by AXT, as required by the Foreign Investment in Real Property Tax Act of 1980, as amended, and California Withholding form 593; (vi) such other documents and other instruments of transfer and conveyance as each party may reasonably agree, each in form and substance satisfactory to each party and its respective legal counsel; (vii) proceeds from the sale of Inventory as described in Section 2.8; (viii) an escrow agreement in the form of Exhibit H, executed by Buyer, AXT and the Escrow Agent (the "Escrow Agreement"); (ix) two (2) duly executed original counterparts of the Monterey Park Lease, in the form agreed between Buyer and Sellers; (x) a duly executed original counterpart of the transfer of the Tongmei Lease, in the form agreed between Buyer and Sellers; (xi) a duly executed lease of the Secured Assets; and (xii) a certificate executed by Sellers as to the accuracy of their representations and warranties as of the date of this Agreement and as of the Closing in accordance with Section 7.2(b) and as to their compliance with and performance of the covenants and obligations to be performed or complied with by Sellers at or before the Closing in accordance with Section 7.2(a). 17 (b) Buyer shall deliver to Sellers: (i) The Purchase Price by wire transfer in accordance with Section 2.6(b) above; (ii) the Escrow Agreement, executed by Buyer, AXT and the Escrow Agent in the form of Exhibit H; (iii) the Assignment and Assumption Agreement executed by Buyer in the form of Exhibit F; (iv) two (2) duly executed original counterparts of the Monterey Park Lease, in the form agreed between Buyer and Sellers; (v) a duly executed original counterpart of the transfer of the Tongmei Lease, in the form agreed between Buyer and Sellers; (vi) a duly executed lease of the Secured Assets; and (vii) a certificate executed by Buyer as to the accuracy of its representations and warranties as of the date of this Agreement and as of the Closing in accordance with Section 7.3(b) and as to its compliance with and performance of its covenants and obligations to be performed or complied with at or before the Closing in accordance with Section 7.3(a). 2.12 License of MOCVD Equipment. Sellers shall retain title to the MOCVD equipment purchased by Sellers from Aixtron or Emcore as identified on Schedule 2.12 (the "MOCVD Equipment"), as well as all rights to any and all license or operating agreements between Sellers and Aixtron and between Sellers and Emcore relating to or arising from the purchase or use of the MOCVD Equipment. Sellers shall lease the MOCVD Equipment to Buyer for the sum of $1.00 United States dollar per year plus the cost incurred by Sellers, including maintenance, operations, applicable personal property taxes and insurance, pursuant to an operating lease in form and substance to be agreed between the parties (the "MOCVD Equipment Lease"). Buyer may designate another Person to assume the lease of the MOCVD Equipment if such Person is (i) duly incorporated and authorized to do business in the United States, or (ii) is a Person to whom Sellers have given their prior written consent following receipt of all necessary approvals. Buyer, or the approved designated Person, shall retain the option to purchase the MOCVD Equipment and require Sellers to transfer title to the MOCVD Equipment for a total consideration of $1.00 United States dollar, such option to be exercisable after the Cree Litigation has settled or a final judgment entered. In addition, once the Cree Litigation has been settled or a final judgment has been entered, Buyer and Sellers agree to assist one another in the title and/or use transfer of the MOCVD Equipment, should Buyer, or its designated Person, desire a title transfer at such time, with the goal of minimizing all transfer, change of use or similar fees or costs for both parties. Sellers agree to include Buyer or its designated Person as an additional insured under their property and casualty insurance covering the MOCVD Equipment located in the United States for so long as Sellers retain title to the MOCVD Equipment. In addition, Buyer agrees to include Sellers as additional insureds under Buyer's property and casualty insurance covering the MOCVD Equipment located at the Telstar Facility 18 for so long as Sellers retain title to the equipment. Sellers shall not allow any Encumbrances to be created or placed on the MOCVD Equipment after the Effective Time, other than the interests of Aixtron or Emcore, respectively, under the license or operating agreements. 2.13 China Equipment. Sellers shall retain title to all Transferred Assets located in China (the "China Equipment"). Buyer shall use its commercially reasonable efforts to establish a subsidiary or affiliate in China that has an organizational structure and requisite Governmental Permits and/or Approvals such that such company can take title to the China Equipment with the goal of minimizing any customs or VAT or other Taxes payable by or imposed upon either party as a result of the transfer of title. Once such subsidiary or affiliate as been established, Sellers shall pay the cost and expense of obtaining all Permits and/or Approvals that they are required to obtain in order to transfer title to the China Equipment to Buyer or its designated subsidiary or affiliate in China. Buyer shall pay the cost and expense of obtaining all Permits and/or Approvals that Buyer is required to obtain in order to receive title to and possession of the China Equipment. In addition, Buyer, or any Person designated by Buyer, shall retain the option to purchase the China Equipment and require Sellers to transfer title to the China Equipment for the sum of $1.00 United States dollar, such option to be exercisable at any time after the earlier of (i) the formation of the subsidiary or affiliate in China by Buyer, and (ii) 60 days after the Closing Date, even if such subsidiary or affiliate in China has not yet been approved by the Chinese government. During the period that Sellers retain title to the China Equipment, Sellers shall charge Buyer or such Person designated by Buyer, and Buyer shall reimburse Sellers or their designated Person the sum of $1 United States dollar per year plus the cost actually incurred by Sellers to maintain and operate the China Equipment, including maintenance, operations, applicable personal property taxes and insurance, pursuant to an operating lease in form and substance to be agreed between the parties (the "China Equipment Lease"). Sellers shall not allow any Encumbrances to be created or placed on the China Equipment after the Effective Time. To the extent possible, each of Buyer and AXT shall include the MOCVD Equipment and the China Equipment under their umbrella property and casualty insurance policies issued in the United States, naming the other party as an additional insured. 2.14 Grant of Security Interest. To secure the options of Buyer to acquire title to the MOCVD Equipment and the China Equipment described in Sections 2.12 and 2.13 above (collectively the "Secured Assets"), Sellers hereby grant to Buyer a first priority security interest, effective immediately, in all of Sellers' right, title and interest in and to the Secured Assets. In accordance with Section 6.11 below, without further consideration, and at Buyer's sole cost and expense, Sellers shall promptly execute and deliver (or shall cause to be executed and delivered) such documents or instruments as Buyer may reasonably request to effect or perfect the security interest granted hereby. Upon the occurrence and during the continuance of any Event of Default (as defined below), Buyer shall have all the rights and remedies of a secured party under the California Uniform Commercial Code and any other applicable Laws of any Governmental Entity. Upon the occurrence and during the continuance of any Event of Default hereunder, Buyer shall thereupon have the immediate right to transfer to itself or to sell, assign and transfer to any other Person all right, title and interest in and to all or any part of the Secured Assets. For purposes of this Section 2.14 only (and for Section 2.6(c) as to Buyer), an "Event of Default" shall be deemed to occur if Sellers (i) shall fail in any material respect to perform or observe any term, covenant or agreement contained in this Agreement on their part to be performed or 19 observed or (ii) shall file a voluntary petition in bankruptcy or a petition or answer seeking reorganization, to effect a plan or other arrangement with creditors or any other relief under the United States Bankruptcy Code or under any other foreign, state or federal law relating to bankruptcy or reorganization granting relief to debtors, whether now or hereafter in effect (collectively, "Bankruptcy Laws"), (iii) Any of the Sellers shall be adjudicated a bankrupt, or admit in writing that they cannot pay their debts as they become due, or shall make an assignment for the benefit of creditors, or shall apply for or consent to the appointment of any custodian, receiver or trustee for all or any substantial part of their property, or shall take any action to authorize any of the actions set forth above in this clause, or (iv) an involuntary petition seeking any of the relief specified in this clause shall be filed against Sellers, or any order for relief shall be entered against Sellers in any involuntary proceeding under any Bankruptcy Laws. 3. Representations and Warranties of Sellers. Sellers, jointly and severally, represent and warrant to Buyer as follows, except as disclosed in a document of even date herewith and delivered by Sellers to Buyer on the date hereof referring to the representations and warranties in this Agreement (the "Seller Disclosure Schedule"). The Seller Disclosure Schedule will be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Section 3, and the disclosure in any such numbered and lettered section of the Seller Disclosure Schedule shall qualify only the corresponding subsection in this Section 3 and any other section hereof where it is reasonably clear, upon a reading of such disclosure without any independent knowledge on the part of the reader regarding the matter disclosed, that the disclosure is intended to apply to such other section. 3.1 Due Incorporation. Sellers are each a corporation duly organized, validly existing, and in good standing under the laws of its respective jurisdiction of organization, with all requisite corporate power and authority to own, lease, and operate its properties and to carry on its business as now being conducted. AXT and Lyte are each qualified to do business and in good standing as a foreign corporation in each jurisdiction where the nature of the properties owned, leased, or operated by it and the business transacted by it require such qualification, except where the failure to be so qualified would not reasonably be expected to have a Material Adverse Effect on the Optoelectronics Business. 3.2 Enforceability; Authority; No Conflict. (a) Sellers each have full corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution, delivery, and performance by Sellers of this Agreement have been duly and validly approved by the Board of Directors of Sellers, and no other actions or proceedings on the part of Sellers are necessary to authorize this Agreement and the transactions contemplated hereby. Sellers have each duly and validly executed and delivered this Agreement. This Agreement constitutes the legal, valid and binding obligation of Sellers, enforceable against them in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization, or other laws from time to time in effect which affect creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 20 (b) The execution and delivery of this Agreement by Sellers does not, and the performance by Sellers of their respective obligations hereunder and the consummation of the transactions contemplated hereby, will not conflict with, result in a violation or breach of, constitute (with or without notice or lapse of time or both) a default under, result in or give to any person any right of payment or reimbursement, termination, cancellation, modification or acceleration of, or result in the creation or imposition of any lien upon any of the respective assets or properties of Sellers under any of the terms, conditions or provisions of (i) the certificate of incorporation or bylaws of AXT, or the articles of incorporation or bylaws of Lyte, or (ii) subject to the taking of the actions described in paragraph (b) of this Section 3.2, (x) any Laws applicable to Sellers or any judgment, decree, order, writ, permit, or license of any Governmental Entity applicable to Sellers or any of their assets or properties, or (y) any contract, agreement, or commitment to which Sellers are a party or by which Sellers or any of their respective assets or properties is bound, excluding from the foregoing clauses (x) and (y) conflicts, violations, breaches, defaults, terminations, modifications, accelerations, and creations and impositions of liens, which, as to any of the foregoing, would not reasonably be expected to have a Material Adverse Effect on the Optoelectronics Business or would not result in the inability of Sellers to consummate the transactions contemplated by this Agreement. (c) No consent, approval, order, or notice to or authorization of, or registration, declaration, or filing with, any Governmental Entity or other third party is required to be made or obtained by Sellers (i) in connection with the execution and delivery of this Agreement or (ii) the consummation by Sellers of the transactions contemplated hereby, the failure to obtain any of which would reasonably be expected to have a Material Adverse Effect or prevent or materially delay the consummation of the transactions contemplated hereby, other than such consents, approvals, orders, notices or authorizations, or registrations, declarations or filings as may be required to effect the provisions of Sections 2.6, 2.12, 2.13 or 2.14. 3.3 Sufficiency Of Transferred Assets. The Transferred Assets constitute all of the assets, tangible and intangible, of any nature whatsoever, necessary to operate the Optoelectronics Business in the manner operated by Sellers during the three months from April 1, 2002 through June 30, 2002, which was the peak quarter for sales by Sellers of their products in the Optoelectronics Business (the "Second Quarter"); provided, however, that Sellers are not transferring certain real estate assets owned, leased or operated by Sellers in the Optoelectronics Business, insurance policies maintained by Sellers, employees or employee benefit plans maintained by Sellers in order to operate the Optoelectronics Business, or financial records, other than customer data, inventory data and fixed asset records, nor any Permits and/or Approvals; and provided, further, that Sellers have discontinued the Optoelectronics Business, are no longer operating the Optoelectronics Business, and the Transferred Assets comprise fewer assets than owned, operated or leased by Sellers when they conducted the Optoelectronics Business. In addition, certain of the patents used in the Optoelectronics Business are being sold to Luming pursuant to the Luming Agreement. The Transferred Assets may include assets that Sellers have substituted for assets used during the Second Quarter with assets acquired since June 30, 2002, which are of comparable capacity or quality. 3.4 Title To Transferred Assets; Encumbrances. Sellers are the sole owners of and have full power and authority to transfer all of their right, title and interest to the Transferred Assets. The tangible Transferred Assets (other than the Telstar Facility as set forth in Section 3.5 21 below), are in good condition and repair (and with respect to the equipment included in the Transferred Assets, in good operating condition and repair consistent with the purpose for which such equipment was or is used by Sellers), have been maintained in accordance with normal industry practice, reasonable wear and tear excepted, and are in condition suitable for the use to which they are put in the Optoelectronics Business as operated by Sellers during the Second Quarter. Sellers have good title (and with respect to the Inventory, marketable title) to (or to the extent comprising a license, a license to use), all of the Transferred Assets, free and clear of all Encumbrances or restrictions on transfer, except for Permitted Encumbrances, and except as provided below and in Section 6.8. At the Closing, Sellers will sell, convey, assign, transfer and deliver to Buyer good title and all its right, title and interest, in and to all of the Transferred Assets, free and clear of all Encumbrances other than Permitted Encumbrances. 3.5 Condition Of Real Properties. Use of the Telstar Facility, the Monterey Park Facility and the Tongmei Facility (collectively the "Real Properties") for the various purposes for which each is presently being used is permitted as of right under all applicable zoning legal requirements, and, as to the Telstar Facility, is not subject to "permitted nonconforming" use, except that the Monterey Park Facility does not comply with all zoning requirements, and does not meet current building codes for all purposes. To Sellers' Knowledge and except as otherwise provided herein or in the Seller Disclosure Schedule, the Improvements at the Real Properties are in compliance with all applicable Laws as of the date of this Agreement except where the failure to be in compliance would not reasonably be expected to have a Material Adverse Effect, and are in good repair and in good condition, ordinary wear and tear excepted and commensurate with the age and use of the building and the other improvements thereon. Sellers make no representations or warranties as to (a) the value of or income derived from the Real Properties; (b) the suitability of the Real Properties for Buyer's use, including without limitation any future development of the Real Properties and the availability of utilities necessary to service the Real Properties, other than the suitability of the Real Properties for the use put to them by Sellers, if any, as of the Second Quarter; (c) other than as used by Sellers during the Second Quarter, the habitability, merchantability, profitability, marketability or fitness for a particular purpose of the Real Properties; and (d) except as set forth in Section 3.7, the nature, quality or condition of the water, drainage, undershoring, subsurface, soil and geology of the Real Properties or the presence or absence of hazardous materials at, on, under or adjacent to the Real Properties. To the extent that Buyer is or will be required to obtain Permits and/or Approvals to own, occupy or use the Real Properties, Sellers make no representation or warranty as to whether any Governmental Entity will allow Buyer to continue to use the Real Properties in the manner used by Sellers, or for any other purposes. 3.6 Inventories. All items included in the Inventories consist of a quality and quantity usable and, with respect to finished goods, saleable, in the ordinary course of business of the Optoelectronics Business as operated by Sellers. The values of all items of obsolete materials and of materials of below standard quality have been written down to estimated realizable market value on the books of Sellers. The values at which the inventory is carried reflect the normal inventory valuation policy of Sellers, and such valuation policy as applied is in accordance with GAAP. 22 3.7 Environmental, Health and Safety Matters. Except as disclosed in Section 3.7 of the Seller Disclosure Schedule: (a) Sellers are, at the Telstar Facility, in compliance in all material respects with all applicable Environmental Laws, and Sellers have not received any written communication from any Governmental Entity that alleges that Sellers are not in compliance with applicable Environmental Laws at the Telstar Facility. (b) Sellers have obtained or have applied for all environmental, health and safety permits, and governmental Permits and/or Approvals (collectively, the "Environmental Permits") necessary for the conduct of their operations at the Telstar Facility, except those the absence of which would not reasonably be expected to have a Material Adverse Effect, and all such Environmental Permits are in good standing or, where applicable, a renewal application has been timely filed and is pending agency approval, and Sellers are in material compliance with all terms and conditions of such Environmental Permits; provided, however, that Sellers make no representation or warranty as to whether any transfer, renewal, or reapplication for any Environmental Permit required as a result of the Acquisition can be accomplished in the ordinary course of business. (c) There are no Environmental Claims pending or, to Sellers' Knowledge, threatened (i) against Sellers that would reasonably be expected to have a Material Adverse Effect on Buyer's ability to operate the Telstar Facility in the same manner as operated by Sellers during the Second Quarter or (ii) against the Telstar Facility. (d) To Sellers' Knowledge, there have been no Releases of any Hazardous Material on, at, upon, into or from the Telstar Facility by Sellers, nor has there been any Release of Hazardous Material, including the off-site disposal of Hazardous Material, that would reasonably be expected to form the basis of any Environmental Claim against Sellers relating to the Telstar Facility. (e) To Sellers' Knowledge, since May 1999, Sellers have complied, and are in compliance with, in all material respects, all Environmental Laws in the operation of the Optoelectronics Business at the Telstar Facility and as related to the Transferred Assets located at the Telstar Facility. (f) To their Knowledge, Sellers are, at the Tongmei Facility, in compliance in all material respects with all applicable Environmental Laws, and Sellers have not received any written communication from any Person that alleges that Sellers are not in compliance with applicable Environmental Laws at the Tongmei Facility. To their Knowledge, Sellers have obtained or have applied for all applicable Environmental Permits (if any) necessary for the conduct of their operations at the Tongmei Facility, except those, the absence of which would not reasonably be expected to have a Material Adverse Effect. All such Environmental Permits obtained by Sellers on the Tongmei Facility are in good standing or, where applicable, a renewal application has been timely filed and is pending agency approval, and Sellers are in material compliance with all terms and conditions of such Environmental Permits; provided, however, that Sellers make no representation or warranty as to whether any transfer, renewal, or reapplication for any Environmental Permit required as a result of the Acquisition can be 23 accomplished in the ordinary course of business. There are no Environmental Claims pending or, to Sellers' Knowledge, threatened (i) against Sellers that would reasonably be expected to have a Material Adverse Effect on Buyer's ability to operate the Tongmei Facility in the same manner as operated by Sellers during the Second Quarter, or (ii) against the Tongmei Facility. To Sellers' Knowledge, there have been no Releases of any Hazardous Material on, at, upon, into or from the Tongmei Facility by Sellers, nor has there been any Release of Hazardous Material, including the off-site disposal of Hazardous Material, that would reasonably be expected to form the basis of any Environmental Claim against Sellers relating to the Tongmei Facility. To Sellers' Knowledge, since May 1999, Sellers have complied, and are in compliance with, in all material respects, all Environmental Laws in the operation of the Optoelectronics Business at the Tongmei Facility and as related to the Transferred Assets located at the Tongmei Facility. (g) To their Knowledge and except as provided in the Seller Disclosure Schedule, Sellers are at the Monterey Park Facility in compliance in all material respects with all applicable Environmental Laws other than zoning Laws and building code requirements, and Sellers have not received any written communication from any Person that alleges that Sellers are not in compliance with such applicable Environmental Laws at the Monterey Park Facility. To their Knowledge, Sellers have obtained or have applied for all applicable Environmental Permits necessary for the conduct of their operations at the Monterey Park Facility, other than those necessary to meet current zoning or building code requirements, and except those the absence of which would not reasonably be expected to have a Material Adverse Effect. All Environmental Permits obtained by Sellers on the Monterey Park Facility are in good standing or, where applicable, a renewal application has been timely filed and is pending agency approval, and Sellers are in material compliance with all terms and conditions of such Environmental Permits; provided, however, that Sellers make no representation or warranty as to whether any transfer, renewal, or reapplication for any Environmental Permit required as a result of the Acquisition can be accomplished in the ordinary course of business. There are no Environmental Claims pending or, to Sellers' Knowledge threatened (i) against Sellers that would reasonably be expected to have a Material Adverse Effect on Buyer's ability to operate the Monterey Park Facility in the same manner as operated by Sellers during the Second Quarter, or (ii) against the Monterey Park Facility. To Sellers' Knowledge, there have been no Releases of any Hazardous Material on, at, upon, into or from the Monterey Park Facility by Sellers, nor has there been any Release of Hazardous Material, including the off-site disposal of Hazardous Material, that would reasonably be expected to form the basis of any Environmental Claim against Sellers relating to the Monterey Park Facility. To Sellers' Knowledge, since May 1999, Sellers have complied, and are in compliance with, in all material respects, all Environmental Laws in the operation of the Optoelectronics Business at the Monterey Park Facility and as related to the Transferred Assets located at the Monterey Park Facility. 3.8 Litigation. (a) Except as disclosed in Section 3.8 of the Seller Disclosure Schedule, there are no claims or Legal Proceedings that are now pending or, to Sellers' Knowledge, threatened against or affecting the Optoelectronics Business or the products sold by Sellers in the Optoelectronics Business, the Transferred Assets, this Agreement or in connection with the transactions contemplated hereby. Except as disclosed in Section 3.8 of the Seller 24 Disclosure Schedule, Sellers are not currently subject to any order, judgment, decree, injunction, stipulation, or consent order of or with any court or other Governmental Entity that substantially interferes with their operation of the Optoelectronics Business. Since May 1999, neither AXT nor Lyte has entered into any agreement to settle or compromise any Legal Proceeding pending or threatened against the Optoelectronics Business which has involved any obligation other than the payment of money or for which Sellers have any continuing obligation, relating to the Optoelectronics Business. (b) Except as set forth on Section 3.8 of the Seller Disclosure Schedule, to AXT's Knowledge, there are no pending or threatened Legal Proceedings against any director, officer, employee, or agent of the Optoelectronics Business in their capacity as such. 3.9 Employees. (a) Neither AXT nor Lyte has violated the Worker Adjustment and Retraining Notification Act (the "WARN Act") or any similar state or local Law relating to the employees of the Optoelectronics Business. (b) To AXT's Knowledge, no officer, director, agent, employee, consultant, or contractor of the Optoelectronics Business is bound by any contract that purports to limit the ability of such officer, director, agent, employee, consultant, or contractor to engage in or continue or perform any conduct, activity, duties or practice relating to the Optoelectronics Business of Sellers. 3.10 Labor Disputes; Compliance. Neither AXT, nor to AXT's Knowledge, Lyte, (i) has been, and is not now, a party to any collective bargaining agreement or other labor contract; (ii) since May, 1999, there has not been, there is not presently pending or existing, and to AXT's Knowledge there is not threatened, any strike, slowdown, picketing, work stoppage or employee grievance process involving the Optoelectronics Business operated by Sellers; (iii) to AXT's Knowledge no event has occurred or circumstance exists that could provide the basis for any work stoppage or other labor dispute; (iv) there is not pending or, to AXT's Knowledge, threatened against or affecting the Optoelectronics Business of Sellers, any proceeding relating to the alleged violation of any Law pertaining to labor relations or employment matters, including any charge or complaint filed with the National Labor Relations Board or any comparable Governmental Entity, and there is no organizational activity or other labor dispute against or affecting the Optoelectronics Business of Sellers or the Real Properties; (v) no application or petition for an election of or for certification of a collective bargaining agent is pending; and (vi) no grievance or arbitration Proceeding exists that might have an adverse effect upon the Optoelectronics Business. 3.11 Intellectual Property Assets. (a) The term "Intellectual Property Assets" means all intellectual property owned or licensed (as licensor or licensee) by Sellers for use in the Optoelectronics Business, in which Sellers, or either of them, have a proprietary interest, including: (i) the Patents; 25 (ii) all registered and unregistered copyrights in both published works and unpublished works included in the Transferred Assets (collectively, "Copyrights"); (iii) all rights in mask works included in the Transferred Assets; and (iv) all current know-how, trade secrets, confidential or proprietary information, customer lists, software, technical information, data, process technology, plans, drawings and blue prints used by Sellers in the production of LD, LED and VCSEL products, including Inventory and finished goods, as part of the Optoelectronics Business. (b) To Sellers' Knowledge, the Intellectual Property Assets are all those necessary for the operation of the Optoelectronics Business as it has been conducted by Sellers for the three years ending on the Closing Date. Sellers are the owner or licensee of all right, title and interest in and to each of the Intellectual Property Assets, free and clear of all Encumbrances, and have the right to use all of the Intellectual Property Assets, subject, in the case of any Intellectual Property Assets comprising licenses, to any payments therefore set forth in any Contract covering such Intellectual Property Asset. Sellers have not assigned, transferred, licensed, or pledged to any other party, or encumbered, the Intellectual Property Assets, nor entered into any agreement to do so. (c) All of the issued Patents are currently in compliance with formal legal requirements (including payment of filing, examination and maintenance fees and proofs of working or use), and are not subject to any maintenance fees or taxes or actions falling due within ninety (90) days after the Closing Date. No Patent has been or is now involved in any interference, reissue, reexamination, or opposition Proceeding. Except as set forth in Section 3.11 of the Seller Disclosure Schedule, to Sellers' Knowledge, none of the issued Patents is infringed by any third party or, to Sellers' Knowledge, has been challenged or threatened in any way, and except as disclosed in Section 3.11(c) of the Seller Disclosure Schedule, to Sellers' Knowledge none of the issued Patents infringes or is alleged to infringe any patent or other proprietary right of any other Person. (d) No license or royalty agreement included in the Transferred Assets to which Sellers, or either of them, are a party, is in material breach or default by Sellers or, to AXT's Knowledge any other party thereto, or the subject of any notice of termination given or, to AXT's Knowledge, threatened. All license, royalty and other fees under each license or royalty agreement regarding Intellectual Property Assets have been fully and timely paid. (e) To the extent that any Intellectual Property Assets are licensed by a third party to Sellers (such Intellectual Property Assets referred to as "Licensed Intellectual Property"), except as set forth on Section 3.11(e) of the Seller Disclosure Schedule, the consummation of the transactions contemplated hereunder will not (i) constitute a breach or default under any license agreement relating to any Licensed Intellectual Property, which breach or default would give the other contracting party a right to terminate such agreement; (ii) materially alter or diminish the rights assigned or transferred to Buyer from that originally granted to either of Sellers under any such agreement; (iii) materially alter or increase the 26 obligations delegated or transferred to Buyer from that originally imposed on Sellers under any such agreement; or (iv) require the consent of or any payment to any licensor under any such agreement. (f) There are no exclusive licenses, exclusive distributorship agreements, or noncompetition agreements with respect to the use of any Intellectual Property Assets or the development, sale, or distribution of any products of the Optoelectronics Business as operated by Sellers, or any other material restrictions regarding the right of Sellers to fully exploit any Intellectual Property Assets anywhere in the world. 3.12 Permits and/or Approvals. Sellers hold (or, at the required times, held) all Permits and/or Approvals that are required for the operation of the Optoelectronics Business, except those the absence of which would not reasonably be expected to have a Material Adverse Effect. Sellers are in compliance with the terms of such Permits and/or Approvals applicable to them, except where the failure so to comply would not reasonably be expected to have a Material Adverse Effect. To Sellers' Knowledge, Sellers are not in violation of any law, ordinance or regulation of any Governmental Entity, except for possible violations, which individually and in the aggregate do not have a Material Adverse Effect. 3.13 Insurance. Schedule 3.13 lists all insurance policies covering the Transferred Assets, Optoelectronics Business, or the Real Properties. To Sellers' Knowledge, there is no claim by Sellers currently pending under any of such policies as to which coverage has been questioned, denied or disputed by the underwriters of such policies. All premiums due and payable under all such policies have been paid, and Sellers are otherwise in material compliance with the terms of such policies. Sellers have no Knowledge of threatened termination of, or of a material increase in the premiums payable for, any of such insurance policies. Schedule 3.13 sets forth the following information with respect to each such insurance policy: (a) the name, address, and telephone number of the agent; (b) the name of the insurer, the name of the policyholder, and the name of each covered insured; (c) the policy number and the period of coverage; (d) the scope (including an indication of whether the coverage is on a claims made, occurrence, or other basis) and amount (including a description of how deductibles and ceilings are calculated and operate) of coverage; and (e) a description of any retroactive premium adjustments or other loss-sharing arrangements. Notwithstanding the above, Sellers make no representations or warranties to Buyer as to the availability to Buyer of comparable insurance policies, of the ability of Sellers to transfer the insurance policies or portion thereof to Buyer, or of the ability of Buyer to obtain insurance covering the Transferred Assets, Optoelectronics Business or the Real Properties on terms and conditions similar to the policies obtained by Sellers. 27 3.14 Assumed Contracts. The Assumed Contracts are in full force and effect as of the date hereof and have not been modified from the copies thereof delivered to Buyer, all of the obligations of Sellers under the Assumed Contracts required to have been performed as of the date of this Agreement have been fully performed by Sellers, and such obligations as Sellers are required to perform between the date of this Agreement and the Effective Time will have been performed by Sellers. Sellers have made no other prior assignment of the Assumed Contracts to any third party. 4. Representations and Warranties of Buyer. Buyer represents and warrants to Sellers as follows, except as disclosed in a document of even date herewith and delivered by Buyer to Sellers on the date hereof referring to the representations and warranties in this Agreement (the "Buyer Disclosure Schedule"). The Buyer Disclosure Schedule will be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Section 4, and the disclosure in any such numbered and lettered section of the Buyer Disclosure Schedule shall qualify only the corresponding section in this Section 4, and any other section hereof where it is reasonably clear, upon a reading of such disclosure without any independent knowledge on the part of the reader regarding the matter disclosed, that the disclosure is intended to apply to such other section. 4.1 Due Incorporation. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of organization, with all requisite corporate power and authority to own, lease, and operate its properties and to carry on its business as now being conducted. Buyer is qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the nature of the properties owned, leased, or operated by it and the business transacted by it require such qualification, except where the failure to be so qualified would not reasonably be expected to have a Material Adverse Effect on its business. 4.2 Enforceability; Authority; No Conflict. (a) Buyer has full corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution, delivery, and performance by Buyer of this Agreement has been duly and validly approved by the Board of Directors of Buyer, and no other actions or proceedings on the part of Buyer are necessary to authorize this Agreement and the transactions contemplated hereby. Buyer has duly and validly executed and delivered this Agreement. This Agreement constitutes the legal, valid and binding obligation of Buyer, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization, or other laws from time to time in effect which affect creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (b) The execution and delivery of this Agreement by Buyer does not, and the performance by Buyer of its obligations hereunder and the consummation of the transactions contemplated hereby, will not conflict with, result in a violation or breach of, constitute (with or without notice or lapse of time or both) a default under, result in or give to any person any right of payment or reimbursement, termination, cancellation, modification or 28 acceleration of, or result in the creation or imposition of any lien upon any of the assets or properties of Buyer under any of the terms, conditions or provisions of (i) the articles of incorporation or bylaws of Buyer, or (ii) subject to the taking of the actions described in paragraph (b) of this Section 4.2, (x) any Laws applicable to Buyer or any judgment, decree, order, writ, permit, or license of any Governmental Entity applicable to Buyer or any of its assets or properties, or (y) any contract, agreement, or commitment to which Buyer is a party or by which Buyer or any of its assets or properties is bound, excluding from the foregoing clauses (x) and (y) conflicts, violations, breaches, defaults, terminations, modifications, accelerations, and creations and impositions of liens, which, as to any of the foregoing, would not reasonably be expected to have a Material Adverse Effect on its business, or would not result in the inability of Buyer to consummate the transactions contemplated by this Agreement. (c) No consent, approval, order, or notice to or authorization of, or registration, declaration, or filing with, any Governmental Entity is required to be made or obtained by Buyer in connection with the execution and delivery of this Agreement or the consummation by Buyer of the transactions contemplated hereby, the failure to obtain which would reasonably be expected to have a Material Adverse Effect or prevent or materially delay the consummation of the transactions contemplated hereby, except for such filings, authorization, orders and approvals as may be required of state and local Governmental Entities. 4.3 Compliance with Applicable Laws. To Buyer's Knowledge, Buyer is not in violation of any law, ordinance or regulation of any Governmental Entity, except for possible violations, which individually and in the aggregate do not have a Material Adverse Effect on its business. 4.4 Litigation. There are no claims or Legal Proceedings pending or, to Buyer's Knowledge threatened (in writing) by or against Buyer with respect to this Agreement or in connection with the transactions contemplated hereby. 5. Covenants Prior to Closing. 5.1 Access and Investigation. Between the date of this Agreement and the Closing Date, and upon reasonable advance notice received from Buyer, Sellers shall afford Buyer and its Representatives full and free access, during regular business hours, to Sellers' personnel, properties, books and records and other documents and data, relating to the Optoelectronics Business, such rights of access to be exercised in a manner that does not unreasonably interfere with the operations of Sellers. No information or knowledge obtained in any investigation pursuant to this Section 5.1 will affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the transactions contemplated hereby. 5.2 Operation of the Optoelectronics Business. Between the date of this Agreement and the Closing, Sellers shall: (a) continue to collect accounts receivable, sell LD, LED and VCSEL products from Inventory in accordance with Section 2.8 above, and maintain the equipment used in the Optoelectronics Business; 29 (b) maintain the Transferred Assets in a state of repair and condition that complies with Law and is consistent with the requirements and normal conduct of Sellers' business; and (c) cooperate with Buyer and assist Buyer in identifying the Permits and/or Approvals required by Buyer to operate the business from and after the Closing Date and use commercially reasonable efforts to cooperate with Buyer in either transferring existing Permits and/or Approvals of Sellers to Buyer, where permissible, or obtaining new Permits and/or Approvals for Buyer. 5.3 Negative Covenant. Except as otherwise expressly permitted herein, between the date of this Agreement and the Closing Date, Sellers shall not, without the prior written consent of Buyer, (a) transfer or license to any person or entity any rights to Intellectual Property Assets, other than in connection with the sale of LD, LED or VCSEL products from Inventory pursuant to Section 2.8; (b) enter into or amend any agreements pursuant to which any other party is granted distribution, marketing or other rights of any type or scope with respect to resale or distribution of the Optoelectronics Business products; (c) sell, lease, license or otherwise dispose of or encumber any of the Transferred Assets, except for Inventory as allowed pursuant to Section 2.8; or (d) enter into any compromise or settlement of any litigation, proceeding or governmental investigation relating to the Transferred Assets or the Optoelectronics Business, except as provided in Section 6.5. 5.4 No Negotiation. Until the earlier of September 5, 2003 and such time as this Agreement shall be terminated pursuant to Section 8, AXT shall not, directly or indirectly, solicit, initiate, seek, encourage or support any inquiries or proposals from, or discuss or negotiate with, any Person (other than Buyer) relating to the sale of the Transferred Assets. 5.5 Inventory of Exhibit A-1 Assets. Between the date of this Agreement and the Closing Date, Buyer and Sellers shall conduct an inventory of all assets listed on Exhibit A-1, and agree the customer information to be delivered pursuant to Section 2.1(a)(iv) above. After such inventory has been completed, Buyer and Sellers shall execute a certification certifying that all such assets are present and accounted for, and shall further execute a certification on the Closing Date certifying that all such assets listed on Exhibit A-1 have been delivered by Sellers to Buyer as of the Closing Date (the "Certification of Transferred Assets"). The Certification of Transferred Assets shall be and represent the final representation and warranty of Buyer to Sellers that Buyer has received all of the assets listed on Exhibit A-1 and required to be transferred by Sellers to Buyer hereunder. Thereafter, after the Effective Time Buyer shall be precluded from claiming that any of the assets listed on Exhibit A-1 are missing or have not been delivered by Sellers to Buyer. After executing and delivering this certification at Closing, Buyer shall be forever barred from making a claim for Damages against Sellers, their subsidiaries, affiliates, successors or assigns, pursuant to Section 9 or otherwise, alleging that any of the assets listed on Exhibit A-1 were missing or have not been delivered by Sellers to Buyer. 30 6. Additional Covenants. 6.1 Employees and Employee Benefits. (a) For the purpose of this Agreement, the term "Active Employees" shall mean all employees employed on the Closing Date by Sellers who are employed exclusively in the Optoelectronics Business as it was operated by Sellers. It is intended that Sellers will pay all Active Employees up to September 1, 2003, but will be entitled to terminate any and all employees from and after September 1, 2003. Sellers will use commercially reasonable efforts to cooperate with Buyer in retaining key employees who have been identified by Buyer. Any and all existing employment contracts and non-compete agreements between Active Employees and Sellers will be terminated upon or prior to Closing, or obligations thereunder shall be paid by Sellers if not so terminated. (b) Buyer is not obligated to hire any Active Employee but may interview any or all Active Employees. It is understood and agreed that (A) Buyer's expressed intention to extend offers of employment as set forth in this Section 6.1 shall not constitute any commitment, contract or understanding (expressed or implied) of any obligation on the part of Buyer to a post-Closing employment relationship of any fixed term or duration or upon any terms or conditions other than those that Buyer may establish pursuant to individual offers of employment, and (B) employment offered by Buyer is "at will" and may be terminated by Buyer or by an employee at any time for any reason (subject to any written commitments to the contrary made by Buyer or an employee and Laws). Nothing in this Agreement shall be deemed to prevent or restrict in any way the right of Buyer to terminate, reassign, promote or demote any of the Active Employees hired by Buyer after the Closing or to change adversely or favorably the title, powers, duties, responsibilities, functions, locations, salaries, other compensation or terms or conditions of employment of such employees. 6.2 Confidentiality. The parties acknowledge that Buyer and AXT have previously executed a Letter of Intent dated August 8, 2003, which includes confidentiality provisions therein (the "Non-Disclosure Agreement"), which Non-Disclosure Agreement is incorporated herein by this reference and will continue in full force and effect in accordance with its terms. 6.3 Public Disclosure. Unless otherwise permitted by this Agreement, Buyer and AXT will consult with each other before issuing any press release or otherwise making any public statement or making any other public (or non-confidential) disclosure (whether or not in response to an inquiry) regarding the terms of this Agreement and the transactions contemplated hereby, and neither will issue any such press release or make any such statement or disclosure without the prior approval of the other (which approval will not be unreasonably withheld), except as may be required by law or by obligations pursuant to any listing agreement with any national securities exchange or with the NASDAQ Stock Market (in which case the disclosing party will, to the extent practicable within the time available to comply therewith, use its reasonable efforts to obtain the consent of the other party prior to such disclosure). 6.4 Conveyance Taxes. Both parties will use commercially reasonable efforts to cooperate in good faith with the other party in connection with such other party's preparation, 31 execution, and filing of all returns, questionnaires, applications, or other documents regarding any property transfer or gains, sales, use, value added, stock transfer, and stamp Taxes, any transfer, recording, registration, and other fees or any similar taxes that become payable in connection with the transactions contemplated by this Agreement that are required or permitted to be filed. Except as otherwise provided in this Agreement, each party will pay any such Taxes or fees imposed on it by any taxing authority (and any penalties and interest with respect to such Taxes and fees) that become payable in connection with the transactions contemplated by this Agreement. 6.5 Fees and Costs for Cree Litigation. (a) AXT shall maintain all responsibility and right to control the defense of, and shall pay any judgment rendered and any settlement of the litigation (the "Cree Litigation") between AXT and Cree, Inc., Cree Lighting Company and Boston University (collectively, "Cree" and individually a "Cree Litigant") provided that any such settlement is entered into with AXT's express written consent, to the extent, and only as to such portion, that such judgment or settlement relates to or arises from actions taken by AXT that are found to infringe Cree's patent that occurred during the period prior to and ending (i) on the Closing Date with regard to all commercial transactions other than LED products, and (ii) at 11:59 p.m. Pacific Time on August 28, 2003 with respect to LED products, in the event the Acquisition closes. Except as otherwise provided in this Section 6.5, if Cree or any Cree Litigant should file suit against Buyer, or join Buyer in the Cree Litigation against AXT, Buyer shall pay all of its own defense costs, and any judgment that may be rendered against Buyer and any settlement of such litigation that Buyer may enter into. In addition, Buyer shall bear all responsibility and pay any damages, costs, claims, penalties or other liabilities arising in such litigation that result from the Transferred Assets from and after the Closing Date, or LED products produced and/or sold using inventory or technology acquired as part of the Transferred Assets, beginning on August 29, 2003, in the event the Acquisition closes. The apportionment of the damages, costs, claims, penalties or other liabilities resulting from the Transferred Assets from and after the Closing Date, or LED products produced and/or sold beginning on August 29, 2003, in the event the Acquisition closes, shall be as set forth in the settlement of or judgment rendered in the Cree Litigation; provided, that to the extent such apportionment is not determinable from the settlement of or judgment rendered in the Cree Litigation, then the apportionment shall be determined by arbitration according to the procedure set forth in Section 9.4 below. Buyer shall share in AXT's legal fees, costs and expenses incurred in defending itself in the Cree Litigation from and after the Closing Date (not including costs involved in pursuing counterclaims against Cree), including fees and costs of legal counsel, ("Shared Legal Fees") as follows: (i) AXT shall pay the first $500,000 of the Shared Legal Fees; (ii) AXT shall pay 85% of Shared Legal Fees incurred between $500,001 and $1,500,000 and Buyer shall pay 15% of Shared Legal Fees incurred between such amounts; and (iii) AXT shall pay all Shared Legal Fees incurred above $1,500,000. AXT shall provide monthly updates to Buyer as to the amount of Shared Legal Fees incurred by AXT as of the end of each month; once the Shared Legal Fees reach $500,000, AXT shall submit an invoice to Buyer monthly with a copy of the invoice representing the Shared Legal Fees incurred for the prior month, and Buyer shall pay to AXT its portion of the Shared Legal Fees for the prior month within 30 days of receipt of the invoice from AXT. 32 (b) If AXT prevails in the Cree Litigation, AXT shall retain the right, subject to the prior written consent of Buyer, such consent not to be unreasonably withheld, to license worldwide to other third parties the buffer layer technology developed by AXT. Net revenues derived from such licenses shall be split 40% to AXT and 60% to Buyer. (c) Each of Buyer and AXT will make their key employees and equipment reasonably available, at no charge, after the Closing Date, to the other party, to assist each such party in defending the Cree Litigation and pursuing the counterclaims against Cree and Boston University, or either of them. Each of Buyer and AXT shall also share with the other party all information it develops in defense of the Cree Litigation, at no charge to such other party. (d) Should Cree file suit against Buyer within two (2) years of the Effective Time, for the same causes of action as are set forth in the Cree Litigation and alleging infringement of the same patent, U.S. Patent Number 5,686,738 (and provided that Cree does not allege that Buyer infringes the patent in a manner substantially different than Cree has alleged that AXT has infringed the patent), AXT shall provide such assistance as may be reasonably requested by Buyers in defending such subsequent action. In addition, AXT shall reimburse Buyer 50% of the first $500,000 of Buyer's legal fees and expenses up to a maximum amount payable by Sellers of $250,000 (the "Cree Reimbursement Obligation") incurred in the defense of any allegation that Buyer has infringed U.S. Patent Number 5,686,738. If Buyer is sued by Cree or any Cree Litigant alleging infringement of patents other than or in addition to the patent that is the subject of the Cree Litigation, the Cree Reimbursement Obligation hereunder shall only include those legal fees and expenses incurred by Buyer in defense of any action involving U.S. Patent Number 5,686,738, and not in defense of any action involving any other patent, nor related to any counterclaims filed by Buyer, nor claiming invalidity of any of Buyer's patents. Should more than one patent be the subject of any subsequent action filed against Buyer, Buyer's legal fees and expenses will be apportioned among, and determined to have been incurred in the defense of the action involving each patent, equally. For example, if four patents are the subject of the litigation, the Cree Reimbursement Obligation shall only be for 50% of one-quarter of the legal fees and expenses incurred, up to a maximum of $250,000. The Cree Reimbursement Obligation shall be paid exclusively from the Escrow Fund and from no other source; accordingly, if at the time the Cree Reimbursement Obligation becomes due and no Escrow Funds remain in escrow, then no amounts will be payable to Buyer hereunder and the Cree Reimbursement Obligation will be terminated. If any portion of the Cree Reimbursement Obligation remains outstanding hereunder as of the Escrow Termination, funds equal to the lesser of (i) the remaining Escrow Funds and (ii) the amount of the remaining portion of Sellers' obligations to pay the Cree Reimbursement Obligation, shall continue to be held in escrow and remain subject to the Escrow Agreement, solely for the purpose of satisfying the remaining outstanding Cree Reimbursement Obligation. (e) In consideration for the agreements set forth herein, Buyer, on its own behalf and on behalf of its subsidiaries, successors and assigns, and Luming, hereby agrees and affirmatively covenants that it will not, and will cause its subsidiaries, successors and assigns and Luming not to, take any action, or initiate or pursue any Legal Proceeding against Sellers, their subsidiaries, successors and assigns, under Section 9 or otherwise, for indemnification for or reimbursement of any Damages incurred by Buyer, as a result of any allegations by any other 33 Person that (i) the Patents infringe or are alleged to infringe any patent or proprietary right or intellectual property of any other Person, or (ii) challenging the validity of any Patent. (f) Buyer further agrees as follows: (i) Buyer agrees to reasonably preserve and maintain and not alter, destroy, spoil or otherwise dispose of any equipment listed in Exhibit J attached hereto, which equipment is used to manufacture LEDs, and which has been received by Buyer from AXT. Buyer agrees to permit the parties to the pending Cree lawsuit, or any other person at the request of AXT, to inspect or test the equipment listed in Exhibit A-1 upon reasonable notice of at least 72 hours in connection with the Cree lawsuit, or as otherwise directed by a court. (ii) Buyer expressly agrees to reasonably preserve and maintain all equipment listed in Exhibit J until such a time as it is advised by AXT that Buyer is no longer required to preserve such equipment. Buyer agrees that to the extent it disposes of any of the equipment described in Exhibit J, it will require the third party to honor the terms of this agreement as it relates to the preservation of evidence, and such agreement shall be in writing, included as a term of sale, and submitted to AXT for approval, but such approval shall not be unreasonably withheld. Buyer will also give AXT at least 45 days notice of a proposed transfer of any of the equipment listed on Exhibit J to a third party. (iii) AXT acknowledges and agrees that, following the Closing, Buyer may move any and all of the Transferred Assets other than the MOCVD Equipment, to China. Subject to Section 9 below, Buyer shall indemnify, defend and hold AXT harmless for any Losses incurred in its litigation with Cree resulting from any breach by Buyer of its agreements in this Section 6.5(d). 6.6 Subsequent Sale of Transferred Assets by Buyer. Should Buyer, its subsidiaries, affiliates, successors or assigns, or any designated Persons identified below, sell, (whether such sale is effected by sale, lease, transfer, or exchange), any of the Intellectual Property Assets or equipment used (in the case of equipment, exclusively, and in the case of Intellectual Property Assets, primarily) in order to manufacture VCSEL products, to any third party, other than Luming or the Person designated in Section 2.12 or 2.13 above, within six (6) months following the Closing Date, Buyer shall pay to AXT fifty percent (50%) of the value Buyer receives in connection with such sale. Should the sale of Intellectual Property Assets or equipment be to the Person identified by AXT on Schedule 6.6 attached hereto, fifty percent (50%) of the value received by Buyer in connection with such sale shall be paid to AXT regardless of the date that the sale occurs. 6.7 Reimbursement of Operating Expenses. (a) AXT shall pay all compensation costs, including benefits, of employees retained by AXT in the Optoelectronics Business through September 1, 2003. All compensation costs and benefits incurred by AXT for employees of the Optoelectronics Business for the period from September 2, 2003 through the earlier of the Closing Date and September 15, 2003 will be reimbursed by Buyer to Sellers, in the event that the Acquisition closes. Sellers shall maintain the Optoelectronics Business in such a manner that enables Buyer to commence 34 operating the Optoelectronics Business after Closing, once Buyer hires employees, obtains all Environmental Permits and other Permits and/or Approvals required from Governmental Entities, and establishes its operating, administrative, safety, training and similar systems, including placement of all service contracts necessary to operate the Optoelectronics Business. All costs incurred by Sellers from August 8, 2003 through the earlier of the Closing Date and September 15, 2003 necessary in order to maintain the Optoelectronics Business in such fashion that are incurred by Sellers, up to a maximum aggregate of $100,000, do not require prior approval from Buyer, and will be reimbursed by Buyer to Sellers as provided in subsection (d) below, in the event that the Acquisition closes. Any such costs incurred by Sellers beyond such amount shall not be reimbursed unless approved in advance by Buyer. Such reimbursable costs shall include the costs that Sellers would not have incurred if Sellers had completely shut down the Optoelectronics Business and not maintained and readied the Optoelectronics Business for transfer to Buyer, and include the cost of raw materials purchased by Sellers and for services necessary to maintain the Optoelectronics Business. (b) Beginning September 16, 2003, and payable only if the Acquisition closes, Buyer shall be liable for, and shall reimburse Sellers as set forth below, all costs customarily incurred by Sellers to operate the Optoelectronics Business at the Telstar Facility, the Monterey Park Facility, the Tongmei Facility and the Xiamen Facility. Such reimbursable costs shall include all operating costs customarily incurred by Sellers at such facilities (other than any closure related costs for the Monterey Park Facility), including but not limited to compensation costs, including benefits, of employees retained by AXT in the Optoelectronics Business, all customary operating costs, including repairs and maintenance, services and utilities, phones, real property taxes, insurance, supplies and raw materials, and any other customary costs not otherwise covered in the foregoing payable by Buyer pursuant to terms of the Monterey Park Facility as if the Monterey Park Lease and the Tongmei Lease had been executed effective as of September 16, 2003 and as if Buyer had owned the Telstar Facility and leased the Xiamen Facility as of September 16 and was operating its Optoelectronics Business. Sellers may claim no more than $200,000 for costs for the period from September 16 through September 30 and may limit the expenditure incurred during the period from September 16 through September 30, 2003 to $200,000 through appropriate management controls. (c) If the Closing is delayed past September 15 and Sellers are prepared to close and all of the conditions set forth in Section 7.2 have been satisfied, other than Section 7.2(d), and the Title Company is irrevocably committed to issue the Title Policy as set forth in Section 7.1(c), Sellers shall be reimbursed for the costs incurred in Section 6.7(b) at the Closing by deducting such amount from the proceeds from the sale of Inventory payable to Buyer pursuant to the terms of Section 2.8 above. At the Closing, Sellers shall provide a reconciliation to Buyer of the costs reimbursed by Buyer pursuant to Section 6.7(b) together with the net proceeds from the sale of Inventory pursuant to Section 2.8 (if any) after deducting the costs and expenses reimbursable by Buyer described above. Sellers and Buyer shall meet within 45 days after the Closing date to agree on the reconciliation of amounts deducted from the proceeds from the sale of Inventory pursuant to Section 6.7(b). (d) Buyer and AXT shall meet within 45 days after the Closing Date to determine and agree on the costs and expenses to be reimbursed by Buyer to AXT pursuant to Section 6.7(a) above and costs related to Section 6.7(b) if the Closing is delayed and either one 35 or more of the conditions set forth in Section 7.2 have not been satisfied, other than Section 7.2(d), or the condition set forth in Section 7.1(c) shall not have been satisfied as of September 15, 2003. Buyer shall pay the amount of the expenses and costs owed under Section 6.7(a) and 6.7(b), if applicable, as agreed in United States dollars within 30 days after the parties reach such agreement. Should the parties fail to reach agreement within 50 days after the Closing Date on the amount of the costs and expenses to be reimbursed to AXT pursuant to Section 6.7(a), and 6.7(b), if applicable, either party may initiate a "claim" under the dispute resolution procedure provided in Section 9.4 below. 6.8 Removal of Encumbrances. AXT shall cause all Encumbrances identified on Schedule 6.8 to be removed within 15 days after the Closing Date by filing a UCC termination statement executed by the holder of such Encumbrance. AXT shall promptly provide a copy of the UCC termination statement to Buyer. 6.9 Real Property Taxes and Other Expenses. The parties agree that as between Buyer and Sellers, general real estate taxes on the Telstar Facility ( "Real Property Taxes"), as well as all utility, maintenance, insurance and other operating expenses of the Telstar Facility (collectively with Real Property Taxes, "Property Expenses") for periods prior to the Closing Date shall be Sellers' sole responsibility (other than as set forth in Section 6.7 above), and Property Expenses for the period from and after the Closing Date shall be Buyer's sole responsibility, subject to the provisions of Section 6.7 above and the following provisions of this Section 6.9. Buyer and AXT shall meet within 45 days after the Closing Date to determine and agree the costs and expenses to be reimbursed by Buyer to AXT pursuant to this Section 6.9, and any amounts due by one party to the other shall be paid as agreed in United States dollars within 10 days after the parties reach such agreement. Should the parties fail to reach agreement within 60 days after the Closing Date on the amount of the costs and expenses to be paid by one party to the other pursuant to this Section 6.9, the matter shall be submitted to dispute resolution as provided in Section 9.4 below. Notwithstanding the foregoing, nothing herein shall be deemed to assign to Buyer any right of Sellers to appeal or apply for a reduction in Real Property Taxes for periods attributable prior to the Closing Date, and Sellers shall be entitled to pursue any and all such appeals after the Closing Date at their expense, and Buyer expressly disclaims any interest whatsoever in any tax reductions or credits obtained by Sellers in connection therewith. In the event any such appeal or application by either party results in a refund to Buyer of Real Property Taxes attributable to the period before Closing Date, then Buyer shall pay such amounts to Sellers promptly after receipt, reduced by a percentage of Buyer's expenses in connection with such appeal or application equal to the percentage Sellers' portion of such refund bears to the entire Tax refund paid to Buyer. In the event any such appeal or application by either party results in a refund to Sellers of Real Property Taxes attributable to the period after the Closing Date, then Sellers shall pay such amounts to Buyer promptly after receipt, reduced by a percentage of Sellers' expenses in connection with such appeal or application equal to the percentage Buyer's portion of such refund bears to the entire Tax refund paid to Sellers. 6.10 Payments Under Open Purchase or Sales Orders. If Sellers, their respective subsidiaries, affiliates, successors or assigns receive payment from any customer on any purchase or sales order the obligation under which was fulfilled by Buyer or its subsidiaries, affiliates, successors or assigns, rather than Sellers or their subsidiaries, affiliates, successors or assigns, Sellers shall promptly remit such payment to Buyer. In addition, should any of the 36 Assumed Contracts include open purchase orders, the fulfillment of which is done by Buyer, its subsidiaries, affiliates, successors or assigns after the Closing Date, but for which Sellers, their subsidiaries, affiliates, successors or assigns, receive payment from the customer, Sellers shall pay to Buyer the payment that relates to the order fulfillment undertaken by Buyer, its subsidiaries, affiliates, successors or assigns after the Effective Time. 6.11 Additional Documents and Further Assurances. Each party hereto, at the request and expense of the other party hereto, shall use all reasonable efforts to take, or cause to be taken, all actions necessary to effectuate the Acquisition and make effective the other transactions contemplated by this Agreement in accordance with the terms hereof. Each further agrees that it shall, and shall cause each of its affiliates to, from time to time, execute and deliver to the other such additional instruments, documents, conveyances or assurances and take such other action as shall be necessary or otherwise reasonably requested to confirm and assure the rights and obligations of Buyer to the Transferred Assets as provided for in this Agreement, and effectively to vest in Buyer beneficial and record title to the Transferred Assets, and to put Buyer in actual possession and operating control of such Assets. At any time and from time to time after the Closing, at Buyer's request and without further consideration, Sellers shall promptly execute and deliver (or shall cause to be executed and delivered) such instruments of sale, transfer, conveyance, assignment and confirmation, and take all such other action as Buyer may reasonably request to effect the transfer, conveyance and assignment of the Transferred Assets to Buyer, to assist Buyer in exercising all rights with respect to the Transferred Assets and otherwise to carry out the full purpose and intent of this Agreement, provided, however, that Buyer shall be responsible for any and all incidental or of pocket fees or costs incurred by Sellers as a result. 6.12 Mutual Covenant Not to Compete and Not to Solicit. (a) For the period beginning at the Effective Time and ending at the five (5) year anniversary of the Effective Time, Sellers, their subsidiaries, successors and assigns, shall not, without Buyer's prior written consent, directly or indirectly, in any capacity: (i) develop, make, market or sell LD, LED or VCSEL products or (ii) directly or indirectly, as principal, partner, agent, servant, employee, shareholder, or otherwise, anywhere in the world, engage or attempt to engage in any business activity competitive with the business that develops, makes, markets or sells LD, LED or VCSEL products; provided, however, that the foregoing shall not limit nor prohibit AXT from operating its substrate business or developing, making, marketing or selling its substrates products, to any customer wherever situated and in any industry or market. The foregoing shall not prohibit Sellers from owning beneficially (i) any security, so long as the beneficial ownership by it constitutes (x) less than, in the case of a passive investment in publicly or privately traded securities, five percent (5%) of the class of such security, or (ii) any shares in an "investment company" (as defined in the Investment Company Act of 1940, as amended). (b) For the period beginning at the Effective Time and ending at the five (5) year anniversary of the Effective Time, Buyer, its subsidiaries, successors and assigns, will not, without AXT's prior written consent, directly or indirectly, in any capacity use the knowledge, expertise, information, know how or other skills of any person identified on Schedule 6.12 hereto to develop, make, market or sell GaAs, InP, or Ge substrates. 37 (c) Buyer and Sellers agree that for a period of two (2) years following the Effective Date, neither shall: (i) solicit, encourage, or take any other action which is intended to induce any employee of the other to terminate his or her employment with such party, as the case may be; or (ii) knowingly and intentionally interfere in any manner with the contractual or employment relationship between the other party and any employee, supplier or customer of such other party; provided, that neither party shall be prohibited from making general, public solicitations for employment for any position or from employing any current employee of the other party who contacts the party on his or her own initiative and without impermissible solicitation by such party; and provided, further, that the foregoing shall not prohibit or limit Buyer from hiring employees of Sellers engaged in the Optoelectronics Business. (d) Each party agrees that the covenants set forth herein are necessary to preserve the value of the business operated by each party after the Effective Time, and each party recognizes that the scope of the restrictions and the foregoing territorial and time limitations are reasonable and properly required for the adequate protection of the business of the other party, including, following the Effective Time. Each party acknowledges that the limitations of time, geographic scope and scope of activity in this Section 6.12 are reasonable because, among other things, (i) Sellers and Buyer are engaged in a highly competitive industry, (ii) management of each party will have unique access to the trade secrets and know-how which are an integral part of the business operated by the other party, and (iii) each party is receiving value under the terms of this Agreement. The covenants contained in this Section 6.12 shall be construed as a series of separate covenants, one for each county, city, state and country. Except for geographic scope, each such covenant shall be deemed identical in terms to the covenants set forth herein. In the event the foregoing restrictions are deemed to be unreasonable for any reason by any tribunal having jurisdiction, each party agrees to request, and to submit to, a narrowing of the scope of the foregoing restrictions or the reduction of either said territorial or time limitation to such an area or period as shall be deemed reasonable by such tribunal. (e) The existence of any claim or cause of action by one party to this Agreement against the other, if any, whether predicated upon this Agreement or otherwise, shall not constitute a defense to the enforcement by either party of the foregoing restrictive covenants but shall be resolved by separate proceeding. (f) Each party agrees that it would be impossible or inadequate to measure and calculate the damages that either party would incur from any breach of the covenants set forth in this Section 6.12 and that in the event of a breach by one party, the other party and its stockholders would be irreparably harmed. Accordingly, each party agrees that if it breaches any provision of this Section 6.12, the other party will have available, in addition to any other right or remedy otherwise available, the right to seek an injunction from a court of competent jurisdiction restraining such breach or threatened breach and to specific performance of this Section 6.12. Each party further agrees that no bond or other security shall be required in obtaining such equitable relief, nor will proof of actual damages be required for such equitable relief. (g) No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of either party to require the performance of any term or obligation of this 38 Section 6.12, or the waiver by either party of any breach of this Section 6.12, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 6.13 Construction at Telstar Facility. AXT hereby agrees to reimburse Buyer as follows for construction costs incurred by Buyer at the Telstar Facility solely as a result of any modifications to the Improvements at the Telstar Facility that Buyer is required to make by any Governmental Entity in order to obtain an Environmental Permit and before such Governmental Entity is willing to issue such Environmental Permit (the "Reimbursed Construction Costs"). AXT shall pay Reimbursed Construction Costs of $20,000 per each required modification, up to a total of three modifications, for an aggregate maximum Reimbursed Construction Costs of $60,000. Reimbursed Construction Costs shall include only the cost of physical labor and materials required to complete the modifications required by the Governmental Entity, and costs or expenses incurred for design, planning or documentation of such required modifications, and shall not include any costs or expenses incurred in applying for or obtaining any Permit and/or Approval, including any Environmental Permit. All payments made under this Section shall be charged against the escrow established hereunder and paid exclusively from the Escrow Funds and from no other source; accordingly, if at the time the Reimbursed Construction Costs become due no Escrow Funds remain in escrow, then no amounts will be payable to Buyer hereunder and the obligation to pay Reimbursed Construction Costs will be terminated. 6.14 Release of Encumbrances on Telstar Facility. AXT shall, no later than 30 days after the Closing Date, provide an updated title report showing that all Encumbrances listed on the Title Report that are not Permitted Encumbrances have been released and removed. 7. Conditions to Closing. 7.1 Conditions to Each Party's Obligation to Consummate the Acquisition. The respective obligations of each party to consummate the Acquisition will be subject to the satisfaction on or prior to the Closing Date of the following conditions, except that, to the extent permitted by applicable law, such conditions may be waived in writing by the joint action of the parties hereto. (a) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction, or other order issued by any court of competent jurisdiction or any other Governmental Entities, or other legal or regulatory restraint or prohibition preventing the consummation of the Acquisition will be and remain in effect, nor will there be any action taken, or any law, statute, rule, regulation, decree or order been enacted, adopted, entered, enforced, or deemed applicable to the Acquisition, which remains in effect and which makes the consummation of the Acquisition illegal. (b) Legal Proceedings. There will not be pending any Legal Proceeding by any Governmental Entity or other person: (i) challenging or seeking to restrain or prohibit the consummation of the Acquisition; (ii) Except for the Cree Litigation, relating to the Acquisition and seeking to obtain from Buyer or Sellers any damages or other relief that would be material to either Buyer or Sellers; (iii) which would materially and adversely affect the right of Buyer to own or use the Transferred Assets; or (iv) seeking to compel Buyer or Sellers or any of their controlled affiliates to dispose of or hold separate any material assets. 39 (c) Title Policy and Telstar Facility Escrow. The Title Company shall have irrevocably committed to issue to Buyer a standard CLTA owner's policy of title insurance (the "Title Policy"). The Title Policy shall be dated as of the Closing and shall insure Buyer's fee simple title to the Telstar Facility in the dollar amount allocated to the Telstar Facility as provided in Schedule 2.9, subject only to the Permitted Exceptions, and the escrow on the transfer of title to the Telstar Facility shall be closed concurrently with the Closing of the transfer of the other Transferred Assets. 7.2 Conditions to Obligations of Buyer. The obligations of Buyer to consummate the Acquisition and the transactions contemplated under the Agreement will be further subject to the satisfaction, at or prior to the Closing, of the following conditions, except as may be waived by Buyer in writing: (a) Compliance With Agreements and Covenants. Sellers will have performed and complied in all material respects with all of their covenants, obligations and agreements contained in this Agreement to be performed and complied with on or prior to the Closing Date. (b) Representations and Warranties. The representations and warranties of Sellers contained herein (i) will be true and correct in all material respects on and as of the date of this Agreement, and (ii) will also be true and correct, on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, except for such inaccuracies which in the aggregate do not constitute, and are not reasonably expected to result in, a Material Adverse Effect (disregarding for purposes of evaluating whether subsection (b)(ii) of this condition is satisfied, any "material adverse effect" or other materiality qualifications contained in such representations and warranties). (c) Closing Certificate. Buyer will have received a certificate signed by the Chief Executive Officer, Chief Financial Officer and President of the Optoelectronics Division of AXT, dated the Closing Date, certifying that the conditions set forth in Section 7.2(a) and 7.2(b) have been satisfied. (d) Due Diligence. Buyer's Representatives shall have completed to Buyer's satisfaction a due diligence review of the Optoelectronics Business and the Transferred Assets pursuant to Section 5.1; provided, however, that should Buyer agree to the Closing, Buyer will be deemed to have determined that this condition has been fully met to its satisfaction or waived by Buyer. (e) Opinion of Counsel. Sellers shall have delivered the opinion of counsel in the form as is attached hereto as Exhibit I-1. (f) Other Closing Documents. Buyer will have received the executed Bill of Sale, Assignment and Assumption Agreement, Grant Deed, Trademark Assignment Agreement, Patent Assignment Agreement, Monterey Park Lease, Tongmei Lease and assignment of the Xiamen Lease, and the Escrow Agreement, and such other closing and transfer documents as Buyer will reasonably request to effect and consummate the Acquisition and the 40 transactions contemplated hereby, in each case in form and substance reasonably satisfactory to Buyer and its counsel. 7.3 Conditions to Obligations of Sellers. The obligations of Sellers to consummate the Acquisition and the transactions contemplated under this Agreement will be further subject to the satisfaction, at or prior to the Closing, of the following conditions except as may be waived by Sellers in writing: (a) Compliance with Agreements and Covenants. Buyer will have performed and complied in all material respects with all of its covenants, obligations and agreements contained in this Agreement, to be performed and complied with on or prior to the Closing Date. (b) Representations and Warranties. The representations and warranties of Buyer contained herein (i) will be true and correct on and as of the date of this Agreement in all material respects, and (ii) will also be true and correct on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, except for such inaccuracies which, in the aggregate, do not constitute and are not reasonably expected to result in, a Material Adverse Effect (disregarding for purposes of evaluating whether subsection (b)(ii) of this condition is satisfied, any "material adverse effect" or other materiality qualifications contained in such representations and warranties). (c) Closing Certificate. Sellers will have received a certificate signed by the Chief Executive Officer and Chief Financial Officer of Buyer, dated the Closing Date, certifying that the conditions set forth in Section 7.3(a) and 7.3(b) have been satisfied. (d) Purchase Price. AXT will have received payment of the Purchase Price provided for in Section 2.6. (e) Opinion of Counsel. Buyer shall have delivered its opinion of counsel in the form as is attached hereto as Exhibit I-2. (f) Other Closing Documents. Sellers will have received the executed Bill of Sale, Assignment and Assumption Agreement, Grant Deed, Trademark Assignment Agreement, Patent Assignment Agreement, Monterey Park Lease, Tongmei Lease and assignment of the Xiamen Lease, and the Escrow Agreement, and such other closing and transfer documents as Sellers will reasonably request to effect and consummate the Acquisition and the transactions contemplated hereby, in each case in form and substance reasonably satisfactory to Sellers and their counsel. 8. Termination, Amendment and Waiver. 8.1 Termination. This Agreement may be terminated at any time prior to the Closing by any of the following actions taken or authorized by the Board of Directors of the terminating party or parties: (a) By mutual written consent of Buyer and Sellers; 41 (b) By either Buyer or Sellers, if the Closing shall not have occurred on or before September 30, 2003 (the "Termination Date"); provided, however, that the right to terminate this Agreement under this Section 8.1(b) will not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before the Termination Date; (c) By either Buyer or Sellers, if any Governmental Entity (i) shall have issued an order, decree or ruling or taken any other action (which the parties shall have used their reasonable commercial efforts to resist, resolve or lift, as applicable) restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such order decree, ruling or other action shall have become final and nonappealable or (ii) shall have failed to issue an order, decree or ruling or to take any other action, and such denial of a request to issue such order, decree, ruling or to take such other action shall have become final and nonappealable (which order, decree, ruling or other action the parties shall have used their reasonable commercial efforts to obtain); provided, however, that the right to terminate this Agreement under this Section 8.1(c) will not be available to any party whose failure to use their reasonable commercial efforts has been the cause of such action or inaction; (d) By Buyer if (i) any of Sellers' representations and warranties shall have been inaccurate as of the date of this Agreement or shall have become inaccurate as of a date subsequent to the date of this Agreement (as if made on such subsequent date), such that the condition set forth in Section 7.2(b) would not be satisfied or (ii) any of Sellers' covenants contained in this Agreement shall have been breached such that the condition set forth in Section 7.2(a) would not be satisfied; provided, however, that if an inaccuracy in the representations and warranties of Sellers arising as of a date subsequent to this Agreement is curable by Sellers by the Termination Date and Sellers are continuing to exercise all reasonable efforts to cure such inaccuracy, then Buyer may not terminate this Agreement under this Section 8.1(d) on account of such inaccuracy; or (e) By Sellers if (i) any of Buyer's representations and warranties shall have been inaccurate as of the date of this Agreement or shall have become inaccurate as of a date subsequent to the date of this Agreement (as if made on such subsequent date), such that the condition set forth in Section 7.3(b) would not be satisfied or (ii) if any of Buyer's covenants contained in this Agreement shall have been breached such that the condition set forth in Section 7.3(a) would not be satisfied; provided, however, that if an inaccuracy in the representations and warranties of Buyer arising as of a date subsequent to this Agreement is curable by Buyer by the Termination Date and Buyer is continuing to exercise all reasonable efforts to cure such inaccuracy, then Sellers may not terminate this Agreement under this Section 8.1(e) on account of such inaccuracy. In the event of termination of this Agreement and abandonment of the Acquisition pursuant to this Section 8, no party hereto (or any of its directors or officers) will have any liability or further obligation to any other party to this Agreement, except that nothing herein will relieve any party from liability for any breach of this Agreement. 8.2 Amendment. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties. 42 8.3 Extension; Waiver. At any time prior to the Closing, the parties may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other party, (b) waive any inaccuracies in the representations and warranties contained in this Agreement or in any document delivered pursuant to this Agreement, or (c) waive compliance with any of the agreements or conditions contained in this Agreement. Any agreement on the part of a party to any such extension or waiver will be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise will not constitute a waiver of such rights. 8.4 Notice of Termination. Any party wishing to terminate this Agreement under Section 8.1 will deliver written notice to the other party, setting forth the paragraph under Section 8.1 pursuant to which the Agreement is being terminated and, unless obvious from the nature of the termination clause, a description of the facts and circumstances forming the basis for such termination; provided, that any failure to provide such additional details will not affect the validity of the termination. Any such termination notice will be delivered in accordance with Section 10.2 of this Agreement. 9. Indemnification and Escrow. 9.1 Indemnification. (a) Except as provided in Section 5.5 and Section 6.5, all representations and warranties made by Sellers or Buyer herein shall survive the Closing and continue in full force and effect until the date that is the one year anniversary of the Closing Date. Neither Sellers nor Buyer has made any representations or warranties to the other, other than as set forth herein. (b) Subject to the limitations set forth in this Section 9, (i) Except as provided in Section 5.5 and Section 6.5, Sellers will indemnify and hold harmless Buyer and its subsidiaries, officers, directors, agents, attorneys and employees, and each person, if any, who controls or may control Buyer within the meaning of the Securities Act (hereinafter referred to individually as a "Buyer Indemnified Person" and collectively as "Buyer Indemnified Persons") from and against any and all Losses, costs, diminution of value, damages, liabilities and expenses and from any and all claims, demands, actions and causes of action, including reasonable legal fees (collectively, "Damages"), arising out of (A) any misrepresentation or breach of or default in connection with any of the representations, warranties, covenants and agreements given or made by Sellers in this Agreement or in any exhibit or schedule to this Agreement, or in the Tongmei Lease, or Monterey Park Lease, the MOCVD Equipment Lease or the China Equipment Lease and (B) the Retained Liabilities. (ii) Buyer will indemnify and hold harmless Sellers and their respective officers, directors, agents, attorneys and employees, and each person, if any, who controls or may control Sellers within the meaning of the Securities Act (hereinafter referred to individually as a "Seller Indemnified Person" and collectively as "Seller Indemnified Persons") 43 from and against any and all Damages arising out of (A) any misrepresentation or breach of or default in connection with any of the representations, warranties, covenants and agreements given or made by Buyer in this Agreement or in any exhibit or schedule to this Agreement, or in the Tongmei Lease, Monterey Park Lease, the MOCVD Equipment Lease or the China Equipment Lease and (B) the Assumed Liabilities. (iii) In the absence of fraud or intentional misrepresentation, and except as otherwise provided in this Agreement, indemnification pursuant to the provisions of this Section 9 shall be the sole and exclusive remedy of Sellers, Buyer and the other Indemnified Parties for any breach of any representation, warranty or covenant contained in this Agreement. The maximum liability of either party to the other for any breach of the representations and warranties set forth herein is limited to the sum of $1,000,000; provided, however, that in no event shall the liability of Sellers to Buyer, Luming, or any Buyer Indemnified Person (as defined in this Agreement and in the Luming Agreement), individually or collectively, for any breach of the representations and warranties set forth in this Agreement and in the Luming Agreement, exceed in the aggregate of $1,000,000. Buyer shall first exhaust all remedies for Damages hereunder against the Escrow Fund. Unless otherwise limited by any provision of this Agreement, any other liability of Sellers or Buyer to the other party arising in connection with this Agreement shall be limited to the sum of $9,600,000; provided, however, that in no event shall the liability of Sellers to Buyer, Luming, or any Buyer Indemnified Person (as defined in this Agreement and in the Luming Agreement), individually or collectively, pursuant to this Agreement or to the Luming Agreement, exceed in the aggregate the sum of $9,600,000. Furthermore, in no event shall the liability of Buyer or Luming, individually or collectively, pursuant to this Agreement or to the Luming Agreement, to Sellers or any Seller Indemnified Person (as defined in this Agreement and in the Luming Agreement), exceed in the aggregate the sum of $9,600,000. For any Damages of Buyer or any Buyer Indemnified Person relating to or arising in connection with any breach by Sellers of any representation or warranty concerning title to the Telstar Facility, Buyer shall first look to the Title Policy to satisfy any claim brought against Sellers concerning such breach. (iv) Any breach of or default under this Agreement by Buyer or Sellers shall also be and cause a breach of or default by such party under the Luming Agreement. Any breach of or default under the Luming Agreement by Luming or by Sellers shall also be and cause a breach of or default under this Agreement. (c) General provisions regarding indemnification rights: (i) A party entitled to indemnification hereunder will take all reasonable steps to mitigate all Damages upon and after becoming aware of any event which could reasonably be expected to give rise to Damages that are indemnifiable hereunder. (ii) No party will be entitled to indemnification to the extent any Tax or other benefits result from, or which may be claimed as a result of the facts and circumstances related to, any indemnifiable claim. (iii) If any Damages are covered by insurance or subject to other third party recoveries (collectively, "Third Party Rights"), Buyer and AXT will use 44 reasonable commercial efforts to recover the amount of coverage or claim from the insurer or such third party, which recovery (after deduction for costs of collection) will reduce any related Damages hereunder. Each of Buyer and AXT agrees to assign all third party rights to the other and to appoint the other as its limited agent and attorney-in-fact for seeking such recovery to the extent that such party fails to recover. Each party also agrees to cooperate with the other in connection therewith. Such appointment as limited agent and attorney-in-fact is coupled with an interest and is irrevocable. (iv) To the extent that an indemnifying party discharges any claim for indemnification hereunder, the indemnifying party will be subrogated to all rights of the indemnified party against third parties. 9.2 Escrow Fund. Within the time period described in Section 2.6(b) above, the Escrow Fund shall be deposited with such banking institution selected by Buyer with the reasonable consent of AXT as escrow agent (the "Escrow Agent"), pursuant to the terms set forth herein and in the Escrow Agreement attached hereto as Exhibit H. The escrow established under the Escrow Agreement shall terminate and the Escrow Funds shall be released pursuant to the terms of the Escrow Agreement on the one year anniversary of the Closing Date (the "Escrow Termination"), except as otherwise provided in Section 6.5(d). The Escrow Fund shall be made and held entirely in United States dollars. Any interest or earnings thereon shall be for AXT's account. The Escrow Fund shall be available to compensate Buyer for any breaches of the representations, warranties or covenants made by Sellers in and pursuant to the terms of this Agreement. 9.3 Claims. Upon receipt by AXT or Buyer of a certificate signed by any officer of the other party (an "Officer's Certificate") stating that with respect to the indemnification obligations of such party set forth in Section 9.1(a)(i) or (ii), Damages exist and specifying in reasonable detail the individual items of such Damages included in the amount or estimated amount so stated, the date each such item was paid, or properly accrued or arose, and the nature of the misrepresentation, breach of warranty, covenant or claim to which such item is related, AXT or Buyer will, as the case may be and subject to the provisions of this Section 9, pay to the other, as promptly as practicable, an amount in cash in value equal to such Damages. 9.4 ARBITRATION OF DISPUTES. (a) Within 30 days of receipt by Buyer or AXT, as the case may be, of an Officer's Certificate, Buyer or AXT, as the case may be, may object in writing to any claim or claims by Buyer or AXT, as the case may be, made in any Officer's Certificate. Buyer or AXT, as the case may be, will have thirty days to respond in a written statement to the objection of the other party. If after such 30 day per period there remains a dispute as to any claims, then Buyer and AXT will attempt in good faith for 60 days to agree upon the rights of the respective parties with respect to each of such claims. To the extent no agreement can be reached after good faith negotiation between the parties, either AXT or Buyer may, by written notice to the other, demand arbitration of the matter unless the amount of the Damages is at issue in pending litigation or dispute with a third party, in which event arbitration with respect to the specific portion of the claim at issue in the pending litigation or dispute shall not be commenced until such amount is ascertained or AXT and Buyer agree to arbitration; and in either such event the 45 matter will be settled by arbitration conducted by one arbitrator. AXT and Buyer will agree on the arbitrator, provided that if AXT and Buyer cannot agree on such arbitrator, either AXT or Buyer can request that JAMS select the arbitrator. The arbitrator will set a limited time period and establish procedures designed to reduce the cost and time for discovery while allowing the parties an opportunity, adequate in the sole judgment of the arbitrator, to discover relevant information from the opposing parties about the subject matter of the dispute. The arbitrator will rule upon motions to compel or limit discovery and will have the authority to impose sanctions, including attorneys' fees and costs, to the same extent as a court of competent jurisdiction in law or equity, should the arbitrator determine that discovery was sought without substantial justification or that discovery was refused or objected to without substantial justification. The decision of the arbitrator will be written, will be in accordance with applicable law and with this Agreement, and will be supported by written findings of fact and conclusion of law, which will set forth the basis for the decision of the arbitrator. The decision of the arbitrator as to the validity and amount of any claim in an Officer's Certificate will be binding and conclusive upon the parties to this Agreement, and notwithstanding anything in this Section 9, the parties will be entitled to act in accordance with such decision. (b) Judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction. Any such arbitration will be held in Alameda County or Los Angeles, California, as may be mutually agreed by the parties, under the commercial rules then in effect of the American Arbitration Association. The non-prevailing party shall be as determined by the arbitrator. The non-prevailing party to an arbitration will pay the fees of the arbitrator and any administrative fee of JAMS, and the reasonable attorneys fees, costs of suit and disbursements of the other party. NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY. WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL ARBITRATION. Buyer's Initials___________ Sellers' Initials____________ ______________ 9.5 Third-Party Claims. As used herein, an "Indemnified Party" will refer to a Buyer Indemnified Party, or a Seller Indemnified Party, as applicable, the "Notifying Party" will refer to the party hereto whose Indemnified Parties are entitled to indemnification hereunder, and the "Indemnifying Party" will refer to the party hereto obligated to indemnify such Notifying Party's Indemnified Parties. In the event that any of the Indemnified Parties is made a defendant 46 in or party to any action or proceeding, judicial or administrative, or is the recipient of any order or directive in connection with any Environmental Laws, instituted by or received from any third party for the liability or the costs or expenses of which are Damages, the Notifying Party will give the Indemnifying Party prompt notice thereof. The failure to give such notice will not affect any Indemnified Party's ability to seek reimbursement unless such failure has materially and adversely affected the Indemnifying Party's ability to defend successfully a claim. The Indemnifying Party will be entitled to contest and defend such claim; provided, that the Indemnifying Party (i) has a reasonable basis for concluding that such defense may be successful and (ii) diligently contests and defends such claim. Notice of the intention to so contest and defend will be given by the Indemnifying Party to the Notifying Party within twenty (20) business days after the Notifying Party's notice of such claim (but, in all events, at least five (5) business days prior to the date that an answer to such claim is due to be filed). Such contest and defense will be conducted by reputable attorneys employed by the Indemnifying Party. The Notifying Party will be entitled at any time, at its own cost and expense (which expense will not constitute Damages unless the Notifying Party reasonably determines that the Indemnifying Party is not adequately representing or, because of a conflict of interest, may not adequately represent, any interests of the Indemnified Parties, and only to the extent that such expenses are reasonable), to participate in such contest and defense and to be represented by attorneys of its or their own choosing. If the Notifying Party elects to participate in such defense, the Notifying Party will cooperate with the Indemnifying Party in the conduct of such defense. Neither the Notifying Party nor the Indemnifying Party may concede, settle or compromise any claim without the consent of the other party, which consents will not be unreasonably withheld or delayed. Notwithstanding the foregoing, (i) if a claim seeks equitable relief or (ii) if the subject matter of a claim relates to the ongoing business of any of the Indemnified Parties, which claim, if decided against any of the Indemnified Parties, would have a Material Adverse Effect on the ongoing business or reputation of any of the Indemnified Parties, then, in each such case, the Indemnified Parties alone will be entitled to contest, defend and settle such claim in the first instance and, if the Indemnified Parties do not contest, defend or settle such claim, the Indemnifying Party will then have the right to contest and defend (but not settle) such claim. 10. General Provisions. 10.1 Expenses. Except as otherwise provided in this Agreement, each party to this Agreement will bear its respective fees and expenses incurred in connection with the preparation, negotiation, execution and performance of this Agreement and the Acquisitions, including all fees and expense of its Representatives; provided, however, that in any suit properly brought pursuant to the terms of Section 10.3 below, upon final determination in such proceeding, the prevailing party as determined by a court of law shall be entitled to reasonable attorneys fees, costs of suit and disbursements in addition to any other remedies or damages which may be properly awarded by the court. 10.2 Notices. All notices, consents, waivers and other communications required or permitted by this Agreement shall be in writing and shall be deemed given to a party when (a) delivered to the appropriate address by hand or by nationally recognized overnight courier service (costs prepaid); (b) sent by facsimile or e-mail with confirmation of transmission by the transmitting equipment; or (c) received or rejected by the addressee, if sent by certified mail, return receipt requested, in each case to the following addresses, facsimile numbers or e- 47 mail addresses and marked to the attention of the person (by name or title) designated below (or to such other address, facsimile number, e-mail address or person as a party may designate by notice to the other parties): (a) if to Sellers, to: AXT, Inc. 4281 Technology Drive Fremont, California 94538 Attention: Donald L. Tatzin Fax: (510) 438-4793 Tel: (510) 683-5900 with a copy to: Gray Cary Ware & Freidenrich LLP 2000 University Circle East Palo Alto, California 94303-2248 Attention: Sally J. Rau, Esq. Fax: (650) 833-2001 Tel: (650) 833-2000 (a) if to Buyer, to: Lumei Optoelectronics Corp. 9650 Telstar Avenue El Monte, California 91731 Attention: Fax: (510) 390-0287 Tel: (323) 838-0653 with a copy to: The Corporate Law Group Waterfront Plaza, Suite 120 500 Airport Boulevard Burlingame, California 94010 Attention: Paul D. Marotta, Esq. or Jennifer Chen, Esq. Fax: (650) 227-8001 Tel: (650) 227-8000 10.3 Jurisdiction; Service of Process. Except for claims subject to arbitration as provided in Section 9.4 above, any Proceeding arising out of or relating to this Agreement or any Acquisition may be brought in the courts of the State of California, County of Alameda or of Los Angeles as the parties may mutually agree, or, if it has or can acquire jurisdiction, in the United States District Court for the Northern District of California or the Southern District of California, as the case may be, and each of the parties irrevocably submits to the exclusive jurisdiction of 48 each such court in any such Proceeding, waives any objection it may now or hereafter have to venue or to convenience of forum, agrees that all claims in respect of the Proceeding shall be heard and determined only in any such court and agrees not to bring any Proceeding arising out of or relating to this Agreement or any Acquisition in any other court. The parties agree that either or both of them may file a copy of this paragraph with any court as written evidence of the knowing, voluntary and bargained agreement between the parties irrevocably to waive any objections to venue or to convenience of forum. Process in any Proceeding referred to in the first sentence of this Section may be served on any party anywhere in the world. 10.4 Waiver; Remedies Cumulative. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither any failure nor any delay by any party in exercising any right, power or privilege under this Agreement or any of the documents referred to in this Agreement will operate as a waiver of such right, power or privilege, and no single or partial exercise of any such right, power or privilege will preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or any of the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of that party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. 10.5 Entire Agreement and Modification. This Agreement supersedes all prior agreements, whether written or oral, between the parties with respect to its subject matter (including any letter of intent and any confidentiality agreement between Buyer and AXT) and constitutes (along with the Seller Disclosure Schedule, Buyer Disclosure Schedule and other documents delivered pursuant to this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended, supplemented, or otherwise modified except by a written agreement executed by the party to be charged with the amendment. 10.6 Assignments, Successors and No Third-Party Rights. No party may assign any of its rights or delegate any of its obligations under this Agreement without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement any legal or equitable right, remedy or claim under or with respect to this Agreement or any provision of this Agreement, except such rights as shall inure to a successor or permitted assignee pursuant to this Section 10.6. 10.7 Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 49 10.8 Construction. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Sections" refer to the corresponding Sections of this Agreement. 10.9 Time of Essence. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence. 10.10 Governing Law. This Agreement will be governed by and construed under the laws of the State of California without regard to conflicts-of-laws principles that would require the application of any other law. 10.11 Execution of Agreement. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. The exchange of copies of this Agreement and of signature pages by facsimile transmission shall constitute effective execution and delivery of this Agreement as to the parties and may be used in lieu of the original Agreement for all purposes. Signatures of the parties transmitted by facsimile shall be deemed to be their original signatures for all purposes. 50 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. LUMEI OPTOELECTRONICS CORP., a AXT, INC., a Delaware corporation California corporation By: /s/ Zhiguo Xiao By: /s/ Morris S. Young ------------------------- ----------------------------- Zhiguo Xiao Morris S. Young Chairman and Chief Executive Officer Chairman and Chief Executive Officer By: /s/ Zhiqiang Xiao By: /s/ Donald L. Tatzin ------------------------- ----------------------------- Zhiqiang Xiao Donald L. Tatzin Chief Financial Officer Chief Financial Officer BEIJING TONGMEI XTAL TECHNOLOGY, LYTE OPTRONICS, INC., a Nevada a corporation organized under the laws corporation of the People's Republic of China By: By: ------------------------- ----------------------------- Name: Name: Title: Title: XIAMEN ADVANCED SEMICONDUCTOR CO., LTD., a corporation organized under the laws of the People's Republic of China By: ------------------------ Name: Title: 51 EX-31.1 4 f94445exv31w1.htm EXHIBIT 31.1

EXHIBIT 31.1

I, Morris S. Young, certify that:

1.	I have reviewed this Form 10-Q of AXT, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2003

    /s/  Morris S. Young

Morris S. Young

Chief Executive Officer

EX-31.2 5 f94445exv31w2.htm EXHIBIT 31.2

EXHIBIT 31.2

I, Donald L. Tatzin, certify that:

1.	I have reviewed this Form 10-Q of AXT, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2003

    /s/  Donald L. Tatzin

Donald L. Tatzin

Chief Financial Officer

EX-32.1 6 f94445exv32w1.htm EXHIBIT 32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of AXT, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Morris S. Young, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that, to the best of my knowledge:

     (1)  The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

     (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 13, 2003

   /s/  Morris S. Young

Morris S. Young

Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to AXT, Inc. and will be retained by AXT, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2 7 f94445exv32w2.htm EXHIBIT 32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of AXT, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Donald L. Tatzin, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that, to the best of my knowledge:

     (1)  The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

     (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 13, 2003

    /s/  Donald L. Tatzin

Donald L. Tatzin

Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to AXT,Inc. and will be retained by AXT, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

-----END PRIVACY-ENHANCED MESSAGE-----

EX-10.16

                                                                   EXHIBIT 10.16

                            ASSET PURCHASE AGREEMENT

                                 by and between

              DALIAN LUMING SCIENCE AND TECHNOLOGY GROUP CO., LTD.

                                       and

                                    AXT, INC.

                             Dated September 4, 2003



                                TABLE OF CONTENTS



                                                                                              Page
                                                                                              ----
                                                                                           
1.       Definitions and Usage...........................................................       1
         1.1      Definitions............................................................       1
         1.2      Usage..................................................................       4

2.       Sale and Transfer of Assets; Closing............................................       5
         2.1      Purchase and Sale of Assets............................................       5
         2.2      Consideration..........................................................       5
         2.3      Liabilities............................................................       6
         2.4      Closing................................................................       7
         2.5      Closing Obligations....................................................       7

3.       Representations and Warranties of Seller........................................       7
         3.1      Due Incorporation......................................................       7
         3.2      Enforceability; Authority; No Conflict.................................       8
         3.3      Title To Transferred Assets; Encumbrances..............................       9
         3.4      Litigation.............................................................       9
         3.5      Patents................................................................       9

4.       Representations and Warranties of Buyer.........................................       9
         4.1      Due Incorporation......................................................      10
         4.2      Enforceability; Authority; No Conflict.................................      10
         4.3      Compliance with Applicable Laws........................................      11
         4.4      Litigation.............................................................      11

5.       Additional Covenants............................................................      11
         5.1      Confidentiality........................................................      11
         5.2      Public Disclosure......................................................      11
         5.3      Conveyance Taxes.......................................................      11
         5.4      Negative Covenant......................................................      12
         5.5      Subsequent Sale of Transferred Assets by Buyer.........................      12
         5.6      Additional Documents and Further Assurances............................      12

6.       Conditions to Closing...........................................................      12
         6.1      Conditions to Each Party's Obligation to Consummate the Acquisition....      12
         6.2      Conditions to Obligations of Buyer.....................................      13
         6.3      Conditions to Obligations of Seller....................................      13

7.       Termination, Amendment and Waiver...............................................      14
         7.1      Termination............................................................      14
         7.2      Amendment..............................................................      15
         7.3      Extension; Waiver......................................................      15
         7.4      Notice of Termination..................................................      16


                                       i



                                TABLE OF CONTENTS
                                   (continued)



                                                                                              Page
                                                                                              ----
                                                                                           
8.       Indemnification and Escrow......................................................      16
         8.1      Indemnification........................................................      16
         8.2      Claims.................................................................      18
         8.3      ARBITRATION OF DISPUTES................................................      18
         8.4      Third-Party Claims.....................................................      19

9.       General Provisions..............................................................      20
         9.1      Expenses...............................................................      20
         9.2      Notices................................................................      20
         9.3      Jurisdiction; Service of Process.......................................      21
         9.4      Waiver; Remedies Cumulative............................................      21
         9.5      Entire Agreement and Modification......................................      22
         9.6      Assignments, Successors and No Third-Party Rights......................      22
         9.7      Severability...........................................................      22
         9.8      Construction...........................................................      22
         9.9      Time of Essence........................................................      22
         9.10     Governing Law..........................................................      22
         9.11     Execution of Agreement.................................................      22


                                       ii



                         LIST OF EXHIBITS AND SCHEDULES

Exhibit A         List of Patents Included in Transferred Assets

Exhibit B         Form of Patent Assignment Agreement

Exhibit C         Form of Seller's Counsel Opinion

Schedule 5.4      Identified Person

Seller Disclosure Schedule

Buyer Disclosure Schedule



                            ASSET PURCHASE AGREEMENT

         This Asset Purchase Agreement ("Agreement") is dated as of September 4,
2003, by and between Dalian Luming Science and Technology Group Co., Ltd., a
corporation organized under the laws of the People's Republic of China
("Buyer"), and AXT, Inc., a Delaware corporation ("Seller").

                                    RECITALS

         WHEREAS, Seller wishes to sell certain assets used by Seller in the
development and production of light-emitting diodes ("LED") products, Fabry
Perot laser diodes ("LD") products, and high-speed vertical cavity
surface-emitting lasers ("VCSEL") products (the "Optoelectronics Business"); and

         WHEREAS, Buyer wishes to purchase from Seller, and Seller wishes to
sell to Buyer, the Transferred Assets (as defined herein) for the purchase price
and subject to the terms and conditions hereinafter set forth.

         NOW, THEREFORE, in consideration of the premises set forth above and
the respective covenants, agreements, representations and warranties hereinafter
set forth, Buyer and Seller hereby agree as follows:

         1.       Definitions and Usage.

                  1.1      Definitions. For purposes of this Agreement, the
following terms and variations thereof have the meanings specified or referred
to in this Section 1.1:

         "Acquisition" means all of the transactions contemplated by this
Agreement.

         "AXT" is as defined in the recitals to this Agreement.

         "AXT Tongmei" means Beijing Tongmei Xtal Technology, Ltd., a
corporation organized under the laws of the People's Republic of China.

         "AXT Xiamen" means Xiamen Advanced Semiconductor Co., Ltd., a
corporation organized under the laws of the People's Republic of China.

         "Business Day" means any day other than (a) Saturday or Sunday or (b)
any other day on which banks in California are permitted or required to be
closed.

         "Buyer" is as defined in the first paragraph of this Agreement.

         "Buyer Disclosure Schedule" is as defined in Section 4.

         "Buyer Indemnified Persons" is as defined in Section 8.1(b)(i).

         "Closing" is as defined in Section 2.5.

                                       1



         "Closing Date" means the date on which the Closing actually takes
place.

         "Code" means the Internal Revenue Code of 1986.

         "Damages" is as defined in Section 8.1(b).

         "Effective Time" means the effective time of the Closing, which will be
midnight California time on the Closing Date.

         "Encumbrance" means any charge, claim, community or other marital
property interest, condition, equitable interest, lien, option, pledge, security
interest, mortgage, right of way, easement, encroachment, servitude, right of
first option, right of first refusal or similar restriction, including any
restriction on use, voting (in the case of any security or equity interest),
transfer, receipt of income or exercise of any other attribute of ownership.

         "Governmental Entity" means any United States federal, state, local, or
foreign court, administrative agency or commission, or other governmental entity
or instrumentality (including a stock exchange or other self-regulatory body).

         "Indemnified Party" is as defined in Section 8.4.

         "Indemnifying Party" is as defined in Section 8.4.

         "Knowledge" means such party's actual knowledge after reasonable
inquiry of officers, directors, and other employees of such party reasonably
believed to have knowledge of such matters;

         "Laws" means all applicable United States federal, state, provincial
and local laws, ordinances, rules, statutes, regulations, all Orders or awards,
and all applicable laws of the People's Republic of China.

         "Legal Proceedings" means any actions, suits, arbitrations, regulatory
or other proceedings, litigation, or governmental investigations by or before
any court, arbitration or Governmental Entity.

         "Liabilities" with respect to any Person means all Indebtedness,
obligations and other liabilities of such Person (whether absolute, accrued,
contingent, asserted, unasserted, fixed or otherwise, known or unknown, or
whether due or to become due).

         "Loss" means liabilities, losses, costs, claims, damages, penalties,
and expenses (including attorneys' fees and expenses and costs of investigation
and litigation).

         "Lumei" means Lumei Optoelectronics Corp., a California corporation.

         "Lumei Agreement" means that certain Asset Purchase Agreement entered
into concurrently with this Agreement by and among Lumei, Seller, Lyte, and
solely as to the transfer of the assets held in their respective names, AXT
Tongmei and AXT Xiamen.

                                       2



         "Lyte" means Lyte Optronics, Inc., a Nevada corporation and
wholly-owned subsidiary of Seller.

         Any reference to any event, change, condition or effect being
"material" with respect to any entity or group of entities means any material
changes, conditions or effects related to the financial condition, properties,
assets (including intangible assets), liabilities, business, operations or
results of operations of such entity or group of entities.

         "Material Adverse Effect" means an adverse effect on the business,
operations, assets, liabilities, or condition (financial or otherwise), of the
Optoelectronics Business or the Transferred Assets, taken individually or as a
whole, to Seller or Buyer as applicable, that results in a liability of in
excess of $20,000, except to the extent that any such effect primarily results
from (i) changes in general economic conditions or changes affecting the
industry generally in which such entities operate (provided that such changes do
not affect such entities in a disproportionate manner), or (ii) the announcement
or pendency of the Acquisition (including resulting losses, deferrals, delays or
cancellations of customer orders). Notwithstanding any other provision of this
Agreement, actions taken that are expressly contemplated by this Agreement, and
the directly intended effects thereof shall not be deemed to constitute a
Material Adverse Effect.

         "Notifying Party" is as defined in Section 8.4

         "Officer's Certificate" is as defined in Section 8.2.

         "Optoelectronics Business" is as defined in the opening recital.

         "Order" means any order, injunction, judgment, decree, ruling,
assessment or arbitration award of any Governmental Entity or arbitrator.

         "Patent" is as defined in Section 2.1.

         "Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization or a Governmental Entity.

         "Proceeding" means any action, arbitration, audit, hearing,
investigation, litigation or suit (whether civil, criminal, administrative,
judicial or investigative, whether formal or informal, whether public or
private) commenced, brought, conducted or heard by or before, or otherwise
involving, any Governmental Entity or arbitrator.

         "Purchase Price" is as defined in Section 2.2.

         "Representative" means with respect to a particular Person, any
director, officer, manager, employee, agent, consultant, advisor, accountant,
financial advisor, legal counsel or other representative of that Person.

         "RMB" means Renminbi, the sole legal tender of the People's Republic of
China.

         "RMB Account" is as defined in Section 2.2(b).

                                       3



         "Seller" is as defined in the opening paragraph to this Agreement.

         "Seller Indemnified Person" is as defined in Section 8.1(b)(ii).

         "Sellers" means collectively Seller, Lyte, AXT Tongmei and AXT Xiamen.

         "Tax" means any income, gross receipts, license, payroll, employment,
excise, severance, stamp, occupation, premium, property, environmental, windfall
profit, customs, vehicle, airplane, boat, vessel or other title or registration,
capital stock, franchise, employees' income withholding, foreign or domestic
withholding, social security, unemployment, disability, real property, personal
property, sales, use, transfer, value added, alternative, add-on minimum and
other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever
and any interest, penalty, addition or additional amount thereon imposed,
assessed or collected by or under the authority of any Governmental Entity or
payable under any tax-sharing agreement or any other Contract.

         "Termination Date" is as defined in Section 7.1(b).

         "Third Party Rights" is as defined in Section 8.1(c).

         "United States Account" is as defined in Section 2.2(b).

                  1.2      Usage.

                           (a)      Interpretation. In this Agreement, unless a
clear contrary intention appears: (i) the singular number includes the plural
number and vice versa; (ii) reference to any Person includes such Person's
successors and assigns but, if applicable, only if such successors and assigns
are not prohibited by this Agreement, and reference to a Person in a particular
capacity excludes such Person in any other capacity or individually; (iii)
reference to any gender includes each other gender; (iv) reference to any
agreement, document or instrument means such agreement, document or instrument
as amended or modified and in effect from time to time in accordance with the
terms thereof; (v) reference to any Law means such Law as amended, modified,
codified, replaced or reenacted, in whole or in part, and in effect from time to
time, including rules and regulations promulgated thereunder, and reference to
any Section or other provision of any Law means that provision of such Law from
time to time in effect and constituting the substantive amendment, modification,
codification, replacement or reenactment of such Section or other provision;
(vi) the words "include," "includes" and "including" when used herein shall be
deemed in each case to be followed by the words "without limitation;" (vii) the
table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement; and (viii) all references to dollars or $ herein will mean
United States dollars.

                           (b)      Legal Representation of the Parties. This
Agreement was negotiated by the parties with the benefit of legal
representation, and any rule of construction or interpretation otherwise
requiring this Agreement to be construed or interpreted against any party shall
not apply to any construction or interpretation hereof.

                                       4



                           (c)      English Language Version Prevails. Should
this Agreement, any exhibit or schedule hereto, or any ancillary document,
agreement or instrument executed in connection herewith be translated into any
language other than the English language, the English language version of such
document, agreement or instrument shall prevail and be the official version of
such document, agreement or instrument.

         2.       Sale and Transfer of Assets; Closing.

                  2.1      Purchase and Sale of Assets. Upon the terms and
subject to the conditions set forth in this Agreement, at the Closing, but
effective as of the Effective Time, Seller shall sell, convey, assign, transfer
and deliver to Buyer, and Buyer shall purchase and acquire from Seller, free and
clear of any Encumbrances, the patents and pending patent applications listed on
Exhibit A attached hereto and incorporated herein and all associated know how,
show how and intellectual property rights therein (the "Patents"). All of such
assets listed above are defined as the "Transferred Assets." Seller will deliver
to Buyer appropriate assignments, conveyances and other instruments of sale
and/or transfer in forms satisfactory to Seller and Buyer in order to convey to
Buyer good title to the Transferred Assets. No other assets of any kind are sold
or transferred to Buyer by Seller hereunder.

                  2.2      Consideration.

                           (a)      In consideration of the purchase of the
Transferred Assets, Buyer will, at the Closing Date, pay to Seller the sum of
Three Million Seven Hundred Fifty Thousand dollars ($3,750,000) (the "Purchase
Price").

                           (b)      In order to remit the Purchase Price, on the
Closing Date, Buyer shall cause to be transmitted by wire transfer to Seller,
the RMB equivalent of $3,750,000 to the bank account in China identified by
Seller (the "RMB Account"). Thereafter, Buyer shall obtain approvals to convert
the RMB equivalent of $2 million within four months after the Closing Date, and
to convert an additional RMB equivalent of $1,750,000 within four months and two
weeks after the Closing Date, as follows. All interest earned on funds deposited
into the RMB Account will be for the account of Seller. Within four months after
the Closing Date, and upon Seller being notified by Buyer that Buyer has
received the approvals required to convert RMB into $2 million, and Seller has
received $4 million converted from RMB under the Lumei Agreement, Seller shall
transfer the RMB equivalent of $2 million (at the exchange rate in effect as of
the Closing Date) from the RMB Account into the bank account in China designated
by Buyer. Within two weeks of its receipt, Buyer will cause the conversion of
this RMB payment into $2 million and wire transfer the full $2 million into
Seller's designated bank account in the United States (the "United States
Account"). Within two weeks of Seller receiving the first $2 million payment
into the United States Account, Seller shall, upon being notified by Buyer that
Buyer has received the approvals required to convert RMB into $2 million,
transfer the remaining RMB equivalent of $1,750,000 (at the exchange rate in
effect as of the Closing Date) from the RMB Account into the bank account in
China designated by Buyer. Within two weeks of its receipt, Buyer will cause the
conversion of this second RMB payment into $1,750,000 and wire transfer the full
$1,750,000 into the United States Account.

                                       5



                           (c)      Should either Buyer or Seller fail to obtain
the necessary approvals within four months after the Closing Date to effect the
above transfers, or fail to carry out their respective obligations as described
above, such defaulting party shall pay to the other party the sum of $30,000 per
month for each month, or part thereof, that such party remains in breach of its
obligations described above. If the full RMB equivalent of the Purchase Price
has not been converted to United States dollars and transferred to the United
States Account within one year after the Closing Date, through no fault of
Seller, Buyer shall be liable for, and shall pay or reimburse Seller, for the
Tax incurred by Seller in China for their use of the RMB up to an aggregate
amount of $9,600,000.

                           (d)      Seller shall provide reasonable and good
faith assistance to Buyer in its efforts to convert RMB to United States
dollars. Any gains or losses incurred as a result of the currency exchanges
resulting from all transfers shall be for the account of, and all gains and
Losses incurred as a result thereof be borne by, Buyer or its subsidiary.

                  2.3      Liabilities.

                           (a)      Assumed Liabilities. On the Closing Date,
but effective as of the Effective Time, Buyer shall assume and agree to
discharge only the following Liabilities of Seller (the "Assumed Liabilities"):

                                    (i)      any Liability related to or arising
from the ownership or use of the Transferred Assets from and after the Effective
time; and

                                    (ii)     all obligations of Buyer under this
Agreement or the Patent Assignment Agreement.

                           (b)      Retained Liabilities. The Retained
Liabilities shall remain the sole responsibility of and shall be retained, paid,
performed and discharged solely by Seller, its successors or assigns. "Retained
Liabilities" shall mean every Liability of Seller, its successors or assigns,
other than the Assumed Liabilities, including, but not limited to:

                                    (i)      except as otherwise provided in
this Agreement or in the Lumei Agreement, any Liability related to or arising as
a result of Seller's operation of the Optoelectronics Business, or the operation
of the Optoelectronics Business by Seller's subsidiaries or affiliates, or
ownership, use or operation of the Transferred Assets prior to the Effective
Time;

                                    (ii)     any Liability of Seller, its
subsidiaries, affiliates, successors or assigns for transfer, sales, use or
similar Taxes payable by Seller as a result of the transfer of the Transferred
Assets to Buyer;

                                    (iii)    all obligations of Seller under
this Agreement or the Patent Assignment Agreement.

         Each party shall be liable for its own costs and expenses incurred in
connection with the negotiation, execution and delivery of this Agreement as set
forth in Section 9.1 below.

                                       6



                  2.4      Closing. The purchase and sale provided for in this
Agreement (the "Closing") will take place at the offices of Seller's counsel at
Gray Cary Ware & Freidenrich LLP, 2000 University Avenue, East Palo Alto, CA
94303-2248 commencing at 10:00 a.m. (local time) on September 15, 2003, or as
soon as practicable thereafter, unless Buyer and Seller otherwise agree. Subject
to the provisions of Article 9, failure to consummate the purchase and sale
provided for in this Agreement on the date and time and at the place determined
pursuant to this Section 2.4 will not result in the termination of this
Agreement and will not relieve any party of any obligation under this Agreement.
In such a situation, the Closing will occur as soon as practicable, subject to
Section 7.

                  2.5      Closing Obligations. In addition to any other
documents to be delivered under other provisions of this Agreement, at the
Closing:

                           (a)      Seller shall deliver to Buyer:

                                    (i)      assignments of the Patents in the
form of Exhibit B (the "Patent Assignment Agreement"), executed by Seller; and

                                    (ii)     a certificate executed by Seller as
to the accuracy of its representations and warranties as of the date of this
Agreement and as of the Closing in accordance with Section 6.2(b) and as to its
compliance with and performance of the covenants and obligations to be performed
or complied with by Seller at or before the Closing in accordance with Section
6.2(a).

                           (b)      Buyer shall deliver to Seller:

                                    (i)      The Purchase Price by wire transfer
in accordance with Section 2.2(b) above; and

                                    (ii)     a certificate executed by Buyer as
to the accuracy of its representations and warranties as of the date of this
Agreement and as of the Closing in accordance with Section 6.3(b) and as to its
compliance with and performance of its covenants and obligations to be performed
or complied with at or before the Closing in accordance with Section 6.3(a).

         3.       Representations and Warranties of Seller. Seller represents
and warrants to Buyer as follows, except as disclosed in a document of even date
herewith and delivered by Seller to Buyer on the date hereof referring to the
representations and warranties in this Agreement (the "Seller Disclosure
Schedule"). The Seller Disclosure Schedule will be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Section
3, and the disclosure in any such numbered and lettered section of the Seller
Disclosure Schedule shall qualify only the corresponding subsection in this
Section 3 and any other section hereof where it is reasonably clear, upon a
reading of such disclosure without any independent knowledge on the part of the
reader regarding the matter disclosed, that the disclosure is intended to apply
to such other section.

                  3.1      Due Incorporation. Seller is a corporation duly
organized, validly existing, and in good standing under the laws of its
jurisdiction of organization, with all requisite

                                       7



corporate power and authority to own, lease, and operate its properties and to
carry on its business as now being conducted. Seller is qualified to do business
and is in good standing as a foreign corporation in each jurisdiction where the
nature of its properties owned, leased, or operated by it and the business
transacted by it require such qualification, except where the failure to be so
qualified would not reasonably be expected to have a Material Adverse Effect on
the Optoelectronics Business.

                  3.2      Enforceability; Authority; No Conflict.

                           (a)      Seller has full corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery, and performance by Seller of this
Agreement has been duly and validly approved by the Board of Directors of
Seller, and no other actions or proceedings on the part of Seller is necessary
to authorize this Agreement and the transactions contemplated hereby. Seller has
duly and validly executed and delivered this Agreement. This Agreement
constitutes the legal, valid and binding obligation of Seller, enforceable
against it in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, fraudulent transfer, moratorium,
reorganization, or other laws from time to time in effect which affect
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).

                           (b)      The execution and delivery of this Agreement
by Seller does not, and the performance by Seller of its obligations hereunder
and the consummation of the transactions contemplated hereby, will not conflict
with, result in a violation or breach of, constitute (with or without notice or
lapse of time or both) a default under, result in or give to any person any
right of payment or reimbursement, termination, cancellation, modification or
acceleration of, or result in the creation or imposition of any lien upon any of
the assets or properties of Seller under any of the terms, conditions or
provisions of (i) the certificate of incorporation or bylaws of Seller, or (ii)
subject to the taking of the actions described in paragraph (b) of this Section
3.2, (x) any Laws applicable to Seller or any judgment, decree, order, writ,
permit, or license of any Governmental Entity applicable to Seller or any of its
assets or properties, or (y) any contract, agreement, or commitment to which
Seller is a party or by which Seller or any of its assets or properties is
bound, excluding from the foregoing clauses (x) and (y) conflicts, violations,
breaches, defaults, terminations, modifications, accelerations, and creations
and impositions of liens, which, as to any of the foregoing, would not
reasonably be expected to have a Material Adverse Effect on the Optoelectronics
Business or would not result in the inability of Seller to consummate the
transactions contemplated by this Agreement.

                           (c)      No consent, approval, order, or notice to or
authorization of, or registration, declaration, or filing with, any Governmental
Entity or other third party is required to be made or obtained by Seller (i) in
connection with the execution and delivery of this Agreement or (ii) the
consummation by Seller of the transactions contemplated hereby, the failure to
obtain any of which would reasonably be expected to have a Material Adverse
Effect or prevent or materially delay the consummation of the transactions
contemplated hereby, other than such consents, approvals, orders, notices or
authorizations, or registrations, declarations or filings as may be required to
effect the provisions of Section 2.2.

                                       8



                  3.3      Title To Transferred Assets; Encumbrances. Seller is
the sole owner of and has full power and authority to transfer all of its right,
title and interest to the Transferred Assets. Seller has good title to all of
the Transferred Assets, free and clear of all Encumbrances or restrictions on
transfer. Seller has not assigned, transferred, licensed or pledged any of the
Transferred Assets to any third party, nor entered into any agreement to do so
other than this Agreement. At the Closing, Seller will sell, convey, assign,
transfer and deliver to Buyer good title and all its right, title and interest,
in and to all of the Transferred Assets, free and clear of all Encumbrances.

                  3.4      Litigation.

                           (a)      Except as disclosed in Section 3.4 of the
Seller Disclosure Schedule, there are no claims or Legal Proceedings that are
now pending or, to Seller's Knowledge, threatened (in writing) against or
affecting Transferred Assets, this Agreement or in connection with the
transactions contemplated hereby. Except as disclosed in Section 3.4 of the
Seller Disclosure Schedule, Seller is not currently subject to any order,
judgment, decree, injunction, stipulation, or consent order of or with any court
or other Governmental Entity concerning the Transferred Assets. Seller has not
entered into any agreement to settle or compromise any Legal Proceeding pending
or threatened against the Transferred Assets, other than pursuant to the Lumei
Agreement.

                  3.5      Patents.

                           (a)      All of the issued Patents are currently in
compliance with formal legal requirements (including payment of filing,
examination and maintenance fees and proofs of working or use), and are not
subject to any maintenance fees or taxes or actions falling due within ninety
(90) days after the Closing Date. No Patent has been or is now involved in any
interference, reissue, reexamination, or opposition Proceeding. Except as set
forth in Section 3.5 of the Seller Disclosure Schedule, to Seller's Knowledge,
none of the issued Patents is infringed by any third party or, to Seller's
Knowledge, has been challenged or threatened in any way, and except as disclosed
in Section 3.5 of the Seller Disclosure Schedule, to Seller's Knowledge none of
the issued Patents infringes or is alleged to infringe any patent or other
proprietary right of any other Person.

                           (b)      No license or royalty agreement included in
the Transferred Assets to which Seller is a party, is in material breach or
default by Seller or, to Seller's Knowledge any other party thereto, or the
subject of any notice of termination given or, to Seller's Knowledge,
threatened. All license, royalty and other fees under each license or royalty
agreement regarding the Transferred Assets have been fully and timely paid.

                           (c)      There are no exclusive licenses, exclusive
distributorship agreements, or noncompetition agreements with respect to the use
of any Transferred Assets, or any other material restrictions regarding the
right of Seller to fully exploit any Transferred Assets anywhere in the world.

         4.       Representations and Warranties of Buyer. Buyer represents and
warrants to Seller as follows, except as disclosed in a document of even date
herewith and delivered by Buyer to

                                       9



Seller on the date hereof referring to the representations and warranties in
this Agreement (the "Buyer Disclosure Schedule"). The Buyer Disclosure Schedule
will be arranged in paragraphs corresponding to the numbered and lettered
paragraphs contained in this Section 4, and the disclosure in any such numbered
and lettered section of the Buyer Disclosure Schedule shall qualify only the
corresponding section in this Section 4, and any other section hereof where it
is reasonably clear, upon a reading of such disclosure without any independent
knowledge on the part of the reader regarding the matter disclosed, that the
disclosure is intended to apply to such other section.

                  4.1      Due Incorporation. Buyer is a corporation duly
organized, validly existing, and in good standing under the laws of its
jurisdiction of organization, with all requisite corporate power and authority
to own, lease, and operate its properties and to carry on its business as now
being conducted.

                  4.2      Enforceability; Authority; No Conflict.

                           (a)      Buyer has full corporate power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby. The execution, delivery, and performance by Buyer of this Agreement has
been duly and validly approved by the Board of Directors of Buyer, and no other
actions or proceedings on the part of Buyer are necessary to authorize this
Agreement and the transactions contemplated hereby. Buyer has duly and validly
executed and delivered this Agreement. This Agreement constitutes the legal,
valid and binding obligation of Buyer, enforceable against it in accordance with
its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization, or
other laws from time to time in effect which affect creditors' rights generally
and by general principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity or at law).

                           (b)      The execution and delivery of this Agreement
by Buyer does not, and the performance by Buyer of its obligations hereunder and
the consummation of the transactions contemplated hereby, will not conflict
with, result in a violation or breach of, constitute (with or without notice or
lapse of time or both) a default under, result in or give to any person any
right of payment or reimbursement, termination, cancellation, modification or
acceleration of, or result in the creation or imposition of any lien upon any of
the assets or properties of Buyer under any of the terms, conditions or
provisions of (i) the organizational documents of Buyer, or (ii) subject to the
taking of the actions described in paragraph (b) of this Section 4.2, (x) any
Laws applicable to Buyer or any judgment, decree, order, writ, permit, or
license of any Governmental Entity applicable to Buyer or any of its assets or
properties, or (y) any contract, agreement, or commitment to which Buyer is a
party or by which Buyer or any of its assets or properties is bound, excluding
from the foregoing clauses (x) and (y) conflicts, violations, breaches,
defaults, terminations, modifications, accelerations, and creations and
impositions of liens, which, as to any of the foregoing, would not reasonably be
expected to have a Material Adverse Effect on its business, or would not result
in the inability of Buyer to consummate the transactions contemplated by this
Agreement.

                           (c)      No consent, approval, order, or notice to or
authorization of, or registration, declaration, or filing with, any Governmental
Entity is required to be made or

                                       10



obtained by Buyer in connection with the execution and delivery of this
Agreement or the consummation by Buyer of the transactions contemplated hereby,
the failure to obtain which would reasonably be expected to have a Material
Adverse Effect or prevent or materially delay the consummation of the
transactions contemplated hereby, except for such filings, authorization, orders
and approvals as may be required of state and local Governmental Entities.

                  4.3      Compliance with Applicable Laws. To Buyer's
Knowledge, Buyer is not in violation of any law, ordinance or regulation of any
Governmental Entity, except for possible violations, which individually and in
the aggregate do not have a Material Adverse Effect on its business.

                  4.4      Litigation. There are no claims or Legal Proceedings
pending or, to Buyer's Knowledge threatened (in writing) by or against Buyer
with respect to this Agreement or in connection with the transactions
contemplated hereby.

         5.       Additional Covenants.

                  5.1      Confidentiality. The parties acknowledge that Lumei
and Seller have previously executed a Letter of Intent dated August 8, 2003,
which includes confidentiality provisions therein (the "Non-Disclosure
Agreement"), which Non-Disclosure Agreement is incorporated herein by this
reference and will continue in full force and effect in accordance with its
terms against Seller and against Buyer with Buyer assuming the same obligations
thereunder as Lumei, as if Buyer were Lumei.

                  5.2      Public Disclosure. Unless otherwise permitted by this
Agreement, Buyer and Seller will consult with each other before issuing any
press release or otherwise making any public statement or making any other
public (or non-confidential) disclosure (whether or not in response to an
inquiry) regarding the terms of this Agreement and the transactions contemplated
hereby, and neither will issue any such press release or make any such statement
or disclosure without the prior approval of the other (which approval will not
be unreasonably withheld), except as may be required by law or by obligations
pursuant to any listing agreement with any national securities exchange or with
the NASDAQ Stock Market (in which case the disclosing party will, to the extent
practicable within the time available to comply therewith, use its reasonable
efforts to obtain the consent of the other party prior to such disclosure).

                  5.3      Conveyance Taxes. Both parties will use commercially
reasonable efforts to cooperate in good faith with the other party in connection
with such other party's preparation, execution, and filing of all returns,
questionnaires, applications, or other documents regarding any property transfer
or gains, sales, use, value added, stock transfer, and stamp Taxes, any
transfer, recording, registration, and other fees or any similar taxes that
become payable in connection with the transactions contemplated by this
Agreement that are required or permitted to be filed. Except as otherwise
provided in this Agreement, each party will pay any such Taxes or fees imposed
on it by any taxing authority (and any penalties and interest with respect to
such Taxes and fees) that become payable in connection with the transactions
contemplated by this Agreement.

                                       11



                  5.4      Negative Covenant. Except as otherwise expressly
permitted herein, between the date of this Agreement and the Closing Date,
Seller shall not, without the prior written consent of Buyer, (a) transfer or
license to any person or entity any rights to the Transferred Assets; (b) sell,
lease, license or otherwise dispose of or encumber any of the Transferred
Assets; or (c) enter into any compromise or settlement of any litigation,
proceeding or governmental investigation relating to the Transferred Assets.

                  5.5      Subsequent Sale of Transferred Assets by Buyer.
Should Buyer, its subsidiaries, affiliates, successors or assigns, or Lumei or
any Person designated pursuant to Section 2.12 or 2.13 of the Lumei Agreement,
sell, (whether such sale is effected by sale, lease, transfer, or exchange), any
of the Patents as described herein and other Transferred Assets identified in
Section 6.6 of the Lumei Agreement, used primarily in order to manufacture VCSEL
products, to any third party, other than Lumei or the Persons designated in
Section 2.12 or 2.13 of the Lumei Agreement, within six (6) months following the
Closing Date, Buyer shall pay to Seller fifty percent (50%) of the value Buyer
receives in connection with such sale. Should the sale of such Patents be to the
Person identified by Seller on Schedule 5.5 attached hereto, fifty percent (50%)
of the value received by Buyer in connection with such sale shall be paid to
Seller regardless of the date that the sale occurs.

                  5.6      Additional Documents and Further Assurances. Each
party hereto, at the request and expense of the other party hereto, shall use
all reasonable efforts to take, or cause to be taken, all actions necessary to
effectuate the Acquisition and make effective the other transactions
contemplated by this Agreement in accordance with the terms hereof. Each further
agrees that it shall, and shall cause each of its affiliates to, from time to
time, execute and deliver to the other such additional instruments, documents,
conveyances or assurances and take such other action as shall be necessary or
otherwise reasonably requested to confirm and assure the rights and obligations
of Buyer to the Transferred Assets as provided for in this Agreement, and
effectively to vest in Buyer beneficial and record title to the Transferred
Assets. At any time and from time to time after the Closing, at Buyer's request
and without further consideration, Seller shall promptly execute and deliver (or
shall cause to be executed and delivered) such instruments of sale, transfer,
conveyance, assignment and confirmation, and take all such other action as Buyer
may reasonably request to effect the transfer, conveyance and assignment of the
Transferred Assets to Buyer, to assist Buyer in exercising all rights with
respect to the Transferred Assets and otherwise to carry out the full purpose
and intent of this Agreement, provided, however, that Buyer shall be responsible
for any and all incidental or of pocket fees or costs incurred by Seller as a
result.

         6.       Conditions to Closing

                  6.1      Conditions to Each Party's Obligation to Consummate
the Acquisition. The respective obligations of each party to consummate the
Acquisition will be subject to the satisfaction on or prior to the Closing Date
of the following conditions, except that, to the extent permitted by applicable
law, such conditions may be waived in writing by the joint action of the parties
hereto.

                           (a)      No Injunctions or Restraints; Illegality. No
temporary restraining order, preliminary or permanent injunction, or other order
issued by any court of competent

                                       12



jurisdiction or any other Governmental Entities, or other legal or regulatory
restraint or prohibition preventing the consummation of the Acquisition will be
and remain in effect, nor will there be any action taken, or any law, statute,
rule, regulation, decree or order been enacted, adopted, entered, enforced, or
deemed applicable to the Acquisition, which remains in effect and which makes
the consummation of the Acquisition illegal.

                           (b)      Legal Proceedings. There will not be pending
any Legal Proceeding by any Governmental Entity or other person: (i) challenging
or seeking to restrain or prohibit the consummation of the Acquisition; (ii)
Except for the Cree Litigation, relating to the Acquisition and seeking to
obtain from Buyer or Seller any damages or other relief that would be material
to either Buyer or Seller; (iii) which would materially and adversely affect the
right of Buyer to own or use the Transferred Assets; or (iv) seeking to compel
Buyer or Seller or any of their controlled affiliates to dispose of or hold
separate any material assets.

                  6.2      Conditions to Obligations of Buyer. The obligations
of Buyer to consummate the Acquisition and the transactions contemplated under
the Agreement will be further subject to the satisfaction, at or prior to the
Closing, of the following conditions, except as may be waived by Buyer in
writing:

                           (a)      Compliance With Agreements and Covenants.
Seller will have performed and complied in all material respects with all of its
covenants, obligations and agreements contained in this Agreement to be
performed and complied with on or prior to the Closing Date.

                           (b)      Representations and Warranties. The
representations and warranties of Seller contained herein (i) will be true and
correct in all material respects on and as of the date of this Agreement, and
(ii) will also be true and correct, on and as of the Closing Date with the same
force and effect as though made on and as of the Closing Date, except for such
inaccuracies which in the aggregate do not constitute, and are not reasonably
expected to result in, a Material Adverse Effect (disregarding for purposes of
evaluating whether subsection (b)(ii) of this condition is satisfied, any
"material adverse effect" or other materiality qualifications contained in such
representations and warranties).

                           (c)      Closing Certificate. Buyer will have
received a certificate signed by the Chief Executive Officer, Chief Financial
Officer and President of the Optoelectronics Division of Seller, dated the
Closing Date, certifying that the conditions set forth in Section 6.2(a) and
6.2(b) have been satisfied.

                           (d)      Opinion of Counsel. Seller shall have
delivered the opinion of counsel in the form as is attached hereto as Exhibit C.

                           (e)      Other Closing Documents. Buyer will have
received the executed Patent Assignment Agreement, and such other closing and
transfer documents as Buyer will reasonably request to effect and consummate the
Acquisition and the transactions contemplated hereby, in each case in form and
substance reasonably satisfactory to Buyer and its counsel.

                  6.3      Conditions to Obligations of Seller. The obligations
of Seller to consummate the Acquisition and the transactions contemplated under
this Agreement will be

                                       13



further subject to the satisfaction, at or prior to the Closing, of the
following conditions except as may be waived by Seller in writing:

                           (a)      Compliance with Agreements and Covenants.
Buyer will have performed and complied in all material respects with all of its
covenants, obligations and agreements contained in this Agreement, to be
performed and complied with on or prior to the Closing Date.

                           (b)      Representations and Warranties. The
representations and warranties of Buyer contained herein (i) will be true and
correct on and as of the date of this Agreement in all material respects, and
(ii) will also be true and correct on and as of the Closing Date with the same
force and effect as though made on and as of the Closing Date, except for such
inaccuracies which, in the aggregate, do not constitute and are not reasonably
expected to result in, a Material Adverse Effect (disregarding for purposes of
evaluating whether subsection (b)(ii) of this condition is satisfied, any
"material adverse effect" or other materiality qualifications contained in such
representations and warranties).

                           (c)      Closing Certificate. Seller will have
received a certificate signed by the Chief Executive Officer and Chief Financial
Officer of Buyer, dated the Closing Date, certifying that the conditions set
forth in Section 6.3(a) and 6.3(b) have been satisfied.

                           (d)      Purchase Price. Seller will have received
payment of the Purchase Price in accordance with Section 2.2(b).

                           (e)      Due Diligence. Seller's Representatives
shall have completed to Seller's satisfaction a due diligence review of the
Buyer; provided, however, that should Seller agree to the Closing, Seller will
be deemed to have determined that this condition has been fully met to its
satisfaction or waived by Seller.

                           (f)      Other Closing Documents. Seller will have
received the executed Patent Assignment Agreement, and such other closing and
transfer documents as Seller will reasonably request to effect and consummate
the Acquisition and the transactions contemplated hereby, in each case in form
and substance reasonably satisfactory to Seller and its counsel..

         7.       Termination, Amendment and Waiver.

                  7.1      Termination. This Agreement may be terminated at any
time prior to the Closing by any of the following actions taken or authorized by
the Board of Directors of the terminating party or parties:

                           (a)      By mutual written consent of Buyer and
Seller;

                           (b)      By either Buyer or Seller, if the Closing
shall not have occurred on or before September 30, 2003 (the "Termination
Date"); provided, however, that the right to terminate this Agreement under this
Section 7.1(b) will not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in, the
failure of the Effective Time to occur on or before the Termination Date;

                                       14



                           (c)      By either Buyer or Seller, if any
Governmental Entity (i) shall have issued an order, decree or ruling or taken
any other action (which the parties shall have used their reasonable commercial
efforts to resist, resolve or lift, as applicable) restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement, and such
order decree, ruling or other action shall have become final and nonappealable
or (ii) shall have failed to issue an order, decree or ruling or to take any
other action, and such denial of a request to issue such order, decree, ruling
or to take such other action shall have become final and nonappealable (which
order, decree, ruling or other action the parties shall have used their
reasonable commercial efforts to obtain); provided, however, that the right to
terminate this Agreement under this Section 7.1(c) will not be available to any
party whose failure to use their reasonable commercial efforts has been the
cause of such action or inaction;

                           (d)      By Buyer if (i) any of Seller's
representations and warranties shall have been inaccurate as of the date of this
Agreement or shall have become inaccurate as of a date subsequent to the date of
this Agreement (as if made on such subsequent date), such that the condition set
forth in Section 6.2(b) would not be satisfied or (ii) any of Seller's covenants
contained in this Agreement shall have been breached such that the condition set
forth in Section 6.2(a) would not be satisfied; provided, however, that if an
inaccuracy in the representations and warranties of Seller arising as of a date
subsequent to this Agreement is curable by Seller by the Termination Date and
Seller is continuing to exercise all reasonable efforts to cure such inaccuracy,
then Buyer may not terminate this Agreement under this Section 7.1(d) on account
of such inaccuracy; or

                           (e)      By Seller if (i) any of Buyer's
representations and warranties shall have been inaccurate as of the date of this
Agreement or shall have become inaccurate as of a date subsequent to the date of
this Agreement (as if made on such subsequent date), such that the condition set
forth in Section 6.3(b) would not be satisfied or (ii) if any of Buyer's
covenants contained in this Agreement shall have been breached such that the
condition set forth in Section 6.3(a) would not be satisfied; provided, however,
that if an inaccuracy in the representations and warranties of Buyer arising as
of a date subsequent to this Agreement is curable by Buyer by the Termination
Date and Buyer is continuing to exercise all reasonable efforts to cure such
inaccuracy, then Seller may not terminate this Agreement under this Section
7.1(e) on account of such inaccuracy.

         In the event of termination of this Agreement and abandonment of the
Acquisition pursuant to this Section 7, no party hereto (or any of its directors
or officers) will have any liability or further obligation to any other party to
this Agreement, except that nothing herein will relieve any party from liability
for any breach of this Agreement.

                  7.2      Amendment. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties.

                  7.3      Extension; Waiver. At any time prior to the Closing,
the parties may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other party, (b)
waive any inaccuracies in the representations and warranties contained in this
Agreement or in any document delivered pursuant to this Agreement, or (c) waive
compliance with any of the agreements or conditions contained in this Agreement.

                                       15



Any agreement on the part of a party to any such extension or waiver will be
valid only if set forth in an instrument in writing signed on behalf of such
party. The failure of any party to this Agreement to assert any of its rights
under this Agreement or otherwise will not constitute a waiver of such rights.

                  7.4      Notice of Termination. Any party wishing to terminate
this Agreement under Section 7.1 will deliver written notice to the other party,
setting forth the paragraph under Section 7.1 pursuant to which the Agreement is
being terminated and, unless obvious from the nature of the termination clause,
a description of the facts and circumstances forming the basis for such
termination; provided, that any failure to provide such additional details will
not affect the validity of the termination. Any such termination notice will be
delivered in accordance with Section 9.2 of this Agreement.

         8.       Indemnification and Escrow.

                  8.1      Indemnification.

                           (a)      All representations and warranties made by
Seller or Buyer herein shall survive the Closing and continue in full force and
effect until the date that is the one year anniversary of the Closing Date.
Neither Seller nor Buyer has made any representations or warranties to the
other, other than as set forth herein.

                           (b)      Subject to the limitations set forth in this
Section 8,

                                    (i)      Seller will indemnify and hold
harmless Buyer and its subsidiaries, officers, directors, agents, attorneys and
employees, and each person, if any, who controls or may control Buyer within the
meaning of the Securities Act (hereinafter referred to individually as a "Buyer
Indemnified Person" and collectively as "Buyer Indemnified Persons") from and
against any and all Losses, costs, diminution of value, damages, liabilities and
expenses and from any and all claims, demands, actions and causes of action,
including reasonable legal fees (collectively, "Damages"), arising out of (A)
any misrepresentation or breach of or default in connection with any of the
representations, warranties, covenants and agreements given or made by Seller in
this Agreement or in any exhibit or schedule to this Agreement, and (B) the
Retained Liabilities.

                                    (ii)     Buyer will indemnify and hold
harmless Seller and its respective officers, directors, agents, attorneys and
employees, and each person, if any, who controls or may control Seller within
the meaning of the Securities Act (hereinafter referred to individually as a
"Seller Indemnified Person" and collectively as "Seller Indemnified Persons")
from and against any and all Damages arising out of (A) any misrepresentation or
breach of or default in connection with any of the representations, warranties,
covenants and agreements given or made by Buyer in this Agreement or in any
exhibit or schedule to this Agreement, and (B) the Assumed Liabilities.

                                    (iii)    In the absence of fraud or
intentional misrepresentation, and except as otherwise provided in this
Agreement, indemnification pursuant to the provisions of this Section 8 shall be
the sole and exclusive remedy of Seller, Buyer and the other Indemnified Parties
for any breach of any representation, warranty or covenant contained in this

                                       16



Agreement. The maximum liability of either party to the other for any breach of
the representations and warranties set forth herein is limited to the sum of
$1,000,000; provided, however, that in no event shall the liability of Sellers
to Buyer, Lumei, or any Buyer Indemnified Person (as defined in this Agreement
and in the Lumei Agreement), individually or collectively, for any breach of the
representations and warranties set forth in this Agreement and in the Lumei
Agreement, exceed in the aggregate of $1,000,000. Buyer shall first exhaust all
remedies for Damages hereunder against the Escrow Fund. Unless otherwise limited
by a provision of this Agreement, any other liability of Sellers or Buyer to the
other party arising in connection with this Agreement shall be limited to the
sum of $9,600,000; provided, however, that in no event shall the liability of
Seller to Buyer, Lumei, or any Buyer Indemnified Person (as defined in this
Agreement and in the Lumei Agreement), individually or collectively, pursuant to
this Agreement or to the Lumei Agreement, exceed in the aggregate the sum of
$9,600,000. Furthermore, in no event shall the liability of Buyer or Lumei,
individually or collectively, pursuant to this Agreement or to the Lumei
Agreement, to Sellers or any Seller Indemnified Person (as defined in this
Agreement and in the Lumei Agreement), exceed in the aggregate the sum of
$9,600,000.

                                    (iv)     Any breach of or default under this
Agreement by Buyer or Seller shall also be and cause a breach of or default by
such party under the Lumei Agreement. Any breach of or default under the Lumei
Agreement by Lumei or by Sellers shall also be and cause a breach of or default
under this Agreement.

                           (c)      General provisions regarding indemnification
rights:

                                    (i)      A party entitled to indemnification
hereunder will take all reasonable steps to mitigate all Damages upon and after
becoming aware of any event which could reasonably be expected to give rise to
Damages that are indemnifiable hereunder.

                                    (ii)     No party will be entitled to
indemnification to the extent any Tax or other benefits result from, or which
may be claimed as a result of the facts and circumstances related to, any
indemnifiable claim.

                                    (iii)    If any Damages are covered by
insurance or subject to other third party recoveries (collectively, "Third Party
Rights"), Buyer and AXT will use reasonable commercial efforts to recover the
amount of coverage or claim from the insurer or such third party, which recovery
(after deduction for costs of collection) will reduce any related Damages
hereunder. Each of Buyer and Seller agrees to assign all third party rights to
the other and to appoint the other as its limited agent and attorney-in-fact for
seeking such recovery to the extent that such party fails to recover. Each party
also agrees to cooperate with the other in connection therewith. Such
appointment as limited agent and attorney-in-fact is coupled with an interest
and is irrevocable.

                                    (iv)     To the extent that an indemnifying
party discharges any claim for indemnification hereunder, the indemnifying party
will be subrogated to all rights of the indemnified party against third parties.

                                       17



                  8.2      Claims. Upon receipt by Seller or Buyer of a
certificate signed by any officer of the other party (an "Officer's
Certificate") stating that with respect to the indemnification obligations of
such party set forth in Section 8.1(a)(i) or (ii), Damages exist and specifying
in reasonable detail the individual items of such Damages included in the amount
or estimated amount so stated, the date each such item was paid, or properly
accrued or arose, and the nature of the misrepresentation, breach of warranty,
covenant or claim to which such item is related, Seller or Buyer will, as the
case may be and subject to the provisions of this Section 8, pay to the other,
as promptly as practicable, an amount in cash in value equal to such Damages.

                  8.3      ARBITRATION OF DISPUTES.

                           (a)      Within 30 days of receipt by Buyer or
Seller, as the case may be, of an Officer's Certificate, Buyer or Seller, as the
case may be, may object in writing to any claim or claims by Buyer or Seller, as
the case may be, made in any Officer's Certificate. Buyer or Seller, as the case
may be, will have thirty days to respond in a written statement to the objection
of the other party. If after such 30 day per period there remains a dispute as
to any claims, then Buyer and Seller will attempt in good faith for 60 days to
agree upon the rights of the respective parties with respect to each of such
claims. To the extent no agreement can be reached after good faith negotiation
between the parties, either Seller or Buyer may, by written notice to the other,
demand arbitration of the matter unless the amount of the Damages is at issue in
pending litigation or dispute with a third party, in which event arbitration
with respect to the specific portion of the claim at issue in the pending
litigation or dispute shall not be commenced until such amount is ascertained or
Seller and Buyer agree to arbitration; and in either such event the matter will
be settled by arbitration conducted by one arbitrator. Seller and Buyer will
agree on the arbitrator, provided that if Seller and Buyer cannot agree on such
arbitrator, either Seller or Buyer can request that JAMS select the arbitrator.
The arbitrator will set a limited time period and establish procedures designed
to reduce the cost and time for discovery while allowing the parties an
opportunity, adequate in the sole judgment of the arbitrator, to discover
relevant information from the opposing parties about the subject matter of the
dispute. The arbitrator will rule upon motions to compel or limit discovery and
will have the authority to impose sanctions, including attorneys' fees and
costs, to the same extent as a court of competent jurisdiction in law or equity,
should the arbitrator determine that discovery was sought without substantial
justification or that discovery was refused or objected to without substantial
justification. The decision of the arbitrator will be written, will be in
accordance with applicable law and with this Agreement, and will be supported by
written findings of fact and conclusion of law, which will set forth the basis
for the decision of the arbitrator. The decision of the arbitrator as to the
validity and amount of any claim in an Officer's Certificate will be binding and
conclusive upon the parties to this Agreement, and notwithstanding anything in
this Section 8, the parties will be entitled to act in accordance with such
decision.

                           (b)      Judgment upon any award rendered by the
arbitrator may be entered in any court having jurisdiction. Any such arbitration
will be held in Alameda County or Los Angeles, California, as may be mutually
agreed by the parties, under the commercial rules then in effect of the American
Arbitration Association. The non-prevailing party shall be as determined by the
arbitrator. The non-prevailing party to an arbitration will pay the fees of the
arbitrator and any administrative fee of JAMS, and the reasonable attorneys
fees, costs of suit and disbursements of the other party.

                                       18



         NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY
DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES"
PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU
ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A
COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR
JUDICIAL RIGHTS TO APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE
"ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION
AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS
ARBITRATION PROVISION IS VOLUNTARY. WE HAVE READ AND UNDERSTAND THE FOREGOING
AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE
"ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL ARBITRATION.

Buyer's Initials___________         Seller's Initials___________

                  8.4      Third-Party Claims. As used herein, an "Indemnified
Party" will refer to a Buyer Indemnified Party, or a Seller Indemnified Party,
as applicable, the "Notifying Party" will refer to the party hereto whose
Indemnified Parties are entitled to indemnification hereunder, and the
"Indemnifying Party" will refer to the party hereto obligated to indemnify such
Notifying Party's Indemnified Parties. In the event that any of the Indemnified
Parties is made a defendant in or party to any action or proceeding, judicial or
administrative, or is the recipient of any order or directive in connection with
any Environmental Laws, instituted by or received from any third party for the
liability or the costs or expenses of which are Damages, the Notifying Party
will give the Indemnifying Party prompt notice thereof. The failure to give such
notice will not affect any Indemnified Party's ability to seek reimbursement
unless such failure has materially and adversely affected the Indemnifying
Party's ability to defend successfully a claim. The Indemnifying Party will be
entitled to contest and defend such claim; provided, that the Indemnifying Party
(i) has a reasonable basis for concluding that such defense may be successful
and (ii) diligently contests and defends such claim. Notice of the intention to
so contest and defend will be given by the Indemnifying Party to the Notifying
Party within twenty (20) business days after the Notifying Party's notice of
such claim (but, in all events, at least five (5) business days prior to the
date that an answer to such claim is due to be filed). Such contest and defense
will be conducted by reputable attorneys employed by the Indemnifying Party. The
Notifying Party will be entitled at any time, at its own cost and expense (which
expense will not constitute Damages unless the Notifying Party reasonably
determines that the Indemnifying Party is not adequately representing or,
because of a conflict of interest, may not adequately represent, any interests
of the Indemnified Parties, and only to the extent that such expenses are
reasonable), to participate in such contest and defense and to be represented by
attorneys of its or their own choosing. If the Notifying Party elects to
participate in such defense, the Notifying Party will cooperate with the
Indemnifying Party in the conduct of such defense. Neither the Notifying Party
nor the Indemnifying Party may concede, settle or compromise any claim without
the consent of the other party, which consents will not be unreasonably withheld
or delayed. Notwithstanding the foregoing, (i) if a claim seeks equitable relief
or (ii) if the subject matter of a claim relates to the ongoing business of any
of the Indemnified Parties, which claim, if decided against any of the
Indemnified Parties, would have a Material Adverse Effect on the

                                       19



ongoing business or reputation of any of the Indemnified Parties, then, in each
such case, the Indemnified Parties alone will be entitled to contest, defend and
settle such claim in the first instance and, if the Indemnified Parties do not
contest, defend or settle such claim, the Indemnifying Party will then have the
right to contest and defend (but not settle) such claim.

         9.       General Provisions.

                  9.1      Expenses. Except as otherwise provided in this
Agreement, each party to this Agreement will bear its respective fees and
expenses incurred in connection with the preparation, negotiation, execution and
performance of this Agreement and the Acquisitions, including all fees and
expense of its Representatives; provided, however, that in any suit properly
brought pursuant to the terms of Section 9.3 below, upon final determination in
such proceeding, the prevailing party as determined by a court of law shall be
entitled to reasonable attorneys fees, costs of suit and disbursements in
addition to any other remedies or damages which may be properly awarded by the
court.

                  9.2      Notices. All notices, consents, waivers and other
communications required or permitted by this Agreement shall be in writing and
shall be deemed given to a party when (a) delivered to the appropriate address
by hand or by nationally recognized overnight courier service (costs prepaid);
(b) sent by facsimile or e-mail with confirmation of transmission by the
transmitting equipment; or (c) received or rejected by the addressee, if sent by
certified mail, return receipt requested, in each case to the following
addresses, facsimile numbers or e-mail addresses and marked to the attention of
the person (by name or title) designated below (or to such other address,
facsimile number, e-mail address or person as a party may designate by notice to
the other parties):

                         (a)      if to Seller, to:

                         AXT, Inc.
                         4281 Technology Drive
                         Fremont, California 94538
                         Attention: Donald L. Tatzin
                         Fax: (510) 438-4793
                         Tel: (510) 683-5900

                         with a copy to:
                         Gray Cary Ware & Freidenrich LLP
                         2000 University Circle
                         East Palo Alto, California 94303-2248
                         Attention: Sally J. Rau, Esq.
                         Fax: (650) 833-2001
                         Tel: (650) 833-2000

                                     20



                         (a)      if to Buyer, to:

                         Dalian Luming Science and Technology Group Co., Ltd.
                         10 Houju Road
                         Qixianling Industrial Base High-tech Zone
                         Dalian, P. R. China 116025
                         Attention: Mr. Zhiguo XiaoFax: (  )
                         Tel: (86) 411-4791492

                         with a copy to:
                         The Corporate Law Group
                         Waterfront Plaza, Suite 120
                         500 Airport Boulevard
                         Burlingame, California 94010
                         Attention: Paul D. Marotta, Esq. or Jennifer Chen, Esq.
                         Fax: (650) 227-8001
                         Tel: (650) 227-8000

                  9.3      Jurisdiction; Service of Process. Except for claims
subject to arbitration as provided in Section 8.3 above, any Proceeding arising
out of or relating to this Agreement or any Acquisition may be brought in the
courts of the State of California, County of Alameda or of Los Angeles as the
parties may mutually agree, or, if it has or can acquire jurisdiction, in the
United States District Court for the Northern District of California or the
Southern District of California, as the case may be, and each of the parties
irrevocably submits to the exclusive jurisdiction of each such court in any such
Proceeding, waives any objection it may now or hereafter have to venue or to
convenience of forum, agrees that all claims in respect of the Proceeding shall
be heard and determined only in any such court and agrees not to bring any
Proceeding arising out of or relating to this Agreement or any Acquisition in
any other court. The parties agree that either or both of them may file a copy
of this paragraph with any court as written evidence of the knowing, voluntary
and bargained agreement between the parties irrevocably to waive any objections
to venue or to convenience of forum. Process in any Proceeding referred to in
the first sentence of this Section may be served on any party anywhere in the
world.

                  9.4      Waiver; Remedies Cumulative. The rights and remedies
of the parties to this Agreement are cumulative and not alternative. Neither any
failure nor any delay by any party in exercising any right, power or privilege
under this Agreement or any of the documents referred to in this Agreement will
operate as a waiver of such right, power or privilege, and no single or partial
exercise of any such right, power or privilege will preclude any other or
further exercise of such right, power or privilege or the exercise of any other
right, power or privilege. To the maximum extent permitted by applicable law,
(a) no claim or right arising out of this Agreement or any of the documents
referred to in this Agreement can be discharged by one party, in whole or in
part, by a waiver or renunciation of the claim or right unless in writing signed
by the other party; (b) no waiver that may be given by a party will be
applicable except in the specific instance for which it is given; and (c) no
notice to or demand on one party will be deemed to be a waiver of any obligation
of that party or of the right of the party giving such

                                       21



notice or demand to take further action without notice or demand as provided in
this Agreement or the documents referred to in this Agreement.

                  9.5      Entire Agreement and Modification. This Agreement
supersedes all prior agreements, whether written or oral, between the parties
with respect to its subject matter (including any letter of intent and any
confidentiality agreement between Buyer and Seller) and constitutes (along with
the Seller Disclosure Schedule, Buyer Disclosure Schedule and other documents
delivered pursuant to this Agreement) a complete and exclusive statement of the
terms of the agreement between the parties with respect to its subject matter.
This Agreement may not be amended, supplemented, or otherwise modified except by
a written agreement executed by the party to be charged with the amendment.

                  9.6      Assignments, Successors and No Third-Party Rights. No
party may assign any of its rights or delegate any of its obligations under this
Agreement without the prior written consent of the other parties. Subject to the
preceding sentence, this Agreement will apply to, be binding in all respects
upon and inure to the benefit of the successors and permitted assigns of the
parties. Nothing expressed or referred to in this Agreement will be construed to
give any Person other than the parties to this Agreement any legal or equitable
right, remedy or claim under or with respect to this Agreement or any provision
of this Agreement, except such rights as shall inure to a successor or permitted
assignee pursuant to this Section 9.6.

                  9.7      Severability. If any provision of this Agreement is
held invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Agreement will remain in full force and effect. Any provision
of this Agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or unenforceable.

                  9.8      Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Sections" refer to the corresponding
Sections of this Agreement.

                  9.9      Time of Essence. With regard to all dates and time
periods set forth or referred to in this Agreement, time is of the essence.

                  9.10     Governing Law. This Agreement will be governed by and
construed under the laws of the State of California without regard to
conflicts-of-laws principles that would require the application of any other
law.

                  9.11     Execution of Agreement. This Agreement may be
executed in one or more counterparts, each of which will be deemed to be an
original copy of this Agreement and all of which, when taken together, will be
deemed to constitute one and the same agreement. The exchange of copies of this
Agreement and of signature pages by facsimile transmission shall constitute
effective execution and delivery of this Agreement as to the parties and may be
used in lieu of the original Agreement for all purposes. Signatures of the
parties transmitted by facsimile shall be deemed to be their original signatures
for all purposes.

                                       22



         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.

                                                      
Buyer:                                                   Seller:
DALIAN LUMING SCIENCE AND TECHNOLOGY GROUP               AXT, INC., a Delaware corporation
CO., LTD., a corporation organized under
the laws of the People's Republic of China

By: /s/ Zhiguo Xiao                                      By: /s/ Morris S. Young
    --------------------------------------                   -----------------------------------
    Zhiguo Xiao                                              Morris S. Young
    Chairman and Chief Executive Officer                     Chairman and Chief Executive Officer

By: /s/ Chuanxin Xu                                      By: /s/ Donald L. Tatzin
    --------------------------------------                   -----------------------------------
    Chuanxin Xu                                              Donald L. Tatzin
    Chief Financial Officer                                  Chief Financial Officer



                                       23


                            ASSET PURCHASE AGREEMENT

                                  by and among

                          LUMEI OPTOELECTRONICS CORP.,

                                    AXT, INC.

                              LYTE OPTRONICS, INC.

                         Beijing Tongmei Xtal Technology

                                       and

                     XIAMEN ADVANCED SEMICONDUCTOR CO., LTD.

                             Dated September 4, 2003



                                TABLE OF CONTENTS



                                                                                                         Page
                                                                                                         ----
                                                                                                      
1.       Definitions and Usage........................................................................     1
         1.1      Definitions.........................................................................     1
         1.2      Usage...............................................................................     7

2.       Sale and Transfer of Assets; Closing.........................................................     8
         2.1      Purchase and Sale of Assets.........................................................     8
         2.2      Transfer of Assumed Contracts.......................................................     9
         2.3      Excluded Assets.....................................................................     9
         2.4      License to Use Trademarks...........................................................    10
         2.5      Sale and Lease of Real Property.....................................................    11
         2.6      Consideration.......................................................................    12
         2.7      Liabilities.........................................................................    14
         2.8      Sale of Inventory...................................................................    16
         2.9      Allocation..........................................................................    16
         2.10     Closing.............................................................................    16
         2.11     Closing Obligations.................................................................    17
         2.12     License of MOCVD Equipment..........................................................    18
         2.13     China Equipment.....................................................................    19
         2.14     Grant of Security Interest..........................................................    19

3.       Representations and Warranties of Sellers....................................................    20
         3.1      Due Incorporation...................................................................    20
         3.2      Enforceability; Authority; No Conflict..............................................    20
         3.3      Sufficiency Of Transferred Assets...................................................    21
         3.4      Title To Transferred Assets; Encumbrances...........................................    21
         3.5      Condition Of Real Properties........................................................    22
         3.6      Inventories.........................................................................    22
         3.7      Environmental, Health and Safety Matters............................................    23
         3.8      Litigation..........................................................................    24
         3.9      Employees...........................................................................    25
         3.10     Labor Disputes; Compliance..........................................................    25
         3.11     Intellectual Property Assets........................................................    25
         3.12     Permits and/or Approvals............................................................    27
         3.13     Insurance...........................................................................    27
         3.14     Assumed Contracts...................................................................    28

4.       Representations and Warranties of Buyer......................................................    28
         4.1      Due Incorporation...................................................................    28
         4.2      Enforceability; Authority; No Conflict..............................................    28
         4.3      Compliance with Applicable Laws.....................................................    29
         4.4      Litigation..........................................................................    29


                                        i


                               TABLE OF CONTENTS
                                  (continued)



                                                                                                          Page
                                                                                                          ----
                                                                                                       
5.       Covenants Prior to Closing...................................................................    29
         5.1      Access and Investigation............................................................    29
         5.2      Operation of the Optoelectronics Business...........................................    29
         5.3      Negative Covenant...................................................................    30
         5.4      No Negotiation......................................................................    30
         5.5      Inventory of Exhibit A-1 Assets.....................................................    30

6.       Additional Covenants.........................................................................    31
         6.1      Employees and Employee Benefits.....................................................    31
         6.2      Confidentiality.....................................................................    31
         6.3      Public Disclosure...................................................................    31
         6.4      Conveyance Taxes....................................................................    31
         6.5      Fees and Costs for Cree Litigation..................................................    32
         6.6      Subsequent Sale of Transferred Assets by Buyer......................................    34
         6.7      Reimbursement of Operating Expenses.................................................    34
         6.8      Removal of Encumbrances.............................................................    36
         6.9      Real Property Taxes and Other Expenses..............................................    36
         6.10     Payments Under Open Purchase or Sales Orders........................................    36
         6.11     Additional Documents and Further Assurances.........................................    37
         6.12     Mutual Covenant Not to Compete and Not to Solicit...................................    37
         6.13     Construction at Telstar Facility....................................................    39
         6.14     Release of Encumbrances on Telstar Facility.........................................    39

7.       Conditions to Closing........................................................................    39
         7.1      Conditions to Each Party's Obligation to Consummate the Acquisition.................    39
         7.2      Conditions to Obligations of Buyer..................................................    40
         7.3      Conditions to Obligations of Sellers................................................    41

8.       Termination, Amendment and Waiver............................................................    41
         8.1      Termination.........................................................................    41
         8.2      Amendment...........................................................................    43
         8.3      Extension; Waiver...................................................................    43
         8.4      Notice of Termination...............................................................    43

9.       Indemnification and Escrow...................................................................    43
         9.1      Indemnification.....................................................................    43
         9.2      Escrow Fund.........................................................................    45
         9.3      Claims..............................................................................    45
         9.4      ARBITRATION OF DISPUTES.............................................................    45
         9.5      Third-Party Claims..................................................................    46

10.      General Provisions...........................................................................    47
         10.1     Expenses............................................................................    47


                                       ii




                                                                                                 Page
                                                                                                 ----
                                                                                              
10.2     Notices.............................................................................    47
10.3     Jurisdiction; Service of Process....................................................    48
10.4     Waiver; Remedies Cumulative.........................................................    49
10.5     Entire Agreement and Modification...................................................    49
10.6     Assignments, Successors and No Third-Party Rights...................................    49
10.7     Severability........................................................................    49
10.8     Construction........................................................................    50
10.9     Time of Essence.....................................................................    50
10.10    Governing Law.......................................................................    50
10.11    Execution of Agreement..............................................................    50


                                      iii


                         LIST OF EXHIBITS AND SCHEDULES

Exhibit A-1            List of Transferred Assets

Exhibit A-2            Description of Patents Included in Transferred Assets

Exhibit B              List of Assumed Contracts

Exhibit C              Trademark License Agreement

Exhibit D              Grant Deed

Exhibit E              Form of Bill of Sale

Exhibit F              Form of Assignment and Assumption Agreement

Exhibit G              Form of Patent Assignment Agreement

Exhibit H              Form of Escrow Agreement

I-1 and I-2            Forms of Buyer's and Sellers' Counsel Opinions

Exhibit J              The LED Equipment

Schedule 2.9           Allocation

Schedule 2.12          MOCVD Equipment

Schedule 6.6           Identified Person

Schedule 6.8           Encumbrances to be Released

Schedule 6.12          Identified Employees

Seller Disclosure Schedule

Buyer Disclosure Schedule



                            ASSET PURCHASE AGREEMENT

         This Asset Purchase Agreement ("Agreement") is dated September 4, 2003,
by and among Lumei Optoelectronics Corp., a California corporation ("Buyer"),
AXT, Inc., a Delaware corporation ("AXT"), and Lyte Optronics, Inc., a Nevada
corporation and wholly-owned subsidiary of AXT ("Lyte"), and solely as to the
transfer of the Transferred Assets held in their respective names, Beijing
Tongmei Xtal Technology, Ltd., a corporation organized under the laws of the
People's Republic of China ("AXT Tongmei") and Xiamen Advanced Semiconductor
Co., Ltd., a corporation organized under the laws of the People's Republic of
China ("AXT Xiamen" and, where applicable, together with AXT, Lyte and AXT
Tongmei, the "Sellers").

                                    RECITALS

         WHEREAS, Sellers wish to sell certain assets used by Sellers in the
development and production of light-emitting diodes ("LED") products, Fabry
Perot laser diodes ("LD") products, and high-speed vertical cavity
surface-emitting lasers ("VCSEL") products (the "Optoelectronics Business");

         WHEREAS, Buyer wishes to purchase from Sellers, and Sellers wish to
sell to Buyer, their respective interests in the Transferred Assets (as defined
herein) for the purchase price and subject to the terms and conditions
hereinafter set forth; and

         WHEREAS, concurrently with the execution of this Agreement, AXT has
entered into an agreement (the "Luming Agreement") with Dalian Luming Science
and Technology Group, Co., Ltd. ("Luming") for the transfer and sale of certain
patents used in the Optoelectronics Business.

         NOW, THEREFORE, in consideration of the premises set forth above and
the respective covenants, agreements, representations and warranties hereinafter
set forth, Buyer and Sellers hereby agree as follows:

         1.       Definitions and Usage.

         1.1      Definitions. For purposes of this Agreement, the following
terms and variations thereof have the meanings specified or referred to in this
Section 1.1:

         "Accounts Receivable" means (a) all trade accounts receivable and other
rights to payment from customers of Sellers and the full benefit of all security
for such accounts or rights to payment, including all trade accounts receivable
representing amounts receivable in respect of goods shipped or products sold or
services rendered to customers of Sellers, (b) all other accounts or notes
receivable of Sellers and the full benefit of all security for such accounts or
notes and (c) any claim, remedy or other right related to any of the foregoing.

         "Acquisition" means all of the transactions contemplated by this
Agreement.

                                       1


         "Assignment and Assumption Agreement" is as defined in Section
2.11(a)(ii).

         "Assumed Contracts" is as defined in Section 2.2.

         "Assumed Liabilities" is as defined in Section 2.7(a).

         "AXT" is as defined in the opening paragraph.

         "AXT Tongmei" is as defined in the opening paragraph to this Agreement.

         "AXT Xiamen" is as defined in the recitals to this Agreement.

         "Bill of Sale" is as defined in Section 2.11(a)(i).

         "Business Day" means any day other than (a) Saturday or Sunday or (b)
any other day on which banks in California are permitted or required to be
closed.

         "Buyer" is as defined in the first paragraph of this Agreement.

         "Buyer Disclosure Schedule" is as defined in Section 4.

         "Buyer Indemnified Persons" is as defined in Section 9.1(b)(i).

         "Certification of Transferred Assets" is as defined in Section 5.5.

         "China Equipment" is as defined in Section 2.12(b).

         "Closing" is as defined in Section 2.10.

         "Closing Date" means the date on which the Closing actually takes
place.

         "Code" means the Internal Revenue Code of 1986.

         "Contract" means any agreement, contract, lease, consensual obligation,
promise or undertaking (whether written or oral and whether express or implied),
whether or not legally binding.

         "Copyrights" is as defined in Section 3.11(a)(ii).

         "Cree Litigation" is as defined in Section 6.5.

         "Cree Reimbursement Obligation" is defined in Section 6.5(d).

         "Damages" is as defined in Section 9.1(b).

         "Effective Time" means the effective time of the Closing, which will be
midnight California time on the Closing Date.

                                       2


         "Encumbrance" means any charge, claim, community or other marital
property interest, condition, equitable interest, lien, option, pledge, security
interest, mortgage, right of way, easement, encroachment, servitude, right of
first option, right of first refusal or similar restriction, including any
restriction on use, voting (in the case of any security or equity interest),
transfer, receipt of income or exercise of any other attribute of ownership.

         "Environmental Claim" means any and all administrative, regulatory, or
judicial actions, suits, demands, demand letters, directives, claims, liens,
investigations, proceedings, or notices of noncompliance or violation by any
person or entity (including any Governmental Entity) alleging liability or
potential liability (including, without limitation, potential responsibility for
or liability for enforcement costs, investigatory costs, cleanup costs,
containment measures, governmental response costs, removal costs, remedial
costs, natural resources damages, property damages, personal injuries, fines or
penalties (collectively "Environmental Costs")) arising out of, based on or
resulting from (A) the presence, or Release or threatened Release into the
environment, of any Hazardous Materials at any location, whether or not owned,
operated, leased, or managed by AXT; (B) circumstances forming the basis of any
violation, or alleged violation, of any Environmental Law; or (C) any and all
claims by any third party seeking damages, contribution, indemnification, cost
recovery, compensation, or injunctive relief resulting from the presence or
Release of any Hazardous Materials.

         "Environmental Laws" mean all applicable federal, state, local, and
foreign laws, rules, regulations, and requirements of common law relating to
public health and safety and worker health and safety, pollution, or protection
of the environment (including, without limitation, ambient air, surface water,
groundwater, land surface, subsurface air, or subsurface strata), as it relates
to Hazardous Materials, including, without limitation, laws and regulations
relating to Releases or threatened Releases of Hazardous Materials, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of Hazardous Materials.

         "Environmental Permits" is as defined in Section 3.7(b).

         "Escrow Agent" is as defined in Section 9.2.

         "Escrow Agreement" is as defined in Section 2.11(a)(vi).

         "Escrow Fund" is as defined in Section 2.6(a).

         "Escrow Termination" is as defined in Section 9.2.

         "Excluded Assets" is as defined in Section 2.3.

         "GAAP" means generally accepted accounting principles for financial
reporting in the United States.

         "Governmental Entity" means any foreign or United States federal,
state, local, county, city, or provincial court, administrative agency or
commission, or other governmental entity or instrumentality (including a stock
exchange or other self-regulatory body).

                                       3


         "Grant Deed" is as defined in Section 2.5.

         "Hazardous Materials" means (a) any petroleum or petroleum products,
radioactive materials, asbestos, urea formaldehyde foam insulation and
transformers or other equipment that contain dielectric fluid containing
polychlorinated biphenyls ("PCBs") in regulated concentrations; (b) any
chemicals, materials, or substances which are now defined as or included in the
definition of "hazardous substances," "hazardous wastes," "hazardous materials,"
"extremely hazardous wastes," "restricted hazardous wastes," "toxic substances,"
"toxic pollutants," or words of similar import, under any Environmental Law; (c)
any other chemical, material, substance, or waste, which is regulated under any
Environmental Law in a jurisdiction in which AXT operates; and (d) any buildings
or parts thereof, technical installations or warfare agents buried in the
ground.

         "Improvements" means all buildings, structures, fixtures and
improvements located on the Telstar Facility or included in the Transferred
Assets, including those under construction.

         "Indemnified Party" is as defined in Section 9.5.

         "Indemnifying Party" is as defined in Section 9.5.

         "Intellectual Property Assets" is as defined in Section 3.11(a).

         "Inventories" means all inventories of Sellers, wherever located,
including all finished goods, work in process, raw materials, spare parts and
all other materials and supplies to be used or consumed by Sellers in the
production of finished goods sold by Sellers in the Optoelectronics Business.

         "Knowledge" means such party's actual knowledge after reasonable
inquiry of officers, directors, and other employees of such party reasonably
believed to have knowledge of such matters.

         "Laws" means all applicable United States federal, state, provincial
and local laws, ordinances, rules, statutes, regulations, all Orders or awards,
and all applicable laws of the People's Republic of China.

         "Legal Proceedings" means any actions, suits, arbitrations, regulatory
or other proceedings, litigation, or governmental investigations by or before
any court, arbitration or Governmental Entity.

         "Liabilities" with respect to any Person means all Indebtedness,
obligations and other liabilities of such Person (whether absolute, accrued,
contingent, asserted, unasserted, fixed or otherwise, known or unknown, or
whether due or to become due).

         "Licensed Intellectual Property" is as defined in Section 3.11(d).

         "Loss" means liabilities, losses, costs, claims, damages, penalties,
and expenses (including attorneys' fees and expenses and costs of investigation
and litigation).

                                       4


         "Luming" is as defined in the recitals to this Agreement.

         "Luming Agreement" is as defined in the recitals to this Agreement.

         "Lyte" is as defined in the opening paragraph.

         Any reference to any event, change, condition or effect being
"material" with respect to any entity or group of entities means any material
changes, conditions or effects related to the financial condition, properties,
assets (including intangible assets), liabilities, business, operations or
results of operations of such entity or group of entities.

         "Material Adverse Effect" means an adverse effect on the business,
operations, assets, liabilities, or condition (financial or otherwise), of the
Optoelectronics Business or the Transferred Assets, taken individually or as a
whole, to Sellers or Buyer as applicable, that results in a liability of in
excess of $20,000, except to the extent that any such effect primarily results
from (i) changes in general economic conditions or changes affecting the
industry generally in which such entities operate (provided that such changes do
not affect such entities in a disproportionate manner), or (ii) the announcement
or pendency of the Acquisition (including resulting losses, deferrals, delays or
cancellations of customer orders). Notwithstanding any other provision of this
Agreement, actions taken that are expressly contemplated by this Agreement, and
the directly intended effects thereof shall not be deemed to constitute a
Material Adverse Effect.

         "MOCVD Equipment" is as defined in Section 2.12.

         "Monterey Park Facility" is as defined in Section 2.5(b).

         "Monterey Park Lease" is as defined in Section 2.5(b).

         "Name" is as defined in Section 2.4.

         "Notifying Party" is as defined in Section 9.5

         "Officer's Certificate" is as defined in Section 9.3.

         "Optoelectronics Business" is as defined in the opening recital.

         "Order" means any order, injunction, judgment, decree, ruling,
assessment or arbitration award of any Governmental Entity or arbitrator.

         "Patent" is as defined in Section 2.1.

         "Permits and/or Approvals" means all permits, licenses, certificates of
authority, authorizations, approvals, registrations, franchises and similar
consents granted or issued by any Governmental Entity.

                                       5


         "Permitted Encumbrances" means liens for Taxes not yet due and payable,
and with respect to the Telstar Facility, items 1-9, 15 and 17 on the Chicago
Title Company Preliminary Report No. 31058048 dated August 22, 2003.

         "Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization or a Governmental Entity.

         "Proceeding" means any action, arbitration, audit, hearing,
investigation, litigation or suit (whether civil, criminal, administrative,
judicial or investigative, whether formal or informal, whether public or
private) commenced, brought, conducted or heard by or before, or otherwise
involving, any Governmental Entity or arbitrator.

         "Property Expenses" is as defined in Section 6.9.

         "Purchase Price" is as defined in Section 2.3.

         "Real Property Taxes" is as defined in Section 6.9.

         "Reimbursed Construction Costs" is as defined in Section 6.13.

         "Release" means any release, spill, emission, leaking, pumping,
pouring, dumping, emptying, injection, deposit, disposal, discharge, dispersal,
leaching or migration on or into the Environment or into or out of any property.

         "Representative" means with respect to a particular Person, any
director, officer, manager, employee, agent, consultant, advisor, accountant,
financial advisor, legal counsel or other representative of that Person.

         "RMB" means Renminbi, the sole legal tender of the People's Republic of
China.

         "RMB Account" is as defined in Section 2.6(b).

         "Second Quarter" is as defined in Section 3.3.

         "Secured Assets" has the meaning set forth in Section 2.14.

         "Sellers" is as defined in the first paragraph of this Agreement.

         "Seller Indemnified Person" is as defined in Section 9.1(b)(ii).

         "Shared Legal Fees" is as defined in Section 6.5(a).

         "Tax" means any income, gross receipts, license, payroll, employment,
excise, severance, stamp, occupation, premium, property, environmental, windfall
profit, customs, vehicle, airplane, boat, vessel or other title or registration,
capital stock, franchise, employees' income withholding, foreign or domestic
withholding, social security, unemployment, disability, real property, personal
property, sales, use, transfer, value added, alternative, add-on minimum and
other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever
and any interest, penalty, addition or additional amount thereon imposed,
assessed or collected by or

                                       6


under the authority of any Governmental Entity or payable under any tax-sharing
agreement or any other Contract.

         "Tax Return" means any return (including any information return),
report, statement, schedule, notice, form, declaration, claim for refund or
other document or information filed with or submitted to, or required to be
filed with or submitted to, any Governmental Entity in connection with the
determination, assessment, collection or payment of any Tax or in connection
with the administration, implementation or enforcement of or compliance with any
Laws relating to any Tax.

         "Telstar Facility" means that building and facilities located at 9650
Telstar Avenue, El Monte, California 91731.

         "Termination Date" is as defined in Section 8.1(b).

         "Third Party Rights" is as defined in Section 9.1(c).

         "Title Company" is as defined in Section 2.5(a).

         "Title Report" is as defined in Section 2.5(a).

         "Tongmei Facility" is as defined in Section 2.5(d).

         "Tongmei Lease" is as defined in Section 2.5(d).

         "United States Account" is as defined in Section 2.6(b).

         "WARN Act" is as defined in Section 3.9(a).

         "Xiamen Facility" is as defined in Section 2.5(d).

                  1.2      Usage.

                           (a)      Interpretation. In this Agreement, unless a
clear contrary intention appears: (i) the singular number includes the plural
number and vice versa; (ii) reference to any Person includes such Person's
successors and assigns but, if applicable, only if such successors and assigns
are not prohibited by this Agreement, and reference to a Person in a particular
capacity excludes such Person in any other capacity or individually; (iii)
reference to any gender includes each other gender; (iv) reference to any
agreement, document or instrument means such agreement, document or instrument
as amended or modified and in effect from time to time in accordance with the
terms thereof; (v) reference to any Law means such Law as amended, modified,
codified, replaced or reenacted, in whole or in part, and in effect from time to
time, including rules and regulations promulgated thereunder, and reference to
any Section or other provision of any Law means that provision of such Law from
time to time in effect and constituting the substantive amendment, modification,
codification, replacement or reenactment of such Section or other provision;
(vi) the words "include," "includes" and "including" when used herein shall be
deemed in each case to be followed by the words "without limitation;" (vii) the
table of contents and headings contained in this Agreement are for reference
purposes only

                                       7


and shall not affect in any way the meaning or interpretation of this Agreement;
and (viii) all references to dollars or $ herein will mean United States
dollars.

                           (b)      Legal Representation of the Parties. This
Agreement was negotiated by the parties with the benefit of legal
representation, and any rule of construction or interpretation otherwise
requiring this Agreement to be construed or interpreted against any party shall
not apply to any construction or interpretation hereof.

                           (c)      English Language Version Prevails. Should
this Agreement, any exhibit or schedule hereto, or any ancillary document,
agreement or instrument executed in connection herewith be translated into any
language other than the English language, the English language version of such
document, agreement or instrument shall prevail and be the official version of
such document, agreement or instrument.

         2.       Sale and Transfer of Assets; Closing.

                  2.1      Purchase and Sale of Assets.

                           (a)      Upon the terms and subject to the conditions
set forth in this Agreement, at the Closing, but effective as of the Effective
Time, Sellers shall sell, convey, assign, transfer and deliver to Buyer, and
Buyer shall purchase and acquire from Sellers, free and clear of any
Encumbrances other than Permitted Encumbrances, (i) all of the Sellers'
respective right, title and interest in and to all of those assets owned by each
of them and listed on Exhibit A-1 attached hereto and incorporated herein; (ii)
the patents and pending patent applications listed on Exhibit A-2 attached
hereto and incorporated herein and all associated know how, show how and any
intellectual property rights thereto (the "Patents"); (iii) the Intellectual
Property Assets (as defined below), used by Sellers in the Optoelectronics
Business (provided, that to the extent that any of such Intellectual Property
Assets comprising know-how, technical information, data, or process technology
are also used by Sellers in the manufacture of substrates in its existing
substrate business, Sellers will retain the right to use itself, but not to
sell, transfer, assign, license or disclose to any third party, such
Intellectual Property Assets); (iv) a complete, current, historical and
prospective list of the customers of the Optoelectronics Business, including
identification of designated sales people of Sellers responsible for such
customers, customer contact information, and to the extent existing in Sellers
records, order, shipment and payment history and such other information that AXT
has that it reasonably believes will help Buyer, its subsidiaries, affiliates,
successors or assigns retain or gain such customers; (v) Inventory equal to at
least $1,500,000, net of reserves, of the LD, LED and VCSEL products on hand at
Sellers' facilities as of August 7, 2003, less any Inventory sold pursuant to
the terms of Section 2.8 below, comprising all raw material, semi-finished goods
and finished goods of the LED and VCSEL products; (vi) the Telstar Facility; and
(vii) all such records, files and documents relating to the Transferred Assets,
other than financial books or records, employee records, records relating to the
Excluded Assets, and any records required to be retained by AXT by Law. All of
such assets listed in subsections (i) through (vii) above are defined as the
"Transferred Assets."

                           (b)      Sellers will deliver possession or control
of the Transferred Assets to Buyer or Buyer's designee upon or promptly
following the Effective Time at the locations at

                                       8


Sellers' premises at which such Transferred Assets are currently located, and
will further deliver to Buyer appropriate assignments, bills of sale,
conveyances and other instruments of sale and/or transfer in forms satisfactory
to AXT and Buyer in order to convey to Buyer good title to the Transferred
Assets.

                           (c)      In the event that any assets held by Sellers
or their subsidiaries or affiliates following the Effective Time are within the
definition of Transferred Assets, and have been part of or previously used in
connection with the Optoelectronics Business by Sellers or their subsidiaries or
affiliates, other than such assets as are sold or transferred to Luming pursuant
to the Luming Agreement, Sellers shall, or shall cause such subsidiaries or
affiliates to, promptly assign, transfer, convey and deliver such assets (or
cause such assets to be assigned, transferred, conveyed and delivered) to Buyer,
or any Person designated by Buyer. Subject to the limitations set forth in
Section 2.1(iii) above and to the terms of Sections 2.12 and 2.13 below relating
to the MOCVD Equipment and China Equipment referenced therein (provided that
Sellers shall not use, and shall cause their subsidiaries, affiliates,
Representatives, successors or assigns not to use, the MOCVD Equipment or the
China Equipment in the operation of their ongoing business), Sellers shall not
use any of the Transferred Assets after the Effective Time, and shall cause
their subsidiaries, affiliates, Representatives, successors and assigns not to
use any of such Transferred Assets.

                  2.2      Transfer of Assumed Contracts. Upon the terms and
subject to the conditions set forth in this Agreement, effective as of the
Effective Time, Sellers shall assign to Buyer, and Buyer shall assume from
Sellers, all of Sellers' respective rights and obligations under the contracts
listed on Exhibit B attached hereto and incorporated herein (the "Assumed
Contracts"). Except as specifically set forth to the contrary herein, subject to
and upon the terms and conditions of this Agreement, effective as of the
Effective Time, Buyer shall assume from Sellers and thereafter pay, perform
and/or otherwise discharge in accordance with the terms of such Assumed
Contracts all liabilities and obligations relating to and arising out of the
Assumed Contracts insofar as (and solely to the extent that) such performance,
payment or other obligations mature, become due or are to be performed after
(but not before) the Effective Time.

                  2.3      Excluded Assets. Notwithstanding anything to the
contrary contained in Section 2.1 or elsewhere in this Agreement, the following
assets of Sellers (collectively, the "Excluded Assets") are not part of the sale
and purchase contemplated hereunder, are excluded from the Transferred Assets
and shall remain the property of Sellers after the Closing:

                           (a)      except for the right to use the facility as
described in Section 2.5(b) or (c), below, any right, title or interest in or to
the buildings and facilities, or to the structures, fixtures and improvements
thereon or therein, located at the Monterey Park Facility, or Tongmei Facility
or any other real property occupied by Sellers or any of their affiliates other
than the Telstar Facility;

                           (b)      all Accounts Receivable, cash, cash
equivalents and short-term investments and the accounts in which these assets
are held;

                           (c)      all minute books, stock records, corporate
seals, employee records and financial records (other than fixed asset records,
customer lists and data relating to inventory,

                                       9


which shall be part of the Transferred Assets, but which Sellers shall be
entitled to retain copies of for the purposes of preparing or filing any
reports, financial statements or other required documents with any Governmental
Entity or required in order to fulfill their obligations hereunder or as to the
Retained Liabilities);

                           (d)      those rights relating to deposits and
prepaid expenses and claims for refunds and rights to offset in respect thereof;

                           (e)      all insurance policies and rights
thereunder;

                           (f)      any Contracts not listed on Exhibit B
hereto;

                           (g)      except for the license as provided in
Section 2.4 below, all trademarks, trade names, and service marks of Sellers;

                           (h)      all assets related to Sellers' prior
consumer products division and all assets used by Sellers in transactions with
Finisar Corporation, or licensed, leased or otherwise provided to Finisar
Corporation, other than the portion of the Telstar Facility and associated
tenant improvements previously leased by Sellers to Finisar Corporation;

                           (i)      all personnel records and other records that
Sellers are required by law to retain in its possession;

                           (j)      all claims for refund of Taxes and other
governmental charges of whatever nature;

                           (k)      all applications for and the resulting
Environmental Permits, environmental monitoring data and reports, business
licenses and operating permits, employee training programs and training records,
and similar information related to public health and safety and worker health
and safety;

                           (l)      all rights in connection with and assets of
any employee benefit plans maintained by Sellers; and

                           (m)      all rights of Sellers under this Agreement,
the Bill of Sale, the Assignment and Assumption Agreement, the Patent Assignment
Agreement, the Grant Deed, the Trademark License Agreement, the Monterey Park
Lease, the Tongmei Lease, and the Escrow Agreement.

                  2.4      License to Use Trademarks. AXT hereby grants to Buyer
a non-exclusive, royalty-free, fully paid up, non-transferable and worldwide
license to use (without any right to sublicense) the name "AXT" (the "Name") in
connection with the sale of LDs, LEDs and VCSELs after the Closing Date, for a
period of twelve (12) months, pursuant to and in accordance with the terms of a
license agreement in the form of Exhibit C attached hereto (the "Trademark
License Agreement"). Buyer acknowledges that, except for the license granted to
Buyer pursuant to the terms and conditions of the Trademark License Agreement,
all right, title, and interest in and to the Name shall remain with Sellers.
During the term of this Agreement and of the Trademark License Agreement, Buyer
will not contest Sellers' exclusive right, title and

                                       10


interest in and to, or the validity of, the Name. In addition, Buyer will not in
any manner represent that it has any interest in the Name, except for the
limited license provided herein. Nothing contained herein shall be construed as
creating any agency, partnership, or other form of joint enterprise between the
parties. The relationship between the parties shall at all times be that of
independent contractors. Neither party shall have authority to contract for or
bind the other in any manner whatsoever.

                  2.5      Sale and Lease of Real Property.

                           (a)      Sellers shall sell to Buyer the Telstar
Facility pursuant to a recordable grant deed (the "Grant Deed"), in the form of
Exhibit D attached hereto. Sellers have provided Buyer with (i) a title report
for the Telstar Facility (the "Title Report") prepared by Chicago Title Company
(the "Title Company") and (b) copies of documents referenced in the exceptions
set forth in the Title Report, and Buyer hereby approves of all Permitted
Encumbrances shown therein. Transfer taxes shall be borne and paid by Sellers,
the costs of any title insurance premium shall be borne and paid by Buyer, and
escrow fees and any other closing costs shall be allocated between Buyer and
Sellers in accordance with the custom of the county in which the Telstar
Facility is located. Buyer and Seller will each deposit the funds necessary to
close the escrow for such sale.

                           (b)      AXT will grant Buyer the exclusive use of
the building and facilities located at 2019 Saturn Street, Monterey Park, CA
91754 (the "Monterey Park Facility") for a period of up to eight (8) months
after the Closing Date pursuant to the terms of the real estate lease to be
agreed between Buyer and AXT (the "Monterey Park Lease"). Buyer shall comply
with all Laws, including all Environmental Laws, solely applicable to its
occupancy or use of the Monterey Park Facility during the term of the Monterey
Park Lease, and shall indemnify, defend and hold AXT harmless for any Losses or
Damages that AXT may incur as a result of Buyer's occupancy or use of the
Monterey Park Facility during the term of the Monterey Park Lease. AXT shall
comply with all Laws, including all Environmental Laws, applicable to its
ownership of the Monterey Park Facility, and shall indemnify, defend and hold
Buyer harmless for any Losses or Damages that Buyer may incur as a result of
AXT's ownership of the Monterey Park Facility. Buyer shall not pay Base Rent to
AXT under the Monterey Park Lease, but shall pay Additional Rent and any other
charges (if any) that are set forth in the Monterey Park Lease, during the
eight-month period of this lease. Buyer may terminate the Monterey Park Lease on
thirty (30) days' prior written notice to AXT. In addition, so long as Buyer is
occupying the Monterey Park Facility, AXT shall maintain property and casualty
insurance covering the ownership of the Monterey Park Facility, Buyer shall
maintain property and casualty insurance covering its personal property at and
its operations conducted at the Monterey Park Facility, and each party shall
name the other party as an additional insured under its respective insurance
policy. AXT may, upon prior notice to and consent of Buyer as to the time of
each visit, such consent not to be unreasonably withheld, conduct clean up work
in the Monterey Park Facility during the term of the Monterey Park Lease so long
as and to the extent that such work does not interfere with the normal
activities of Buyer at the Monterey Park Facility or materially increase the
operating costs of the Monterey Park Facility to Buyer.

                           (c)      Sellers shall also grant Buyer or its
designated subsidiary the exclusive use of that portion of the building and
facilities located at Tongmei, China that was

                                       11


used by Sellers or a subsidiary or affiliate of Sellers for the operation of the
Optoelectronics Business (the "Tongmei Facility") for up to twelve (12) months
after the Closing Date, at a charge of $900 per month, pursuant to the terms of
a real estate lease to be agreed between Buyer and AXT (the "Tongmei Lease").
Buyer may terminate the Tongmei Lease at any time upon thirty (30) days' prior
written notice. Buyer and the designated subsidiary occupying the Tongmei
Facility shall comply with all Laws, including all Environmental Laws,
applicable to its occupancy or use of the Tongmei Facility, and shall indemnify,
defend and hold Sellers and any Seller Indemnified Person (as defined in Section
9.1(b)(ii) below) harmless for any Losses or Damages that Sellers or such Seller
Indemnified Person may incur as a result of Buyer's or such subsidiary's
occupancy or use of the Tongmei Facility. Sellers shall comply with all Laws,
including all Environmental Laws, applicable to its ownership of the Tongmei
Facility, and shall indemnify, defend and hold Buyer or any Buyer Indemnified
Person (as defined in Section 9.1(b)(i) below) harmless for any Losses or
Damages that Buyer or such Buyer Indemnified Person may incur as a result of
Sellers' ownership of the Tongmei Facility. In addition, so long as Buyer or its
designated subsidiary is occupying the Tongmei Facility, Sellers shall maintain
property and casualty insurance covering its ownership of the Tongmei Facility,
and Buyer or such designated subsidiary shall maintain property and casualty
insurance covering its personal property at and its operations conducted at the
Tongmei Facility, if and to the extent that such insurance coverage is available
in China. Should a claim for damages arise at the Tongmei Facility that is
covered by one party's insurance, such party shall collect the proceeds paid
under the insurance policy and reimburse the other party its proportionate
amount of the total damages incurred and paid.

                           (d)      Sellers shall terminate the lease for the
facility located in Xiamen, China (the "Xiamen Facility") as soon as possible
after the Closing. Buyer shall negotiate its own lease for the Xiamen Facility
directly with the landlord.

                  2.6      Consideration.

                           (a)      In consideration of the purchase of the
Transferred Assets and the assignment of the Assumed Contracts, Buyer will, at
the Closing Date, (i) pay to Sellers the sum of Five Million Eight Hundred Fifty
Thousand dollars ($5,850,000) (the "Purchase Price") and (b) assume the Assumed
Contracts, in accordance with Section 2.6.(b) below. One million dollars
($1,000,000) of the Purchase Price will represent funds to be paid to the escrow
agent (the "Escrow Fund") as provided in subsection (b) below, and pursuant to
the Escrow Agreement. The Escrow Fund shall be beneficially owned by AXT, but
shall be held in escrow and shall be available to compensate Buyer for certain
damages as provided in Section 9 and in the Escrow Agreement. To the extent not
used for such purposes, the Escrow Fund shall be released to AXT, all as
provided in Section 9 and in the Escrow Agreement.

                           (b)      In order to remit the Purchase Price, on the
Closing Date, Buyer shall cause to be transmitted by wire transfer to Sellers,
the RMB equivalent of $5,850,000 to the bank account in China identified by AXT
(the "RMB Account"). Thereafter, Buyer shall obtain approvals to convert the RMB
equivalent of $2 million within three months after the Closing Date, to convert
an additional RMB equivalent of $2 million within three months and two weeks
after the Closing Date, and to convert an additional RMB equivalent of
$1,850,000 within five months after the Closing Date, as follows. All interest
earned on funds deposited into the RMB

                                       12


Account will be for the account of AXT. Within three months after the Closing
Date, and upon AXT being notified by Buyer that Buyer has received the approvals
required to convert RMB into $2 million, Sellers shall transfer the sum of the
RMB equivalent of $2 million (at the exchange rate in effect as of the Closing
Date) from the RMB Account into the bank account in China designated by Buyer.
Within two weeks of its receipt, Buyer will cause the conversion of this RMB
payment into $2 million and wire transfer the full $2 million into Sellers'
designated bank account in the United States (the "United States Account"). Two
weeks after AXT receives the first $2 million United States dollar payment into
the United States Account, Sellers shall, upon being notified by Buyer that
Buyer has received the approvals required to convert RMB into $2 million,
transfer the RMB equivalent of another $2 million (at the exchange rate in
effect as of the Closing Date) from the RMB Account into the bank account in
China designated by Buyer. Within two weeks of its receipt, Buyer will cause the
conversion of this second RMB payment into $2 million and wire transfer the full
second $2 million into the United States Account. Within four weeks of the wire
transfer of the second $2 million to the United States Account, and upon AXT
being notified by Buyer that Buyer has received the approvals required to
convert RMB into $1,850,000, and only if Sellers have received wire transfers of
$3,750,000 under the provisions in Section 2.2 of the Luming Agreement, Sellers
shall transfer the sum of the RMB equivalent of $1,850,000 (at the exchange rate
in effect as of the Closing Date) from the RMB Account into the account in China
designated by Buyer. Within two weeks of its receipt, Buyer will cause the
conversion of this final RMB payment into $1,850,000 and wire transfer
$1,850,000 to the Escrow Agent who shall place $1 million into the Escrow Fund
and wire $850,000 into the United States Account once the Escrow Agent has
received confirmation from AXT that AXT has released its security interest in
the Telstar Facility, including the filing of all documents or instruments
necessary to record the release of the security interest and deed of trust. The
final RMB wire transfer shall be made by Sellers no later than five months and
two weeks following the Closing Date, so long as Sellers have received, by such
date, no less than the aggregate sum of $7,750,000 into the United States
Account, under both this Agreement and the Luming Agreement.

                           (c)      To secure Buyer's obligations set forth in
this Section 2.6 and Luming's obligations set forth in Section 2.2 of the Luming
Agreement, AXT is hereby granted a security interest in the Telstar Facility up
to the amount of $2,000,000, to be perfected by the filing a deed of trust on
the Telstar Facility in form and substance agreed between Buyer and AXT. As soon
as Buyer has fully complied with the payment terms set forth herein and in the
Luming Agreement, AXT shall release its lien on the Telstar, provided that if
Buyer has, solely by its own fault, defaulted in any of the terms of this
Section 2.6(b), AXT shall release such lien within 90 days following receipt of
full payment of all amounts required herein or in the Luming Agreement, in which
case the Escrow Agent will continue to hold the final $850,000 otherwise
transferable to AXT (but in a separate account and not part of the Escrow Fund)
until the Escrow Agent receives confirmation that the lien has been released
after such 90-day period has elapsed. If Sellers, solely by their own fault,
have defaulted in any of the terms of this Section 2.6, AXT's lien on the
Telstar Facility shall be automatically terminated, unless such default is cured
within ten business days of the default. AXT shall not foreclose on the deed of
trust until the earlier of (i) three months after a default hereunder by Buyer,
and Buyer has not within such three month period made a required payment in
United States dollars into the United States Account or returned the RMB
equivalent of such payment to AXT to the China Account, or (ii) upon receipt

                                       13


by AXT of reasonable evidence that Lumei, Luming or a significant subsidiary of
either will become subject to an Event of Default of the type defined in Section
2.14 below.

                           (d)      Should either Buyer or Sellers fail to
obtain the necessary approvals within three months after the Closing Date to
effect the above transfers, or fail to carry out their respective obligations as
described above, such defaulting party shall pay to the other party the sum of
$30,000 per month for each month, or part thereof, that such party remains in
breach of its obligations described above. If the full RMB equivalent of the
Purchase Price has not been converted to United States dollars and transferred
to the United States Account within one year after the Closing Date, through no
fault of Sellers, Buyer shall be liable for, and shall pay or reimburse Sellers,
for the Tax incurred by Sellers in China for their use of the RMB up to an
aggregate amount of $9,600,000.

                           (e)      AXT shall provide reasonable and good faith
assistance to Buyer in its efforts to convert RMB to United States dollars. Any
gains or losses incurred as a result of the currency exchanges resulting from
all transfers shall be for the account of, and all gains and Losses incurred as
a result thereof be borne by, Buyer or its subsidiary.

                  2.7      Liabilities.

                           (a)      Assumed Liabilities. On the Closing Date,
but effective as of the Effective Time, Buyer shall assume and agree to
discharge only the following Liabilities of Sellers (the "Assumed Liabilities"):

                                    (i)      any Liability related to or arising
from the ownership or use of the Transferred Assets from and after the Effective
time;

                                    (ii)     any Liability of Sellers or Buyer
arising after the Effective Time under any Assumed Contract;

                                    (iii)    any Liability arising out of or
relating to products of the Optoelectronics Business to the extent manufactured
or sold by Buyer or any of its subsidiaries, affiliates, successors or assigns
after the Effective Time, or sold by Sellers or any of their subsidiaries,
affiliates, successors or assigns beginning on and from August 29, 2003;

                                    (iv)     any Environmental Claims or
permitting requirements arising out of or relating to the operation of the
Optoelectronics Business by Buyer, its subsidiaries, affiliates, successors or
assigns after the Effective Time, or to Buyer's ownership, occupation or use of
or operations at the Telstar Facility, or the occupation or use of or operations
at the Telstar Facility by Buyer's subsidiaries, affiliates, successors or
assigns from and after the Closing Date, or Buyer's leasing of or operations at
the Monterey Park Facility or Tongmei Facility; provided, however, that Buyer
shall not be liable to Sellers or any Seller Indemnified Person for
Environmental Costs for any Environmental Claim relating to conditions existing
prior to the Effective Time at the Monterey Park Facility, Tongmei Facility, or
the Telstar Facility;

                                    (v)      any Liability for Taxes arising as
a result of Buyer's operation of the Optoelectronics Business, or the operation
of the Optoelectronics Business by

                                       14


Buyer's subsidiaries, affiliates, successors or assigns or ownership, use or
operation of the Transferred Assets after the Effective Time; and

                                    (vi)     all obligations of Buyer under this
Agreement, the Bill of Sale, the Assignment and Assumption Agreement, the Patent
Assignment Agreement, the Grant Deed, the Monterey Park Lease, the Tongmei
Lease, the Trademark License Agreement, the Escrow Agreement, the MOCVD
Equipment Lease and the China Equipment Lease.

                           (b)      Retained Liabilities. The Retained
Liabilities shall remain the sole responsibility of and shall be retained, paid,
performed and discharged solely by Sellers, their successors or assigns.
"Retained Liabilities" shall mean every Liability of Sellers, their successors
or assigns, other than the Assumed Liabilities, including, but not limited to:

                                    (i)      except as otherwise provided in
this Agreement or in the Luming Agreement, any Liability related to or arising
as a result of Sellers' operation of the Optoelectronics Business, or the
operation of the Optoelectronics Business by Sellers' subsidiaries or
affiliates, or ownership, use or operation of the Transferred Assets prior to
the Effective Time;

                                    (ii)     any Liability arising out of or
relating to products of Sellers to the extent such products were manufactured
and shipped by Sellers, or any of their respective subsidiaries or affiliates
prior to August 29, 2003;

                                    (iii)    any Liability for Taxes arising as
a result of Sellers' operation of their respective businesses, or the operation
by Sellers' subsidiaries or affiliates of their respective businesses, or the
ownership, use or operation of the Transferred Assets prior to the Effective
Time and any deferred Taxes of any nature;

                                    (iv)     any Liability of Sellers, their
subsidiaries, affiliates, successors or assigns for transfer, sales, use or
similar Taxes payable by Sellers as a result of the transfer of the Transferred
Assets to Buyer;

                                    (v)      any Liability under any Contract
not assumed by Buyer under Section 2.7(a);

                                    (vi)     any Environmental Claims, including
any Environmental Costs as set forth in Section 2.7(a)(iv), or permitting
requirements arising out of the operation of the Optoelectronics Business by
Sellers, their subsidiaries or affiliates, or relating to Sellers' leasing,
ownership, occupation, use or operation of the Real Properties prior to the
Effective Time;

                                    (vii)    any Liability under any employee
benefit plans maintained by Sellers or their subsidiaries relating to payroll,
vacation, sick leave, workers' compensation, unemployment benefits, pension
benefits, employee stock option or profit-sharing plans, health care plans or
benefits or any other employee plans or benefits of any kind for current or
former employees of Sellers or their subsidiaries relating to services performed
on behalf of Sellers or their subsidiaries, whether before or after the
Effective Time, other than such Liability relating to services performed on
behalf of Buyer after the Effective Time;

                                       15


                                    (viii)   any Liability under any employment,
severance, retention or termination agreement entered into between Sellers and
any employee of Sellers;

                                    (ix)     all obligations of Sellers under
this Agreement, the Bill of Sale, the Assignment and Assumption Agreement, the
Patent Assignment Agreement, the Grant Deed, the Monterey Park Lease, the
Tongmei Lease, the Trademark License Agreement, the Escrow Agreement, the MOCVD
Equipment Lease and the China Equipment Lease; and

                                    (x)      any Liability of Sellers for the
unpaid taxes of any Person under Reg. Section 1.1502-6 of the Code (or similar
provision of state, local or foreign law), as a transferee or successor, by
contract or otherwise.

         Each party will be liable for such portion of any judgment rendered in
and any settlement of the Cree Litigation as is set forth in Section 6.5 below.
Each party shall also be liable for its own costs and expenses incurred in
connection with the negotiation, execution and delivery of this Agreement as set
forth in Section 10.1 below.

                  2.8      Sale of Inventory. Sellers shall be entitled to
continue to sell Inventory during the period from the date of this Agreement
through the Closing Date, up to a maximum amount equal to $450,000 without the
prior written consent of Buyer. To the extent that Sellers sell any of such
Inventory after August 7, 2003 up to the Closing Date, all proceeds from the
sale of the Inventory up to $200,000 will be split 12.5% to AXT and 87.5% to
Buyer, and any proceeds exceeding $200,000 shall belong to Buyer, with the
proceeds payable to Buyer at the Closing Date and only if the Closing occurs,
net of any costs reimbursed to Sellers pursuant to the terms of Section 6.7(b)
below. Payment to Buyer by AXT of any amounts due pursuant to the foregoing, net
of any amounts payable to Sellers under Section 6.7(b) below, shall be made in
United States dollars.

                  2.9      Allocation. The Purchase Price shall be allocated in
accordance with Schedule 2.9, which the parties consider to be fair. After the
Closing, the parties shall make consistent use of the allocation, fair market
value and useful lives specified in Schedule 2.9 for all Tax purposes and in all
filings, declarations and reports with the IRS in respect thereof, including the
reports required to be filed under Section 1060 of the Code. In any Proceeding
related to the determination of any Tax, Buyer and Sellers shall not contend or
represent that such allocation is not a correct allocation.

                  2.10     Closing. The purchase and sale provided for in this
Agreement (the "Closing") will take place at the offices of AXT's counsel at
Gray Cary Ware & Freidenrich LLP, 2000 University Avenue, East Palo Alto, CA
94303-2248 commencing at 10:00 a.m. (local time) on September 8, 2003, or as
soon as practicable thereafter, unless Buyer and Sellers otherwise agree. Should
the Closing not occur by September 15, 2003, Buyer shall be responsible for
payment of the operating expenses incurred by Sellers in accordance with Section
6.7 below. Consummation of the transfer of the Telstar Facility shall occur
through a real property sales escrow established with the Title Company,
concurrent with the closing of the sale of the other Transferred Assets. Subject
to the provisions of Section 8, failure to consummate the purchase and sale
provided for in this Agreement on the date and time and at the place determined
pursuant to this Section 2.10 will not result in the termination of this
Agreement and will not

                                       16


relieve any party of any obligation under this Agreement. In such a situation,
the Closing will occur as soon as practicable, subject to Section 8.

                  2.11     Closing Obligations. At the Closing:

                           (a)      Sellers shall deliver to Buyer:

                                    (i)      a bill of sale for all of the
Transferred Assets that are Tangible Personal Property in the form of Exhibit E
(the "Bill of Sale") executed by Sellers;

                                    (ii)     an assignment and assumption of the
Assumed Contracts in the form of Exhibit F, which assignment shall also contain
Buyer's undertaking and assumption of the Assumed Contracts (the "Assignment and
Assumption Agreement"), executed by Sellers;

                                    (iii)    assignment of the Patents in the
form of Exhibit G (the "Patent Assignment Agreement"), executed by Sellers;

                                    (iv)     a duly executed recordable grant
deed in substantially the form attached here as Exhibit D, conveying the Telstar
Facility to Buyer, subject only to the Permitted Exceptions;

                                    (v)      a certification and affidavit, duly
executed by AXT, as required by the Foreign Investment in Real Property Tax Act
of 1980, as amended, and California Withholding form 593;

                                    (vi)     such other documents and other
instruments of transfer and conveyance as each party may reasonably agree, each
in form and substance satisfactory to each party and its respective legal
counsel;

                                    (vii)    proceeds from the sale of Inventory
as described in Section 2.8;

                                    (viii)   an escrow agreement in the form of
Exhibit H, executed by Buyer, AXT and the Escrow Agent (the "Escrow Agreement");

                                    (ix)     two (2) duly executed original
counterparts of the Monterey Park Lease, in the form agreed between Buyer and
Sellers;

                                    (x)      a duly executed original
counterpart of the transfer of the Tongmei Lease, in the form agreed between
Buyer and Sellers;

                                    (xi)     a duly executed lease of the
Secured Assets; and

                                    (xii)    a certificate executed by Sellers
as to the accuracy of their representations and warranties as of the date of
this Agreement and as of the Closing in accordance with Section 7.2(b) and as to
their compliance with and performance of the covenants and obligations to be
performed or complied with by Sellers at or before the Closing in accordance
with Section 7.2(a).

                                       17


                  (b)      Buyer shall deliver to Sellers:

                                    (i)      The Purchase Price by wire transfer
in accordance with Section 2.6(b) above;

                                    (ii)     the Escrow Agreement, executed by
Buyer, AXT and the Escrow Agent in the form of Exhibit H;

                                    (iii)    the Assignment and Assumption
Agreement executed by Buyer in the form of Exhibit F;

                                    (iv)     two (2) duly executed original
counterparts of the Monterey Park Lease, in the form agreed between Buyer and
Sellers;

                                    (v)      a duly executed original
counterpart of the transfer of the Tongmei Lease, in the form agreed between
Buyer and Sellers;

                                    (vi)     a duly executed lease of the
Secured Assets; and

                                    (vii)    a certificate executed by Buyer as
to the accuracy of its representations and warranties as of the date of this
Agreement and as of the Closing in accordance with Section 7.3(b) and as to its
compliance with and performance of its covenants and obligations to be performed
or complied with at or before the Closing in accordance with Section 7.3(a).

                  2.12     License of MOCVD Equipment. Sellers shall retain
title to the MOCVD equipment purchased by Sellers from Aixtron or Emcore as
identified on Schedule 2.12 (the "MOCVD Equipment"), as well as all rights to
any and all license or operating agreements between Sellers and Aixtron and
between Sellers and Emcore relating to or arising from the purchase or use of
the MOCVD Equipment. Sellers shall lease the MOCVD Equipment to Buyer for the
sum of $1.00 United States dollar per year plus the cost incurred by Sellers,
including maintenance, operations, applicable personal property taxes and
insurance, pursuant to an operating lease in form and substance to be agreed
between the parties (the "MOCVD Equipment Lease"). Buyer may designate another
Person to assume the lease of the MOCVD Equipment if such Person is (i) duly
incorporated and authorized to do business in the United States, or (ii) is a
Person to whom Sellers have given their prior written consent following receipt
of all necessary approvals. Buyer, or the approved designated Person, shall
retain the option to purchase the MOCVD Equipment and require Sellers to
transfer title to the MOCVD Equipment for a total consideration of $1.00 United
States dollar, such option to be exercisable after the Cree Litigation has
settled or a final judgment entered. In addition, once the Cree Litigation has
been settled or a final judgment has been entered, Buyer and Sellers agree to
assist one another in the title and/or use transfer of the MOCVD Equipment,
should Buyer, or its designated Person, desire a title transfer at such time,
with the goal of minimizing all transfer, change of use or similar fees or costs
for both parties. Sellers agree to include Buyer or its designated Person as an
additional insured under their property and casualty insurance covering the
MOCVD Equipment located in the United States for so long as Sellers retain title
to the MOCVD Equipment. In addition, Buyer agrees to include Sellers as
additional insureds under Buyer's property and casualty insurance covering the
MOCVD Equipment located at the Telstar Facility

                                       18


for so long as Sellers retain title to the equipment. Sellers shall not allow
any Encumbrances to be created or placed on the MOCVD Equipment after the
Effective Time, other than the interests of Aixtron or Emcore, respectively,
under the license or operating agreements.

                  2.13     China Equipment. Sellers shall retain title to all
Transferred Assets located in China (the "China Equipment"). Buyer shall use its
commercially reasonable efforts to establish a subsidiary or affiliate in China
that has an organizational structure and requisite Governmental Permits and/or
Approvals such that such company can take title to the China Equipment with the
goal of minimizing any customs or VAT or other Taxes payable by or imposed upon
either party as a result of the transfer of title. Once such subsidiary or
affiliate as been established, Sellers shall pay the cost and expense of
obtaining all Permits and/or Approvals that they are required to obtain in order
to transfer title to the China Equipment to Buyer or its designated subsidiary
or affiliate in China. Buyer shall pay the cost and expense of obtaining all
Permits and/or Approvals that Buyer is required to obtain in order to receive
title to and possession of the China Equipment. In addition, Buyer, or any
Person designated by Buyer, shall retain the option to purchase the China
Equipment and require Sellers to transfer title to the China Equipment for the
sum of $1.00 United States dollar, such option to be exercisable at any time
after the earlier of (i) the formation of the subsidiary or affiliate in China
by Buyer, and (ii) 60 days after the Closing Date, even if such subsidiary or
affiliate in China has not yet been approved by the Chinese government. During
the period that Sellers retain title to the China Equipment, Sellers shall
charge Buyer or such Person designated by Buyer, and Buyer shall reimburse
Sellers or their designated Person the sum of $1 United States dollar per year
plus the cost actually incurred by Sellers to maintain and operate the China
Equipment, including maintenance, operations, applicable personal property taxes
and insurance, pursuant to an operating lease in form and substance to be agreed
between the parties (the "China Equipment Lease"). Sellers shall not allow any
Encumbrances to be created or placed on the China Equipment after the Effective
Time. To the extent possible, each of Buyer and AXT shall include the MOCVD
Equipment and the China Equipment under their umbrella property and casualty
insurance policies issued in the United States, naming the other party as an
additional insured.

                  2.14     Grant of Security Interest. To secure the options of
Buyer to acquire title to the MOCVD Equipment and the China Equipment described
in Sections 2.12 and 2.13 above (collectively the "Secured Assets"), Sellers
hereby grant to Buyer a first priority security interest, effective immediately,
in all of Sellers' right, title and interest in and to the Secured Assets. In
accordance with Section 6.11 below, without further consideration, and at
Buyer's sole cost and expense, Sellers shall promptly execute and deliver (or
shall cause to be executed and delivered) such documents or instruments as Buyer
may reasonably request to effect or perfect the security interest granted
hereby. Upon the occurrence and during the continuance of any Event of Default
(as defined below), Buyer shall have all the rights and remedies of a secured
party under the California Uniform Commercial Code and any other applicable Laws
of any Governmental Entity. Upon the occurrence and during the continuance of
any Event of Default hereunder, Buyer shall thereupon have the immediate right
to transfer to itself or to sell, assign and transfer to any other Person all
right, title and interest in and to all or any part of the Secured Assets. For
purposes of this Section 2.14 only (and for Section 2.6(c) as to Buyer), an
"Event of Default" shall be deemed to occur if Sellers (i) shall fail in any
material respect to perform or observe any term, covenant or agreement contained
in this Agreement on their part to be performed or

                                       19


observed or (ii) shall file a voluntary petition in bankruptcy or a petition or
answer seeking reorganization, to effect a plan or other arrangement with
creditors or any other relief under the United States Bankruptcy Code or under
any other foreign, state or federal law relating to bankruptcy or reorganization
granting relief to debtors, whether now or hereafter in effect (collectively,
"Bankruptcy Laws"), (iii) Any of the Sellers shall be adjudicated a bankrupt, or
admit in writing that they cannot pay their debts as they become due, or shall
make an assignment for the benefit of creditors, or shall apply for or consent
to the appointment of any custodian, receiver or trustee for all or any
substantial part of their property, or shall take any action to authorize any of
the actions set forth above in this clause, or (iv) an involuntary petition
seeking any of the relief specified in this clause shall be filed against
Sellers, or any order for relief shall be entered against Sellers in any
involuntary proceeding under any Bankruptcy Laws.

         3.       Representations and Warranties of Sellers. Sellers, jointly
and severally, represent and warrant to Buyer as follows, except as disclosed in
a document of even date herewith and delivered by Sellers to Buyer on the date
hereof referring to the representations and warranties in this Agreement (the
"Seller Disclosure Schedule"). The Seller Disclosure Schedule will be arranged
in paragraphs corresponding to the numbered and lettered paragraphs contained in
this Section 3, and the disclosure in any such numbered and lettered section of
the Seller Disclosure Schedule shall qualify only the corresponding subsection
in this Section 3 and any other section hereof where it is reasonably clear,
upon a reading of such disclosure without any independent knowledge on the part
of the reader regarding the matter disclosed, that the disclosure is intended to
apply to such other section.

                  3.1      Due Incorporation. Sellers are each a corporation
duly organized, validly existing, and in good standing under the laws of its
respective jurisdiction of organization, with all requisite corporate power and
authority to own, lease, and operate its properties and to carry on its business
as now being conducted. AXT and Lyte are each qualified to do business and in
good standing as a foreign corporation in each jurisdiction where the nature of
the properties owned, leased, or operated by it and the business transacted by
it require such qualification, except where the failure to be so qualified would
not reasonably be expected to have a Material Adverse Effect on the
Optoelectronics Business.

                  3.2      Enforceability; Authority; No Conflict.

                           (a)      Sellers each have full corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery, and performance by Sellers of this
Agreement have been duly and validly approved by the Board of Directors of
Sellers, and no other actions or proceedings on the part of Sellers are
necessary to authorize this Agreement and the transactions contemplated hereby.
Sellers have each duly and validly executed and delivered this Agreement. This
Agreement constitutes the legal, valid and binding obligation of Sellers,
enforceable against them in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, fraudulent
transfer, moratorium, reorganization, or other laws from time to time in effect
which affect creditors' rights generally and by general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).

                                       20


                           (b)      The execution and delivery of this Agreement
by Sellers does not, and the performance by Sellers of their respective
obligations hereunder and the consummation of the transactions contemplated
hereby, will not conflict with, result in a violation or breach of, constitute
(with or without notice or lapse of time or both) a default under, result in or
give to any person any right of payment or reimbursement, termination,
cancellation, modification or acceleration of, or result in the creation or
imposition of any lien upon any of the respective assets or properties of
Sellers under any of the terms, conditions or provisions of (i) the certificate
of incorporation or bylaws of AXT, or the articles of incorporation or bylaws of
Lyte, or (ii) subject to the taking of the actions described in paragraph (b) of
this Section 3.2, (x) any Laws applicable to Sellers or any judgment, decree,
order, writ, permit, or license of any Governmental Entity applicable to Sellers
or any of their assets or properties, or (y) any contract, agreement, or
commitment to which Sellers are a party or by which Sellers or any of their
respective assets or properties is bound, excluding from the foregoing clauses
(x) and (y) conflicts, violations, breaches, defaults, terminations,
modifications, accelerations, and creations and impositions of liens, which, as
to any of the foregoing, would not reasonably be expected to have a Material
Adverse Effect on the Optoelectronics Business or would not result in the
inability of Sellers to consummate the transactions contemplated by this
Agreement.

                           (c)      No consent, approval, order, or notice to or
authorization of, or registration, declaration, or filing with, any Governmental
Entity or other third party is required to be made or obtained by Sellers (i) in
connection with the execution and delivery of this Agreement or (ii) the
consummation by Sellers of the transactions contemplated hereby, the failure to
obtain any of which would reasonably be expected to have a Material Adverse
Effect or prevent or materially delay the consummation of the transactions
contemplated hereby, other than such consents, approvals, orders, notices or
authorizations, or registrations, declarations or filings as may be required to
effect the provisions of Sections 2.6, 2.12, 2.13 or 2.14.

                  3.3      Sufficiency Of Transferred Assets. The Transferred
Assets constitute all of the assets, tangible and intangible, of any nature
whatsoever, necessary to operate the Optoelectronics Business in the manner
operated by Sellers during the three months from April 1, 2002 through June 30,
2002, which was the peak quarter for sales by Sellers of their products in the
Optoelectronics Business (the "Second Quarter"); provided, however, that Sellers
are not transferring certain real estate assets owned, leased or operated by
Sellers in the Optoelectronics Business, insurance policies maintained by
Sellers, employees or employee benefit plans maintained by Sellers in order to
operate the Optoelectronics Business, or financial records, other than customer
data, inventory data and fixed asset records, nor any Permits and/or Approvals;
and provided, further, that Sellers have discontinued the Optoelectronics
Business, are no longer operating the Optoelectronics Business, and the
Transferred Assets comprise fewer assets than owned, operated or leased by
Sellers when they conducted the Optoelectronics Business. In addition, certain
of the patents used in the Optoelectronics Business are being sold to Luming
pursuant to the Luming Agreement. The Transferred Assets may include assets that
Sellers have substituted for assets used during the Second Quarter with assets
acquired since June 30, 2002, which are of comparable capacity or quality.

                  3.4      Title To Transferred Assets; Encumbrances. Sellers
are the sole owners of and have full power and authority to transfer all of
their right, title and interest to the Transferred Assets. The tangible
Transferred Assets (other than the Telstar Facility as set forth in Section 3.5

                                       21


below), are in good condition and repair (and with respect to the equipment
included in the Transferred Assets, in good operating condition and repair
consistent with the purpose for which such equipment was or is used by Sellers),
have been maintained in accordance with normal industry practice, reasonable
wear and tear excepted, and are in condition suitable for the use to which they
are put in the Optoelectronics Business as operated by Sellers during the Second
Quarter. Sellers have good title (and with respect to the Inventory, marketable
title) to (or to the extent comprising a license, a license to use), all of the
Transferred Assets, free and clear of all Encumbrances or restrictions on
transfer, except for Permitted Encumbrances, and except as provided below and in
Section 6.8. At the Closing, Sellers will sell, convey, assign, transfer and
deliver to Buyer good title and all its right, title and interest, in and to all
of the Transferred Assets, free and clear of all Encumbrances other than
Permitted Encumbrances.

                  3.5      Condition Of Real Properties. Use of the Telstar
Facility, the Monterey Park Facility and the Tongmei Facility (collectively the
"Real Properties") for the various purposes for which each is presently being
used is permitted as of right under all applicable zoning legal requirements,
and, as to the Telstar Facility, is not subject to "permitted nonconforming"
use, except that the Monterey Park Facility does not comply with all zoning
requirements, and does not meet current building codes for all purposes. To
Sellers' Knowledge and except as otherwise provided herein or in the Seller
Disclosure Schedule, the Improvements at the Real Properties are in compliance
with all applicable Laws as of the date of this Agreement except where the
failure to be in compliance would not reasonably be expected to have a Material
Adverse Effect, and are in good repair and in good condition, ordinary wear and
tear excepted and commensurate with the age and use of the building and the
other improvements thereon. Sellers make no representations or warranties as to
(a) the value of or income derived from the Real Properties; (b) the suitability
of the Real Properties for Buyer's use, including without limitation any future
development of the Real Properties and the availability of utilities necessary
to service the Real Properties, other than the suitability of the Real
Properties for the use put to them by Sellers, if any, as of the Second Quarter;
(c) other than as used by Sellers during the Second Quarter, the habitability,
merchantability, profitability, marketability or fitness for a particular
purpose of the Real Properties; and (d) except as set forth in Section 3.7, the
nature, quality or condition of the water, drainage, undershoring, subsurface,
soil and geology of the Real Properties or the presence or absence of hazardous
materials at, on, under or adjacent to the Real Properties. To the extent that
Buyer is or will be required to obtain Permits and/or Approvals to own, occupy
or use the Real Properties, Sellers make no representation or warranty as to
whether any Governmental Entity will allow Buyer to continue to use the Real
Properties in the manner used by Sellers, or for any other purposes.

                  3.6      Inventories. All items included in the Inventories
consist of a quality and quantity usable and, with respect to finished goods,
saleable, in the ordinary course of business of the Optoelectronics Business as
operated by Sellers. The values of all items of obsolete materials and of
materials of below standard quality have been written down to estimated
realizable market value on the books of Sellers. The values at which the
inventory is carried reflect the normal inventory valuation policy of Sellers,
and such valuation policy as applied is in accordance with GAAP.

                                       22


                  3.7      Environmental, Health and Safety Matters. Except as
disclosed in Section 3.7 of the Seller Disclosure Schedule:

                           (a)      Sellers are, at the Telstar Facility, in
compliance in all material respects with all applicable Environmental Laws, and
Sellers have not received any written communication from any Governmental Entity
that alleges that Sellers are not in compliance with applicable Environmental
Laws at the Telstar Facility.

                           (b)      Sellers have obtained or have applied for
all environmental, health and safety permits, and governmental Permits and/or
Approvals (collectively, the "Environmental Permits") necessary for the conduct
of their operations at the Telstar Facility, except those the absence of which
would not reasonably be expected to have a Material Adverse Effect, and all such
Environmental Permits are in good standing or, where applicable, a renewal
application has been timely filed and is pending agency approval, and Sellers
are in material compliance with all terms and conditions of such Environmental
Permits; provided, however, that Sellers make no representation or warranty as
to whether any transfer, renewal, or reapplication for any Environmental Permit
required as a result of the Acquisition can be accomplished in the ordinary
course of business.

                           (c)      There are no Environmental Claims pending
or, to Sellers' Knowledge, threatened (i) against Sellers that would reasonably
be expected to have a Material Adverse Effect on Buyer's ability to operate the
Telstar Facility in the same manner as operated by Sellers during the Second
Quarter or (ii) against the Telstar Facility.

                           (d)      To Sellers' Knowledge, there have been no
Releases of any Hazardous Material on, at, upon, into or from the Telstar
Facility by Sellers, nor has there been any Release of Hazardous Material,
including the off-site disposal of Hazardous Material, that would reasonably be
expected to form the basis of any Environmental Claim against Sellers relating
to the Telstar Facility.

                           (e)      To Sellers' Knowledge, since May 1999,
Sellers have complied, and are in compliance with, in all material respects, all
Environmental Laws in the operation of the Optoelectronics Business at the
Telstar Facility and as related to the Transferred Assets located at the Telstar
Facility.

                           (f)      To their Knowledge, Sellers are, at the
Tongmei Facility, in compliance in all material respects with all applicable
Environmental Laws, and Sellers have not received any written communication from
any Person that alleges that Sellers are not in compliance with applicable
Environmental Laws at the Tongmei Facility. To their Knowledge, Sellers have
obtained or have applied for all applicable Environmental Permits (if any)
necessary for the conduct of their operations at the Tongmei Facility, except
those, the absence of which would not reasonably be expected to have a Material
Adverse Effect. All such Environmental Permits obtained by Sellers on the
Tongmei Facility are in good standing or, where applicable, a renewal
application has been timely filed and is pending agency approval, and Sellers
are in material compliance with all terms and conditions of such Environmental
Permits; provided, however, that Sellers make no representation or warranty as
to whether any transfer, renewal, or reapplication for any Environmental Permit
required as a result of the Acquisition can be

                                       23


accomplished in the ordinary course of business. There are no Environmental
Claims pending or, to Sellers' Knowledge, threatened (i) against Sellers that
would reasonably be expected to have a Material Adverse Effect on Buyer's
ability to operate the Tongmei Facility in the same manner as operated by
Sellers during the Second Quarter, or (ii) against the Tongmei Facility. To
Sellers' Knowledge, there have been no Releases of any Hazardous Material on,
at, upon, into or from the Tongmei Facility by Sellers, nor has there been any
Release of Hazardous Material, including the off-site disposal of Hazardous
Material, that would reasonably be expected to form the basis of any
Environmental Claim against Sellers relating to the Tongmei Facility. To
Sellers' Knowledge, since May 1999, Sellers have complied, and are in compliance
with, in all material respects, all Environmental Laws in the operation of the
Optoelectronics Business at the Tongmei Facility and as related to the
Transferred Assets located at the Tongmei Facility.

                           (g)      To their Knowledge and except as provided in
the Seller Disclosure Schedule, Sellers are at the Monterey Park Facility in
compliance in all material respects with all applicable Environmental Laws other
than zoning Laws and building code requirements, and Sellers have not received
any written communication from any Person that alleges that Sellers are not in
compliance with such applicable Environmental Laws at the Monterey Park
Facility. To their Knowledge, Sellers have obtained or have applied for all
applicable Environmental Permits necessary for the conduct of their operations
at the Monterey Park Facility, other than those necessary to meet current zoning
or building code requirements, and except those the absence of which would not
reasonably be expected to have a Material Adverse Effect. All Environmental
Permits obtained by Sellers on the Monterey Park Facility are in good standing
or, where applicable, a renewal application has been timely filed and is pending
agency approval, and Sellers are in material compliance with all terms and
conditions of such Environmental Permits; provided, however, that Sellers make
no representation or warranty as to whether any transfer, renewal, or
reapplication for any Environmental Permit required as a result of the
Acquisition can be accomplished in the ordinary course of business. There are no
Environmental Claims pending or, to Sellers' Knowledge threatened (i) against
Sellers that would reasonably be expected to have a Material Adverse Effect on
Buyer's ability to operate the Monterey Park Facility in the same manner as
operated by Sellers during the Second Quarter, or (ii) against the Monterey Park
Facility. To Sellers' Knowledge, there have been no Releases of any Hazardous
Material on, at, upon, into or from the Monterey Park Facility by Sellers, nor
has there been any Release of Hazardous Material, including the off-site
disposal of Hazardous Material, that would reasonably be expected to form the
basis of any Environmental Claim against Sellers relating to the Monterey Park
Facility. To Sellers' Knowledge, since May 1999, Sellers have complied, and are
in compliance with, in all material respects, all Environmental Laws in the
operation of the Optoelectronics Business at the Monterey Park Facility and as
related to the Transferred Assets located at the Monterey Park Facility.

                  3.8      Litigation.

                           (a)      Except as disclosed in Section 3.8 of the
Seller Disclosure Schedule, there are no claims or Legal Proceedings that are
now pending or, to Sellers' Knowledge, threatened against or affecting the
Optoelectronics Business or the products sold by Sellers in the Optoelectronics
Business, the Transferred Assets, this Agreement or in connection with the
transactions contemplated hereby. Except as disclosed in Section 3.8 of the
Seller

                                       24


Disclosure Schedule, Sellers are not currently subject to any order, judgment,
decree, injunction, stipulation, or consent order of or with any court or other
Governmental Entity that substantially interferes with their operation of the
Optoelectronics Business. Since May 1999, neither AXT nor Lyte has entered into
any agreement to settle or compromise any Legal Proceeding pending or threatened
against the Optoelectronics Business which has involved any obligation other
than the payment of money or for which Sellers have any continuing obligation,
relating to the Optoelectronics Business.

                           (b)      Except as set forth on Section 3.8 of the
Seller Disclosure Schedule, to AXT's Knowledge, there are no pending or
threatened Legal Proceedings against any director, officer, employee, or agent
of the Optoelectronics Business in their capacity as such.

                  3.9      Employees.

                           (a)      Neither AXT nor Lyte has violated the Worker
Adjustment and Retraining Notification Act (the "WARN Act") or any similar state
or local Law relating to the employees of the Optoelectronics Business.

                           (b)      To AXT's Knowledge, no officer, director,
agent, employee, consultant, or contractor of the Optoelectronics Business is
bound by any contract that purports to limit the ability of such officer,
director, agent, employee, consultant, or contractor to engage in or continue or
perform any conduct, activity, duties or practice relating to the
Optoelectronics Business of Sellers.

                  3.10     Labor Disputes; Compliance. Neither AXT, nor to AXT's
Knowledge, Lyte, (i) has been, and is not now, a party to any collective
bargaining agreement or other labor contract; (ii) since May, 1999, there has
not been, there is not presently pending or existing, and to AXT's Knowledge
there is not threatened, any strike, slowdown, picketing, work stoppage or
employee grievance process involving the Optoelectronics Business operated by
Sellers; (iii) to AXT's Knowledge no event has occurred or circumstance exists
that could provide the basis for any work stoppage or other labor dispute; (iv)
there is not pending or, to AXT's Knowledge, threatened against or affecting the
Optoelectronics Business of Sellers, any proceeding relating to the alleged
violation of any Law pertaining to labor relations or employment matters,
including any charge or complaint filed with the National Labor Relations Board
or any comparable Governmental Entity, and there is no organizational activity
or other labor dispute against or affecting the Optoelectronics Business of
Sellers or the Real Properties; (v) no application or petition for an election
of or for certification of a collective bargaining agent is pending; and (vi) no
grievance or arbitration Proceeding exists that might have an adverse effect
upon the Optoelectronics Business.

                  3.11     Intellectual Property Assets.

                           (a)      The term "Intellectual Property Assets"
means all intellectual property owned or licensed (as licensor or licensee) by
Sellers for use in the Optoelectronics Business, in which Sellers, or either of
them, have a proprietary interest, including:

                                    (i)      the Patents;

                                       25


                                    (ii)     all registered and unregistered
copyrights in both published works and unpublished works included in the
Transferred Assets (collectively, "Copyrights");

                                    (iii)    all rights in mask works included
in the Transferred Assets; and

                                    (iv)     all current know-how, trade
secrets, confidential or proprietary information, customer lists, software,
technical information, data, process technology, plans, drawings and blue prints
used by Sellers in the production of LD, LED and VCSEL products, including
Inventory and finished goods, as part of the Optoelectronics Business.

                           (b)      To Sellers' Knowledge, the Intellectual
Property Assets are all those necessary for the operation of the Optoelectronics
Business as it has been conducted by Sellers for the three years ending on the
Closing Date. Sellers are the owner or licensee of all right, title and interest
in and to each of the Intellectual Property Assets, free and clear of all
Encumbrances, and have the right to use all of the Intellectual Property Assets,
subject, in the case of any Intellectual Property Assets comprising licenses, to
any payments therefore set forth in any Contract covering such Intellectual
Property Asset. Sellers have not assigned, transferred, licensed, or pledged to
any other party, or encumbered, the Intellectual Property Assets, nor entered
into any agreement to do so.

                           (c)      All of the issued Patents are currently in
compliance with formal legal requirements (including payment of filing,
examination and maintenance fees and proofs of working or use), and are not
subject to any maintenance fees or taxes or actions falling due within ninety
(90) days after the Closing Date. No Patent has been or is now involved in any
interference, reissue, reexamination, or opposition Proceeding. Except as set
forth in Section 3.11 of the Seller Disclosure Schedule, to Sellers' Knowledge,
none of the issued Patents is infringed by any third party or, to Sellers'
Knowledge, has been challenged or threatened in any way, and except as disclosed
in Section 3.11(c) of the Seller Disclosure Schedule, to Sellers' Knowledge none
of the issued Patents infringes or is alleged to infringe any patent or other
proprietary right of any other Person.

                           (d)      No license or royalty agreement included in
the Transferred Assets to which Sellers, or either of them, are a party, is in
material breach or default by Sellers or, to AXT's Knowledge any other party
thereto, or the subject of any notice of termination given or, to AXT's
Knowledge, threatened. All license, royalty and other fees under each license or
royalty agreement regarding Intellectual Property Assets have been fully and
timely paid.

                           (e)      To the extent that any Intellectual Property
Assets are licensed by a third party to Sellers (such Intellectual Property
Assets referred to as "Licensed Intellectual Property"), except as set forth on
Section 3.11(e) of the Seller Disclosure Schedule, the consummation of the
transactions contemplated hereunder will not (i) constitute a breach or default
under any license agreement relating to any Licensed Intellectual Property,
which breach or default would give the other contracting party a right to
terminate such agreement; (ii) materially alter or diminish the rights assigned
or transferred to Buyer from that originally granted to either of Sellers under
any such agreement; (iii) materially alter or increase the

                                       26


obligations delegated or transferred to Buyer from that originally imposed on
Sellers under any such agreement; or (iv) require the consent of or any payment
to any licensor under any such agreement.

                           (f)      There are no exclusive licenses, exclusive
distributorship agreements, or noncompetition agreements with respect to the use
of any Intellectual Property Assets or the development, sale, or distribution of
any products of the Optoelectronics Business as operated by Sellers, or any
other material restrictions regarding the right of Sellers to fully exploit any
Intellectual Property Assets anywhere in the world.

                  3.12     Permits and/or Approvals. Sellers hold (or, at the
required times, held) all Permits and/or Approvals that are required for the
operation of the Optoelectronics Business, except those the absence of which
would not reasonably be expected to have a Material Adverse Effect. Sellers are
in compliance with the terms of such Permits and/or Approvals applicable to
them, except where the failure so to comply would not reasonably be expected to
have a Material Adverse Effect. To Sellers' Knowledge, Sellers are not in
violation of any law, ordinance or regulation of any Governmental Entity, except
for possible violations, which individually and in the aggregate do not have a
Material Adverse Effect.

                  3.13     Insurance. Schedule 3.13 lists all insurance policies
covering the Transferred Assets, Optoelectronics Business, or the Real
Properties. To Sellers' Knowledge, there is no claim by Sellers currently
pending under any of such policies as to which coverage has been questioned,
denied or disputed by the underwriters of such policies. All premiums due and
payable under all such policies have been paid, and Sellers are otherwise in
material compliance with the terms of such policies. Sellers have no Knowledge
of threatened termination of, or of a material increase in the premiums payable
for, any of such insurance policies. Schedule 3.13 sets forth the following
information with respect to each such insurance policy:

                           (a)      the name, address, and telephone number of
the agent;

                           (b)      the name of the insurer, the name of the
policyholder, and the name of each covered insured;

                           (c)      the policy number and the period of
coverage;

                           (d)      the scope (including an indication of
whether the coverage is on a claims made, occurrence, or other basis) and amount
(including a description of how deductibles and ceilings are calculated and
operate) of coverage; and

                           (e)      a description of any retroactive premium
adjustments or other loss-sharing arrangements.

         Notwithstanding the above, Sellers make no representations or
warranties to Buyer as to the availability to Buyer of comparable insurance
policies, of the ability of Sellers to transfer the insurance policies or
portion thereof to Buyer, or of the ability of Buyer to obtain insurance
covering the Transferred Assets, Optoelectronics Business or the Real Properties
on terms and conditions similar to the policies obtained by Sellers.

                                       27


                  3.14     Assumed Contracts. The Assumed Contracts are in full
force and effect as of the date hereof and have not been modified from the
copies thereof delivered to Buyer, all of the obligations of Sellers under the
Assumed Contracts required to have been performed as of the date of this
Agreement have been fully performed by Sellers, and such obligations as Sellers
are required to perform between the date of this Agreement and the Effective
Time will have been performed by Sellers. Sellers have made no other prior
assignment of the Assumed Contracts to any third party.

         4.       Representations and Warranties of Buyer. Buyer represents and
warrants to Sellers as follows, except as disclosed in a document of even date
herewith and delivered by Buyer to Sellers on the date hereof referring to the
representations and warranties in this Agreement (the "Buyer Disclosure
Schedule"). The Buyer Disclosure Schedule will be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Section
4, and the disclosure in any such numbered and lettered section of the Buyer
Disclosure Schedule shall qualify only the corresponding section in this Section
4, and any other section hereof where it is reasonably clear, upon a reading of
such disclosure without any independent knowledge on the part of the reader
regarding the matter disclosed, that the disclosure is intended to apply to such
other section.

                  4.1      Due Incorporation. Buyer is a corporation duly
organized, validly existing, and in good standing under the laws of its
jurisdiction of organization, with all requisite corporate power and authority
to own, lease, and operate its properties and to carry on its business as now
being conducted. Buyer is qualified to do business and is in good standing as a
foreign corporation in each jurisdiction where the nature of the properties
owned, leased, or operated by it and the business transacted by it require such
qualification, except where the failure to be so qualified would not reasonably
be expected to have a Material Adverse Effect on its business.

                  4.2      Enforceability; Authority; No Conflict.

                           (a)      Buyer has full corporate power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby. The execution, delivery, and performance by Buyer of this Agreement has
been duly and validly approved by the Board of Directors of Buyer, and no other
actions or proceedings on the part of Buyer are necessary to authorize this
Agreement and the transactions contemplated hereby. Buyer has duly and validly
executed and delivered this Agreement. This Agreement constitutes the legal,
valid and binding obligation of Buyer, enforceable against it in accordance with
its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization, or
other laws from time to time in effect which affect creditors' rights generally
and by general principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity or at law).

                           (b)      The execution and delivery of this Agreement
by Buyer does not, and the performance by Buyer of its obligations hereunder and
the consummation of the transactions contemplated hereby, will not conflict
with, result in a violation or breach of, constitute (with or without notice or
lapse of time or both) a default under, result in or give to any person any
right of payment or reimbursement, termination, cancellation, modification or

                                       28


acceleration of, or result in the creation or imposition of any lien upon any of
the assets or properties of Buyer under any of the terms, conditions or
provisions of (i) the articles of incorporation or bylaws of Buyer, or (ii)
subject to the taking of the actions described in paragraph (b) of this Section
4.2, (x) any Laws applicable to Buyer or any judgment, decree, order, writ,
permit, or license of any Governmental Entity applicable to Buyer or any of its
assets or properties, or (y) any contract, agreement, or commitment to which
Buyer is a party or by which Buyer or any of its assets or properties is bound,
excluding from the foregoing clauses (x) and (y) conflicts, violations,
breaches, defaults, terminations, modifications, accelerations, and creations
and impositions of liens, which, as to any of the foregoing, would not
reasonably be expected to have a Material Adverse Effect on its business, or
would not result in the inability of Buyer to consummate the transactions
contemplated by this Agreement.

                           (c)      No consent, approval, order, or notice to or
authorization of, or registration, declaration, or filing with, any Governmental
Entity is required to be made or obtained by Buyer in connection with the
execution and delivery of this Agreement or the consummation by Buyer of the
transactions contemplated hereby, the failure to obtain which would reasonably
be expected to have a Material Adverse Effect or prevent or materially delay the
consummation of the transactions contemplated hereby, except for such filings,
authorization, orders and approvals as may be required of state and local
Governmental Entities.

                  4.3      Compliance with Applicable Laws. To Buyer's
Knowledge, Buyer is not in violation of any law, ordinance or regulation of any
Governmental Entity, except for possible violations, which individually and in
the aggregate do not have a Material Adverse Effect on its business.

                  4.4      Litigation. There are no claims or Legal Proceedings
pending or, to Buyer's Knowledge threatened (in writing) by or against Buyer
with respect to this Agreement or in connection with the transactions
contemplated hereby.

         5.       Covenants Prior to Closing.

                  5.1      Access and Investigation. Between the date of this
Agreement and the Closing Date, and upon reasonable advance notice received from
Buyer, Sellers shall afford Buyer and its Representatives full and free access,
during regular business hours, to Sellers' personnel, properties, books and
records and other documents and data, relating to the Optoelectronics Business,
such rights of access to be exercised in a manner that does not unreasonably
interfere with the operations of Sellers. No information or knowledge obtained
in any investigation pursuant to this Section 5.1 will affect or be deemed to
modify any representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the transactions contemplated hereby.

                  5.2      Operation of the Optoelectronics Business. Between
the date of this Agreement and the Closing, Sellers shall:

                           (a)      continue to collect accounts receivable,
sell LD, LED and VCSEL products from Inventory in accordance with Section 2.8
above, and maintain the equipment used in the Optoelectronics Business;

                                       29


                           (b)      maintain the Transferred Assets in a state
of repair and condition that complies with Law and is consistent with the
requirements and normal conduct of Sellers' business; and

                           (c)      cooperate with Buyer and assist Buyer in
identifying the Permits and/or Approvals required by Buyer to operate the
business from and after the Closing Date and use commercially reasonable efforts
to cooperate with Buyer in either transferring existing Permits and/or Approvals
of Sellers to Buyer, where permissible, or obtaining new Permits and/or
Approvals for Buyer.

                  5.3      Negative Covenant. Except as otherwise expressly
permitted herein, between the date of this Agreement and the Closing Date,
Sellers shall not, without the prior written consent of Buyer, (a) transfer or
license to any person or entity any rights to Intellectual Property Assets,
other than in connection with the sale of LD, LED or VCSEL products from
Inventory pursuant to Section 2.8; (b) enter into or amend any agreements
pursuant to which any other party is granted distribution, marketing or other
rights of any type or scope with respect to resale or distribution of the
Optoelectronics Business products; (c) sell, lease, license or otherwise dispose
of or encumber any of the Transferred Assets, except for Inventory as allowed
pursuant to Section 2.8; or (d) enter into any compromise or settlement of any
litigation, proceeding or governmental investigation relating to the Transferred
Assets or the Optoelectronics Business, except as provided in Section 6.5.

                  5.4      No Negotiation. Until the earlier of September 5,
2003 and such time as this Agreement shall be terminated pursuant to Section 8,
AXT shall not, directly or indirectly, solicit, initiate, seek, encourage or
support any inquiries or proposals from, or discuss or negotiate with, any
Person (other than Buyer) relating to the sale of the Transferred Assets.

                  5.5      Inventory of Exhibit A-1 Assets. Between the date of
this Agreement and the Closing Date, Buyer and Sellers shall conduct an
inventory of all assets listed on Exhibit A-1, and agree the customer
information to be delivered pursuant to Section 2.1(a)(iv) above. After such
inventory has been completed, Buyer and Sellers shall execute a certification
certifying that all such assets are present and accounted for, and shall further
execute a certification on the Closing Date certifying that all such assets
listed on Exhibit A-1 have been delivered by Sellers to Buyer as of the Closing
Date (the "Certification of Transferred Assets"). The Certification of
Transferred Assets shall be and represent the final representation and warranty
of Buyer to Sellers that Buyer has received all of the assets listed on Exhibit
A-1 and required to be transferred by Sellers to Buyer hereunder. Thereafter,
after the Effective Time Buyer shall be precluded from claiming that any of the
assets listed on Exhibit A-1 are missing or have not been delivered by Sellers
to Buyer. After executing and delivering this certification at Closing, Buyer
shall be forever barred from making a claim for Damages against Sellers, their
subsidiaries, affiliates, successors or assigns, pursuant to Section 9 or
otherwise, alleging that any of the assets listed on Exhibit A-1 were missing or
have not been delivered by Sellers to Buyer.

                                       30


         6.       Additional Covenants.

                  6.1      Employees and Employee Benefits.

                           (a)      For the purpose of this Agreement, the term
"Active Employees" shall mean all employees employed on the Closing Date by
Sellers who are employed exclusively in the Optoelectronics Business as it was
operated by Sellers. It is intended that Sellers will pay all Active Employees
up to September 1, 2003, but will be entitled to terminate any and all employees
from and after September 1, 2003. Sellers will use commercially reasonable
efforts to cooperate with Buyer in retaining key employees who have been
identified by Buyer. Any and all existing employment contracts and non-compete
agreements between Active Employees and Sellers will be terminated upon or prior
to Closing, or obligations thereunder shall be paid by Sellers if not so
terminated.

                           (b)      Buyer is not obligated to hire any Active
Employee but may interview any or all Active Employees. It is understood and
agreed that (A) Buyer's expressed intention to extend offers of employment as
set forth in this Section 6.1 shall not constitute any commitment, contract or
understanding (expressed or implied) of any obligation on the part of Buyer to a
post-Closing employment relationship of any fixed term or duration or upon any
terms or conditions other than those that Buyer may establish pursuant to
individual offers of employment, and (B) employment offered by Buyer is "at
will" and may be terminated by Buyer or by an employee at any time for any
reason (subject to any written commitments to the contrary made by Buyer or an
employee and Laws). Nothing in this Agreement shall be deemed to prevent or
restrict in any way the right of Buyer to terminate, reassign, promote or demote
any of the Active Employees hired by Buyer after the Closing or to change
adversely or favorably the title, powers, duties, responsibilities, functions,
locations, salaries, other compensation or terms or conditions of employment of
such employees.

                  6.2      Confidentiality. The parties acknowledge that Buyer
and AXT have previously executed a Letter of Intent dated August 8, 2003, which
includes confidentiality provisions therein (the "Non-Disclosure Agreement"),
which Non-Disclosure Agreement is incorporated herein by this reference and will
continue in full force and effect in accordance with its terms.

                  6.3      Public Disclosure. Unless otherwise permitted by this
Agreement, Buyer and AXT will consult with each other before issuing any press
release or otherwise making any public statement or making any other public (or
non-confidential) disclosure (whether or not in response to an inquiry)
regarding the terms of this Agreement and the transactions contemplated hereby,
and neither will issue any such press release or make any such statement or
disclosure without the prior approval of the other (which approval will not be
unreasonably withheld), except as may be required by law or by obligations
pursuant to any listing agreement with any national securities exchange or with
the NASDAQ Stock Market (in which case the disclosing party will, to the extent
practicable within the time available to comply therewith, use its reasonable
efforts to obtain the consent of the other party prior to such disclosure).

                  6.4      Conveyance Taxes. Both parties will use commercially
reasonable efforts to cooperate in good faith with the other party in connection
with such other party's preparation,

                                       31


execution, and filing of all returns, questionnaires, applications, or other
documents regarding any property transfer or gains, sales, use, value added,
stock transfer, and stamp Taxes, any transfer, recording, registration, and
other fees or any similar taxes that become payable in connection with the
transactions contemplated by this Agreement that are required or permitted to be
filed. Except as otherwise provided in this Agreement, each party will pay any
such Taxes or fees imposed on it by any taxing authority (and any penalties and
interest with respect to such Taxes and fees) that become payable in connection
with the transactions contemplated by this Agreement.

                  6.5      Fees and Costs for Cree Litigation.

                           (a)      AXT shall maintain all responsibility and
right to control the defense of, and shall pay any judgment rendered and any
settlement of the litigation (the "Cree Litigation") between AXT and Cree, Inc.,
Cree Lighting Company and Boston University (collectively, "Cree" and
individually a "Cree Litigant") provided that any such settlement is entered
into with AXT's express written consent, to the extent, and only as to such
portion, that such judgment or settlement relates to or arises from actions
taken by AXT that are found to infringe Cree's patent that occurred during the
period prior to and ending (i) on the Closing Date with regard to all commercial
transactions other than LED products, and (ii) at 11:59 p.m. Pacific Time on
August 28, 2003 with respect to LED products, in the event the Acquisition
closes. Except as otherwise provided in this Section 6.5, if Cree or any Cree
Litigant should file suit against Buyer, or join Buyer in the Cree Litigation
against AXT, Buyer shall pay all of its own defense costs, and any judgment that
may be rendered against Buyer and any settlement of such litigation that Buyer
may enter into. In addition, Buyer shall bear all responsibility and pay any
damages, costs, claims, penalties or other liabilities arising in such
litigation that result from the Transferred Assets from and after the Closing
Date, or LED products produced and/or sold using inventory or technology
acquired as part of the Transferred Assets, beginning on August 29, 2003, in the
event the Acquisition closes. The apportionment of the damages, costs, claims,
penalties or other liabilities resulting from the Transferred Assets from and
after the Closing Date, or LED products produced and/or sold beginning on August
29, 2003, in the event the Acquisition closes, shall be as set forth in the
settlement of or judgment rendered in the Cree Litigation; provided, that to the
extent such apportionment is not determinable from the settlement of or judgment
rendered in the Cree Litigation, then the apportionment shall be determined by
arbitration according to the procedure set forth in Section 9.4 below. Buyer
shall share in AXT's legal fees, costs and expenses incurred in defending itself
in the Cree Litigation from and after the Closing Date (not including costs
involved in pursuing counterclaims against Cree), including fees and costs of
legal counsel, ("Shared Legal Fees") as follows: (i) AXT shall pay the first
$500,000 of the Shared Legal Fees; (ii) AXT shall pay 85% of Shared Legal Fees
incurred between $500,001 and $1,500,000 and Buyer shall pay 15% of Shared Legal
Fees incurred between such amounts; and (iii) AXT shall pay all Shared Legal
Fees incurred above $1,500,000. AXT shall provide monthly updates to Buyer as to
the amount of Shared Legal Fees incurred by AXT as of the end of each month;
once the Shared Legal Fees reach $500,000, AXT shall submit an invoice to Buyer
monthly with a copy of the invoice representing the Shared Legal Fees incurred
for the prior month, and Buyer shall pay to AXT its portion of the Shared Legal
Fees for the prior month within 30 days of receipt of the invoice from AXT.

                                       32


                           (b)      If AXT prevails in the Cree Litigation, AXT
shall retain the right, subject to the prior written consent of Buyer, such
consent not to be unreasonably withheld, to license worldwide to other third
parties the buffer layer technology developed by AXT. Net revenues derived from
such licenses shall be split 40% to AXT and 60% to Buyer.

                           (c)      Each of Buyer and AXT will make their key
employees and equipment reasonably available, at no charge, after the Closing
Date, to the other party, to assist each such party in defending the Cree
Litigation and pursuing the counterclaims against Cree and Boston University, or
either of them. Each of Buyer and AXT shall also share with the other party all
information it develops in defense of the Cree Litigation, at no charge to such
other party.

                           (d)      Should Cree file suit against Buyer within
two (2) years of the Effective Time, for the same causes of action as are set
forth in the Cree Litigation and alleging infringement of the same patent, U.S.
Patent Number 5,686,738 (and provided that Cree does not allege that Buyer
infringes the patent in a manner substantially different than Cree has alleged
that AXT has infringed the patent), AXT shall provide such assistance as may be
reasonably requested by Buyers in defending such subsequent action. In addition,
AXT shall reimburse Buyer 50% of the first $500,000 of Buyer's legal fees and
expenses up to a maximum amount payable by Sellers of $250,000 (the "Cree
Reimbursement Obligation") incurred in the defense of any allegation that Buyer
has infringed U.S. Patent Number 5,686,738. If Buyer is sued by Cree or any Cree
Litigant alleging infringement of patents other than or in addition to the
patent that is the subject of the Cree Litigation, the Cree Reimbursement
Obligation hereunder shall only include those legal fees and expenses incurred
by Buyer in defense of any action involving U.S. Patent Number 5,686,738, and
not in defense of any action involving any other patent, nor related to any
counterclaims filed by Buyer, nor claiming invalidity of any of Buyer's patents.
Should more than one patent be the subject of any subsequent action filed
against Buyer, Buyer's legal fees and expenses will be apportioned among, and
determined to have been incurred in the defense of the action involving each
patent, equally. For example, if four patents are the subject of the litigation,
the Cree Reimbursement Obligation shall only be for 50% of one-quarter of the
legal fees and expenses incurred, up to a maximum of $250,000. The Cree
Reimbursement Obligation shall be paid exclusively from the Escrow Fund and from
no other source; accordingly, if at the time the Cree Reimbursement Obligation
becomes due and no Escrow Funds remain in escrow, then no amounts will be
payable to Buyer hereunder and the Cree Reimbursement Obligation will be
terminated. If any portion of the Cree Reimbursement Obligation remains
outstanding hereunder as of the Escrow Termination, funds equal to the lesser of
(i) the remaining Escrow Funds and (ii) the amount of the remaining portion of
Sellers' obligations to pay the Cree Reimbursement Obligation, shall continue to
be held in escrow and remain subject to the Escrow Agreement, solely for the
purpose of satisfying the remaining outstanding Cree Reimbursement Obligation.

                           (e)      In consideration for the agreements set
forth herein, Buyer, on its own behalf and on behalf of its subsidiaries,
successors and assigns, and Luming, hereby agrees and affirmatively covenants
that it will not, and will cause its subsidiaries, successors and assigns and
Luming not to, take any action, or initiate or pursue any Legal Proceeding
against Sellers, their subsidiaries, successors and assigns, under Section 9 or
otherwise, for indemnification for or reimbursement of any Damages incurred by
Buyer, as a result of any allegations by any other

                                       33


Person that (i) the Patents infringe or are alleged to infringe any patent or
proprietary right or intellectual property of any other Person, or (ii)
challenging the validity of any Patent.

                           (f)      Buyer further agrees as follows:

                                    (i)      Buyer agrees to reasonably preserve
and maintain and not alter, destroy, spoil or otherwise dispose of any equipment
listed in Exhibit J attached hereto, which equipment is used to manufacture
LEDs, and which has been received by Buyer from AXT. Buyer agrees to permit the
parties to the pending Cree lawsuit, or any other person at the request of AXT,
to inspect or test the equipment listed in Exhibit A-1 upon reasonable notice of
at least 72 hours in connection with the Cree lawsuit, or as otherwise directed
by a court.

                                    (ii)     Buyer expressly agrees to
reasonably preserve and maintain all equipment listed in Exhibit J until such a
time as it is advised by AXT that Buyer is no longer required to preserve such
equipment. Buyer agrees that to the extent it disposes of any of the equipment
described in Exhibit J, it will require the third party to honor the terms of
this agreement as it relates to the preservation of evidence, and such agreement
shall be in writing, included as a term of sale, and submitted to AXT for
approval, but such approval shall not be unreasonably withheld. Buyer will also
give AXT at least 45 days notice of a proposed transfer of any of the equipment
listed on Exhibit J to a third party.

                                    (iii)    AXT acknowledges and agrees that,
following the Closing, Buyer may move any and all of the Transferred Assets
other than the MOCVD Equipment, to China. Subject to Section 9 below, Buyer
shall indemnify, defend and hold AXT harmless for any Losses incurred in its
litigation with Cree resulting from any breach by Buyer of its agreements in
this Section 6.5(d).

                  6.6      Subsequent Sale of Transferred Assets by Buyer.
Should Buyer, its subsidiaries, affiliates, successors or assigns, or any
designated Persons identified below, sell, (whether such sale is effected by
sale, lease, transfer, or exchange), any of the Intellectual Property Assets or
equipment used (in the case of equipment, exclusively, and in the case of
Intellectual Property Assets, primarily) in order to manufacture VCSEL products,
to any third party, other than Luming or the Person designated in Section 2.12
or 2.13 above, within six (6) months following the Closing Date, Buyer shall pay
to AXT fifty percent (50%) of the value Buyer receives in connection with such
sale. Should the sale of Intellectual Property Assets or equipment be to the
Person identified by AXT on Schedule 6.6 attached hereto, fifty percent (50%) of
the value received by Buyer in connection with such sale shall be paid to AXT
regardless of the date that the sale occurs.

                  6.7      Reimbursement of Operating Expenses.

                           (a)      AXT shall pay all compensation costs,
including benefits, of employees retained by AXT in the Optoelectronics Business
through September 1, 2003. All compensation costs and benefits incurred by AXT
for employees of the Optoelectronics Business for the period from September 2,
2003 through the earlier of the Closing Date and September 15, 2003 will be
reimbursed by Buyer to Sellers, in the event that the Acquisition closes.
Sellers shall maintain the Optoelectronics Business in such a manner that
enables Buyer to commence

                                       34


operating the Optoelectronics Business after Closing, once Buyer hires
employees, obtains all Environmental Permits and other Permits and/or Approvals
required from Governmental Entities, and establishes its operating,
administrative, safety, training and similar systems, including placement of all
service contracts necessary to operate the Optoelectronics Business. All costs
incurred by Sellers from August 8, 2003 through the earlier of the Closing Date
and September 15, 2003 necessary in order to maintain the Optoelectronics
Business in such fashion that are incurred by Sellers, up to a maximum aggregate
of $100,000, do not require prior approval from Buyer, and will be reimbursed by
Buyer to Sellers as provided in subsection (d) below, in the event that the
Acquisition closes. Any such costs incurred by Sellers beyond such amount shall
not be reimbursed unless approved in advance by Buyer. Such reimbursable costs
shall include the costs that Sellers would not have incurred if Sellers had
completely shut down the Optoelectronics Business and not maintained and readied
the Optoelectronics Business for transfer to Buyer, and include the cost of raw
materials purchased by Sellers and for services necessary to maintain the
Optoelectronics Business.

                           (b)      Beginning September 16, 2003, and payable
only if the Acquisition closes, Buyer shall be liable for, and shall reimburse
Sellers as set forth below, all costs customarily incurred by Sellers to operate
the Optoelectronics Business at the Telstar Facility, the Monterey Park
Facility, the Tongmei Facility and the Xiamen Facility. Such reimbursable costs
shall include all operating costs customarily incurred by Sellers at such
facilities (other than any closure related costs for the Monterey Park
Facility), including but not limited to compensation costs, including benefits,
of employees retained by AXT in the Optoelectronics Business, all customary
operating costs, including repairs and maintenance, services and utilities,
phones, real property taxes, insurance, supplies and raw materials, and any
other customary costs not otherwise covered in the foregoing payable by Buyer
pursuant to terms of the Monterey Park Facility as if the Monterey Park Lease
and the Tongmei Lease had been executed effective as of September 16, 2003 and
as if Buyer had owned the Telstar Facility and leased the Xiamen Facility as of
September 16 and was operating its Optoelectronics Business. Sellers may claim
no more than $200,000 for costs for the period from September 16 through
September 30 and may limit the expenditure incurred during the period from
September 16 through September 30, 2003 to $200,000 through appropriate
management controls.

                           (c)      If the Closing is delayed past September 15
and Sellers are prepared to close and all of the conditions set forth in Section
7.2 have been satisfied, other than Section 7.2(d), and the Title Company is
irrevocably committed to issue the Title Policy as set forth in Section 7.1(c),
Sellers shall be reimbursed for the costs incurred in Section 6.7(b) at the
Closing by deducting such amount from the proceeds from the sale of Inventory
payable to Buyer pursuant to the terms of Section 2.8 above. At the Closing,
Sellers shall provide a reconciliation to Buyer of the costs reimbursed by Buyer
pursuant to Section 6.7(b) together with the net proceeds from the sale of
Inventory pursuant to Section 2.8 (if any) after deducting the costs and
expenses reimbursable by Buyer described above. Sellers and Buyer shall meet
within 45 days after the Closing date to agree on the reconciliation of amounts
deducted from the proceeds from the sale of Inventory pursuant to Section
6.7(b).

                           (d)      Buyer and AXT shall meet within 45 days
after the Closing Date to determine and agree on the costs and expenses to be
reimbursed by Buyer to AXT pursuant to Section 6.7(a) above and costs related to
Section 6.7(b) if the Closing is delayed and either one

                                       35


or more of the conditions set forth in Section 7.2 have not been satisfied,
other than Section 7.2(d), or the condition set forth in Section 7.1(c) shall
not have been satisfied as of September 15, 2003. Buyer shall pay the amount of
the expenses and costs owed under Section 6.7(a) and 6.7(b), if applicable, as
agreed in United States dollars within 30 days after the parties reach such
agreement. Should the parties fail to reach agreement within 50 days after the
Closing Date on the amount of the costs and expenses to be reimbursed to AXT
pursuant to Section 6.7(a), and 6.7(b), if applicable, either party may initiate
a "claim" under the dispute resolution procedure provided in Section 9.4 below.

                  6.8      Removal of Encumbrances. AXT shall cause all
Encumbrances identified on Schedule 6.8 to be removed within 15 days after the
Closing Date by filing a UCC termination statement executed by the holder of
such Encumbrance. AXT shall promptly provide a copy of the UCC termination
statement to Buyer.

                  6.9      Real Property Taxes and Other Expenses. The parties
agree that as between Buyer and Sellers, general real estate taxes on the
Telstar Facility ( "Real Property Taxes"), as well as all utility, maintenance,
insurance and other operating expenses of the Telstar Facility (collectively
with Real Property Taxes, "Property Expenses") for periods prior to the Closing
Date shall be Sellers' sole responsibility (other than as set forth in Section
6.7 above), and Property Expenses for the period from and after the Closing Date
shall be Buyer's sole responsibility, subject to the provisions of Section 6.7
above and the following provisions of this Section 6.9. Buyer and AXT shall meet
within 45 days after the Closing Date to determine and agree the costs and
expenses to be reimbursed by Buyer to AXT pursuant to this Section 6.9, and any
amounts due by one party to the other shall be paid as agreed in United States
dollars within 10 days after the parties reach such agreement. Should the
parties fail to reach agreement within 60 days after the Closing Date on the
amount of the costs and expenses to be paid by one party to the other pursuant
to this Section 6.9, the matter shall be submitted to dispute resolution as
provided in Section 9.4 below. Notwithstanding the foregoing, nothing herein
shall be deemed to assign to Buyer any right of Sellers to appeal or apply for a
reduction in Real Property Taxes for periods attributable prior to the Closing
Date, and Sellers shall be entitled to pursue any and all such appeals after the
Closing Date at their expense, and Buyer expressly disclaims any interest
whatsoever in any tax reductions or credits obtained by Sellers in connection
therewith. In the event any such appeal or application by either party results
in a refund to Buyer of Real Property Taxes attributable to the period before
Closing Date, then Buyer shall pay such amounts to Sellers promptly after
receipt, reduced by a percentage of Buyer's expenses in connection with such
appeal or application equal to the percentage Sellers' portion of such refund
bears to the entire Tax refund paid to Buyer. In the event any such appeal or
application by either party results in a refund to Sellers of Real Property
Taxes attributable to the period after the Closing Date, then Sellers shall pay
such amounts to Buyer promptly after receipt, reduced by a percentage of
Sellers' expenses in connection with such appeal or application equal to the
percentage Buyer's portion of such refund bears to the entire Tax refund paid to
Sellers.

                  6.10     Payments Under Open Purchase or Sales Orders. If
Sellers, their respective subsidiaries, affiliates, successors or assigns
receive payment from any customer on any purchase or sales order the obligation
under which was fulfilled by Buyer or its subsidiaries, affiliates, successors
or assigns, rather than Sellers or their subsidiaries, affiliates, successors or
assigns, Sellers shall promptly remit such payment to Buyer. In addition, should
any of the

                                       36


Assumed Contracts include open purchase orders, the fulfillment of which is done
by Buyer, its subsidiaries, affiliates, successors or assigns after the Closing
Date, but for which Sellers, their subsidiaries, affiliates, successors or
assigns, receive payment from the customer, Sellers shall pay to Buyer the
payment that relates to the order fulfillment undertaken by Buyer, its
subsidiaries, affiliates, successors or assigns after the Effective Time.

                  6.11     Additional Documents and Further Assurances. Each
party hereto, at the request and expense of the other party hereto, shall use
all reasonable efforts to take, or cause to be taken, all actions necessary to
effectuate the Acquisition and make effective the other transactions
contemplated by this Agreement in accordance with the terms hereof. Each further
agrees that it shall, and shall cause each of its affiliates to, from time to
time, execute and deliver to the other such additional instruments, documents,
conveyances or assurances and take such other action as shall be necessary or
otherwise reasonably requested to confirm and assure the rights and obligations
of Buyer to the Transferred Assets as provided for in this Agreement, and
effectively to vest in Buyer beneficial and record title to the Transferred
Assets, and to put Buyer in actual possession and operating control of such
Assets. At any time and from time to time after the Closing, at Buyer's request
and without further consideration, Sellers shall promptly execute and deliver
(or shall cause to be executed and delivered) such instruments of sale,
transfer, conveyance, assignment and confirmation, and take all such other
action as Buyer may reasonably request to effect the transfer, conveyance and
assignment of the Transferred Assets to Buyer, to assist Buyer in exercising all
rights with respect to the Transferred Assets and otherwise to carry out the
full purpose and intent of this Agreement, provided, however, that Buyer shall
be responsible for any and all incidental or of pocket fees or costs incurred by
Sellers as a result.

                  6.12     Mutual Covenant Not to Compete and Not to Solicit.

                           (a)      For the period beginning at the Effective
Time and ending at the five (5) year anniversary of the Effective Time, Sellers,
their subsidiaries, successors and assigns, shall not, without Buyer's prior
written consent, directly or indirectly, in any capacity: (i) develop, make,
market or sell LD, LED or VCSEL products or (ii) directly or indirectly, as
principal, partner, agent, servant, employee, shareholder, or otherwise,
anywhere in the world, engage or attempt to engage in any business activity
competitive with the business that develops, makes, markets or sells LD, LED or
VCSEL products; provided, however, that the foregoing shall not limit nor
prohibit AXT from operating its substrate business or developing, making,
marketing or selling its substrates products, to any customer wherever situated
and in any industry or market. The foregoing shall not prohibit Sellers from
owning beneficially (i) any security, so long as the beneficial ownership by it
constitutes (x) less than, in the case of a passive investment in publicly or
privately traded securities, five percent (5%) of the class of such security, or
(ii) any shares in an "investment company" (as defined in the Investment Company
Act of 1940, as amended).

                           (b)      For the period beginning at the Effective
Time and ending at the five (5) year anniversary of the Effective Time, Buyer,
its subsidiaries, successors and assigns, will not, without AXT's prior written
consent, directly or indirectly, in any capacity use the knowledge, expertise,
information, know how or other skills of any person identified on Schedule 6.12
hereto to develop, make, market or sell GaAs, InP, or Ge substrates.

                                       37


                           (c)      Buyer and Sellers agree that for a period of
two (2) years following the Effective Date, neither shall: (i) solicit,
encourage, or take any other action which is intended to induce any employee of
the other to terminate his or her employment with such party, as the case may
be; or (ii) knowingly and intentionally interfere in any manner with the
contractual or employment relationship between the other party and any employee,
supplier or customer of such other party; provided, that neither party shall be
prohibited from making general, public solicitations for employment for any
position or from employing any current employee of the other party who contacts
the party on his or her own initiative and without impermissible solicitation by
such party; and provided, further, that the foregoing shall not prohibit or
limit Buyer from hiring employees of Sellers engaged in the Optoelectronics
Business.

                           (d)      Each party agrees that the covenants set
forth herein are necessary to preserve the value of the business operated by
each party after the Effective Time, and each party recognizes that the scope of
the restrictions and the foregoing territorial and time limitations are
reasonable and properly required for the adequate protection of the business of
the other party, including, following the Effective Time. Each party
acknowledges that the limitations of time, geographic scope and scope of
activity in this Section 6.12 are reasonable because, among other things, (i)
Sellers and Buyer are engaged in a highly competitive industry, (ii) management
of each party will have unique access to the trade secrets and know-how which
are an integral part of the business operated by the other party, and (iii) each
party is receiving value under the terms of this Agreement. The covenants
contained in this Section 6.12 shall be construed as a series of separate
covenants, one for each county, city, state and country. Except for geographic
scope, each such covenant shall be deemed identical in terms to the covenants
set forth herein. In the event the foregoing restrictions are deemed to be
unreasonable for any reason by any tribunal having jurisdiction, each party
agrees to request, and to submit to, a narrowing of the scope of the foregoing
restrictions or the reduction of either said territorial or time limitation to
such an area or period as shall be deemed reasonable by such tribunal.

                           (e)      The existence of any claim or cause of
action by one party to this Agreement against the other, if any, whether
predicated upon this Agreement or otherwise, shall not constitute a defense to
the enforcement by either party of the foregoing restrictive covenants but shall
be resolved by separate proceeding.

                           (f)      Each party agrees that it would be
impossible or inadequate to measure and calculate the damages that either party
would incur from any breach of the covenants set forth in this Section 6.12 and
that in the event of a breach by one party, the other party and its stockholders
would be irreparably harmed. Accordingly, each party agrees that if it breaches
any provision of this Section 6.12, the other party will have available, in
addition to any other right or remedy otherwise available, the right to seek an
injunction from a court of competent jurisdiction restraining such breach or
threatened breach and to specific performance of this Section 6.12. Each party
further agrees that no bond or other security shall be required in obtaining
such equitable relief, nor will proof of actual damages be required for such
equitable relief.

                           (g)      No waiver of any provision hereof shall be
effective unless made in writing and signed by the waiving party. The failure of
either party to require the performance of any term or obligation of this

                                       38


Section 6.12, or the waiver by either party of any breach of this Section 6.12,
shall not prevent any subsequent enforcement of such term or obligation or be
deemed a waiver of any subsequent breach.

                  6.13     Construction at Telstar Facility. AXT hereby agrees
to reimburse Buyer as follows for construction costs incurred by Buyer at the
Telstar Facility solely as a result of any modifications to the Improvements at
the Telstar Facility that Buyer is required to make by any Governmental Entity
in order to obtain an Environmental Permit and before such Governmental Entity
is willing to issue such Environmental Permit (the "Reimbursed Construction
Costs"). AXT shall pay Reimbursed Construction Costs of $20,000 per each
required modification, up to a total of three modifications, for an aggregate
maximum Reimbursed Construction Costs of $60,000. Reimbursed Construction Costs
shall include only the cost of physical labor and materials required to complete
the modifications required by the Governmental Entity, and costs or expenses
incurred for design, planning or documentation of such required modifications,
and shall not include any costs or expenses incurred in applying for or
obtaining any Permit and/or Approval, including any Environmental Permit. All
payments made under this Section shall be charged against the escrow established
hereunder and paid exclusively from the Escrow Funds and from no other source;
accordingly, if at the time the Reimbursed Construction Costs become due no
Escrow Funds remain in escrow, then no amounts will be payable to Buyer
hereunder and the obligation to pay Reimbursed Construction Costs will be
terminated.

                  6.14     Release of Encumbrances on Telstar Facility. AXT
shall, no later than 30 days after the Closing Date, provide an updated title
report showing that all Encumbrances listed on the Title Report that are not
Permitted Encumbrances have been released and removed.

         7.       Conditions to Closing.

                  7.1      Conditions to Each Party's Obligation to Consummate
the Acquisition. The respective obligations of each party to consummate the
Acquisition will be subject to the satisfaction on or prior to the Closing Date
of the following conditions, except that, to the extent permitted by applicable
law, such conditions may be waived in writing by the joint action of the parties
hereto.

                           (a)      No Injunctions or Restraints; Illegality. No
temporary restraining order, preliminary or permanent injunction, or other order
issued by any court of competent jurisdiction or any other Governmental
Entities, or other legal or regulatory restraint or prohibition preventing the
consummation of the Acquisition will be and remain in effect, nor will there be
any action taken, or any law, statute, rule, regulation, decree or order been
enacted, adopted, entered, enforced, or deemed applicable to the Acquisition,
which remains in effect and which makes the consummation of the Acquisition
illegal.

                           (b)      Legal Proceedings. There will not be pending
any Legal Proceeding by any Governmental Entity or other person: (i) challenging
or seeking to restrain or prohibit the consummation of the Acquisition; (ii)
Except for the Cree Litigation, relating to the Acquisition and seeking to
obtain from Buyer or Sellers any damages or other relief that would be material
to either Buyer or Sellers; (iii) which would materially and adversely affect
the right of Buyer to own or use the Transferred Assets; or (iv) seeking to
compel Buyer or Sellers or any of their controlled affiliates to dispose of or
hold separate any material assets.

                                       39


                           (c)      Title Policy and Telstar Facility Escrow.
The Title Company shall have irrevocably committed to issue to Buyer a standard
CLTA owner's policy of title insurance (the "Title Policy"). The Title Policy
shall be dated as of the Closing and shall insure Buyer's fee simple title to
the Telstar Facility in the dollar amount allocated to the Telstar Facility as
provided in Schedule 2.9, subject only to the Permitted Exceptions, and the
escrow on the transfer of title to the Telstar Facility shall be closed
concurrently with the Closing of the transfer of the other Transferred Assets.

                  7.2      Conditions to Obligations of Buyer. The obligations
of Buyer to consummate the Acquisition and the transactions contemplated under
the Agreement will be further subject to the satisfaction, at or prior to the
Closing, of the following conditions, except as may be waived by Buyer in
writing:

                           (a)      Compliance With Agreements and Covenants.
Sellers will have performed and complied in all material respects with all of
their covenants, obligations and agreements contained in this Agreement to be
performed and complied with on or prior to the Closing Date.

                           (b)      Representations and Warranties. The
representations and warranties of Sellers contained herein (i) will be true and
correct in all material respects on and as of the date of this Agreement, and
(ii) will also be true and correct, on and as of the Closing Date with the same
force and effect as though made on and as of the Closing Date, except for such
inaccuracies which in the aggregate do not constitute, and are not reasonably
expected to result in, a Material Adverse Effect (disregarding for purposes of
evaluating whether subsection (b)(ii) of this condition is satisfied, any
"material adverse effect" or other materiality qualifications contained in such
representations and warranties).

                           (c)      Closing Certificate. Buyer will have
received a certificate signed by the Chief Executive Officer, Chief Financial
Officer and President of the Optoelectronics Division of AXT, dated the Closing
Date, certifying that the conditions set forth in Section 7.2(a) and 7.2(b) have
been satisfied.

                           (d)      Due Diligence. Buyer's Representatives shall
have completed to Buyer's satisfaction a due diligence review of the
Optoelectronics Business and the Transferred Assets pursuant to Section 5.1;
provided, however, that should Buyer agree to the Closing, Buyer will be deemed
to have determined that this condition has been fully met to its satisfaction or
waived by Buyer.

                           (e)      Opinion of Counsel. Sellers shall have
delivered the opinion of counsel in the form as is attached hereto as Exhibit
I-1.

                           (f)      Other Closing Documents. Buyer will have
received the executed Bill of Sale, Assignment and Assumption Agreement, Grant
Deed, Trademark Assignment Agreement, Patent Assignment Agreement, Monterey Park
Lease, Tongmei Lease and assignment of the Xiamen Lease, and the Escrow
Agreement, and such other closing and transfer documents as Buyer will
reasonably request to effect and consummate the Acquisition and the

                                       40


transactions contemplated hereby, in each case in form and substance reasonably
satisfactory to Buyer and its counsel.

                  7.3      Conditions to Obligations of Sellers. The obligations
of Sellers to consummate the Acquisition and the transactions contemplated under
this Agreement will be further subject to the satisfaction, at or prior to the
Closing, of the following conditions except as may be waived by Sellers in
writing:

                           (a)      Compliance with Agreements and Covenants.
Buyer will have performed and complied in all material respects with all of its
covenants, obligations and agreements contained in this Agreement, to be
performed and complied with on or prior to the Closing Date.

                           (b)      Representations and Warranties. The
representations and warranties of Buyer contained herein (i) will be true and
correct on and as of the date of this Agreement in all material respects, and
(ii) will also be true and correct on and as of the Closing Date with the same
force and effect as though made on and as of the Closing Date, except for such
inaccuracies which, in the aggregate, do not constitute and are not reasonably
expected to result in, a Material Adverse Effect (disregarding for purposes of
evaluating whether subsection (b)(ii) of this condition is satisfied, any
"material adverse effect" or other materiality qualifications contained in such
representations and warranties).

                           (c)      Closing Certificate. Sellers will have
received a certificate signed by the Chief Executive Officer and Chief Financial
Officer of Buyer, dated the Closing Date, certifying that the conditions set
forth in Section 7.3(a) and 7.3(b) have been satisfied.

                           (d)      Purchase Price. AXT will have received
payment of the Purchase Price provided for in Section 2.6.

                           (e)      Opinion of Counsel. Buyer shall have
delivered its opinion of counsel in the form as is attached hereto as Exhibit
I-2.

                           (f)      Other Closing Documents. Sellers will have
received the executed Bill of Sale, Assignment and Assumption Agreement, Grant
Deed, Trademark Assignment Agreement, Patent Assignment Agreement, Monterey Park
Lease, Tongmei Lease and assignment of the Xiamen Lease, and the Escrow
Agreement, and such other closing and transfer documents as Sellers will
reasonably request to effect and consummate the Acquisition and the transactions
contemplated hereby, in each case in form and substance reasonably satisfactory
to Sellers and their counsel.

         8.       Termination, Amendment and Waiver.

                  8.1      Termination. This Agreement may be terminated at any
time prior to the Closing by any of the following actions taken or authorized by
the Board of Directors of the terminating party or parties:

                           (a)      By mutual written consent of Buyer and
Sellers;

                                       41


                           (b)      By either Buyer or Sellers, if the Closing
shall not have occurred on or before September 30, 2003 (the "Termination
Date"); provided, however, that the right to terminate this Agreement under this
Section 8.1(b) will not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in, the
failure of the Effective Time to occur on or before the Termination Date;

                           (c)      By either Buyer or Sellers, if any
Governmental Entity (i) shall have issued an order, decree or ruling or taken
any other action (which the parties shall have used their reasonable commercial
efforts to resist, resolve or lift, as applicable) restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement, and such
order decree, ruling or other action shall have become final and nonappealable
or (ii) shall have failed to issue an order, decree or ruling or to take any
other action, and such denial of a request to issue such order, decree, ruling
or to take such other action shall have become final and nonappealable (which
order, decree, ruling or other action the parties shall have used their
reasonable commercial efforts to obtain); provided, however, that the right to
terminate this Agreement under this Section 8.1(c) will not be available to any
party whose failure to use their reasonable commercial efforts has been the
cause of such action or inaction;

                           (d)      By Buyer if (i) any of Sellers'
representations and warranties shall have been inaccurate as of the date of this
Agreement or shall have become inaccurate as of a date subsequent to the date of
this Agreement (as if made on such subsequent date), such that the condition set
forth in Section 7.2(b) would not be satisfied or (ii) any of Sellers' covenants
contained in this Agreement shall have been breached such that the condition set
forth in Section 7.2(a) would not be satisfied; provided, however, that if an
inaccuracy in the representations and warranties of Sellers arising as of a date
subsequent to this Agreement is curable by Sellers by the Termination Date and
Sellers are continuing to exercise all reasonable efforts to cure such
inaccuracy, then Buyer may not terminate this Agreement under this Section
8.1(d) on account of such inaccuracy; or

                           (e)      By Sellers if (i) any of Buyer's
representations and warranties shall have been inaccurate as of the date of this
Agreement or shall have become inaccurate as of a date subsequent to the date of
this Agreement (as if made on such subsequent date), such that the condition set
forth in Section 7.3(b) would not be satisfied or (ii) if any of Buyer's
covenants contained in this Agreement shall have been breached such that the
condition set forth in Section 7.3(a) would not be satisfied; provided, however,
that if an inaccuracy in the representations and warranties of Buyer arising as
of a date subsequent to this Agreement is curable by Buyer by the Termination
Date and Buyer is continuing to exercise all reasonable efforts to cure such
inaccuracy, then Sellers may not terminate this Agreement under this Section
8.1(e) on account of such inaccuracy.

         In the event of termination of this Agreement and abandonment of the
Acquisition pursuant to this Section 8, no party hereto (or any of its directors
or officers) will have any liability or further obligation to any other party to
this Agreement, except that nothing herein will relieve any party from liability
for any breach of this Agreement.

                  8.2      Amendment. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties.

                                       42


                  8.3      Extension; Waiver. At any time prior to the Closing,
the parties may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other party, (b)
waive any inaccuracies in the representations and warranties contained in this
Agreement or in any document delivered pursuant to this Agreement, or (c) waive
compliance with any of the agreements or conditions contained in this Agreement.
Any agreement on the part of a party to any such extension or waiver will be
valid only if set forth in an instrument in writing signed on behalf of such
party. The failure of any party to this Agreement to assert any of its rights
under this Agreement or otherwise will not constitute a waiver of such rights.

                  8.4      Notice of Termination. Any party wishing to terminate
this Agreement under Section 8.1 will deliver written notice to the other party,
setting forth the paragraph under Section 8.1 pursuant to which the Agreement is
being terminated and, unless obvious from the nature of the termination clause,
a description of the facts and circumstances forming the basis for such
termination; provided, that any failure to provide such additional details will
not affect the validity of the termination. Any such termination notice will be
delivered in accordance with Section 10.2 of this Agreement.

         9.       Indemnification and Escrow.

                  9.1      Indemnification.

                           (a)      Except as provided in Section 5.5 and
Section 6.5, all representations and warranties made by Sellers or Buyer herein
shall survive the Closing and continue in full force and effect until the date
that is the one year anniversary of the Closing Date. Neither Sellers nor Buyer
has made any representations or warranties to the other, other than as set forth
herein.

                           (b)      Subject to the limitations set forth in this
Section 9,

                                    (i)      Except as provided in Section 5.5
and Section 6.5, Sellers will indemnify and hold harmless Buyer and its
subsidiaries, officers, directors, agents, attorneys and employees, and each
person, if any, who controls or may control Buyer within the meaning of the
Securities Act (hereinafter referred to individually as a "Buyer Indemnified
Person" and collectively as "Buyer Indemnified Persons") from and against any
and all Losses, costs, diminution of value, damages, liabilities and expenses
and from any and all claims, demands, actions and causes of action, including
reasonable legal fees (collectively, "Damages"), arising out of (A) any
misrepresentation or breach of or default in connection with any of the
representations, warranties, covenants and agreements given or made by Sellers
in this Agreement or in any exhibit or schedule to this Agreement, or in the
Tongmei Lease, or Monterey Park Lease, the MOCVD Equipment Lease or the China
Equipment Lease and (B) the Retained Liabilities.

                                    (ii)     Buyer will indemnify and hold
harmless Sellers and their respective officers, directors, agents, attorneys and
employees, and each person, if any, who controls or may control Sellers within
the meaning of the Securities Act (hereinafter referred to individually as a
"Seller Indemnified Person" and collectively as "Seller Indemnified Persons")

                                       43


from and against any and all Damages arising out of (A) any misrepresentation or
breach of or default in connection with any of the representations, warranties,
covenants and agreements given or made by Buyer in this Agreement or in any
exhibit or schedule to this Agreement, or in the Tongmei Lease, Monterey Park
Lease, the MOCVD Equipment Lease or the China Equipment Lease and (B) the
Assumed Liabilities.

                                    (iii)    In the absence of fraud or
intentional misrepresentation, and except as otherwise provided in this
Agreement, indemnification pursuant to the provisions of this Section 9 shall be
the sole and exclusive remedy of Sellers, Buyer and the other Indemnified
Parties for any breach of any representation, warranty or covenant contained in
this Agreement. The maximum liability of either party to the other for any
breach of the representations and warranties set forth herein is limited to the
sum of $1,000,000; provided, however, that in no event shall the liability of
Sellers to Buyer, Luming, or any Buyer Indemnified Person (as defined in this
Agreement and in the Luming Agreement), individually or collectively, for any
breach of the representations and warranties set forth in this Agreement and in
the Luming Agreement, exceed in the aggregate of $1,000,000. Buyer shall first
exhaust all remedies for Damages hereunder against the Escrow Fund. Unless
otherwise limited by any provision of this Agreement, any other liability of
Sellers or Buyer to the other party arising in connection with this Agreement
shall be limited to the sum of $9,600,000; provided, however, that in no event
shall the liability of Sellers to Buyer, Luming, or any Buyer Indemnified Person
(as defined in this Agreement and in the Luming Agreement), individually or
collectively, pursuant to this Agreement or to the Luming Agreement, exceed in
the aggregate the sum of $9,600,000. Furthermore, in no event shall the
liability of Buyer or Luming, individually or collectively, pursuant to this
Agreement or to the Luming Agreement, to Sellers or any Seller Indemnified
Person (as defined in this Agreement and in the Luming Agreement), exceed in the
aggregate the sum of $9,600,000. For any Damages of Buyer or any Buyer
Indemnified Person relating to or arising in connection with any breach by
Sellers of any representation or warranty concerning title to the Telstar
Facility, Buyer shall first look to the Title Policy to satisfy any claim
brought against Sellers concerning such breach.

                                    (iv)     Any breach of or default under this
Agreement by Buyer or Sellers shall also be and cause a breach of or default by
such party under the Luming Agreement. Any breach of or default under the Luming
Agreement by Luming or by Sellers shall also be and cause a breach of or default
under this Agreement.

                           (c)      General provisions regarding indemnification
rights:

                                    (i)      A party entitled to indemnification
hereunder will take all reasonable steps to mitigate all Damages upon and after
becoming aware of any event which could reasonably be expected to give rise to
Damages that are indemnifiable hereunder.

                                    (ii)     No party will be entitled to
indemnification to the extent any Tax or other benefits result from, or which
may be claimed as a result of the facts and circumstances related to, any
indemnifiable claim.

                                    (iii)    If any Damages are covered by
insurance or subject to other third party recoveries (collectively, "Third Party
Rights"), Buyer and AXT will use

                                       44


reasonable commercial efforts to recover the amount of coverage or claim from
the insurer or such third party, which recovery (after deduction for costs of
collection) will reduce any related Damages hereunder. Each of Buyer and AXT
agrees to assign all third party rights to the other and to appoint the other as
its limited agent and attorney-in-fact for seeking such recovery to the extent
that such party fails to recover. Each party also agrees to cooperate with the
other in connection therewith. Such appointment as limited agent and
attorney-in-fact is coupled with an interest and is irrevocable.

                                    (iv)     To the extent that an indemnifying
party discharges any claim for indemnification hereunder, the indemnifying party
will be subrogated to all rights of the indemnified party against third parties.

                  9.2      Escrow Fund. Within the time period described in
Section 2.6(b) above, the Escrow Fund shall be deposited with such banking
institution selected by Buyer with the reasonable consent of AXT as escrow agent
(the "Escrow Agent"), pursuant to the terms set forth herein and in the Escrow
Agreement attached hereto as Exhibit H. The escrow established under the Escrow
Agreement shall terminate and the Escrow Funds shall be released pursuant to the
terms of the Escrow Agreement on the one year anniversary of the Closing Date
(the "Escrow Termination"), except as otherwise provided in Section 6.5(d). The
Escrow Fund shall be made and held entirely in United States dollars. Any
interest or earnings thereon shall be for AXT's account. The Escrow Fund shall
be available to compensate Buyer for any breaches of the representations,
warranties or covenants made by Sellers in and pursuant to the terms of this
Agreement.

                  9.3      Claims. Upon receipt by AXT or Buyer of a certificate
signed by any officer of the other party (an "Officer's Certificate") stating
that with respect to the indemnification obligations of such party set forth in
Section 9.1(a)(i) or (ii), Damages exist and specifying in reasonable detail the
individual items of such Damages included in the amount or estimated amount so
stated, the date each such item was paid, or properly accrued or arose, and the
nature of the misrepresentation, breach of warranty, covenant or claim to which
such item is related, AXT or Buyer will, as the case may be and subject to the
provisions of this Section 9, pay to the other, as promptly as practicable, an
amount in cash in value equal to such Damages.

                  9.4      ARBITRATION OF DISPUTES.

                           (a)      Within 30 days of receipt by Buyer or AXT,
as the case may be, of an Officer's Certificate, Buyer or AXT, as the case may
be, may object in writing to any claim or claims by Buyer or AXT, as the case
may be, made in any Officer's Certificate. Buyer or AXT, as the case may be,
will have thirty days to respond in a written statement to the objection of the
other party. If after such 30 day per period there remains a dispute as to any
claims, then Buyer and AXT will attempt in good faith for 60 days to agree upon
the rights of the respective parties with respect to each of such claims. To the
extent no agreement can be reached after good faith negotiation between the
parties, either AXT or Buyer may, by written notice to the other, demand
arbitration of the matter unless the amount of the Damages is at issue in
pending litigation or dispute with a third party, in which event arbitration
with respect to the specific portion of the claim at issue in the pending
litigation or dispute shall not be commenced until such amount is ascertained or
AXT and Buyer agree to arbitration; and in either such event the

                                       45


matter will be settled by arbitration conducted by one arbitrator. AXT and Buyer
will agree on the arbitrator, provided that if AXT and Buyer cannot agree on
such arbitrator, either AXT or Buyer can request that JAMS select the
arbitrator. The arbitrator will set a limited time period and establish
procedures designed to reduce the cost and time for discovery while allowing the
parties an opportunity, adequate in the sole judgment of the arbitrator, to
discover relevant information from the opposing parties about the subject matter
of the dispute. The arbitrator will rule upon motions to compel or limit
discovery and will have the authority to impose sanctions, including attorneys'
fees and costs, to the same extent as a court of competent jurisdiction in law
or equity, should the arbitrator determine that discovery was sought without
substantial justification or that discovery was refused or objected to without
substantial justification. The decision of the arbitrator will be written, will
be in accordance with applicable law and with this Agreement, and will be
supported by written findings of fact and conclusion of law, which will set
forth the basis for the decision of the arbitrator. The decision of the
arbitrator as to the validity and amount of any claim in an Officer's
Certificate will be binding and conclusive upon the parties to this Agreement,
and notwithstanding anything in this Section 9, the parties will be entitled to
act in accordance with such decision.

                           (b)      Judgment upon any award rendered by the
arbitrator may be entered in any court having jurisdiction. Any such arbitration
will be held in Alameda County or Los Angeles, California, as may be mutually
agreed by the parties, under the commercial rules then in effect of the American
Arbitration Association. The non-prevailing party shall be as determined by the
arbitrator. The non-prevailing party to an arbitration will pay the fees of the
arbitrator and any administrative fee of JAMS, and the reasonable attorneys
fees, costs of suit and disbursements of the other party.

         NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY
DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES"
PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU
ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A
COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR
JUDICIAL RIGHTS TO APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE
"ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION
AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS
ARBITRATION PROVISION IS VOLUNTARY. WE HAVE READ AND UNDERSTAND THE FOREGOING
AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE
"ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL ARBITRATION.

Buyer's Initials___________      Sellers' Initials____________   ______________

                  9.5      Third-Party Claims. As used herein, an "Indemnified
Party" will refer to a Buyer Indemnified Party, or a Seller Indemnified Party,
as applicable, the "Notifying Party" will refer to the party hereto whose
Indemnified Parties are entitled to indemnification hereunder, and the
"Indemnifying Party" will refer to the party hereto obligated to indemnify such
Notifying Party's Indemnified Parties. In the event that any of the Indemnified
Parties is made a defendant

                                       46


in or party to any action or proceeding, judicial or administrative, or is the
recipient of any order or directive in connection with any Environmental Laws,
instituted by or received from any third party for the liability or the costs or
expenses of which are Damages, the Notifying Party will give the Indemnifying
Party prompt notice thereof. The failure to give such notice will not affect any
Indemnified Party's ability to seek reimbursement unless such failure has
materially and adversely affected the Indemnifying Party's ability to defend
successfully a claim. The Indemnifying Party will be entitled to contest and
defend such claim; provided, that the Indemnifying Party (i) has a reasonable
basis for concluding that such defense may be successful and (ii) diligently
contests and defends such claim. Notice of the intention to so contest and
defend will be given by the Indemnifying Party to the Notifying Party within
twenty (20) business days after the Notifying Party's notice of such claim (but,
in all events, at least five (5) business days prior to the date that an answer
to such claim is due to be filed). Such contest and defense will be conducted by
reputable attorneys employed by the Indemnifying Party. The Notifying Party will
be entitled at any time, at its own cost and expense (which expense will not
constitute Damages unless the Notifying Party reasonably determines that the
Indemnifying Party is not adequately representing or, because of a conflict of
interest, may not adequately represent, any interests of the Indemnified
Parties, and only to the extent that such expenses are reasonable), to
participate in such contest and defense and to be represented by attorneys of
its or their own choosing. If the Notifying Party elects to participate in such
defense, the Notifying Party will cooperate with the Indemnifying Party in the
conduct of such defense. Neither the Notifying Party nor the Indemnifying Party
may concede, settle or compromise any claim without the consent of the other
party, which consents will not be unreasonably withheld or delayed.
Notwithstanding the foregoing, (i) if a claim seeks equitable relief or (ii) if
the subject matter of a claim relates to the ongoing business of any of the
Indemnified Parties, which claim, if decided against any of the Indemnified
Parties, would have a Material Adverse Effect on the ongoing business or
reputation of any of the Indemnified Parties, then, in each such case, the
Indemnified Parties alone will be entitled to contest, defend and settle such
claim in the first instance and, if the Indemnified Parties do not contest,
defend or settle such claim, the Indemnifying Party will then have the right to
contest and defend (but not settle) such claim.

         10.      General Provisions.

                  10.1     Expenses. Except as otherwise provided in this
Agreement, each party to this Agreement will bear its respective fees and
expenses incurred in connection with the preparation, negotiation, execution and
performance of this Agreement and the Acquisitions, including all fees and
expense of its Representatives; provided, however, that in any suit properly
brought pursuant to the terms of Section 10.3 below, upon final determination in
such proceeding, the prevailing party as determined by a court of law shall be
entitled to reasonable attorneys fees, costs of suit and disbursements in
addition to any other remedies or damages which may be properly awarded by the
court.

                  10.2     Notices. All notices, consents, waivers and other
communications required or permitted by this Agreement shall be in writing and
shall be deemed given to a party when (a) delivered to the appropriate address
by hand or by nationally recognized overnight courier service (costs prepaid);
(b) sent by facsimile or e-mail with confirmation of transmission by the
transmitting equipment; or (c) received or rejected by the addressee, if sent by
certified mail, return receipt requested, in each case to the following
addresses, facsimile numbers or e-

                                       47


mail addresses and marked to the attention of the person (by name or title)
designated below (or to such other address, facsimile number, e-mail address or
person as a party may designate by notice to the other parties):

                         (a)      if to Sellers, to:

                         AXT, Inc.
                         4281 Technology Drive
                         Fremont, California 94538
                         Attention:  Donald L. Tatzin
                         Fax: (510) 438-4793
                         Tel: (510) 683-5900

                         with a copy to:

                         Gray Cary Ware & Freidenrich LLP
                         2000 University Circle
                         East Palo Alto, California 94303-2248
                         Attention: Sally J. Rau, Esq.
                         Fax: (650) 833-2001
                         Tel: (650) 833-2000

                         (a)      if to Buyer, to:

                         Lumei Optoelectronics Corp.
                         9650 Telstar Avenue
                         El Monte, California 91731
                         Attention:
                         Fax: (510) 390-0287
                         Tel: (323) 838-0653

                         with a copy to:

                         The Corporate Law Group
                         Waterfront Plaza, Suite 120
                         500 Airport Boulevard
                         Burlingame, California 94010
                         Attention: Paul D. Marotta, Esq. or Jennifer Chen, Esq.
                         Fax: (650) 227-8001
                         Tel: (650) 227-8000

                  10.3     Jurisdiction; Service of Process. Except for claims
subject to arbitration as provided in Section 9.4 above, any Proceeding arising
out of or relating to this Agreement or any Acquisition may be brought in the
courts of the State of California, County of Alameda or of Los Angeles as the
parties may mutually agree, or, if it has or can acquire jurisdiction, in the
United States District Court for the Northern District of California or the
Southern District of California, as the case may be, and each of the parties
irrevocably submits to the exclusive jurisdiction of

                                       48


each such court in any such Proceeding, waives any objection it may now or
hereafter have to venue or to convenience of forum, agrees that all claims in
respect of the Proceeding shall be heard and determined only in any such court
and agrees not to bring any Proceeding arising out of or relating to this
Agreement or any Acquisition in any other court. The parties agree that either
or both of them may file a copy of this paragraph with any court as written
evidence of the knowing, voluntary and bargained agreement between the parties
irrevocably to waive any objections to venue or to convenience of forum. Process
in any Proceeding referred to in the first sentence of this Section may be
served on any party anywhere in the world.

                  10.4     Waiver; Remedies Cumulative. The rights and remedies
of the parties to this Agreement are cumulative and not alternative. Neither any
failure nor any delay by any party in exercising any right, power or privilege
under this Agreement or any of the documents referred to in this Agreement will
operate as a waiver of such right, power or privilege, and no single or partial
exercise of any such right, power or privilege will preclude any other or
further exercise of such right, power or privilege or the exercise of any other
right, power or privilege. To the maximum extent permitted by applicable law,
(a) no claim or right arising out of this Agreement or any of the documents
referred to in this Agreement can be discharged by one party, in whole or in
part, by a waiver or renunciation of the claim or right unless in writing signed
by the other party; (b) no waiver that may be given by a party will be
applicable except in the specific instance for which it is given; and (c) no
notice to or demand on one party will be deemed to be a waiver of any obligation
of that party or of the right of the party giving such notice or demand to take
further action without notice or demand as provided in this Agreement or the
documents referred to in this Agreement.

                  10.5     Entire Agreement and Modification. This Agreement
supersedes all prior agreements, whether written or oral, between the parties
with respect to its subject matter (including any letter of intent and any
confidentiality agreement between Buyer and AXT) and constitutes (along with the
Seller Disclosure Schedule, Buyer Disclosure Schedule and other documents
delivered pursuant to this Agreement) a complete and exclusive statement of the
terms of the agreement between the parties with respect to its subject matter.
This Agreement may not be amended, supplemented, or otherwise modified except by
a written agreement executed by the party to be charged with the amendment.

                  10.6     Assignments, Successors and No Third-Party Rights. No
party may assign any of its rights or delegate any of its obligations under this
Agreement without the prior written consent of the other parties. Subject to the
preceding sentence, this Agreement will apply to, be binding in all respects
upon and inure to the benefit of the successors and permitted assigns of the
parties. Nothing expressed or referred to in this Agreement will be construed to
give any Person other than the parties to this Agreement any legal or equitable
right, remedy or claim under or with respect to this Agreement or any provision
of this Agreement, except such rights as shall inure to a successor or permitted
assignee pursuant to this Section 10.6.

                  10.7     Severability. If any provision of this Agreement is
held invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Agreement will remain in full force and effect. Any provision
of this Agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or unenforceable.

                                       49


                  10.8     Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Sections" refer to the corresponding
Sections of this Agreement.

                  10.9     Time of Essence. With regard to all dates and time
periods set forth or referred to in this Agreement, time is of the essence.

                  10.10    Governing Law. This Agreement will be governed by and
construed under the laws of the State of California without regard to
conflicts-of-laws principles that would require the application of any other
law.

                  10.11    Execution of Agreement. This Agreement may be
executed in one or more counterparts, each of which will be deemed to be an
original copy of this Agreement and all of which, when taken together, will be
deemed to constitute one and the same agreement. The exchange of copies of this
Agreement and of signature pages by facsimile transmission shall constitute
effective execution and delivery of this Agreement as to the parties and may be
used in lieu of the original Agreement for all purposes. Signatures of the
parties transmitted by facsimile shall be deemed to be their original signatures
for all purposes.

                                       50



         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.

LUMEI OPTOELECTRONICS CORP., a               AXT, INC., a Delaware corporation
California corporation

By: /s/ Zhiguo Xiao                          By: /s/ Morris S. Young
   -------------------------                    -----------------------------
   Zhiguo Xiao                                  Morris S. Young
   Chairman and Chief Executive Officer         Chairman and Chief Executive
                                                Officer

By: /s/ Zhiqiang Xiao                        By: /s/ Donald L. Tatzin
   -------------------------                    -----------------------------
   Zhiqiang Xiao                                Donald L. Tatzin
   Chief Financial Officer                      Chief Financial Officer

BEIJING TONGMEI XTAL TECHNOLOGY,             LYTE OPTRONICS, INC., a Nevada
a corporation organized under the laws       corporation
of the People's Republic of China

By:                                          By:
   -------------------------                    -----------------------------
   Name:                                        Name:
   Title:                                       Title:

XIAMEN ADVANCED SEMICONDUCTOR
CO., LTD., a corporation organized under the
laws of the People's Republic of China

By:
   ------------------------
   Name:
   Title:

                                       51

EX-31.1

Exhibit 31.1

EX-31.2

Exhibit 31.2

EX-32.1

Exhibit 32.1

EX-32.2

Exhibit 32.2