AXT, INC.

EXHIBIT (a)(1)(A)

================================================================================
XXX, INC.

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

OFFER TO EXCHANGE CERTAIN OUTSTANDING OPTIONS
FOR NEW OPTIONS (THE "OFFER TO EXCHANGE")

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

THIS OFFER AND THE RIGHT TO WITHDRAW FROM THIS OFFER EXPIRE
AT 9:00 P.M., PACIFIC TIME, ON JUNE 24, 2003, UNLESS WE EXTEND THIS OFFER

This Document Constitutes Part of the Section 10(a) Prospectus
Relating to the XXX, Inc. 1997 Stock Option Plan

May 27, 2003

================================================================================

XXX, INC.

OFFER TO EXCHANGE CERTAIN OUTSTANDING OPTIONS FOR NEW OPTIONS
(THE "OFFER TO EXCHANGE").

THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 9:00 P.M.,
PACIFIC TIME, ON JUNE 24, 2003 UNLESS WE EXTEND THE OFFER.

XXX, Inc. ("XXX," the "Company," "we" or "us") is offering option
holders who are current employees of XXX or its subsidiaries the opportunity to
exchange certain outstanding options to purchase shares of XXX common stock at
an exercise price greater than $2.10 per share ("Eligible Options") originally
granted under the XXX, Inc. 1997 Stock Option Plan (the "1997 Plan") for new
options to purchase shares of XXX common stock ("New Options") that we will
grant under the 1997 Plan. We are making the offer upon the terms and conditions
described in this Offer to Exchange, the related memorandum from Xxxxxx X. Xxxxx
dated May 27, 2003, the Election Form and the Notice to Withdraw from the Offer
(which together, as they may be amended from time to time, constitute the
"offer" or "program"). The offer is not conditioned on a minimum number of
options being tendered. The offer is subject to the conditions that we describe
in Section 7 ("Conditions of the Offer") of this Offer to Exchange.

You are eligible to participate in the offer if you are an employee of
XXX or one of our subsidiaries and remain an employee through the date on which
options returned for exchange are canceled. Members of our Board of Directors,
including those who are employees of XXX, and executive officers of XXX, are not
eligible to participate. We currently expect to cancel options tendered for
exchange on June 24, 2003, after 9:00 p.m. Pacific Time, or promptly thereafter,
unless the offer period is extended.

Even if you are eligible to participate, you are not required to accept
the offer. If you choose to accept the offer, then you may return for exchange
any or all of your Eligible Options. If you decide to return for exchange one or
more of your Eligible Options, then you must return for exchange the entire
outstanding unexercised portion of each option you want to have exchanged. For
purposes of the offer, "option" means a particular option grant to purchase a
certain number of shares of our common stock. We will not accept partial tenders
of options. In addition, if you choose to accept the offer, you must also return
for exchange all of the options granted to you after November 26, 2002,
regardless of exercise price ("Required Options"). Any Eligible Option that you
do not return for exchange or that is not accepted by us for exchange will
remain outstanding, and you will continue to hold such option in accordance with
its terms.

The offer is currently scheduled to expire on June 24, 2003 (the
"Expiration Date"), and we expect to cancel options on June 24, 2003 after 9:00
p.m., Pacific Time, or promptly thereafter (the "Cancellation Date"). If you
elect to participate in the offer, you will receive a confirmation of the
acceptance for cancellation of your Eligible Options and Required Options
promptly after the Expiration Date.

Subject to the terms and conditions of this offer, the New Options will
be granted on or promptly after the first trading day that is at least six
months and one day after the date the returned options accepted for exchange are
canceled (the "New Option Grant Date"). Assuming we do not extend the Expiration
Date, we presently expect to grant the New Options on December 26, 2003 or
promptly thereafter. In order to receive a grant of New Options, you must
continue to be an employee of XXX or one of our subsidiaries on the New Option
Grant Date. If you cease to be employed by XXX or any of our subsidiaries for
any reason after the Cancellation Date and prior to the New Option Grant Date,
you will not receive any New Options, or any other payment or consideration, in
exchange for your returned options. If you are not employed by XXX or one of our
subsidiaries on the New Option Grant Date, you will have forfeited your tendered
and cancelled options. In addition, if XXX or any of its divisions in which you
are employed is sold, or spun off in a transaction in which we do not retain
control of the division prior to the New Option Grant Date, you may not be
eligible to receive New Options, and may forfeit your cancelled options.

We will grant the New Options under the 1997 Plan. Each eligible
employee who accepts the offer and who remains an eligible employee on the New
Option Grant Date will receive three shares subject to a New Option for every
four shares subject to an option tendered in the exchange, rounded down to the
nearest full share.

As of May 27, 2003, options to purchase 3,020,577 shares of our common
stock were outstanding under our 1997 Plan. As of that date, there were
1,527,926 shares of our common stock subject to Eligible Options and Required
Options outstanding under the 1997 Plan. Assuming that all Eligible Options and
Required Options are tendered for exchange, we would issue New Options to
purchase 1,145,913 shares. The total number of shares underlying New Options
that could be issued in the exchange would represent approximately 5.1% of our
total shares outstanding as of May 27, 2003.

Each New Option granted will preserve the vesting schedule and the
vesting commencement date of the option it replaces, so that on the date the New
Option is granted and on any date thereafter, you will be vested in the New
Option to the same extent you would have been vested on that date had you
retained your option that was submitted for exchange and replaced by the New
Option. However, if you are a U.S. employee subject to the overtime compensation
requirements of the Fair Labor Standards Act of 1938 (a "nonexempt employee"),
your New Option, although vested, may not be exercised during the period of six
months following the New Option Grant Date (except in the event of your death,
disability, retirement, change in corporate ownership of XXX or other
circumstances permitted by regulation) in accordance with the Worker Economic
Opportunity Act.

The exercise price per share under each New Option will be equal to the
last reported sale price of our common stock reported by the Nasdaq National
Market (or such other market on which the shares are principally traded or
quoted) on the New Option Grant Date. The exercise price of your New Option may
be higher or lower than the current price of our common stock, and may be higher
or lower than the exercise price of your Eligible Options or Required Options.
The market price of our common stock has declined substantially over the last
year and has been subject to high volatility. Our common stock may trade at
prices below the exercise price per share of the New Options. Depending on the
exercise price of your Eligible Options and Required Options and other factors,
the New Options may be less valuable than the options you return for exchange.
WE RECOMMEND THAT YOU EVALUATE CURRENT MARKET QUOTES FOR OUR COMMON STOCK, AMONG
OTHER FACTORS, BEFORE DECIDING WHETHER OR NOT TO TENDER YOUR OPTIONS. AT THE
SAME TIME, YOU SHOULD CONSIDER THAT THE CURRENT MARKET PRICE OF OUR COMMON STOCK
MAY PROVIDE LITTLE OR NO BASIS FOR PREDICTING WHAT THE MARKET PRICE OF OUR
COMMON STOCK WILL BE ON THE NEW OPTION GRANT DATE OR AT ANY TIME IN THE FUTURE.
YOU SHOULD CAREFULLY CONSIDER THESE UNCERTAINTIES BEFORE DECIDING WHETHER TO
ACCEPT THE OFFER.

Shares of XXX common stock are traded on the Nasdaq National Market
under the symbol "AXTI." On May 22, 2002, the closing price of our common stock
reported on the Nasdaq National Market was $1.21 per share. Unless otherwise
stated, all monetary denominations referred to in this offer are United States
dollars.

ALTHOUGH OUR BOARD OF DIRECTORS HAS APPROVED THE OFFER, NEITHER WE NOR
OUR BOARD OF DIRECTORS MAKES ANY RECOMMENDATION AS TO WHETHER YOU SHOULD TENDER
OR NOT TENDER YOUR OPTIONS FOR EXCHANGE. YOU MUST MAKE YOUR OWN DECISION WHETHER
OR NOT TO TENDER YOUR OPTIONS.

THIS OFFER TO EXCHANGE HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS OFFER TO
EXCHANGE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

You should direct questions about the offer or requests for assistance
or for additional copies of this Offer to Exchange, the memorandum from Xxxxxx
X. Xxxxx dated May 27, 2003, the Election Form and the Notice to Withdraw from
the Offer to Xxxx Xxxx (email: xxxx.xxxx@xxx.xxx) at XXX, Inc., 0000 Xxxxxxxxxx
Xxxxx, Xxxxxxx, Xxxxxxxxxx 00000 (telephone: (000) 000-0000, extension 208).

IMPORTANT

If you wish to tender your Eligible Options for exchange, you must
complete and sign the Election Form in accordance with its instructions, and
deliver it and any other required documents by fax, hand delivery, courier or
mail to Xxxx Xxxx, at XXX, Inc., 0000 Xxxxxxxxxx Xxxxx, Xxxxxxx, Xxxxxxxxxx
00000 (fax number (000) 000-0000) at or before 9:00 p.m., Pacific Time, on June
24, 2003, unless the offer is extended.

We are not making the offer to, and we will not accept any tender of
options from or on behalf of, option holders in any jurisdiction in which the
offer or the acceptance of any tender of options would not be in compliance with
the laws of that jurisdiction. However, we may, at our discretion, take any
actions necessary for us to make the offer to option holders in any of these
jurisdictions.

WE HAVE NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON OUR
BEHALF AS TO WHETHER YOU SHOULD TENDER OR NOT TENDER YOUR OPTIONS THROUGH THE
OFFER. YOU SHOULD RELY ONLY ON THE INFORMATION IN THIS DOCUMENT OR TO WHICH WE
HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION OR
TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFER OTHER THAN THE
INFORMATION AND REPRESENTATIONS CONTAINED IN THIS DOCUMENT AND IN THE RELATED
MEMORANDUM FROM XXXXXX X. XXXXX DATED MAY 27, 2003, ELECTION FORM AND NOTICE TO
WITHDRAW FROM THE OFFER. IF ANYONE MAKES ANY RECOMMENDATION OR REPRESENTATION TO
YOU OR GIVES YOU ANY INFORMATION, YOU MUST NOT RELY UPON THAT RECOMMENDATION,
REPRESENTATION OR INFORMATION AS HAVING BEEN AUTHORIZED BY US.

iii

TABLE OF CONTENTS

SUMMARY OF TERMS 1

CERTAIN RISKS OF PARTICIPATING IN THE OFFER 13

INTRODUCTION 16

THE OFFER 18

2. ELIGIBILITY.......................................................................................... 18

3. NUMBER OF OPTIONS; EXPIRATION DATE................................................................... 18

4. PURPOSE OF THE OFFER................................................................................. 19

5. PROCEDURES FOR TENDERING OPTIONS..................................................................... 21

6. WITHDRAWAL RIGHTS AND CHANGE OF ELECTION............................................................. 22

7. ACCEPTANCE OF OPTIONS FOR EXCHANGE AND ISSUANCE OF NEW OPTIONS....................................... 23

8. CONDITIONS OF THE OFFER.............................................................................. 25

9. PRICE RANGE OF OUR COMMON STOCK UNDERLYING THE OPTIONS............................................... 28

10. SOURCE AND AMOUNT OF CONSIDERATION; TERMS OF NEW OPTIONS............................................. 29

11. INFORMATION CONCERNING XXX, INC...................................................................... 31

12. INTERESTS OF DIRECTORS AND OFFICERS; TRANSACTIONS AND ARRANGEMENTS CONCERNING THE OPTIONS............ 35

13. STATUS OF OPTIONS ACQUIRED BY US IN THE OFFER; ACCOUNTING CONSEQUENCES OF THE OFFER.................. 36

14. LEGAL MATTERS; REGULATORY APPROVALS.................................................................. 36

15. MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES........................................................ 36

16. TERMS OF THE OFFER SPECIFIC TO ELIGIBLE PARTICIPANTS EMPLOYED OUTSIDE OF THE UNITED STATES........... 39

17. EXTENSION OF OFFER; TERMINATION; AMENDMENT........................................................... 39

18. FEES AND EXPENSES.................................................................................... 40

19. ADDITIONAL INFORMATION............................................................................... 40

20. MISCELLANEOUS........................................................................................ 41

APPENDIX A INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF XXX, INC. 00

XXXXXXXX X GUIDE TO INTERNATIONAL ISSUES 45

ANNEX 1 ELECTION FORM 49

ANNEX 2 NOTICE TO WITHDRAW FROM THE OFFER 57

SUMMARY OF TERMS

The following are answers to some of the questions that you may have
about the offer. However, it is only a summary, and you should read carefully
the remainder of this Offer to Exchange, the accompanying memorandum from Xxxxxx
X. Xxxxx dated May 27, 2003, the Election Form and the Notice to Withdraw from
the Offer. In addition, we urge you to review the information in our annual
report on Form 10-K for the year ended December 31, 2002 and our quarterly
report on Form 10-Q for the quarter ended March 31, 2003, as those documents
contain important financial and other information about us. We have included
references to the relevant sections of this Offer to Exchange where you can find
a more complete description of the topics covered in this summary.

GENERAL QUESTIONS ABOUT THE PROGRAM

1. WHAT SECURITIES IS XXX OFFERING TO EXCHANGE?

We are offering to exchange your Eligible Options and any options that
are required to be exchanged if you accept this offer for New Options. Eligible
Options are all options to purchase common stock of XXX held by current
employees that have an exercise price greater than $2.10 per share that are
outstanding under the 1997 Plan. If you elect to exchange any of your Eligible
Options, you must also exchange all of your Required Options, which are options
granted to you after November 26, 2002, regardless of their exercise price. By
returning for exchange any of your Eligible Options, you will automatically be
deemed to have returned for exchange all of your Required Options. For purposes
of the offer, "option" means a particular option grant to purchase a certain
number of shares of our common stock. (See Section 2 of the Offer to Exchange.)

2. WHO IS ELIGIBLE TO PARTICIPATE IN THE OFFER?

Current employees of XXX or one of XXX'x subsidiaries, excluding
executive officers and members of the Board of Directors, who remain employees
as of the Cancellation Date are eligible to participate in the offer. If you are
currently on medical, maternity, worker's compensation, military or other
statutorily protected leave of absence or personal leave of absence, you are
also eligible to participate in the offer. However, if you resign or receive a
"Notice of Termination" (as defined below) at any time before the Cancellation
Date, you are not eligible to participate in the offer. In order to receive a
New Option, you must remain an employee as of the date the New Options are
granted, which will be the first trading day that is at least six months and one
day after the date the returned options accepted for exchange are canceled. If
XXX does not extend the offer, the New Options will be granted on December 26,
2003 or promptly thereafter. (See Section 1 of the Offer to Exchange.)

3. HOW WILL I KNOW IF I HAVE RECEIVED A "NOTICE OF TERMINATION"?

For purposes of the offer, you have received a "Notice of Termination"
if, at any time before the Cancellation Date, you have received a written notice
that XXX or one of its subsidiaries intends to take the necessary steps to end
your employment relationship or, in accordance with local laws, you have
received an offer, filed or have agreed in writing to file a petition in a labor
court or have entered into an agreement, in each case, to end your employment
relationship with XXX or one of its subsidiaries. (See Section 1 of the Offer to
Exchange.)

4. ARE EMPLOYEES OUTSIDE THE UNITED STATES ELIGIBLE TO PARTICIPATE?

Yes. Eligible employees include those who are residents of the United
States, Japan, Taiwan, and the People's Republic of China or employees of
subsidiaries of XXX that are located in those countries, unless they are members
of the XXX Board of Directors or are executive officers. Please be sure to read
Section 15 of this Offer to Exchange, which discusses terms of the offer
specific to eligible employees outside the United States.

5. WHY IS XXX MAKING THE OFFER?

We believe that granting stock options motivates high levels of
performance and provides an effective means of recognizing employee
contributions to the success of our Company. The offer provides an opportunity
for us to offer eligible employees a valuable incentive to stay with our Company
and to achieve high levels of

performance. Some of our outstanding options, whether or not they are currently
exercisable, have exercise prices that are significantly higher than the current
market price of our shares. We believe these options are unlikely to be
exercised in the foreseeable future. This program is voluntary and will allow
employees to choose whether to keep their current stock options at their current
exercise price, or to cancel those options in exchange for New Options. By
making this offer to exchange outstanding options for New Options with an
exercise price equal to the market value of the underlying shares on the grant
date, we intend to create better performance incentives for eligible employees
and thereby maximize stockholder value. (See Section 3 of the Offer to
Exchange.)

6. HOW DOES THE EXCHANGE WORK?

The Offer to Exchange will require the holder of an Eligible Option to
make a voluntary election to cancel the outstanding stock option in exchange for
a grant of a New Option on the first trading day that is at least six months and
one day after the date that the returned option is canceled. This election will
become irrevocable on the Expiration Date, currently scheduled for June 24,
2003, unless we extend the offer. If you choose to participate by exchanging any
of your Eligible Options, you must exchange all stock options granted to you
after November 26, 2002. Each New Option will be granted under the 1997 Plan and
will be for the purchase of three shares for every four shares subject to the
canceled option, rounded down to the nearest full share. If an eligible holder
cancels an option that is an incentive stock option, the New Option will be an
incentive stock option to the maximum extent that it qualifies as an incentive
stock option under the current U.S. tax laws. It is possible that a portion of a
holder's New Option will not qualify as an incentive stock option, and the
excess portion of the New Option will be treated as a nonstatutory stock option.

7. WHAT DO I NEED TO DO TO PARTICIPATE IN THE OFFER?

To participate, you must complete the Election Form (in the form
attached as Annex 1), sign it and ensure that we receive it no later than 9:00
p.m. Pacific Time on June 24, 2003 (or such later date as we may extend the
expiration of the offer). You may return your Election Form either by facsimile
to fax number (000) 000-0000 or by hand delivery, courier or mail to Xxxx Xxxx,
SEC Reporting Manager, at XXX, Inc., 0000 Xxxxxxxxxx Xxxxx, Xxxxxxx, Xxxxxxxxxx
00000. (See Section 4 of the Offer to Exchange.)

8. WHEN DOES THE OFFER EXPIRE? CAN THE OFFER BE EXTENDED, AND IF SO, HOW
WILL I BE NOTIFIED IF IT IS EXTENDED?

The offer expires at 9:00 p.m., Pacific Time, on June 24, 2003, unless
we extend the offer. We may, in our discretion or as required, extend the offer
at any time, but we cannot assure you that the offer will be extended or, if
extended, for how long. If the offer is extended, we will make a public
announcement of the extension no later than 6:00 a.m., Pacific Time, on the next
business day following the previously scheduled expiration of the offer. If we
extend the offer, you must deliver your Election Form or Notice to Withdraw from
the Offer before the expiration of the extended offer period. (See Section 4 of
the Offer to Exchange.)

9. WHAT WILL HAPPEN IF I DO NOT SUBMIT MY ELECTION FORM BY THE DEADLINE?

If you do not submit your Election Form by the deadline in the manner
described in the answer to the next question, then you will not participate in
the option exchange, and all stock options you currently hold will remain
outstanding at their original exercise price and under their original terms.
(See Section 4 of the Offer to Exchange.)

We request that even if you decide not to participate in the offer that
you complete the Election Form and check the "No" box. This will help to
facilitate our administration of the offer. Of course, as described in the
answers to Questions 37 and 38 below, you are permitted during the period of
this offer to change your election to participate in the offer.

10. HOW DO I EXCHANGE MY OPTIONS?

If you decide to tender your Eligible Options, you must deliver, before
9:00 p.m., Pacific Time, on June 24, 2003 (or such later date and time as we may
extend the expiration of the offer), a properly completed and executed

Election Form and any other documents required by the Election Form via
facsimile (fax number (000) 000-0000) or by hand delivery, courier or mail to
Xxxx Xxxx, SEC Reporting Manger, at XXX, Inc., 0000 Xxxxxxxxxx Xxxxx, Xxxxxxx,
Xxxxxxxxxx 00000. This is a one-time offer, and we must strictly enforce the
tender offer period. We cannot accept delivery of the Election Form (or Notice
to Withdraw from the Offer) after the Expiration Date. We reserve the right to
reject any or all tenders of options that we determine are not in appropriate
form or that we determine are unlawful to accept. Subject to our rights to
extend, terminate and amend the offer, we currently expect that we will accept
all properly tendered options promptly after the expiration of the offer. (See
Section 4 of the Offer to Exchange.)

11. IF I PARTICIPATE, WHAT WILL HAPPEN TO MY CURRENT OPTIONS?

Eligible Options you elect to exchange under this program and any
Required Options, which must be exchanged if you participate, will be canceled
on June 24, 2003 or promptly thereafter (unless we extend the offer), and you
will no longer have those options available for exercise. Any options you do not
tender for exchange (other than any Required Options) will not be canceled and
will remain outstanding at their original exercise price and under their
original terms. (See Section 6 of the Offer to Exchange.)

12. WHAT ARE THE CONDITIONS TO THE OFFER?

The offer is subject to the conditions described in Section 7
("Conditions of the Offer") of this Offer to Exchange. However, the offer is not
conditioned on a minimum number of options being tendered. Participation in the
offer is completely voluntary.

13. ARE THERE ANY ELIGIBILITY REQUIREMENTS THAT I MUST SATISFY AFTER THE
EXPIRATION DATE OF THE OFFER TO RECEIVE THE NEW OPTIONS?

Yes. To receive a grant of New Options through the offer, you must be
employed by XXX or one of its subsidiaries both as of the option Cancellation
Date and as of the New Option Grant Date.

As discussed below, subject to the terms of this offer, we will not
grant the New Options until the first trading day that is at least six months
and one day after the option Cancellation Date. As the Cancellation Date is
expected to be June 24, 2003, after 9:00 p.m. Pacific Time, we do not expect to
grant New Options before December 26, 2003. IF, FOR ANY REASON, YOU DO NOT
REMAIN AN EMPLOYEE OF XXX OR ONE OF ITS SUBSIDIARIES THROUGH THE DATE WE GRANT
THE NEW OPTIONS, YOU WILL NOT RECEIVE ANY NEW OPTIONS OR OTHER PAYMENT OR
CONSIDERATION IN EXCHANGE FOR YOUR TENDERED OPTIONS THAT HAVE BEEN ACCEPTED FOR
EXCHANGE AND CANCELED. THIS RULE APPLIES REGARDLESS OF THE REASON YOUR
EMPLOYMENT TERMINATED, WHETHER AS A RESULT OF VOLUNTARY RESIGNATION, INVOLUNTARY
TERMINATION, DEATH OR DISABILITY. IT IS ALSO POSSIBLE THAT THE COMPANY OR ONE OF
ITS DIVISIONS IS SOLD PRIOR TO THE DATE WE GRANT THE NEW OPTIONS, OR IS A PARTY
TO A TRANSACTION IN WHICH THE DIVISION IN WHICH YOU ARE EMPLOYED IS SPUN OFF IN
A TRANSACTION THAT COULD RENDER YOU SUBSEQUENTLY INELIGIBLE TO RECEIVE NEW
OPTIONS, IN WHICH CASE THE NEW OPTIONS MAY NOT BE GRANTED TO YOU, AND YOU MAY
NOT RECEIVE ANY NEW OPTIONS, OR MAY RECEIVE OPTIONS IN THE NEW OR RESULTING
ENTITY. (See Section 2 of the Offer to Exchange.)

You are reminded that unless expressly provided in your employment
agreement, your employment with XXX or one of our subsidiaries, as the case may
be, can be terminated by you or XXX, or one of our subsidiaries, including by
sale of the Company or any of its subsidiaries at any time with or without
cause. If your employment terminates before the New Option Grant Date, you will
not receive any New Options, nor any payment or other consideration for your
canceled options. Accordingly, you should carefully consider this decision
before tendering any of your options. (See Section 6 of the Offer to Exchange.)

14. WHAT IF I AM AN EMPLOYEE OF XXX WHEN THE OFFER EXPIRES, BUT NOT AN
EMPLOYEE WHEN THE NEW OPTIONS ARE GRANTED?

IF YOU ARE NOT AN EMPLOYEE OF XXX OR ONE OF ITS SUBSIDIARIES ON THE NEW
OPTION GRANT DATE (EXPECTED TO BE ON OR ABOUT DECEMBER 26, 2003), YOU WILL NOT
RECEIVE ANY NEW OPTIONS OR OTHER CONSIDERATION IN EXCHANGE FOR YOUR TENDERED
OPTIONS, EVEN IF YOUR TENDERED OPTIONS WERE PARTIALLY OR FULLY VESTED AT THE
TIME OF

TENDER. As a result, if your employment ends after the offer expires but before
the New Option Grant Date, you will not be able to exercise the tendered
options, which will have been canceled, nor will you be granted New Options, nor
will you receive a payment or other consideration for the tendered and canceled
options. If you do not accept the offer, when your employment with us ends, you
generally will be able to exercise your vested options, if any, during the
limited period specified in your option documents, to the extent those options
are vested on the day your employment ends. However, if you accept the offer,
your returned options will be canceled, and you will not be eligible to receive
New Options if you are not employed by us on the New Option Grant Date. (See
Section 2 of the Offer to Exchange.)

THE OFFER DOES NOT CHANGE THE NATURE OF YOUR "AT-WILL" EMPLOYMENT WITH
XXX, AND DOES NOT CREATE ANY OBLIGATION ON THE PART OF XXX OR ANY OF ITS
SUBSIDIARIES TO CONTINUE YOUR EMPLOYMENT FOR ANY PERIOD. YOUR EMPLOYMENT MAY BE
TERMINATED BY US OR BY YOU AT ANY TIME, INCLUDING PRIOR TO THE GRANT DATE OR
VESTING OF THE NEW OPTIONS, FOR ANY REASON, WITH OR WITHOUT CAUSE.

15. WHY DOESN'T XXX XXXXX THE NEW OPTIONS IMMEDIATELY AFTER THE EXPIRATION
DATE OF THE OFFER?

If we were to grant the New Options on any date that is earlier than
six months and one day after the Cancellation Date, we would be subject to
onerous accounting treatment. We would be required for financial reporting
purposes to treat the New Options as variable awards. This means that we would
be required to record the non-cash accounting impact of decreases and increases
in the Company's share price as a compensation expense for the New Options
issued under this offer. We would have to continue this variable accounting for
these New Options until they were exercised, forfeited or terminated. The higher
the market value of our shares, the greater the compensation expense we would
have to record. By deferring the grant of the New Options for at least six
months and one day, we will not have to treat the New Options as variable
awards. (See Section 12 of the Offer to Exchange.)

16. IF I TENDER OPTIONS IN THE OFFER, WILL I BE ELIGIBLE TO RECEIVE OTHER
OPTION GRANTS BEFORE I RECEIVE MY NEW OPTIONS?

No. If we cancel options you tender in the offer, you will not receive
any other option grants before you receive your New Options. We will defer until
after the New Option Grant Date the grant of other options, such as annual,
bonus or promotion-related options, for which you might otherwise become
eligible before the New Option Grant Date. If we were to grant you any options
sooner than six months and one day after the Cancellation Date, they would be
subject to the adverse accounting treatment described in the answer to Question
15. Therefore, any annual or other merit grant that might otherwise be approved
for you will be delayed until after the New Option Grant Date. (See Section 6 of
the Offer to Exchange.)

If you do not tender any of your Eligible Options for exchange in the
offer, you may receive discretionary option grants prior to the New Option Grant
Date if the Compensation Committee or Board of Directors or their designee
decides to make such grants (such options would have an exercise price equal to
the last reported closing price on the date they are granted). As a result,
participation in the offer may affect the date, price and vesting of any
discretionary option grant that may be approved for you in the future. (See
Section 6 of the Offer to Exchange.)

SPECIFIC QUESTIONS ABOUT THE CANCELED OPTIONS

17. WHICH OPTIONS MAY I TENDER FOR CANCELLATION?

If eligible to participate, you may tender for cancellation one or more
Eligible Options, which are outstanding, unexercised options granted under the
1997 Plan that have an exercise price greater than $2.10 per share. If you
choose to participate, you must exchange all of your Required Options, which are
stock options granted to you after November 26, 2002. (See Section 2 of the
Offer to Exchange.)

18. WILL I BE REQUIRED TO GIVE UP ALL MY RIGHTS TO THE CANCELED OPTIONS?

Yes. Each returned option that we accept for exchange will be canceled,
along with the corresponding stock option agreement, and will cease to exist.
You will no longer have any rights under those options. (See Section 6 of the
Offer to Exchange.)

19. IF I CHOOSE TO TENDER AN ELIGIBLE OPTION, DO I HAVE TO TENDER THE
ENTIRE OPTION, OR MAY I DECIDE TO RETURN FOR EXCHANGE ONLY A PORTION OF
THE OPTION?

We are not accepting partial tenders of options. For each Eligible
Option you hold, you may choose either to return it for exchange in its entirety
or not at all. You may choose to tender one Eligible Option but retain another
Eligible Option. However, you may not return for exchange less than all of a
particular outstanding option. For example, if you have received two Eligible
Options, you may choose to return for exchange neither option, both options or
one option. If you have exercised an Eligible Option in part, you may tender the
remaining unexercised portion of that option. (See Section 6 of the Offer to
Exchange.)

Also, if you decide to tender any of your Eligible Options, then you
must tender all of your Required Options, which are options that were granted to
you during the six month period prior to the commencement of the offer on May
27, 2003. This means that if you participate in the offer, you will be required
to tender all options granted to you after November 26, 2002. For example, if
you were granted an option in March 2002 and a second option in March 2003 and
you want to tender your March 2002 option for cancellation, you would also be
required to tender your March 2003 option. (See Section 2 of the Offer to
Exchange.)

20. MAY I TENDER EITHER VESTED OR UNVESTED OPTIONS?

Yes. You may return for exchange any or all of your Eligible Options,
whether or not they are vested, so long as they remain unexercised. But if you
choose to accept the offer with respect to any of your Eligible Options, you
must return the entire Eligible Option, both the vested and unvested portions.
Moreover, if you choose to accept the offer with respect to any of your Eligible
Options, you must also return for exchange all of your Required Options, if any,
regardless of their exercise prices and whether or not they have vested.

21. MAY I TENDER OPTIONS THAT I HAVE ALREADY EXERCISED IN FULL?

No. The offer only pertains to outstanding options. It does not apply
in any way to shares you have purchased, whether upon the exercise of options or
otherwise, or whether or not you have vested in those shares. If you have
exercised an Eligible Option in its entirety, that option is no longer
outstanding and is therefore not subject to the offer. If you have exercised an
Eligible Option in part, the remaining unexercised portion of that option is
outstanding and may be tendered for exchange pursuant to the offer. Options for
which you have properly submitted an exercise notice prior to the date the offer
expires will be considered exercised to that extent, whether or not you have
received confirmation of exercise for the shares purchased.

22. MAY I TENDER SHARES I BOUGHT UNDER THE 1998 EMPLOYEE STOCK PURCHASE
PLAN?

No. The offer only pertains to options granted under the Company stock
option plans listed in the response to Question 1 above. Any shares you
purchased under the XXX, Inc. 1998 Employee Stock Purchase Plan are not
outstanding options and cannot be tendered. The offer has no effect on the
prices at which a participant in the Employee Stock Purchase Plan can buy stock.

SPECIFIC QUESTIONS ABOUT THE NEW OPTIONS

23. HOW MANY SHARES WILL MY NEW OPTIONS COVER?

This is a three-for four exchange offer. For every four Eligible
Options or Required Options we cancel under this program, you will be entitled
to receive a New Option for three shares that were subject to the returned
option at the time it was canceled, rounded down to the nearest full share. For
example, if you were granted an

Eligible Option for 1,000 shares, which you previously exercised for 300 shares,
you would receive in exchange a New Option for 525 shares. (See Section 2 of the
Offer to Exchange.)

24. WHAT WILL BE THE EXERCISE PRICE OF THE NEW OPTIONS?

The exercise price per share under the New Options will be equal to the
last reported sale price of our common stock on the Nasdaq National Market (or
such other market on which the shares are principally traded or quoted) on the
New Option Grant Date (currently expected to be December 26, 2003 or promptly
thereafter). Accordingly, we cannot predict the exercise price of the New
Options. BECAUSE WE WILL NOT GRANT NEW OPTIONS UNTIL THE FIRST TRADING DAY THAT
IS AT LEAST SIX MONTHS AND ONE DAY AFTER THE DATE WE CANCEL THE OPTIONS RETURNED
AND ACCEPTED FOR EXCHANGE, THE NEW OPTIONS MAY HAVE A HIGHER EXERCISE PRICE THAN
SOME OR ALL OF YOUR CANCELED OPTIONS. FURTHERMORE, AFTER THE GRANT OF THE NEW
OPTIONS, OUR COMMON STOCK MAY TRADE AT A PRICE BELOW THE EXERCISE PRICE PER
SHARE OF THOSE OPTIONS. DEPENDING ON THE EXERCISE PRICE OF YOUR RETURNED OPTIONS
AND OTHER FACTORS, THE NEW OPTIONS MAY BE LESS VALUABLE THAN THE OPTIONS YOU ARE
RETURNING FOR EXCHANGE. WE RECOMMEND THAT YOU OBTAIN CURRENT MARKET QUOTATIONS
FOR OUR COMMON STOCK BEFORE DECIDING WHETHER TO EXCHANGE YOUR OPTIONS. HOWEVER,
YOU SHOULD ALSO CONSIDER THAT THE CURRENT MARKET PRICE OF OUR COMMON STOCK MAY
PROVIDE LITTLE OR NO BASIS FOR PREDICTING WHAT THE MARKET PRICE OF OUR COMMON
STOCK WILL BE ON THE GRANT DATE OF THE NEW OPTIONS OR AT ANY TIME IN THE FUTURE.
(See Section 2 of the Offer to Exchange.)

25. WHEN WILL I RECEIVE MY NEW OPTIONS?

We will not grant the New Options until the first trading day that is
at least six months and one day after the date we cancel the options accepted
for exchange. If we cancel tendered options on June 24, 2003, after 9:00 p.m.
Pacific Time, which is currently the expected Cancellation Date, the New Options
will not be granted until December 26, 2003 or promptly thereafter. You must be
an employee of XXX or one of its subsidiaries on the date we grant the New
Options in order to be eligible to receive them. Note that we will require
additional time after the New Option Grant Date in which to prepare and deliver
to you for signature your new stock option agreement(s), and thus we estimate
that you will not be able to exercise even vested portions of your New Options
for a short period of time following the New Option Grant Date. (See Section 6
of the Offer to Exchange.)

26. WHEN WILL THE NEW OPTIONS VEST?

The vesting schedule for each New Option granted will preserve the
vesting schedule and the vesting commencement date of the option it replaces, so
that on the date the New Option is granted and on any date thereafter, you will
be vested in your New Option to the same extent you would have been vested on
that date had you retained the option that you returned for exchange. However,
if you are a nonexempt employee, your New Option, although vested, may not be
exercised during the period of six months following the New Option Grant Date
(except in the event of your death, disability, retirement, change in corporate
ownership of XXX or other circumstances permitted by regulation) in accordance
with the Worker Economic Opportunity Act. (See Section 9 of the Offer to
Exchange.)

27. AS A NONEXEMPT EMPLOYEE, WHY DO I HAVE TO WAIT UNTIL SIX MONTHS AFTER
THE NEW OPTION GRANT DATE TO EXERCISE MY NEW OPTION?

Pursuant to a recent Department of Labor interpretation of the Fair
Labor Standards Act, profits made from the exercise of options held by nonexempt
employees must be included in each nonexempt employee's regular rate of pay for
purposes of calculating overtime payments. This treatment of nonexempt employee
options could result in overtime payments that significantly exceed our budgeted
forecasts. However, the Worker Economic Opportunity Act provides that if
nonexempt employees are restricted from exercising their options within the
first six months following the time of grant and certain additional requirements
are satisfied, then this impact on overtime payment calculations does not occur.
Accordingly, we have implemented a six-month exercise restriction with respect
to New Options to be granted to nonexempt employees so that we may properly
forecast and prudently manage our overtime costs. However, in accordance with
the Worker Economic Opportunity Act, an exception to the six-month restriction
on exercise of New Options granted to nonexempt employees will be provided in
the event of the employee's death, disability, retirement, change in corporate
ownership of XXX or other circumstances

permitted by regulation. All other terms and conditions applicable to New
Options, including their vesting, will be determined in the same manner for both
nonexempt and exempt employees alike.

Nonexempt employees should be aware that the practical effect of the
six-month restriction on the exercise of New Options is that the employee will
not be able to exercise any New Options for at least one year after the
Cancellation Date. Consequently, until you are entitled to exercise your New
Option you will be subject to the risk that fluctuations in the market price of
our common stock may result in your New Option being "in-the-money" at a time
when you are not entitled to exercise the option and then to be "under water"
again once you are permitted to exercise the New Option.

28. AFTER THE GRANT OF THE NEW OPTIONS, WHAT WILL HAPPEN IF I AGAIN END UP
WITH "UNDERWATER" OPTIONS?

We are conducting this offer only at this time, considering the unusual
stock market conditions that have affected many companies throughout the
country. This is a one-time offer, and we do not expect to make this or a
similar offer again in the future. As your stock options are valid for ten years
from the date of grant, subject to continued employment, the price of our common
stock may appreciate over the long term even if your options are "underwater"
for some period of time after the date of grant of the New Options. HOWEVER, WE
CAN PROVIDE NO ASSURANCE AS TO THE PRICE OF OUR COMMON STOCK AT ANY TIME IN THE
FUTURE.

29. WILL THE NEW OPTIONS BE DIFFERENT FROM MY TENDERED OPTIONS?

New Options will be granted under the 1997 Plan and will be subject to
the terms and conditions of the 1997 Plan and a new stock option agreement
between you and us, which you will be required to sign as a condition to
receiving your New Option. The New Options will have substantially the same
terms and conditions as the tendered options, except for the new exercise price
and a new ten-year term. However, if you are a nonexempt employee, your New
Option will contain a limitation on exercise not contained in your canceled
option. Even if vested, your New Option may not be exercised during the period
of six months following the New Option Grant Date (except in the event of your
death, disability, retirement, change in corporate ownership of XXX or other
circumstances permitted by regulation) in accordance with the Worker Economic
Opportunity Act.

If you tender incentive stock options, the New Options will be
incentive stock options to extent they qualify, but it is possible that your New
Options may not qualify and will be treated as nonstatutory stock options. (See
Section 14 of the Offer to Exchange.)

30. IF MY CURRENT OPTIONS ARE INCENTIVE STOCK OPTIONS, WILL MY NEW OPTIONS\
BE INCENTIVE STOCK OPTIONS?

Not necessarily. If your tendered options are incentive stock options,
the New Options will be incentive stock options to the maximum extent they
qualify as incentive stock options under current U.S. tax laws. One requirement
for the New Options to qualify as incentive stock options is that the value of
shares subject to options that first become exercisable by the option holder in
any calendar year cannot exceed $100,000, as determined using the fair market
value of the shares on the option grant date. The excess portion is deemed to be
a nonstatutory stock option. It is possible that your New Options may exceed the
$100,000 limit and the excess portion will be granted as nonstatutory stock
options, even if your tendered options were incentive stock options. For a
comparison of the U.S. federal income tax treatment of incentive stock options
and nonstatutory stock options, see Section 14 of the Offer to Exchange.

31. WHEN WILL THE NEW OPTIONS EXPIRE?

New Options will expire ten years from the New Option Grant Date, or
earlier if your employment with XXX terminates. (See Section 9 of the Offer to
Exchange.)

32. HOW WOULD A STOCK SPLIT OR OTHER CHANGE IN XXX'X CAPITAL STRUCTURE
AFFECT MY NEW OPTION?

If, between the Cancellation Date and the New Option Grant Date, XXX
pays a stock dividend or effects a stock split, reverse stock split or similar
change in its capital structure, a proportionate adjustment will be made in

the number of shares subject to a New Option granted in replacement of an option
canceled in the exchange. For example, if XXX effected a one-for-four reverse
stock split, each four shares of XXX common stock outstanding would be combined
into one share of common stock. Accordingly, for each 1,000 shares subject to an
option canceled in the exchange prior to the effective date of the reverse stock
split, a New Option for 187 shares would be granted on the New Option Grant Date
following the reverse stock split (1,000 shares adjusted for the one-for-four
stock split results in 250 shares tendered for cancellation, for which an option
to purchase three shares shall be issued for every four shares tendered, rounded
down to the nearest full share). The exercise price of the New Option would
nevertheless be equal to the last reported sale price of XXX common stock on the
New Option Grant Date.

33. WHAT HAPPENS IF XXX MERGES INTO OR IS ACQUIRED BY ANOTHER COMPANY, OR
IF THE DIVISION IN WHICH I AM EMPLOYED IS SOLD OR SPUN OFF INTO A SEPARATE
ENTITY?

It is possible that, prior to the grant of New Options, we might effect
or enter into an agreement for a merger or other similar transaction in which
XXX or one of its divisions is acquired by another company, or spun off into a
separate entity.

If there is a sale of all or substantially all of our assets or stock,
or we merge with another company, or if the division in which you are employed
is sold or spun off before the Expiration Date, you may withdraw your tendered
options and have all the rights afforded you to acquire our common stock under
the existing agreements evidencing those options. Further, if XXX is acquired
prior to the Expiration Date, we reserve the right to withdraw the offer, in
which case your old options and your rights under them will remain intact.

If there is a sale of all or substantially all of our assets or stock,
or we merge with another company, after your tendered options are accepted for
exchange and canceled but before the New Options are granted, our obligations in
connection with the offer would not automatically be assumed by the acquiring or
resulting company. Whether or not the obligation to grant the New Options is
assumed would depend on the terms of the acquisition agreement. While we would
seek to make provision for tendering option holders in the acquisition
agreement, we cannot guarantee what, if any, provision would be made. As a
result, we cannot guarantee that any New Options would be granted by the
acquiror in the event of such an acquisition or transaction. Therefore, it is
possible that you could give up your Eligible Options and Required Options and
not receive any New Options from the acquiring company.

If there is a sale of all or substantially all of our assets or stock,
or we merge with another company, after your New Options have been granted, your
New Options may be assumed by or replaced with new options of the acquiring
company. If the acquiring or resulting company does not assume or replace your
New Options and if you remain an employee of XXX or one of our subsidiaries, the
New Options will automatically become fully vested and exercisable ten days
prior to the effective date of such a transaction. However, any New Option that
is neither assumed by the acquiring company nor exercised as of the date of the
acquisition will terminate as of the effective date of the acquisition. If the
division in which you are employed is sold, spun off or subject to a similar
transaction that results in such division no longer being a subsidiary of XXX
after your New Options have been granted, the treatment of your outstanding
options will depend on the terms of the transaction documents, similar to the
treatment of any outstanding options that you do not tender for cancellation.

We are also reserving the right, in the event of a merger, sale, spin
off or other or similar transaction, to take any actions we deem necessary or
appropriate to complete a transaction that our Board of Directors believes is in
the best interest of our Company and our stockholders. This could include
terminating your right to receive New Options under this Offer to Exchange. If
we were to terminate your right to receive New Options under this offer in
connection with such a transaction, employees who have tendered options for
cancellation pursuant to this offer

might not receive options to purchase securities of the acquiring company or any
other consideration for their tendered options. (See Section 6 of the Offer to
Exchange.)

34. ARE THERE CIRCUMSTANCES WHERE I WOULD NOT BE GRANTED NEW OPTIONS?

Yes. If you are no longer an employee of XXX or one of its subsidiaries
on the New Option Grant Date, you will not receive any New Options. (See Section
2 of the Offer to Exchange.)

Although we are not currently aware of any prohibitions under
applicable law, it is possible that, even if we accept your tendered options, we
will not grant New Options to you if we are prohibited by applicable law or
regulations from doing so. Such a prohibition could result from changes in
Securities and Exchange Commission rules, regulations or policies, Nasdaq
listing requirements, accounting rules or foreign laws. We will use reasonable
efforts to avoid or remedy any such prohibitions, but if it is applicable
throughout the period from the first business day that is at least six months
and one day after we cancel the options accepted for exchange and continuing
thereafter, you will not be granted a New Option. (See Section 13 of the Offer
to Exchange.)

Also, as described in answer to the preceding question, you may not be
granted New Options if the Board of Directors determines that this is necessary
or appropriate to complete a transaction that is in the best interests of XXX
and its stockholders.

35. WHAT HAPPENS TO OPTIONS THAT I CHOOSE NOT TO TENDER OR THAT ARE NOT
ACCEPTED FOR EXCHANGE?

Options that you choose not to tender in the offer or that we do not
accept for exchange will remain outstanding until they expire by their terms and
will retain their current exercise price and current vesting schedule.

If you are a U.S. employee, you should note that there is a risk
that incentive stock options you hold may be affected, even if you do not
participate in the exchange. We believe that you will not be subject to current
U.S. federal income tax if you do not elect to participate in the offer. We also
believe that the offer will not change the U.S. federal income tax treatment of
subsequent grants and exercises of your incentive stock options (and sales of
shares acquired upon exercise of such options) if you do not participate in the
offer. However, the IRS may characterize the offer as a "modification" of those
incentive stock options for U.S. federal income tax purposes, even if you
decline to participate. Please read Section 14 ("Material U.S. Federal Income
Tax Consequences") of the Offer to Exchange for more information.

36. WILL I HAVE TO PAY TAXES IF I EXCHANGE MY OPTIONS IN THE OFFER?

If you exchange your current options for New Options, you should not be
required under current law to recognize income for U.S. federal income tax
purposes at the time of the exchange or upon our acceptance and cancellation of
the options. Further, at the grant date of the New Options, you will not be
required under current law to recognize income for U.S. federal income tax
purposes. (See Section 14 of the Offer to Exchange.)

All option holders, including those subject to taxation in a foreign
jurisdiction, whether by reason of their nationality, residence or otherwise,
should consult their own personal tax advisors as to the tax consequences of
their participation in the offer. Tax consequences may vary depending on each
individual participant's circumstances. We have distributed as Appendix B to
this Offer to Exchange a short summary of some of the consequences with respect
to employees located in the People's Republic of China, Japan or Taiwan, who may
be eligible to participate in the offer. If you are an employee located outside
of the United States, we recommend that you consult with your own tax advisor to
determine the tax and social insurance consequences of the offer under the laws
of the country in which you live and work before deciding whether or not to
participate in the offer. (See Section 15 of the Offer to Exchange.)

37. CAN I WITHDRAW PREVIOUSLY TENDERED OPTIONS?

Yes. You may withdraw your tendered options at any time before the
offer expires at 9:00 p.m., Pacific Time, on the Expiration Date (currently
scheduled to be June 24, 2003). If we extend the offer beyond that time,

you may withdraw your tendered options at any time until the extended expiration
of the offer. In addition, although we presently intend to accept and cancel
validly tendered options promptly after the expiration of this offer, if we have
not accepted and canceled your tendered options by July 23, 2003, you may
withdraw your tendered options at any time on and after July 23, 2003. To
withdraw tendered options, you must deliver to us via facsimile (fax number
(000) 000-0000) or by hand delivery, courier or mail to Xxxx Xxxx, SEC Reporting
Manager, at XXX, Inc., 0000 Xxxxxxxxxx Xxxxx, Xxxxxxx, Xxxxxxxxxx 00000, a
signed Notice to Withdraw from the Offer (in the form attached as Annex 2), with
the required information while you still have the right to withdraw the tendered
options. Once you have withdrawn options, you may re-tender options only by
again submitting another Election Form prior to the Expiration Date. (See
Section 5 of the Offer to Exchange.)

38. CAN I CHANGE MY ELECTION REGARDING PARTICULAR TENDERED OPTIONS?

Yes. You may change your election regarding particular tendered options
at any time before the offer expires at 9:00 p.m., Pacific Time, on the
Expiration Date (currently scheduled to be June 24, 2003). If we extend the
offer beyond that time, you may change your election regarding particular
tendered options at any time until the extended expiration of the offer. In
order to change your election, you must deliver to us via facsimile (fax number
(000) 000-0000) or by hand delivery, courier or mail Xxxx Xxxx, SEC Reporting
Manager, at XXX, Inc., 0000 Xxxxxxxxxx Xxxxx, Xxxxxxx, Xxxxxxxxxx 00000, a new
Election Form, which includes the information regarding your new election, and
is clearly dated after your original Election Form. (See Section 5 of the Offer
to Exchange.)

39. IS THIS A REPRICING?

This is not a stock option repricing in the traditional sense. In a
repricing, the exercise price of the employee's current stock options would be
adjusted immediately to be equal to the closing price of our common stock on the
date of the repricing.

40. WHY CAN'T XXX JUST REPRICE MY OPTIONS, AS I HAVE SEEN DONE AT OTHER
COMPANIES?

In 1998, the Financial Accounting Standards Board adopted rules
requiring unfavorable accounting consequences for companies that reprice
options, as described in the answer to Question 15. If we were to simply reprice
options, XXX would be required to take a charge against earnings for any future
appreciation in the stock underlying the repriced options until the options were
exercised, forfeited or terminated.

41. WHY CAN'T I JUST BE GRANTED ADDITIONAL OPTIONS?

Because of the large number of underwater XXX options currently
outstanding, the grant of additional options equal in size to the outstanding
options would have a severe negative impact on our common stock dilution,
outstanding shares and per share operating results. In addition, we have a
limited number of shares that we are allowed to grant under our stock option
plans without seeking additional stockholder approval, and therefore our current
stock option plan share reserves must be conserved.

42. CAN I HAVE SOME EXAMPLES OF HOW THE OFFER MIGHT WORK?

EXAMPLE 1

ASSUMPTIONS:

YOUR ORIGINAL GRANT DATE: May 1, 2002

YOUR ORIGINAL STOCK OPTION GRANT: 5,000 shares (none of which
has been exercised)

YOUR ORIGINAL EXERCISE PRICE: $16.00 per share

YOUR ORIGINAL VESTING SCHEDULE: 1,000 shares vested on May 1,
2003, and then annually thereafter until fully vested on May
1, 2007 or until termination of employment.

HYPOTHETICAL STOCK PRICE ON NEW OPTION GRANT DATE: $2.00 per
share

HYPOTHETICAL NEW OPTION: Using the above assumptions to illustrate
the offer, if you properly tendered your option and we accepted it
for exchange, we would cancel your original option on June 25,
2003. On the New Option Grant Date, which would be December 26,
2003, if you remained employed with XXX, we would grant you a New
Option for 3,750 shares at an exercise price equal to the
hypothetical stock price of $2.00 per share. The vesting schedule
for the New Option would be the same as the vesting schedule of the
canceled option, and therefore you would have vested in 750 shares
(reflecting the 3 for 4 exchange) as of December 26, 2003. Provided
your employment with XXX continued, you would vest in an additional
750 shares on May 1, 2004 and annually thereafter through May 1,
2007.

EXAMPLE 2

ASSUMPTIONS:

YOUR ORIGINAL GRANT DATE: December 1, 2002

YOUR ORIGINAL STOCK OPTION GRANT: 5,000 shares (none of which
have been exercised)

YOUR ORIGINAL EXERCISE PRICE: $1.50 per share

YOUR ORIGINAL VESTING SCHEDULE: 1,000 shares vest on December
1, 2003, and then annually thereafter until fully vested on
December 1, 2007 or until termination of employment.

HYPOTHETICAL REVERSE STOCK SPLIT: Assume that prior to the New
Option Grant Date, the Company effects a one-for-four reverse
stock split in which each four shares of common stock
outstanding are combined into one share of common stock. As a
result of this reverse stock split, all outstanding options will
be proportionately adjusted. Had your original option remained
outstanding, it would have been adjusted to represent an option
for 1,250 shares at an exercise price of $6.00 per share, thus
preserving the original aggregate exercise price for your option
of $7,500.00.

HYPOTHETICAL STOCK PRICE ON NEW OPTION GRANT DATE: $8.00 per
share

HYPOTHETICAL NEW OPTION: Since your original option was granted
after November 26, 2002, it is a Required Option that must be
returned for exchange if you elect to return for exchange any
Eligible Option. Using the above assumptions to illustrate the
offer, we would cancel your original option on June 25, 2003. On
the New Option Grant Date, which would be December 26, 2003, if you
remained employed with XXX, we would grant you a New Option for 937
shares (reflecting a proportionate adjustment for the reverse stock
split and rounding down for any fractional shares) at an exercise
price equal to the hypothetical stock price of $8.00 per share.
Please note that in this example, the new exercise price of $8.00
is greater than your original option's exercise price of $6.00 (as
proportionately adjusted for the reverse stock split). The vesting
schedule for the New Option would be the same percentage as the
vesting schedule of the canceled option, and therefore you would
vest in approximately 187 shares (as proportionately adjusted for
the reverse stock split) on December 1, 2003. Provided your
employment with XXX continued, you would vest in an additional
approximately 187 shares on December 1, 2004 and annually
thereafter through December 1, 2007.

43. WHAT DO XXX AND THE BOARD OF DIRECTORS THINK OF THE OFFER?

Although our Board of Directors has approved the offer, neither we nor
our Board of Directors makes any recommendation as to whether you should tender
or not tender your options. You must make your own decision

whether or not to tender options taking into account your own personal
circumstances and preferences. For questions regarding tax implications or other
investment-related questions, you should talk to your own legal counsel,
accountant and/or financial advisor.

44. WHOM CAN I TALK TO IF I HAVE QUESTIONS ABOUT THE OFFER?

For additional information or assistance, you should contact:

Xxxx Xxxx
SEC Reporting Manager
XXX, Inc.
0000 Xxxxxxxxxx Xxxxx
Xxxxxxx, XX 00000

Xxxx Xxxx: (000) 000-0000, extension 208; e-mail: xxxx.xxxx@xxx.xxx

WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION OR TO MAKE
ANY REPRESENTATION IN CONNECTION WITH THIS OFFER OTHER THAN THE INFORMATION AND
REPRESENTATIONS CONTAINED IN THIS DOCUMENT, THE RELATED MEMORANDUM FROM XXXXXX
X. XXXXX, THE ELECTION FORM OR THE NOTICE TO WITHDRAW FROM THE OFFER. IF ANYONE
MAKES ANY REPRESENTATION OR GIVES YOU ANY INFORMATION DIFFERENT FROM THE
REPRESENTATIONS OR INFORMATION CONTAINED IN THESE DOCUMENTS, YOU MUST NOT RELY
UPON THAT REPRESENTATION OR INFORMATION AS HAVING BEEN AUTHORIZED BY US. WE HAVE
NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON OUR BEHALF AS TO WHETHER
YOU SHOULD RETURN FOR EXCHANGE OR REFRAIN FROM RETURNING FOR EXCHANGE YOUR
OPTIONS PURSUANT TO THIS OFFER. IF ANYONE MAKES ANY RECOMMENDATION TO YOU, YOU
MUST NOT RELY UPON THAT RECOMMENDATION AS HAVING BEEN AUTHORIZED BY US. YOU
SHOULD RELY ONLY ON THE REPRESENTATIONS AND INFORMATION CONTAINED IN THIS
DOCUMENT OR TO WHICH WE HAVE REFERRED YOU.

CERTAIN RISKS OF PARTICIPATING IN THE OFFER

Participation in the offer involves a number of potential risks,
including those described below. The risks identified in this section and the
risks described under the heading entitled "Risk Factors That Could Affect Our
Future Performance" in our quarterly report on Form 10-Q for our fiscal quarter
ended March 31, 2003, filed with the SEC on May 9, 2003, highlight the material
risks of participating in this offer. Eligible participants should carefully
consider these risks and are encouraged to speak with an investment and tax
advisor as necessary before deciding to participate in the offer. In addition,
we strongly urge you to read the rest of this Offer to Exchange, along with the
memorandum from Xxxxxx X. Xxxxx dated May 27, 2003, the Election Form and the
Notice to Withdraw from the Offer before deciding to participate in the offer.
IN ADDITION, WE URGE THOSE EMPLOYEES WHO LIVE AND WORK OUTSIDE OF THE UNITED
STATES TO READ SECTION 15 ("TERMS OF THE OFFER SPECIFIC TO ELIGIBLE PARTICIPANTS
EMPLOYED OUTSIDE OF THE UNITED STATES") AND APPENDIX B OF THIS OFFER TO EXCHANGE
DISCUSSING TAX CONSEQUENCES IN THAT COUNTRY, AS WELL AS THE OTHER DOCUMENTS
LISTED ABOVE, AND TO CONSULT WITH AN INVESTMENT AND TAX ADVISOR AS NECESSARY
BEFORE DECIDING TO PARTICIPATE IN THIS EXCHANGE OFFER.

ECONOMIC RISKS

IF YOUR EMPLOYMENT TERMINATES PRIOR TO THE GRANT OF THE NEW OPTIONS, YOU WILL
RECEIVE NEITHER A NEW OPTION NOR THE RETURN OF YOUR CANCELED OPTION.

Once your option is canceled, it cannot be restored, and you will not
be granted a New Option if you are not an employee of XXX or one of its
subsidiaries on the date the New Options are granted. Accordingly, if your
employment terminates for any reason, including as a result of a
reduction-in-force by the Company, prior to the grant of the New Options, you
will have the benefit of neither the canceled option nor the New Option.

IF OUR STOCK PRICE INCREASES AFTER THE DATE YOUR TENDERED OPTIONS ARE CANCELED,
YOUR CANCELED OPTIONS MIGHT HAVE BEEN WORTH MORE THAN THE NEW OPTIONS THAT YOU
RECEIVE IN EXCHANGE FOR THEM.

Although the market price of our common stock is currently lower than
the exercise prices of all Eligible Options, the market price of our common
stock may increase in the future. If you accept the offer and the price of our
common stock increases above the exercise price of the Eligible Options and
Required Options, if any, that you tender in the offer during the term of such
options, the value of your New Options may be less than the value of your
options which were canceled in the exchange. For example, if you tender for
cancellation an option with a $12.00 exercise price, and our stock appreciates
to $15.00 when the New Options are granted, your New Option will have a higher
exercise price than the canceled option and you will have only three-quarters of
the number of options you cancelled.

PARTICIPATION IN THE OFFER WILL MAKE YOU INELIGIBLE TO RECEIVE ANY OPTION GRANTS
UNTIL DECEMBER 26, 2003, AT THE EARLIEST.

Employees are generally eligible to receive option grants at any time
that the Board of Directors or Compensation Committee chooses to make them. For
example, you might be eligible to receive future option grants in accordance
with our standard policies relating to performance and/or promotion. However, if
you participate in the offer, you will not be eligible to receive any option
grants until December 26, 2003, at the earliest, because we would incur adverse
accounting consequences if we were to grant additional options to employees who
participate in the offer within six months of the Cancellation Date. Please
note, however, that acceptance of the offer will not, by itself, entitle you to
receive any future option grants other than any New Options you are eligible to
receive in replacement of your canceled options.

IF WE ENTER INTO A MERGER OR OTHER SIMILAR TRANSACTION, OR SELL OR SPIN OFF THE
DIVISION IN WHICH YOU ARE EMPLOYED, EITHER BEFORE OR AFTER THE EXPECTED DATE OF
GRANT OF THE NEW OPTIONS, YOU MIGHT RECEIVE NEW OPTIONS WITH LIMITED POTENTIAL
FOR FUTURE VALUE OR NO NEW OPTIONS AT ALL.

If XXX is acquired in a merger, a sale of all or substantially all of
our assets or stock, or other similar transaction before the New Option Grant
Date, the acquiring company may not agree to assume our obligation to

grant New Options. Therefore, it is possible that you could give up your
Eligible Options and Required Options, if any, and not receive New Options from
the acquiring company. If our shares are acquired in a cash merger following the
New Option Grant Date, your New Option exercise price may be close to the cash
price being paid for our shares, resulting in very limited future price
appreciation potential. Furthermore, the Board of Directors has reserved the
right to not grant the New Options if that were to become necessary or
appropriate to complete a transaction that the Board believes to be in the best
interests of XXX and our stockholders.

If the division in which you are employed is sold, spun off or subject
to a similar transaction that results in such division no longer being a
subsidiary of XXX, after your tendered options are accepted for exchange and
canceled but before the New Options are granted, you may be ineligible to
receive New Options from us, and our obligations in connection with the offer
may not automatically be assumed by the acquiring or resulting company. Whether
or not the obligation to grant options in the acquiring or resulting entity is
assumed would depend on the terms of the transaction documents and the structure
of the transaction. While we would seek to make provision for tendering option
holders in the transaction, we cannot guarantee what, if any, provision would be
made. If the division in which you are employed is sold, spun off or subject to
a similar transaction that results in such division no longer being a subsidiary
of XXX, after your New Options have been granted, the treatment of your
outstanding options will depend on the terms of the transaction documents,
similar to the treatment of any outstanding options that you do not tender for
cancellation.

IF WE ARE PROHIBITED BY APPLICABLE LAW OR REGULATIONS FROM GRANTING NEW OPTIONS,
YOU WILL NOT RECEIVE EITHER A NEW OPTION, THE RETURN OF YOUR CANCELED OPTIONS,
OR ANY OTHER CONSIDERATION.

We will not grant New Options to you if we are prohibited by applicable
law or regulations from doing so. Such a prohibition could result from changes
in SEC rules, regulations or policies or Nasdaq National Market listing
requirements. We are unaware of any such prohibition at this time, and we will
use reasonable efforts to effect the grant, but if the grant is prohibited as of
the date of grant we will not grant you any New Options and you will not receive
any other compensation for the options you tendered.

TAX-RELATED RISKS FOR U.S. RESIDENTS

A PORTION OF YOUR NEW OPTIONS MAY BE NONSTATUTORY STOCK OPTIONS, WHEREAS YOUR
CANCELED OPTIONS MAY HAVE BEEN INCENTIVE STOCK OPTIONS.

If your canceled option was an incentive stock option, the New Option
which replaces it will be an incentive stock option to the maximum extent it
qualifies as an incentive stock option under current U.S. tax laws. One
requirement for the New Option to qualify as an incentive stock option is that
the value of shares subject to the New Option that become exercisable for the
first time in any calendar year cannot exceed $100,000, as determined by the
fair market value of the shares subject to the option on the date of grant. The
excess portion of the option is deemed to be a nonstatutory stock option. It is
possible that your New Option may exceed this $100,000 limit, and the excess
portion will be granted as a separate New Option that is a nonstatutory stock
option. For more detailed information, please read Section 14 ("Material U.S.
Federal Income Tax Consequences") of this Offer to Exchange. You should consult
with your personal tax advisor regarding any effect this may have on your
personal tax situation.

EVEN IF YOU ELECT NOT TO PARTICIPATE IN THE OPTION EXCHANGE PROGRAM, YOUR
INCENTIVE STOCK OPTIONS MAY BE AFFECTED.

We believe that you will not be subject to current U.S. federal income
tax if you do not elect to participate in the offer. We also believe that the
offer will not change the U.S. federal income tax treatment of subsequent grants
and exercises of your incentive stock options (and sales of shares acquired upon
exercises of such options) if you do not participate in the offer.

However, the IRS may characterize the offer as a "modification" of
those incentive stock options, even if you decline to participate. In 1991, the
IRS issued a private letter ruling in which another company's option exchange
program was characterized as a "modification" of the incentive stock options
that could have been exchanged. This does not necessarily mean that our offer to
exchange options will be viewed the same way. Private

letter rulings issued by the IRS contain its opinion regarding only the specific
facts presented by a specific person or company. The person or company receiving
the letter may rely on it, but no other person or company may rely on the letter
ruling or assume the same opinion would apply to their situation, even if the
facts at issue are similar to those in the letter. While such letters do not
provide certainty, they may indicate how the IRS will view a similar situation.
We, therefore, do not know if the IRS will assert the position that our offer
constitutes a "modification" of incentive stock options, which although not
tendered are still eligible for the exchange offer. A successful assertion by
the IRS of this position could, in some cases, cause an option to cease to
qualify as an incentive stock option. In other cases, such a successful
assertion by the IRS could extend the option's holding period necessary to
qualify for favorable tax treatment. Accordingly, to the extent you dispose of
your incentive stock option shares prior to the lapse of the new extended
holding period, your incentive stock option could be taxed similarly to a
nonstatutory stock option. Please review Section 14 ("Material U.S. Federal
Income Tax Consequences") of this Offer to Exchange for further detailed
information regarding the tax differences between incentive stock options and
nonstatutory stock options.

If you are an employee who lives or works outside of the United States,
you should read Section 15 ("Terms of the Offer Specific to Eligible
Participants Employed Outside of the United States") and Appendix B of this
Offer to Exchange for a discussion of the tax consequences in that country, and
you should consult with your personal tax advisor about the effect on your
personal tax situation if you choose to participate in the offer.

BUSINESS-RELATED RISKS

For a description of risks related to XXX'x business, please see
Section 19 ("Miscellaneous") of this Offer to Exchange.

INTRODUCTION

XXX, Inc. ("XXX," the "Company," "we" or "us") is offering certain
option holders who are current employees of XXX or its subsidiaries the
opportunity to exchange certain outstanding options to purchase shares of XXX
common stock at an exercise price greater than $2.10 per share ("Eligible
Options") originally granted under the XXX, Inc. 1997 Stock Option Plan (the
"1997 Plan") for new options to purchase shares of XXX common stock ("New
Options") that we will grant under the 1997 Plan. We are making the offer upon
the terms and conditions described in this Offer to Exchange (the "Offer to
Exchange"), the related memorandum from Xxxxxx X. Xxxxx dated May 27, 2003, the
Election Form and the Notice to Withdraw from the Offer (which together, as they
may be amended from time to time, constitute the "offer" or "program"). The
offer is not conditioned on a minimum number of options being tendered. The
offer is subject to the conditions that we describe in Section 7 ("Conditions of
the Offer") of this Offer to Exchange.

You are eligible to participate in the offer if you are an employee of
XXX or one of our subsidiaries and remain an employee through the date on which
options returned for exchange are canceled. Members of our Board of Directors,
including those who are employees of XXX and executive officers of XXX, are not
eligible to participate. We currently expect to cancel options tendered for
exchange on June 24, 2003 after 9:00 p.m. Pacific Time, or promptly thereafter,
unless the offer period is extended.

The offer is currently scheduled to expire on June 24, 2003 (the
"Expiration Date"), and we expect to cancel options on June 24, 2003 after 9:00
p.m. Pacific Time, or promptly thereafter (the "Cancellation Date"). If you
elect to participate in the offer, you will receive a confirmation of the
acceptance for cancellation of your Eligible Options and Required Options
promptly after the Expiration Date.

As of May 27, 2003, options to purchase 3,020,577 shares of our common
stock were outstanding under our 1997 Plan. As of that date, there were
1,527,926 shares of our common stock subject to Eligible Options and Required
Options outstanding under this plan. Assuming that all Eligible Options and
Required Options are tendered for exchange, we would issue New Options to
purchase 1,145,913 shares. The total shares underlying New Options that could be
issued in the exchange would represent approximately 5.1% of our total shares
outstanding as of May 27, 2003.

Each New Option granted will preserve the vesting schedule and the
vesting commencement date of the option it replaces, so that on the date the New
Option is granted and on any date thereafter, you will be vested in the New
Option to the same proportion you would have been vested on that date had you
retained your option that was tendered for exchange and replaced by the New
Option. However, if you are a U.S. employee subject to the overtime compensation
requirements of the Fair Labor Standards Act of 1938 (a "nonexempt employee"),
your New Option, although vested, may not be exercised during the period of six
months following the New Option Grant Date (except in the event of your death,
disability, retirement, change in corporate ownership of XXX or other
circumstances permitted by regulation) in accordance with the Worker Economic
Opportunity Act.

The exercise price per share under each New Option will be equal to the
last reported sale price of our common stock reported by the Nasdaq National
Market (or such other market on which the shares are principally traded or
quoted) on the New Option Grant Date. The exercise price of your New Option may
be higher or lower than the current price of our common stock, and may be higher
or lower than the exercise price of your Eligible Options or Required Options.
The market price of our common stock has declined substantially over the last
year and has been subject to high volatility. Our common stock may trade at
prices below the exercise price per share of the New Options. Depending on the
exercise price of your returned options and other factors, the New Options may
be less valuable than the options you return for exchange. WE RECOMMEND THAT YOU
EVALUATE CURRENT MARKET QUOTES FOR OUR COMMON STOCK, AMONG OTHER FACTORS, BEFORE
DECIDING WHETHER OR NOT TO TENDER YOUR OPTIONS. AT THE SAME TIME, YOU SHOULD
CONSIDER THAT THE CURRENT MARKET PRICE OF OUR COMMON STOCK MAY PROVIDE LITTLE OR
NO BASIS FOR PREDICTING WHAT THE MARKET PRICE OF OUR COMMON STOCK WILL BE ON THE
NEW OPTION GRANT DATE OR AT ANY TIME IN THE FUTURE. YOU SHOULD CAREFULLY
CONSIDER THESE UNCERTAINTIES BEFORE DECIDING WHETHER TO ACCEPT THE OFFER.

Shares of XXX common stock are traded on the Nasdaq National Market
under the symbol "AXTI." On May 22, 2003, the closing price of our common stock
reported on the Nasdaq National Market was $1.21 per share. Unless otherwise
stated, all monetary denominations referred to in this offer are United States
dollars.

THE OFFER

1. ELIGIBILITY.

Employees are "eligible employees" if they are employees of XXX or one
of our subsidiaries as of the date the offer commences and as of the date on
which the tendered options are canceled; provided, however, that members of the
Board of Directors, including those who are employees of XXX, and executive
officers are not eligible to participate in the offer. Employees who are on
medical, maternity, worker's compensation, military or other statutorily
protected leave of absence or personal leave of absence are eligible to
participate in the offer. However, an employee who resigns or receives a "Notice
of Termination" at any time before the Cancellation Date is not eligible to
participate in the offer. An employee will have received a "Notice of
Termination" if, at any time before the Cancellation Date, the employee has
received a written notice that XXX or one of its subsidiaries intends to take
the necessary steps to end the employee's employment relationship or, in
accordance with local laws, the employee has received an offer, filed or has
agreed in writing to file a petition in a labor court or has entered into an
agreement, in each case, to end the employee's employment relationship with XXX
or one of its subsidiaries.

In order to receive a New Option, you must remain an employee of XXX or
one of its subsidiaries as of the date the New Options are granted, which will
be at least six months and one day after the Expiration Date. If XXX does not
extend the offer, the New Options will be granted on or promptly after December
26, 2003.

2. NUMBER OF OPTIONS; EXPIRATION DATE.

In accordance with the terms and subject to the conditions of this
offer, we will exchange for New Options granted under the 1997 Plan, all
Eligible Options and all Required Options that are properly tendered and not
validly withdrawn in accordance with Section 5 before 9:00 p.m., Pacific Time,
on the Expiration Date. We will not accept partial tenders of options for any
portion less than all of the unexercised shares subject to an individual option.
Therefore, you may tender options for all or none of the unexercised shares
subject to each of your Eligible Options.

Eligible Options are all options held by current employees of XXX or
our subsidiaries that are outstanding under the 1997 Plan and have an exercise
price greater than $2.10 per share. In addition, if you tender any option for
exchange, you will be required to also tender all options that you received
during the six-month period prior to the commencement of this offer. Since the
offer commenced on May 27, 2003, if you participate in the offer, you will be
required to tender all options granted to you after November 26, 2002. By
exchanging any Eligible Option pursuant to the offer, you will automatically be
deemed to have returned all of your options granted to you after November 26,
2002 for exchange and cancellation.

If you properly tender any of your Eligible Options and all of your
Required Options for exchange and we accept such options for exchange, we will
cancel such options and grant you New Options under the 1997 Plan pursuant to a
New Option agreement. You will be entitled to receive, in exchange for each
canceled option, a New Option for three shares for every four shares of
unexercised shares that were subject to the canceled option, rounded down to the
nearest full share. If, between the Cancellation Date and the New Option Grant
Date, we pay a stock dividend or effect a stock split, reverse stock split or
similar change in our capital structure, we will make a proportionate adjustment
in the number of shares subject to the New Option granted in replacement of each
option canceled in the exchange.

The New Options will be granted on or promptly after the first trading
day that is at least six months and one day after the date returned options are
accepted for exchange and canceled. The exercise price of the New Options will
be equal to the last reported sale price of our common stock on the Nasdaq
National Market (or such other market on which our shares are traded or quoted)
on the date of grant, which is currently expected to be December 26, 2003. The
returned options that we accept for exchange pursuant to the offer will be
canceled, and you will have no further right or entitlement to purchase shares
of our common stock pursuant to those canceled options.

IF, FOR ANY REASON, YOU DO NOT REMAIN AN EMPLOYEE OF XXX OR ONE OF OUR
SUBSIDIARIES THROUGH THE DATE WE GRANT THE NEW OPTIONS, YOU WILL NOT RECEIVE ANY
NEW OPTIONS OR OTHER CONSIDERATION IN EXCHANGE FOR YOUR

TENDERED OPTIONS THAT HAVE BEEN ACCEPTED FOR EXCHANGE. THIS MEANS THAT IF YOU
RETIRE, QUIT, WITH OR WITHOUT A GOOD REASON, RESIGN DUE TO DISABILITY OR DIE OR
WE TERMINATE YOUR EMPLOYMENT, WITH OR WITHOUT CAUSE, PRIOR TO THE DATE WE GRANT
THE NEW OPTIONS, YOU WILL NOT RECEIVE ANYTHING FOR THE OPTIONS THAT YOU TENDERED
AND WE CANCELED. FURTHERMORE, YOUR CANCELED OPTIONS WILL NOT BE REINSTATED.

Each New Option granted will preserve the vesting schedule and the
vesting commencement date of the option it replaces, so that on the date the New
Option is granted and on any date thereafter, you will be vested in the New
Option to the same proportion you would have been vested on that date had you
retained your option that was tendered for exchange. However, if you are a
nonexempt employee, your New Option, although vested, may not be exercised
during the period of six months following the New Option Grant Date (except in
the event of your death, disability, retirement, change in corporate ownership
of XXX or other circumstances permitted by regulation) in accordance with the
Worker Economic Opportunity Act.

The Expiration Date for this offer is 9:00 p.m., Pacific Time, on June
24, 2003, unless and until we, in our discretion, have extended the period of
time during which the offer will remain open, in which event the term
"Expiration Date" refers to the latest time and date at which the offer, as so
extended, expires. See Section 16 ("Extension of Offer; Termination; Amendment")
of this Offer to Exchange for a description of our rights to extend, delay,
terminate and amend the offer.

If we decide to take any of the following actions, we will publish a
notice or otherwise inform you in writing of such action:

- we increase or decrease the amount of consideration offered
for the exchanged options;

- we decrease the number of options eligible to be tendered in
the offer;

- we increase the number of options eligible to be tendered in
the offer by an amount that exceeds 2% of the shares issuable
upon exercise of the options that are subject to the offer
immediately prior to the increase; or

- we extend or terminate the offer.

If the offer is scheduled to expire at any time earlier than the tenth
business day from, and including, the date that notice of the increase or
decrease is first published, sent or given in the manner specified in Section 16
of this Offer to Exchange, we will extend the offer so that the offer is open at
least ten business days following the publication, sending or giving of notice.

We will also notify you of any other material change in the information
contained in this Offer to Exchange.

For purposes of the offer, a "business day" means any day other than a
Saturday, Sunday or federal holiday and consists of the time period from 12:01
a.m. through 12:00 midnight, Eastern Time, and a "trading day" means any
business day on which a last sale price of our common stock is reported on the
Nasdaq National Market (or other market or exchange on which our stock is quoted
or traded).

3. PURPOSE OF THE OFFER.

We issued the options currently outstanding to:

- provide our eligible employees with additional incentive and
to promote the success of our business, and

- encourage our eligible employees to continue their employment
with us.

One of the keys to our continued growth and success is the retention of
our most valuable asset, our employees. The offer provides an opportunity for us
to offer our eligible employees a valuable incentive to stay with XXX. Many of
our outstanding options, whether or not they are currently exercisable, have
exercise prices that are significantly higher than the current market price of
our shares. We believe that these "underwater" options are unlikely to be
exercised in the foreseeable future. By making this offer to exchange
outstanding options for New Options that will have an exercise price at least
equal to the market value of their underlying shares on their grant date, we
intend to provide our eligible employees with the benefit of owning options that
over time may have a greater potential to increase in value, create better
performance incentives for employees and thereby maximize stockholder value.
However, since we will not grant New Options until at least six months and one
day after the date we cancel the options accepted for exchange, the New Options
may have a higher exercise price than some or all of our currently outstanding
options. Because of the large number of "underwater" options currently
outstanding, a total re-grant of new options would have a severe negative impact
on our dilution and outstanding shares. Furthermore, we have a limited pool of
shares that we are allowed to issue under our employee stock plans without
stockholder approval for additional shares, and we must therefore conserve our
currently available plan shares for future new hires and on-going grants.

Considering the ever-present risks associated with a volatile and
unpredictable stock market, and our industry in particular, there is no
guarantee that the market price at the time of the New Option grant (and thus
the exercise price of your own New Option) will be less than or equal to the
exercise price of your existing option, or that your New Option will increase in
value over time.

From time to time we engage in strategic transactions with business
partners, customers and other third parties. We may engage in transactions in
the future with these or other companies which could significantly change our
structure, ownership, organization or management or the make-up of our Board of
Directors, and which could significantly affect the price of our shares. If we
engage in such a transaction or transactions before the date we grant the New
Options, our shares could increase (or decrease) in value, and the exercise
price of the New Options could be higher (or lower) than the exercise price of
options you elect to have canceled as part of this offer. As outlined in Section
9 ("Source and Amount of Consideration; Terms of New Options") of this Offer to
Exchange, the exercise price of any New Options granted to you in return for
your tendered options will be the fair market value of the underlying shares on
the date of grant, as determined by the closing price reported by the Nasdaq
National Market on the date of grant. You will be at risk of any such increase
in our share price before the grant date of the New Options for these or any
other reasons.

We are also reserving the right, in the event of a merger, spin off or
similar transaction, to take any actions we deem necessary or appropriate to
complete a transaction that our Board of Directors believes is in the best
interest of our Company and our stockholders. This could include terminating
your right to receive New Options under this Offer to Exchange. If we were to
terminate your right to receive New Options under this offer in connection with
such a transaction, employees who have tendered options for cancellation
pursuant to this offer would not receive options to purchase securities of the
acquiror or any other consideration for their tendered options. These
transactions could include plans or proposals that relate to or would result in:

(a) an extraordinary corporate transaction, such as a merger,
reorganization or liquidation, involving our Company;

(b) any purchase, sale or transfer of a material amount of our
assets, including a sale or transfer of one of our divisions;

(d) any change in our present Board of Directors or management,
including a change in the number or term of directors; however
we may fill our existing Board and officer vacancies, hire for
new officer positions or change any executive officer's
material terms of employment (see Appendix A of this Offer to
Exchange);

(e) any other material change in our corporate structure or
business;

(f) our common stock not being authorized for quotation in an
automated quotation system operated by a national securities
association;

(g) our common stock becoming eligible for termination of
registration pursuant to Section 12(g)(4) of the Securities
Exchange Act;

(h) the suspension of our obligation to file reports pursuant to
Section 15(d) of the Securities Exchange Act;

(i) the acquisition by any person of any of our securities or the
disposition of any of our securities; or

(j) any changes in our certificate of incorporation, bylaws, other
governing instruments or any actions that could impede the
acquisition of control of us by any person.

Neither we nor our Board of Directors makes any recommendation as to
whether you should tender or not tender your options, nor have we authorized any
person to make any such recommendation. You are urged to evaluate carefully all
of the information in this Offer to Exchange and to consult your own investment
and tax advisors. You must make your own decision whether or not to tender your
options for exchange.

4. PROCEDURES FOR TENDERING OPTIONS.

PROPER TENDER OF OPTIONS.

To validly tender your options through the offer, you must, in
accordance with the terms of the Election Form (in the form attached as Annex 1)
and its accompanying instructions, properly complete, execute and deliver the
Election Form to us via facsimile (fax number (000) 000-0000) or hand delivery,
courier or mail to Xxxx Xxxx, SEC Reporting Manager, at XXX, Inc., 0000
Xxxxxxxxxx Xxxxx, Xxxxxxx, Xxxxxxxxxx 00000, along with any other required
documents. We must receive all of the required documents before 9:00 p.m.,
Pacific Time, on the Expiration Date. The Expiration Date is June 24, 2003,
unless we extend the offer.

If you do not deliver your Election Form by the deadline, then you will
not be able to participate in the option exchange, and all stock options
currently held by you will remain unchanged at their original exercise price and
under their original terms. If the offer is extended by us, you must deliver
these documents before 9:00 p.m., Pacific Time, on the extended Expiration Date.
We will not accept delivery of any Election Form after expiration of the offer.
If you deliver an Election Form and then decide to tender additional Eligible
Options, you must properly complete, execute and deliver to us a new Election
Form before 9:00 p.m., Pacific Time, on the Expiration Date.

Except as described in the following sentences, an Election Form must
be executed by the option holder who tendered the options exactly as the option
holder's name appears on the option agreement or agreements evidencing such
options. If the option holder's name has been legally changed since the signing
of the option agreement, the option holder must submit proof of the legal name
change. If the signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or another person acting in a
fiduciary or representative capacity, the signer's full title and proper
evidence of authority of such person to act in such a representative capacity
must be indicated on the Election Form.

IF YOU RETURN FOR EXCHANGE ANY ELIGIBLE OPTION, YOU WILL AUTOMATICALLY
BE DEEMED TO HAVE RETURNED ALL OF YOUR REQUIRED OPTIONS FOR EXCHANGE AND
CANCELLATION, ALTHOUGH YOU MUST STILL PROPERLY COMPLETE THE ELECTION FORM.

THE DELIVERY OF ALL DOCUMENTS, INCLUDING ELECTION FORMS, NOTICES TO
WITHDRAW FROM THE OFFER AND ANY OTHER REQUIRED DOCUMENT, IS AT YOUR OWN RISK. IF
DELIVERY IS BY MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED AND PROPERLY INSURE YOUR PACKAGE. IN ALL CASES, YOU SHOULD
ALLOW SUFFICIENT TIME TO ENSURE TIMELY DELIVERY. WE INTEND TO CONFIRM OUR
RECEIPT OF YOUR ELECTION FORM WITHIN TWO BUSINESS DAYS OF RECEIPT. IF YOU DO NOT
RECEIVE CONFIRMATION OF RECEIPT, IT IS YOUR RESPONSIBILITY TO ENSURE THAT WE
HAVE RECEIVED YOUR ELECTION FORM.

DETERMINATION OF VALIDITY; REJECTION OF OPTIONS; WAIVER OF DEFECTS; NO
OBLIGATION TO GIVE NOTICE OF DEFECTS.

We will determine, in our discretion, all questions as to the form of
documents and the validity, form, eligibility, including time of receipt, and
acceptance of any tender of options and all questions as to the number of shares
subject to Eligible Options or Required Options or to be subject to New Options.
Our determination of these matters will be final and binding on all parties. We
reserve the right to reject any or all tenders of options that we determine are
not in appropriate form or that we determine are unlawful to accept. Otherwise,
we will accept properly and timely tendered options that are not validly
withdrawn. We also reserve the right to waive any of the conditions of the offer
or any defect or irregularity in any tender of any particular options or for any
particular option holder. To the extent we waive any of the conditions of the
offer or any defect or irregularity in any tender of any particular options or
for any particular option holder, we will waive such condition, defect or
irregularity for all other similarly situated options or option holders. No
tender of options will be deemed to have been properly made until all defects or
irregularities have been cured by the tendering option holder or waived by us.
Neither we nor any other person is obligated to give notice of any defects or
irregularities in tenders, nor will anyone incur any liability for failure to
give any notice. This is a one-time offer, and we will strictly enforce the
offer period, subject only to an extension, which we may grant in our sole
discretion.

OUR ACCEPTANCE CONSTITUTES AN AGREEMENT.

Your tender of options pursuant to the procedures described above
constitutes your acceptance of the terms and conditions of the offer, subject to
your right to withdraw from the offer prior to the Expiration Date. Our
acceptance for exchange of your options tendered by you through the offer will
constitute a binding agreement between us and you upon the terms and subject to
the conditions of the offer. This agreement will survive your death or
incapacity and all of your obligations pursuant to this offer will be binding
upon your heirs, personal representatives, successors and assigns.

Subject to our rights to extend, terminate and amend the offer, we
currently expect that we will accept promptly after the Expiration Date all
properly tendered Eligible Options and Required Options that have not been
validly withdrawn.

5. WITHDRAWAL RIGHTS AND CHANGE OF ELECTION.

You may only withdraw your tendered options or change your election in
accordance with the provisions of this Section 5. If your employment with us
terminates prior to the Expiration Date, your tendered options will
automatically be withdrawn. If automatically withdrawn, you may exercise those
options to the extent they are vested at the time of your termination, but only
during the limited period for which those options remain exercisable pursuant to
your option agreement following your termination.

You may withdraw your tendered options at any time before 9:00 p.m.,
Pacific Time, on June 24, 2003. If we extend the offer beyond that time, you may
withdraw your tendered options at any time until the extended Expiration Date.
We expect to accept and cancel all properly tendered Eligible Options and
Required Options promptly on the Cancellation Date. However, if we have not
accepted and canceled your properly tendered options by July 23, 2003, you may
withdraw your tendered options at any time on and after July 23, 2003.

To validly withdraw your tendered options, you must, in accordance with
the terms of the Notice to Withdraw from the Offer (in the form attached as
Annex 2) and its accompanying instructions, properly complete, execute and
deliver the Notice to Withdraw from the Offer to us via facsimile (fax number
(000) 000-0000) or hand delivery, courier or mail to Xxxx Xxxx, SEC Reporting
Manager, at XXX, Inc., 0000 Xxxxxxxxxx Xxxxx, Xxxxxxx, Xxxxxxxxxx 00000, while
you still have the right to withdraw your tendered options. WE WILL NOT ACCEPT
DELIVERY OF A NOTICE TO WITHDRAW FROM THE OFFER BY E-MAIL.

A PROPERLY COMPLETED, EXECUTED AND DELIVERED NOTICE TO WITHDRAW FROM
THE OFFER WILL RESULT IN THE WITHDRAWAL FROM THE OFFER OF ALL OF YOUR TENDERED
OPTIONS. YOU MAY NOT SUBMIT SUCH A NOTICE TO WITHDRAW FROM THE OFFER FOR LESS
THAN ALL OF YOUR TENDERED OPTIONS (INCLUDING BOTH ELIGIBLE OPTIONS AND REQUIRED
OPTIONS) AND MUST WITHDRAW ALL AND NOT ONLY A PORTION OF A PARTICULAR TENDERED
OPTION. IF YOU DO NOT WISH TO WITHDRAW ALL OF YOUR TENDERED OPTIONS FROM THE
OFFER, YOU SHOULD NOT SUBMIT A NOTICE TO WITHDRAW FROM THE OFFER. TO CHANGE YOUR
ELECTION WITH RESPECT ONLY TO PARTICULAR OPTIONS, YOU SHOULD INSTEAD SUBMIT A
NEW

ELECTION FORM COVERING THOSE OPTIONS THAT YOU DO WISH TO TENDER. YOU MAY NOT
RESCIND ANY WITHDRAWAL, AND OPTIONS YOU WITHDRAW WILL THEREAFTER BE DEEMED NOT
PROPERLY TENDERED FOR PURPOSES OF THE OFFER, UNLESS YOU PROPERLY RE-TENDER THOSE
OPTIONS BY DELIVERING A PROPERLY COMPLETED AND EXECUTED ELECTION FORM BEFORE THE
EXPIRATION DATE.

If you deliver a new Election Form or Notice to Withdraw from the Offer
that is properly signed and dated, it will replace any previously submitted
Election Form or Notice to Withdraw from the Offer, which will be disregarded.

Except as described in the following sentences, a Notice to Withdraw
from the Offer must be executed by the option holder who tendered the options to
be withdrawn exactly as the option holder's name appears on the option agreement
or agreements evidencing such options. If the option holder's name has been
legally changed since the signing of the option agreement, the option holder
must submit proof of the legal name change. If the signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation or
another person acting in a fiduciary or representative capacity, the signer's
full title and proper evidence of the authority of such person to act in that
capacity must be indicated on the Notice to Withdraw from the Offer.

Neither XXX nor any other person is obligated to give notice to you of
any defects or irregularities in any Notice to Withdraw from the Offer or any
new Election Form, nor will anyone incur any liability for failure to give any
notice. We will determine, in our discretion, all questions as to the form and
validity, including time of receipt, of Notices to Withdraw from the Offer and
new Election Forms. Our determination of these matters will be final and
binding.

THE DELIVERY OF ALL DOCUMENTS, INCLUDING ELECTION FORMS, NOTICES TO
WITHDRAW FROM THE OFFER AND ANY OTHER REQUIRED DOCUMENT, IS AT YOUR OWN RISK. IF
DELIVERY IS BY MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED AND PROPERLY INSURE YOUR PACKAGE. IN ALL CASES, YOU SHOULD
ALLOW SUFFICIENT TIME TO ENSURE TIMELY DELIVERY. WE INTEND TO CONFIRM OUR
RECEIPT OF ANY NOTICE TO WITHDRAW FROM THE OFFER WITHIN TWO BUSINESS DAYS OF
RECEIPT. IF YOU DO NOT RECEIVE CONFIRMATION OF RECEIPT, IT IS YOUR
RESPONSIBILITY TO ENSURE THAT WE HAVE RECEIVED YOUR NOTICE TO WITHDRAW FROM THE
OFFER.

6. ACCEPTANCE OF OPTIONS FOR EXCHANGE AND ISSUANCE OF NEW OPTIONS.

Upon the terms and subject to the conditions of the offer and promptly
following the Expiration Date, we will accept for exchange and cancellation all
options properly tendered and not validly withdrawn before the Expiration Date.
Once the options are canceled, you will no longer have any rights with respect
to those options. If your options are properly tendered and accepted for
exchange, these options will be canceled as of the Cancellation Date, and you
will be granted New Options on or promptly after the first trading day that is
at least six months and one day after the Cancellation Date. Thus, subject to
the terms and conditions of this offer, if your options are properly tendered by
June 24, 2003, the scheduled Expiration Date of the offer, and accepted for
exchange and canceled on June 24, 2003 after 9:00 p.m. Pacific Time, you will be
granted New Options on or promptly after December 26, 2003. If we accept and
cancel options properly tendered for exchange after June 24, 2003, or if we
extend the date by which we must accept and cancel options properly elected for
exchange, the period in which the New Options will be granted will be similarly
delayed.

We will send a confirmation of our acceptance of the tender of your
Eligible Options and Required Options promptly after the Expiration Date and
will notify you if we reject your election to exchange your Eligible Options on
or prior to the Expiration Date. Unless you are notified of a rejection, you may
assume that, immediately following the Expiration Date, your properly executed
and delivered Election Form and your tendered Eligible Options and Required
Options have been accepted.

If we accept for exchange any of the options you tender in the offer,
you will not be granted any other options, such as annual, bonus or
promotion-related options, for which you otherwise may be eligible, before the
grant date of the New Options, so that you will be granted no new options for
any reason until at least six months and one day after any of your tendered
options have been canceled. We will defer the grant to you of these other
options in order to avoid incurring compensation expense against our earnings as
a result of accounting rules that could apply to these interim option grants as
a result of the offer. Any such grant of these other options is in the

discretion of our Board of Directors or Compensation Committee and subject to
compliance with law and market prices for our stock prevailing at the time of
the grant. On the other hand, if you do not return for exchange any of your
Eligible Options in the offer, you may receive promotion, merit or other
discretionary option grants for which you are approved prior to the date New
Options are granted to others. As a result, participation in the offer may
affect the grant date, price and vesting of any promotion, merit or other
discretionary grants that may otherwise have been approved for you in the
future.

If you return options for exchange, you will receive, in exchange for
each Eligible Option and Required Option that you return and we accept for
exchange and cancellation, a grant of New Options for three shares for every
four shares tendered for exchange, subject to proportionate adjustments for any
stock dividends, stock splits, reverse stock splits and similar events. If, for
any reason, you do not remain an employee of XXX or any of its subsidiaries
through the date on which we grant the New Options, you will not receive any New
Options or any other consideration in exchange for your tendered options that
have been canceled pursuant to this offer.

All New Options will be granted under our 1997 Plan. Each New Option
will be subject to the terms and conditions of the applicable option agreement
between you and XXX.

If your canceled options were incentive stock options, the New Options
will be incentive stock options to the maximum extent they qualify as incentive
stock options under current U.S. tax laws. One requirement for the New Options
to qualify as incentive stock options is that the value of shares subject to
options that become exercisable by the option holder for the first time in any
calendar year cannot exceed $100,000, as determined using the fair market value
of the shares on the option grant date. The excess value is deemed to be a
nonstatutory stock option. It is possible that your New Options may exceed the
$100,000 limit, and the excess portion will be granted as nonstatutory stock
options, even if your tendered options were incentive stock options.

IF YOU DO NOT REMAIN AN EMPLOYEE OF XXX OR ONE OF OUR SUBSIDIARIES FROM
THE DATE YOU RETURN YOUR OPTIONS FOR EXCHANGE THROUGH THE DATE WE GRANT THE NEW
OPTIONS, YOU WILL NOT RECEIVE ANY NEW OPTIONS, OR ANY OTHER PAYMENT OR
CONSIDERATION IN EXCHANGE FOR YOUR RETURNED OPTIONS THAT HAVE BEEN ACCEPTED FOR
EXCHANGE AND CANCELED, REGARDLESS OF HOW OR WHY YOUR EMPLOYMENT TERMINATED. THE
OFFER DOES NOT CHANGE THE "AT-WILL" NATURE OF YOUR EMPLOYMENT WITH US, AND YOUR
EMPLOYMENT MAY BE TERMINATED BY US OR YOU AT ANY TIME, INCLUDING PRIOR TO THE
GRANT DATE OR VESTING OF THE NEW OPTIONS, FOR ANY REASON WITH OR WITHOUT CAUSE.

PARTIAL TENDERS.

We will not accept partial tenders of your Eligible Options or Required
Options. However, you may tender the remaining portion of an option that you
have partially exercised. You may choose to exchange one option and not exchange
another, but you may not exchange less than all of the unexercised shares
subject to a particular outstanding option that you elect to exchange. In
addition, if you tender any option for exchange, you will be required to also
tender all of your Required Options, which are options that were granted to you
during the six-month period prior to the commencement of this offer. If you
return for exchange any Eligible Options pursuant to the offer, you will
automatically be deemed to have returned all of your Required Options for
exchange and cancellation. This does not change your responsibility to properly
complete and return the Election Form. The offer was commenced on May 27, 2003,
which means that if you participate in the offer, you will be required to tender
all options granted to you after November 26, 2002.

CONSEQUENCES OF XXX BEING ACQUIRED, OR OF THE SALE OR SPIN OFF OF ONE
OF OUR DIVISIONS.

It is possible that, prior to the grant of New Options, we might effect
or enter into an agreement for a merger or other similar transaction in which
XXX is acquired by another company.

If there is a sale of all or substantially all of our assets or stock,
or we merge with another company, or the division in which you are employed is
sold, transferred or spun off into a separate entity, before the Expiration
Date, you may withdraw your tendered options and have all the rights afforded
you to acquire our common stock under

the existing agreements evidencing those options. Further, if XXX is acquired
prior to the Expiration Date, we reserve the right to withdraw the offer, in
which case your old options and your rights under them will remain intact.

If there is a sale of all or substantially all of our assets or stock,
or we merge with another company, after your tendered options are accepted for
exchange and canceled but before the New Options are granted, our obligations in
connection with the offer would not automatically be assumed by the acquiring
company. Whether or not the obligation to grant the New Options is assumed would
depend on the terms of the acquisition agreement. While we would seek to make
provision for tendering option holders in the acquisition agreement, we cannot
guarantee what, if any, provision would be made. As a result, we cannot
guarantee that any New Options would be granted by the acquiring company in the
event of such an acquisition. Therefore, it is possible that you could give up
your Eligible Options and Required Options and not receive any New Options from
the acquiring company.

If there is a sale of all or substantially all of our assets or stock,
or we merge with another company, after your New Options have been granted, your
New Options may be assumed or replaced with new options of the acquiring
company. If the acquiring company does not assume or replace your New Options
and if you remain an employee of XXX or one of our subsidiaries, the New Options
will automatically become fully vested and exercisable ten days prior to the
effective date of such a transaction. Any New Option that is neither assumed by
the acquiring company nor exercised as of the date of the acquisition will
terminate as of the effective date of the acquisition. If the division in which
you are employed is sold, spun off or subject to a similar transaction that
results in such division no longer being a subsidiary of XXX, after your New
Options have been granted, the treatment of your outstanding options will depend
on the terms of the transaction documents, similar to the treatment of any
outstanding options that you do not tender for cancellation.

We are also reserving the right, in the event of a merger or similar
transaction, or sale, transfer or spin out of one of our divisions, to take any
actions we deem necessary or appropriate to complete a transaction that our
Board of Directors believes is in the best interest of our Company and our
stockholders. This could include terminating your right to receive New Options
under this Offer to Exchange. If we were to terminate your right to receive New
Options under this offer in connection with such a transaction, employees who
have tendered options for cancellation pursuant to this offer might not receive
options to purchase securities of the acquiring company or any other
consideration for their tendered options.

ACCEPTANCE OF OPTIONS RETURNED FOR EXCHANGE.

For the purposes of the offer, we will be deemed to have accepted
Eligible Options and Required Options that are validly returned for exchange and
are not properly withdrawn when we give oral or written notice to the option
holders that we have accepted the tendered options for exchange. We currently
intend to provide such notice by e-mail, inter-office mail, mail, or facsimile.
Subject to our rights to extend, terminate and amend the offer, we currently
expect that we will accept promptly after the Expiration Date all properly
tendered options that are not validly withdrawn. When we accept your tendered
options for exchange and we cancel those options, you will have no further
rights with respect to those options. We will send each participating option
holder a notice indicating the number of option shares that we have accepted and
canceled, the number of shares that will be subject to the New Options and the
expected New Option Grant Date.

7. CONDITIONS OF THE OFFER.

Notwithstanding any other provision of the offer, we will not be
required to accept any options tendered for exchange, and we may terminate or
amend the offer, or postpone our acceptance and cancellation of any options
tendered for exchange, in each case, subject to Rule 13e-4(f)(5) under the
Securities Exchange Act of 1934, as

amended, if at any time on or after May 27, 2003, and prior to the Expiration
Date, any of the following events has occurred, or has been determined by us to
have occurred, and, in our reasonable judgment in any case and regardless of the
circumstances giving rise to the event, the occurrence of such event or events
makes it inadvisable for us to proceed with the offer or with such acceptance
and cancellation of options tendered for exchange:

(a) there has been threatened or instituted or is pending any
action or proceeding by any government or governmental,
regulatory or administrative agency, authority or tribunal
that directly or indirectly challenges the making of the
offer, the acquisition of some or all of the tendered options
pursuant to the offer, or the issuance of New Options, or
otherwise relates in any manner to the offer, or that, in our
reasonable judgment, could materially and adversely affect the
business, condition (financial or other), income, operations
or prospects of XXX or our subsidiaries or materially impair
(such as by increasing the accounting or other costs of the
offer to XXX) the contemplated benefits of the offer to XXX,
as described above in Section 3 ("Purpose of the Offer");

(b) there has been any action threatened, pending or taken, or
approval withheld, or any statute, rule, regulation, judgment,
order or injunction threatened, proposed, sought, promulgated,
enacted, entered, amended, enforced or deemed to be applicable
to the offer or to XXX or any of our subsidiaries, by any
court or any authority, agency or tribunal that, in our
reasonable judgment, would or might directly or indirectly:

(i) make the acceptance for exchange of, or issuance of
New Options for, some or all of the tendered options
illegal or otherwise restrict or prohibit
consummation of the offer or that otherwise relates
in any manner to the offer;

(ii) delay or restrict our ability, or render us unable,
to accept for exchange, or issue New Options for,
some or all of the tendered options;

(iii) materially impair (such as by increasing the
accounting or other costs of the offer to XXX) the
contemplated benefits we hope to receive as a result
of the offer as described above in Section 3
("Purpose of the Offer"); or

(iv) materially and adversely affect XXX'x business,
condition (financial or other), income, operations or
prospects or materially impair the contemplated
benefits of the offer to us;

(i) any general suspension of trading in, or limitation
on prices for, securities on any national securities
exchange or in the over-the-counter market;

(ii) the declaration of a banking moratorium or any
suspension of payments in respect of banks in the
United States, whether or not mandatory;

(iii) any limitation, whether or not mandatory, by any
governmental, regulatory or administrative agency or
authority on, or any event that in our reasonable
judgment might affect, the extension of credit by
banks or other lending institutions in the United
States;

(iv) any decrease in the market price of the shares of our
common stock to a price that is less than 50% of the
closing sale price of our common stock on the date of
this Offer to Exchange or any change in the general
political, market, economic or financial conditions
in the United States or abroad that could, in our
reasonable judgment, have a material adverse effect
on the business, condition (financial or other),
operations or prospects of XXX or our subsidiaries or
on the trading in our common stock;

(v) any change in the general political, market, economic
or financial conditions in the United States or
abroad that could have a material adverse effect on
the business, condition (financial or other),
operations or prospects of XXX or our subsidiaries or
that, in our reasonable judgment, makes it
inadvisable to proceed with the offer;

(vi) in the case of any of the foregoing existing at the
time of the commencement of the offer, a material
acceleration or worsening thereof; or

(vii) any decline in either the Dow Xxxxx Industrial
Average or the Standard and Poor's Index of 500
Companies by an amount in excess of 10% measured
during any time period prior to the close of business
on June 24, 2003;

(d) there has occurred any change in generally accepted accounting
standards or the application or interpretation thereof that
could or would require us for financial reporting purposes to
record compensation expense against our earnings in connection
with the offer;

(e) a tender or exchange offer with respect to some or all of our
common stock, or a merger or acquisition proposal for XXX,
shall have been proposed, announced or made by another person
or entity or shall have been publicly disclosed, or we shall
have learned that:

(i) any person, entity or "group" within the meaning of
Section 13(d)(3) of the Securities Exchange Act,
shall have acquired or proposed to acquire beneficial
ownership of more than 5% of the outstanding shares
of our common stock, or any new group shall have been
formed that beneficially owns more than 5% of the
outstanding shares of our common stock, other than
any such person, entity or group that has filed a
Schedule 13D or Schedule 13G with the Securities and
Exchange Commission on or before June 24, 2003;

(ii) any such person, entity or group that has filed a
Schedule 13D or Schedule 13G with the SEC on or
before June 24, 2003 shall have acquired or proposed
to acquire beneficial ownership of an additional 2%
or more of the outstanding shares of our common
stock;

(iii) any person, entity or group shall have filed a
Notification and Report Form under the
Xxxx-Xxxxx-Xxxxxx Antitrust Improvements Act of 1976,
as amended, or made a public announcement reflecting
an intent to acquire us or any of our subsidiaries or
any of the assets or securities of us or any of our
subsidiaries; or

(f) any change or changes shall have occurred in the business,
condition (financial or other), assets, income, operations,
prospects or stock ownership of XXX or our subsidiaries that,
in our reasonable judgment, is material and adverse to XXX or
our subsidiaries or may materially impair the contemplated
benefits of the offer to XXX.

The conditions to the offer are for XXX'x benefit. We may assert them
in our discretion regardless of the circumstances giving rise to them before the
expiration date. We may waive them, in whole or in part, at any time and from
time to time prior to the expiration date, in our discretion, whether or not we
waive any other condition to the offer. Our failure at any time to exercise any
of these rights will not be deemed a waiver of any such rights. The waiver of
any of these rights with respect to particular facts and circumstances will not
be deemed a waiver with respect to any other facts and circumstances. To the
extent that judgment is required to determine whether one of the conditions set
forth above has been triggered, we will employ our commercially reasonable
judgment in determining whether such condition has been triggered and whether to
waive such condition. Any determination we make concerning the events described
in this Section 7 will be final and binding upon all persons.

8. PRICE RANGE OF OUR COMMON STOCK UNDERLYING THE OPTIONS.

Since our initial public offering in May, 1998, our common stock has
been quoted on the Nasdaq National Market under the symbol "AXTI". The following
table shows the high and low sales prices per share of our common stock as
reported by the Nasdaq National Market for each of the fiscal quarters
indicated.

HIGH LOW
-------- --------

Fiscal 1998
May 20, 1998 to June 30, 1998........................ $ 15.000 $ 10.125
Third quarter........................................ 15.500 7.000
Fourth quarter....................................... 10.813 6.000

Fiscal 1999
First quarter........................................ 22.500 9.063
Second quarter....................................... 27.000 19.375
Third quarter........................................ 35.125 17.750
Fourth quarter....................................... 23.875 12.063

Fiscal 2000
First quarter........................................ 45.750 14.500
Second quarter....................................... 46.000 21.250
Third quarter........................................ 44.375 31.125
Fourth quarter....................................... 41.688 24.500

Fiscal 2001
First quarter........................................ 44.560 14.500
Second quarter....................................... 40.670 13.720
Third quarter........................................ 26.700 10.200
Fourth quarter....................................... 16.850 10.300

Fiscal 2002
First quarter........................................ 16.890 8.850
Second quarter....................................... 11.600 7.000
Third quarter........................................ 8.390 2.080
Fourth quarter....................................... 2.820 0.970

Fiscal 2003
First quarter........................................ 0.6700 1.950

As of May 22, 2003, the last reported sale price during regular trading
hours of our common stock, as reported by the Nasdaq National Market, was $1.21
per share.

WE RECOMMEND THAT YOU EVALUATE CURRENT MARKET QUOTES FOR OUR COMMON
STOCK, AMONG OTHER FACTORS, BEFORE DECIDING WHETHER OR NOT TO TENDER YOUR
OPTIONS.

Our stock price has been, and in the future may be, highly volatile and
could continue to decline. Our stock price could also rise prior to the grant of
the New Options and thereafter fall. The trading price of our common stock has
fluctuated widely in the past and is expected to continue to do so in the
future, as a result of a number of factors, many of which are outside our
control. In addition, the stock market has experienced extreme price and volume
fluctuations that have affected the market prices of many technology companies,
including semiconductor companies, and that have often been unrelated or
disproportionate to the operating performance of these companies. The New
Options will not be granted until the trading date that is at least six months
and one day after the date your

returned options are accepted and canceled. The exercise price of the New
Options will be the last reported sale price of our common stock reported on the
Nasdaq National Market (or such other market on which our shares are principally
traded or quoted) on the date they are granted. The exercise price of the New
Options may be higher than the exercise price of your options canceled under
this program. In addition, our common stock may thereafter trade at prices below
the exercise price of the New Options. Depending on the exercise price of your
canceled options and other factors, your New Options may be less valuable than
your canceled options.

9. SOURCE AND AMOUNT OF CONSIDERATION; TERMS OF NEW OPTIONS.

CONSIDERATION.

The New Options will be issued under our 1997 Plan. For each Eligible
Option or Required Option that you return and that we accept for exchange, you
will receive a New Option exercisable for the same number of shares that were
subject to your returned option at the time it was canceled, subject to
proportionate adjustments for any stock dividends, stock splits, reverse stock
splits and similar events.

If we receive and accept for exchange all Eligible Options and Required
Options outstanding as of May 27, 2003, we will grant New Options to purchase
approximately 1,145,913 shares of our common stock. If all Eligible Options and
Required Options are properly returned and accepted for exchange and canceled,
the common stock issuable upon exercise of the New Options granted in exchange
will equal approximately 5.1% of the total shares of our common stock
outstanding as of May 27, 2003. The shares of common stock subject to returned
options originally granted under the 1997 Plan that are accepted for exchange
and canceled will, after such cancellation, be available for re-grant and
reissuance under the 1997 Plan.

TERMS OF NEW OPTIONS.

All New Options will be issued under either the 1997 Plan. For each New
Option granted, XXX and the option holder will enter into a new stock option
agreement. The terms and conditions of the New Options will vary from the terms
and conditions of the options tendered for exchange in terms of the number of
shares underlying such options to the extent that a canceled option was
partially exercised prior to tender, the exercise price of such options and the
termination date of such options. The following description of the New Options
to be granted under the 1997 Plan is a summary of the material terms of the New
Options.

IMPORTANT NOTE: THE DESCRIPTION BELOW OF THE NEW OPTIONS IS MERELY A
SUMMARY AND DOES NOT PURPORT TO BE COMPLETE. THE DESCRIPTION IS SUBJECT TO,
AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, ALL PROVISIONS OF THE 1997 PLAN
AND THE FORMS OF STOCK OPTION AGREEMENT UNDER THE 1997 PLAN. THE COMPLETE 1997
PLAN DOCUMENTS, AS MOST RECENTLY AMENDED, THE FORMS OF STOCK OPTION AGREEMENT
UNDER THE 1997 PLAN AND THE PROSPECTUSES FOR THE 1997 PLAN MAY BE OBTAINED BY
CONTACTING XXXX XXXX, SEC REPORTING MANAGER, AT XXX, INC., 0000 XXXXXXXXXX
XXXXX, XXXXXXX, XXXXXXXXXX 00000, TELEPHONE (000) 000-0000, EXTENSION 208, OR
EMAIL AT XXXX.XXXX@XXX.XXX. WE WILL PROMPTLY FURNISH YOU COPIES OF THESE
DOCUMENTS AT OUR EXPENSE.

GENERAL.

The 1997 Plan was adopted on July 26, 1997. As of May 27, 2003, there
were 1,956,981 shares of our common stock available for issuance under the 1997
Plan. The 1997 Plan permits our Board of Directors or Compensation Committee to
grant, on a discretionary basis, incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, and nonstatutory
stock options to eligible service providers.

ADMINISTRATION.

The Plans and the options granted under them are administered by the
Board of Directors or a duly appointed committee of the Board of Directors (the
"Administrator"). Subject to the other provisions of the 1997 Plan, the
Administrator has the power to determine the terms and conditions of the options
granted and has the authority to construe, interpret and amend the Plans and any
options.

TERM.

Each New Option will have a term of ten years commencing on the New
Option Grant Date.

TIME OF EXERCISE; TERMINATION OF EMPLOYMENT.

Generally, you may exercise the vested portion of a New Option at any
time prior to the option's expiration date. However, if your employment with us
terminates, the time in which you may exercise the vested portion of your New
Option will be reduced. If your employment with us terminates for any reason
other than your death or disability, you may only exercise the vested portion of
your New Option within one (1) month following your termination date, but in any
event no later than the option expiration date. If your employment with us
terminates as a result of your disability or death, you, or the person who
becomes entitled to exercise your option by reason of your death, may only
exercise the vested portion of your New Option within six (6) months following
your termination date, but in any event no later than the option expiration
date.

VESTING.

Each New Option will preserve the vesting schedule and the vesting
commencement date of the option it replaces, so that on the date the New Option
is granted and on any date thereafter, you will be vested in the New Option to
the same extent you would have been vested on that date had you retained your
canceled option. However, if you are a nonexempt employee, your New Option,
although vested, may not be exercised during the period of six months following
the New Option Grant Date (except in the event of your death, disability,
retirement, change in corporate ownership of XXX or other circumstances
permitted by regulation) in accordance with the Worker Economic Opportunity Act.

EXERCISE PRICE.

The Administrator determines the exercise price at the time the option
is granted. The exercise price per share for the New Options will be 100% of the
fair market value of our common stock on the New Option Grant Date, which will
be equal to the last reported sale price during regular trading hours of our
common stock on the Nasdaq National Market on the New Option Grant Date. Because
we will not grant New Options until at least six months and one day after the
date we cancel the options accepted for exchange, the New Options may have a
higher exercise price than some or all of the options that are tendered. We
recommend that you obtain current market quotations for our common stock before
deciding whether to elect to exchange your options.

WE CANNOT GUARANTEE THAT THE NEW OPTIONS WILL HAVE A LOWER EXERCISE
PRICE THAN ANY OR ALL ELIGIBLE OPTIONS AND REQUIRED OPTIONS YOU ELECT TO TENDER.

PAYMENT OF EXERCISE PRICE.

You may exercise your New Options, in whole or in part, by delivery to
us of a written notice of exercise accompanied by payment in full of the
applicable exercise price. The permissible methods of payment of the option
exercise price are determined by the Board of Directors and generally include
the following, subject to the right of the Company to restrict at any time the
permissible forms of payment as set forth in the option agreement (the
permissible methods also may be limited in certain countries outside of the
United States):

- cash or check;

- by delivery of a properly executed notice together with
irrevocable instructions to a broker providing for the assignment
to XXX of the proceeds of a sale or loan with respect to some or
all of the shares being acquired upon the exercise of the option;

- tender to XXX of shares of our common stock, which if acquired
from us, have been owned by the option holder for no less than six
months, having a fair market value on the date of exercise equal
to the aggregate exercise price; or

- a combination of the foregoing methods.

ADJUSTMENTS UPON CERTAIN EVENTS.

If there is a change in our capitalization, such as a stock dividend,
stock split, reverse stock split or other similar event, an appropriate
adjustment will be made to the price of each option and the number of shares
subject to each option.

If there is a "Change in Control," which is defined in the 1997 Plan,
your New Options may be assumed or replaced with new options of the acquiring
company. In the event the acquiring corporation elects not to assume the
Company's rights and obligations under the New Option or substitute for the New
Options in connection with the Change in Control, and provided that your
employment has not terminated prior to such date, any unexercised portion of the
New Option shall be immediately exercisable and vested in full as of the date
ten (10) days prior to the date of the Change of Control. Any New Option that is
neither assumed nor replaced by the acquiring company nor exercised as of the
date of the Change in Control will terminate at the effective time of the Change
in Control. In addition, New Options will provide that in the event of a "change
in control," as defined in the option agreement, and termination of employment
or resignation for "good reason," as defined in the option agreement, within
twelve months after the change in control, the vesting and exercisability of the
option will accelerate such that the option will become immediately exercisable
and vested in full as of the date of the termination or resignation.

REGISTRATION OF OPTION SHARES.

All shares of common stock issuable upon exercise of options under the
1997 Plan, including the shares that will be issuable upon exercise of all New
Options, have been registered under the Securities Act of 1933 on Registration
Statements on Form S-8 filed with the SEC. Unless you are considered an
"affiliate" of ours, you will be able to sell XXX shares you acquire by
exercising your New Option free of any transfer restrictions under applicable
United States securities laws.

TAX CONSEQUENCES.

If you are a U.S. employee, you should refer to Section 14 of this
Offer to Exchange for a discussion of the material U.S. federal income tax
consequences of the New Options and the options tendered for exchange, as well
as the consequences of accepting or rejecting this offer. If you are an employee
outside the United States, you should refer to Appendix B to this Offer to
Exchange for a discussion of income tax consequences for employees in the
People's Republic of China, Japan or Taiwan, of the New Options and the options
tendered for exchange. We recommend that you consult with your own tax advisor
to determine the tax and social insurance consequences of this transaction under
the laws of the country in which you live and work.

10. INFORMATION CONCERNING XXX, INC.

We are incorporated in the State of Delaware. Our principal executive
offices are located at 0000 Xxxxxxxxxx Xxxxx, Xxxxxxx, Xxxxxxxxxx 00000, and our
telephone number at that address is (000) 000-0000.

AXT designs, develops, manufactures and distributes high-performance
compound semiconductor substrates, as well as opto-electronic semiconductor
devices, such as high-brightness light emitting diodes, or HBLEDs, and laser
diodes including vertical cavity surface emitting lasers, or VCSELs, and
Xxxxx-Xxxxx laser diodes. Our substrate products are used primarily in wireless
communications, lighting display applications, and fiber optic communications.
We believe our proprietary vertical gradient freeze, or VGF, technique for
manufacturing compound semiconductor substrates provides significant benefits
over other methods and has enabled us to become a leading manufacturer of
compound semiconductor substrates. We pioneered the commercial use of VGF
technology to manufacture gallium arsenide, or GaAs, substrates and used VGF
technology to manufacture substrates from other materials, including indium
phosphide, or InP, and germanium, or GE. Our acquisition of Lyte Optronics in
1999 provided us with expertise in epitaxial processes for manufacturing
opto-electronic semiconductor devices. We use these capabilities to make blue,
green and cyan HBLEDs and laser diodes. Our opto-electronic semiconductor
devices are used in a wide range of applications, such as solid-state lighting
and fiber optic communications. Over the past four years, we have implemented an
initiative, which is now

largely complete, to reduce the cost of manufacturing our substrates by moving
most of our operations to China and by investing in sources of low cost raw
materials. We also expanded our HBLED manufacturing capacity in response to an
increase in customer demand.

The following table sets forth selected financial information for XXX,
Inc. The selected historical statement of operations data for the fiscal years
ended December 31, 2001 and 2002 and the selected historical balance sheet data
as of December 31, 2001 and 2002 have been derived from the financial statements
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2002. The selected historical statement of operations data for the three
months ended March 31, 2002 and March 31, 2003 and the selected historical
balance sheet data as of March 31, 2003 have been derived from the unaudited
financial statements included in our Quarterly Report on Form 10-Q for the
period ended March 31, 2003. The information presented below should be read
together with the complete financial statements and the notes related thereto as
well as the section of these reports entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." We have presented
the following data in thousands, except per share data.

Statement of Operations Data

Quarters Ended March 31, Years Ended December 31,
------------ ------------ ---------------------------
2003 2002 2002 2001
------------ ------------ ------------ ------------

Revenue $ 12,657 $ 16,777 $ 63,175 $ 119,530
Cost of revenue 12,938 16,484 74,031 82,191
------------ ------------ ------------ ------------
Gross profit (loss) (281) 293 (10,856) 37,339
Operating expenses:
Selling, general and administrative 3,286 5,202 18,648 21,487
Research and development 744 1,353 4,868 8,204
Restructuring costs - - 39,086 -
------------ ------------ ------------ ------------
Total operating expenses 4,030 6,555 62,602 29,691
------------ ------------ ------------ ------------
Income (loss) from operations (4,311) (6,262) (73,458) 7,648
Interest expense 237 385 1,326 2,081
Other (income) and expense, net (231) (717) 12,705 13,373
------------ ------------ ------------ ------------
Loss before income tax benefit (4,317) (5,930) (87,489) (7,806)
Income tax benefit - (2,372) (6,308) (2,810)
------------ ------------ ------------ ------------
Net loss $ (4,317) $ (3,558) $ (81,181) $ (4,996)
============ ============ ============ ============

Basic income (loss) per share:
Income (loss) from continuing operations $ (0.20) $ (0.17) $ (3.63) $ (0.23)
Loss from discontinued operations - - - -
Net income (loss) (0.20) (0.17) (3.63) (0.23)

Diluted income (loss) per share:
Income (loss) from continuing operations $ (0.20) $ (0.17) $ (3.63) $ (0.23)
Loss from discontinued operations - - - -
Net income (loss) (0.20) (0.17) (3.63) (0.23)

Shares used in per share calculations:
Basic 22,628 22,414 22,433 22,278
Diluted 22,628 22,414 22,433 22,278

Balance Sheet Data

Years Ended
Quarter Ended December 31,
March 31, ---------------------------
ASSETS 2003 2002 2001
------------- ------------ ------------

Current assets
Cash and cash equivalents $ 18,335 $ 13,797 $ 37,538
Short-term investments 9,107 8,205 25,673
Accounts receivable, net 7,947 7,195 15,684
Inventories 34,487 37,598 55,587
Prepaid expenses and other current assets 2,979 4,002 3,577
Income tax receivable 8,220 8,783 -
Assets held for sale - 5,957 -
Deferred income taxes - - 10,557
Total current assets 81,075 85,537 148,616
Property, plant and equipment 39,178 39,982 82,573
Other assets 5,936 5,341 4,511
Goodwill - - 1,107
Restricted deposits 10,722 11,150 -
Long-term investments 2,197 3,657 6,552
------------ ------------ ------------
Total assets $ 139,108 $ 145,667 $ 243,359
============ ============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Accounts payable $ 4,221 $ 4,228 $ 2,943
Accrued liabilities 10,499 11,407 13,670
Current portion of long-term debt 944 965 2,336
Current portion of capital lease obligation 3,411 3,562 4,372
------------ ------------ ------------
Total current liabilities 19,075 20,162 23,321
Long-term debt, net of current portion 13,062 13,289 14,342
Long-term capital lease, net of current portion 3,990 4,847 10,002
Deferred income taxes - - 8,099
Other long-term liabilities 1,746 1,712 1,273
------------ ------------ ------------
Total liabilities 37,873 40,010 57,037
------------ ------------ ------------
Stockholders' equity:
Preferred stock, $.001 par value; 2,000 shares authorized; 3,532 3,532 3,532
883 shares issued and outstanding
Common stock, $.001 par value; 70,000 shares authorized; 154,670 154,485 153,635
22,694, 22,495 and 22,383 shares issued and outstanding
Retained earnings (56,514) (52,197) 28,984
Other comprehensive income (loss) (453) (163) 171
------------ ------------ ------------
Total stockholders' equity 101,235 105,657 186,322
------------ ------------ ------------
Total liabilities and stockholders' equity $ 139,108 $ 145,667 $ 243,359
============ ============ ============

Fiscal Years Ended December 31 Quarters Ended March 31
------------------------------ ------------------------
2002 2001 2003 2002
------ ------ ------ ------

Book value per share $ 4.70 $ 8.36 $ 4.47 $ 8.09
Earnings deficiency* $100,390.00 $16,233.00 $5,573.00 $7,723.00

-----------
*Additional earnings (in thousands) required to bring ratio of earnings to
fixed charges to one-to-one.

The financial information included in our annual report on Form 10-K
for the fiscal year ended December 31, 2002, together with our quarterly report
on Form 10-Q for the quarter ended March 31, 2003, are incorporated herein by
reference. Please see Section 18 ("Additional Information") of this Offer to
Exchange for instructions on how you can obtain copies of our SEC filings,
including filings that contain our financial statements.

11. INTERESTS OF DIRECTORS AND OFFICERS; TRANSACTIONS AND ARRANGEMENTS
CONCERNING THE OPTIONS.

A list of our directors and executive officers is attached to this
Offer to Exchange as Appendix A. Please see our definitive proxy statement for
our 2003 annual meeting of stockholders, filed with the SEC on April 30, 2003,
for information concerning the amount of our securities beneficially owned by
our executive officers and directors as of April 24, 2003. As of May 27, 2003,
our executive officers and directors (seven persons) as a group beneficially
owned options outstanding under our employee benefit plans to purchase a total
of 1,436,400 shares of our common stock, which represented approximately 46.9%
of the shares subject to all options to purchase our common stock outstanding
under our employee benefit plans as of that date. The options to purchase our
shares owned by members of our Board of Directors, including those who are
employees, and our executive officers, are not eligible to be tendered in the
offer.

The following table sets forth information, as of May 27, 2003, with
respect to the ownership of options to purchase our common stock by each
director, each of our executive officers and all of the directors and executive
officers as a group. The percentages in the table below are based on a total of
3,062,738 shares of our common stock subject to outstanding stock options as of
May 27, 2003.

SHARES SUBJECT TO PERCENTAGE OF TOTAL
NAME OPTIONS OUTSTANDING OPTIONS OWNED

Xxxxxx X. Xxxxx ............................... 376,000 12.3%
Davis Zhang ................................... 464,000 15.2%
Xxxxxx X. Xxxxxx .............................. 247,000 8.1%
Xxxxxx Xxx .................................... 197,400 6.4%
Xxxxx Xxxx .................................... 86,000 2.8%
Xxxxx Xxxxx ................................... 66,000 2.1%
Xxxxxxx XxXxxxx ............................... None 0.0%

All seven directors and executive directors
as a group .................................... 1,436,400 46.9%

To the Company's knowledge, none of our executive officers, directors,
affiliates or subsidiaries effected transactions in options to purchase XXX
common stock, and two of our executive officers effected transactions in shares
of XXX common stock during the 60 days prior to May 27, 2003. The following is
a brief description of transactions in such securities effected by our
executive officers during such 60-day period:

- On April 29, 2003, Xxxxxx Xxx purchased 15,000 shares of XXX common
stock for a price of $1.30 per share.

- On April 30, 2003, Xxxxxx Xxxxx sold 8,000 shares of XXX common
stock for a price of $1.50 per share. On May 6, 2003, Xxxxxx
Xxxxx sold 5,000 shares of XXX common stock for a price of
$1.50 per share. On May 8, 2003, Xxxxxx Xxxxx sold 5,000 shares
of XXX common stock for a price of $1.50 per share. These
transactions were effected pursuant to the terms of the sales
plan established by Xx. Xxxxx under Rule 10b5-1 of the
Securities Exchange Act of 1934.

Except as otherwise described above, there have been no transactions
in options to purchase our shares or in our shares which were effected during
the 60 days prior to May 27, 2003 by XXX or, to our knowledge, by any executive
officer, director, affiliate or subsidiary of XXX.

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

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

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

12. STATUS OF OPTIONS ACQUIRED BY US IN THE OFFER; ACCOUNTING CONSEQUENCES
OF THE OFFER.

Options granted under the 1997 Plan that we acquire through the offer
will be canceled, and the shares subject to those options will be returned to
the pool of shares available for the grant of New Options under the 1997 Plan.

We believe that we will not incur any compensation expense for
financial reporting purposes, as determined under generally accepted accounting
principles, solely as a result of the transactions contemplated by the offer
because:

- an eligible employee who tenders any option for exchange must
tender all options granted to that employee during the six month
period prior to the date this offer commenced;

- we will not grant any New Options until a trading day that is at
least six months and one day after the date that we cancel options
tendered and accepted by us for exchange; and

- the exercise price of all New Options will equal the market price
of the shares of common stock on the date we grant the New
Options.

We may incur compensation expense, however, if we grant any options to
any tendering option holder before the first day that is at least six months and
one day after the date we cancel the Eligible Options and Required Options
accepted for exchange. Our grant of those options to the tendering option holder
would be treated for financial reporting purposes as a variable award to the
extent that the number of shares subject to the newly granted options is equal
to or less than the number of the options holder's tendered option shares. In
this event, we would be required to record as compensation expense the amount by
which the market value of the shares subject to the newly granted options
exceeds the exercise price of those shares. This compensation expense would
accrue as a charge to our earnings over the vesting period of the newly granted
options. We would adjust this compensation expense periodically during the
vesting period based on increases or decreases in the market value of the shares
subject to the newly granted options.

13. LEGAL MATTERS; REGULATORY APPROVALS.

We are not aware of any license or regulatory permit that appears to be
material to our business that might be adversely affected by our exchange of
options and issuance of New Options as contemplated by the offer, or of any
approval or other action by any government or governmental, administrative or
regulatory authority or agency, domestic or foreign, that would be required for
the acquisition or ownership of our options as contemplated herein. Should any
such approval or other action be required, we presently contemplate that we will
seek such approval or take such other action. We cannot assure you that any such
approval or other action, if needed, would be obtained or would be obtained
without substantial conditions or that the failure to obtain any such approval
or other action might not result in adverse consequences to our business. Our
obligation under the offer to accept tendered options for exchange and to issue
New Options for tendered options is subject to the conditions described in
Section 7 of this Offer to Exchange.

If we are prohibited by applicable laws or regulations from granting
New Options during the period beginning on the day that is six months and one
day from the date that we cancel the options accepted for exchange, when we
currently expect to grant the New Options, and continuing thereafter, we will
not grant any New Options. We are unaware of any such prohibition at this time,
and we will use reasonable efforts to effect the grant, but if the grant is
prohibited throughout the period we will not grant any New Options, and you will
not receive any other consideration for the options you tendered.

14. MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES.

The following is a general summary of the material U.S. federal income
tax consequences of the exchange of options pursuant to the offer. This
discussion is based on the Internal Revenue Code, its legislative history,
Treasury Regulations thereunder and administrative and judicial interpretations
thereof as of the date of the offer, all

of which are subject to change, possibly on a retroactive basis. This summary
does not discuss all of the tax consequences that may be relevant to you in
light of your particular circumstances, nor is it intended to be applicable in
all respects to all categories of option holders.

If you are living or working in the United States, but are also subject
to the tax laws in another country, you should be aware that there may be other
tax and social insurance consequences which may apply to you. We strongly
recommend that you consult your own tax advisor to discuss the consequences to
you of participating in the offer.

Option holders who exchange outstanding options for New Options should
not be required to recognize income for federal income tax purposes at the time
of the exchange. We believe that the exchange will be treated as a non-taxable
event. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE
FEDERAL, STATE, LOCAL AND FOREIGN CONSEQUENCES OF PARTICIPATING IN THE OFFER, AS
WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION.

The following discussion regarding incentive stock options is presented
to help Eligible Employees compare the different tax consequences of incentive
stock options and nonstatutory stock options.

FEDERAL INCOME TAX TREATMENT OF INCENTIVE STOCK OPTIONS.

Under current law, an option holder will not realize taxable income
upon receiving the grant of an incentive stock option. In addition, an option
holder generally will not realize taxable income for regular tax purposes upon
the exercise of an incentive stock option. However, an option holder's
alternative minimum taxable income will be increased by the amount that the
aggregate fair market value of the shares purchased, which is generally
determined as of the date of exercise, exceeds the aggregate exercise price of
the shares. Except in the case of an option holder's death or disability, if an
option is exercised more than three months after the option holder's termination
of employment, the option ceases to be treated as an incentive stock option and
is subject to taxation under the rules that apply to nonstatutory stock options.

If an option holder sells or otherwise disposes of the option shares
acquired upon exercise of an incentive stock option, the tax consequences of the
disposition depend upon whether the disposition is qualifying or disqualifying.
The disposition of the option shares is qualifying if it is made:

- more than two years after the date the incentive stock option was
granted, and

- more than one year after the date the incentive stock option was
exercised.

If the disposition of the option shares is qualifying, any excess of
the sale price of the option shares over the exercise price of those shares will
be treated as long-term capital gain taxable to the option holder at the time of
the sale. Any such capital gain will be taxed at the long-term capital gain rate
in effect at the time of sale. If the disposition is not qualifying, which we
refer to as a "disqualifying disposition," the excess of the fair market value
of the option shares on the date the option was exercised over the exercise
price (not to exceed the gain realized on the sale if the disposition is a
transaction with respect to which a loss, if sustained, would be recognized)
will be taxed as ordinary income to the option holder at the time of the
disposition. Any gain in excess of that amount will be long-term or short-term
capital gain, depending upon whether or not the shares were sold more than one
year after the option was exercised. If a loss is recognized, the option holder
will have no ordinary income as a result of the disqualifying disposition, and
the loss will be a capital loss.

Unless an option holder engages in a disqualifying disposition, we will
not be entitled to a deduction with respect to an incentive stock option. If an
option holder engages in a disqualifying disposition, we will be entitled to a
deduction equal to the amount of compensation income taxable to the option
holder.

You should note that there is a risk that any incentive stock option
you hold may be affected, even if you do not participate in the option exchange
program. We believe that you will not be subject to current U.S. federal

income tax if you do not elect to participate in the option exchange program. We
also believe that the option exchange program will not change the U.S. federal
income tax treatment of subsequent grants and exercises of your incentive stock
options (and sales of shares acquired upon exercises of such options) if you do
not participate in the option exchange program.

However, the IRS may characterize the option exchange program as a
"modification" of those incentive stock options, even if you decline to
participate. In 1991, the IRS issued a private letter ruling in which another
company's option exchange program was characterized as a "modification" of the
incentive stock options that could be exchanged. This does not necessarily mean
that our offer to exchange options will be viewed the same way. Private letter
rulings issued by the IRS contain its opinion regarding only the specific facts
presented by a specific person or company. The person or company receiving the
letter may rely on it, but no other person or company may rely on the letter
ruling or assume the same opinion would apply to their situation, even if the
facts at issue are similar. While such letters do not provide certainty, they
may indicate how the IRS will view a similar situation. We, therefore, do not
know if the IRS will assert the position that our option exchange program
constitutes a "modification" of incentive stock options that can be tendered. A
successful assertion by the IRS of this position could, in some cases, cause an
option to cease to qualify as an incentive stock option. In other cases, such a
successful assertion by the IRS could extend the option's holding period
necessary to qualify for favorable tax treatment. Accordingly, to the extent you
dispose of your incentive stock option shares prior to the lapse of the new
extended holding period, your incentive stock option could be taxed similarly to
a nonstatutory stock option.

If you tender incentive stock options and those options are accepted
for exchange, the New Options that you are granted will be incentive stock
options to the maximum extent they qualify as incentive stock options under U.S.
tax laws on the date of the grant. One requirement for the New Options to
qualify as incentive stock options is that the value of shares subject to
options that become exercisable by the option holder for the first time in any
calendar year cannot exceed $100,000, as determined using the fair market value
of the shares on the option grant date. The excess value is deemed to be a
nonstatutory stock option. It is possible that your New Options may exceed the
$100,000 limit. In that case, the excess portion will be granted as nonstatutory
stock options, even if your tendered options were incentive stock options. While
the exchange and cancellation of your incentive stock options will not give rise
to any tax consequences, you should refer to the tax discussion below regarding
"Federal Income Tax Treatment of Nonstatutory Stock Options," because your New
Options may not be incentive stock options and may be subject to different tax
treatment than your Eligible Options.

FEDERAL INCOME TAX TREATMENT OF NONSTATUTORY STOCK OPTIONS.

Under current law, an option holder will not realize taxable income
upon receiving the grant of an option that is not qualified as an incentive
stock option, also referred to as a nonstatutory stock option. However, when an
option holder exercises a nonstatutory stock option, the difference between the
exercise price of the shares purchased and their fair market value on the date
of exercise will be treated as compensation taxable as ordinary income to the
option holder.

We will be entitled to a deduction equal to the amount of ordinary
income taxable to the option holder if we comply with applicable reporting
requirements.

The subsequent sale of the shares acquired pursuant to the exercise of
a nonstatutory stock option generally will give rise to capital gain or loss
equal to the difference between the sale price and the sum of the exercise price
paid for the shares plus the ordinary income recognized with respect to the
shares, and these capital gains or losses will be treated as long-term if you
held the shares for more than one year following exercise of the option.

WE RECOMMEND THAT YOU CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF PARTICIPATING IN THE
OFFER.

15. TERMS OF THE OFFER SPECIFIC TO ELIGIBLE PARTICIPANTS EMPLOYED IN THE
PEOPLE'S REPUBLIC OF CHINA, JAPAN OR TAIWAN.

If you are eligible to participate in the offer and are employed in the
People's Republic of China, Japan or Taiwan, you are subject to the terms of
this offer as described herein. International employees should refer to Appendix
B ("Guide to International Issues") to this Offer to Exchange for a discussion
of the tax and other consequences of accepting or rejecting the offer under
foreign law.

BEFORE ACCEPTING THE OFFER, WE RECOMMEND THAT YOU CONSULT WITH YOUR OWN
TAX ADVISOR TO DETERMINE THE TAX AND SOCIAL CONTRIBUTION CONSEQUENCES OF
PARTICIPATING IN THE OFFER.

16. EXTENSION OF OFFER; TERMINATION; AMENDMENT.

We expressly reserve the right, in our discretion, at any time and from
time to time, and regardless of whether or not any event listed in Section 7
("Conditions of the Offer") of this Offer to Exchange has occurred or is deemed
by us to have occurred, to extend the period of time during which the offer is
open and thereby delay the acceptance for exchange of any options by giving
oral, written or electronic notice of such extension to the option holders or
making a public announcement thereof.

We also expressly reserve the right, in our reasonable judgment, prior
to the Expiration Date to terminate or amend the offer and to postpone our
acceptance and cancellation of any options tendered for exchange upon the
occurrence of any of the events listed in Section 7, by giving oral, written or
electronic notice of such termination or postponement to you or by making a
public announcement thereof. Our reservation of the right to delay our
acceptance and cancellation of options tendered for exchange is limited by Rule
13e-4(f)(5) promulgated under the Securities Exchange Act, which requires that
we must pay the consideration offered or return the options tendered promptly
after termination or withdrawal of a tender offer.

Subject to compliance with applicable law, we further reserve the
right, in our discretion, and regardless of whether any event listed in Section
7 has occurred or is deemed by us to have occurred, to amend the offer in any
respect, including, without limitation, by decreasing or increasing the
consideration offered in the offer to option holders or by decreasing or
increasing the number of options being sought in the offer.

Amendments to the offer may be made at any time and from time to time
by public announcement of the amendment. In the case of an extension, the
amendment must be issued no later than 9:00 a.m., Eastern Time, on the next
business day after the last previously scheduled or announced expiration date.
Any public announcement made through the offer will be disseminated promptly to
option holders in a manner reasonably designated to inform option holders of the
change. Without limiting the manner in which we may choose to make a public
announcement, except as required by applicable law, we have no obligation to
publish, advertise or otherwise communicate any such public announcement.

If we materially change the terms of the offer or the information
concerning the offer, or if we waive a material condition of the offer, we will
extend the offer to the extent required by Rules 13e-4(d)(2) and 13e-4(e)(3)
under the Securities Exchange Act. These rules require that the minimum period
during which an offer must remain open following material changes in the terms
of the offer or information concerning the offer, other than a change in price
or a change in percentage of securities sought, will depend on the facts and
circumstances, including the relative materiality of such terms or information.

If we decide to take any of the following actions, we will publish a
notice or otherwise inform you in writing of these actions:

- we increase or decrease the amount of consideration offered for
the exchanged options;

- we decrease the number of options eligible to be exchanged in the
offer;

- we increase the number of options eligible to be exchanged in the
offer by an amount that exceeds 2% of the shares issuable upon
exercise of the options that are subject to the offer immediately
prior to the increase; or

- we extend or terminate the offer.

If the offer is scheduled to expire at any time earlier than the tenth
business day from, and including, the date that notice of such increase or
decrease is first published, sent or given in the manner specified in this
Section 16, we will extend the offer so that the offer is open at least ten
business days after we give notice of the change.

For purposes of the offer, a "business day" means any day other than a
Saturday, Sunday or federal holiday and consists of the time period from 12:01
a.m. through 12:00 midnight, Eastern Time.

17. FEES AND EXPENSES.

We will not pay any fees or commissions to any broker, dealer or other
person for soliciting tenders of options pursuant to this Offer to Exchange.

18. ADDITIONAL INFORMATION.

This Offer to Exchange is part of a Tender Offer Statement on Schedule
TO that we have filed with the SEC. This Offer to Exchange does not contain all
of the information contained in the Schedule TO and the exhibits to the Schedule
TO. We recommend that you review the Schedule TO, including its exhibits, and
the following materials that we have filed with the SEC before making a decision
on whether to tender your options:

1. our annual report on Form 10-K for our fiscal year ended
December 31, 2002, filed with the SEC on March 21, 2003;

2. our quarterly report on Form 10-Q for the fiscal quarter ended
March 31, 2003, filed with the SEC on May 9, 2003;

3. our definitive proxy statement for our 2003 annual meeting of
stockholders, filed with the SEC on April 30, 2003;

4. our Form S-8 registration statements registering shares to be
issued under the 1997 Plan, filed with the SEC on November 13,
1998 (SEC file number 333-67297) and June 8, 2000 (SEC file
number 333-38858); and

5. the description of our common stock contained in our
Registration Statement on Form 8-A, filed with the SEC on
April 24, 1998 (SEC file number 000-24085).

These filings, our other annual, quarterly and current reports, our
proxy statements and our other SEC filings may be examined, and copies may be
obtained, at the following SEC public reference rooms:

000 Xxxxx Xxxxxx, X.X.
Xxxx 0000
Xxxxxxxxxx, X.X. 00000

You may obtain information on the operation of the public reference
rooms by calling the SEC at 1-800-732-0330.

Our SEC filings are also available to the public on the SEC's Internet
site at xxxx://xxx.xxx.xxx.

Our common stock is quoted on the Nasdaq National Market under the
symbol "AXTI" and our SEC filings can be read at the following Nasdaq address:

Nasdaq Operations
0000 X Xxxxxx, X.X.
Xxxxxxxxxx, X.X. 00000

Each person to whom a copy of this Offer to Exchange is delivered may
obtain a copy of any or all of the documents to which we have referred you,
other than exhibits to such documents (unless such exhibits are specifically
incorporated by reference into such documents) at no cost, by writing to Xxxx
Xxxx at XXX, Inc., 0000 Xxxxxxxxxx Xxxxx, Xxxxxxx, Xxxxxxxxxx 00000, or
telephoning at (000) 000-0000 between the hours of 9:00 a.m. and 5:00 p.m.,
Pacific Time.

As you read the documents listed above, you may find some
inconsistencies in information from one document to another. If you find
inconsistencies between the documents, or between a document and this Offer to
Exchange, you should rely on the statements made in the most recent document.

The information contained in this Offer to Exchange about XXX should be
read together with the information contained in the documents to which we have
referred you.

19. MISCELLANEOUS.

This Offer to Exchange and our SEC reports referred to above include
"forward-looking statements." When used in this Offer to Exchange, the words
"anticipate," "believe," "estimate," "expect," "intend" and "plan" as they
relate to XXX or our management are intended to identify these forward-looking
statements. All statements by us regarding our expected future financial
position and operating results, our business strategy, our financing plans and
expected capital requirements, forecasted trends relating to our services or the
markets in which we operate and similar matters are forward-looking statements.
The documents we filed with the SEC, including our annual report on Form 10-K
filed on March 21, 2003 and our quarterly report on Form 10-Q filed on May 9,
2003, discuss some of the risks that could cause our actual results to differ
from those contained or implied in the forward-looking statements. These risks
include, but are not limited to, the following:

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

- 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.

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

- 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.

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

- We may need additional capital fund our future operations,
expansion of capacity, or changes in manufacturing processes,
which may not be available.

- We may be adversely impacted by the occurrence of sudden acute
respiratory syndrome (SARS), or the response of our customers or
others to a perceived threat of SARS.

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

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

- Our 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.

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

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

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

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

- 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.

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

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

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

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

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

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

- 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.

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

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

- 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.

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

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

- We derive a significant portion of our revenue from international
sales, and our ability to sustain and increase our international
sales involves significant risks.

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

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

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

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

- If we fail to comply with Nasdaq rules, our common stock may be
delisted from the Nasdaq National Market, which could eliminate
the trading market for our common stock.

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

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

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

- 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.

For a complete description of these risks, please see the SEC filings
referred to in Section 18 ("Additional Information") of this Offer to Exchange.

We are not aware of any jurisdiction where the making of the offer is
not in compliance with applicable law. If we become aware of any jurisdiction
where the making of the offer is not in compliance with any applicable law, we
will make a good faith effort to comply with such law. If, after such good faith
effort, we cannot comply with such law, the offer will not be made to, nor will
tenders be accepted from or on behalf of, the option holders residing in such
jurisdiction.

WE HAVE NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON OUR
BEHALF AS TO WHETHER YOU SHOULD TENDER OR NOT TENDER YOUR OPTIONS THROUGH THE
OFFER. YOU SHOULD RELY ONLY ON THE INFORMATION IN THIS DOCUMENT OR DOCUMENTS TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER OTHER
THAN THE INFORMATION AND REPRESENTATIONS CONTAINED IN THIS DOCUMENT, THE
MEMORANDUM FROM XXXXXX XXXXX DATED MAY 27, 2003, THE ELECTION FORM AND THE
NOTICE TO WITHDRAW FROM THE OFFER. IF ANYONE MAKES ANY RECOMMENDATION OR
REPRESENTATION TO YOU OR GIVES YOU ANY INFORMATION, YOU MUST NOT RELY UPON THAT
RECOMMENDATION, REPRESENTATION OR INFORMATION AS HAVING BEEN AUTHORIZED BY US.

XXX, INC.

May 27, 2003

APPENDIX A

INFORMATION CONCERNING THE DIRECTORS AND
EXECUTIVE OFFICERS OF XXX, INC.

The directors and executive officers of XXX, Inc. and their positions
and offices as of May 27, 2003, are set forth in the following table:

NAME POSITION

Xxxxxx X. Xxxxx Chairman of the Board of Directors, President and Chief Executive
Officer
Xxxxxx X. Xxxxxx Chief Financial Officer and Director
Davis Zhang President, Substrate Division
Xxxxxx Xxx President, Opto-electronics Division
Xxxxx X. Xxxxx Director
Xxxxx Xxxx Director
Xxxxxxx XxXxxxx Director

The address of each director and executive officer is: c/o AXT, Inc.,
0000 Xxxxxxxxxx Xxxxx, Xxxxxxx, Xxxxxxxxxx 00000.

Executive officers are those persons defined as "officers" for purposes
of Section 16(b) of the Securities Exchange Act of 1934, as amended.

XXXXXXXX X

GUIDE TO INTERNATIONAL ISSUES

XXX, INC.
OFFER TO EXCHANGE OPTIONS: A GUIDE TO ISSUES IN THE PEOPLE'S REPUBLIC OF
CHINA

The following is a general summary of the tax consequences of the exchange of
options under the offer for individuals subject to tax in the People's Republic
of China. This discussion is based on Chinese tax law as of the date of this
offer, which is subject to change, possibly on a retroactive basis. This summary
is general in nature and does not discuss all of the tax consequences that may
be relevant to you in light of your particular circumstances, nor is it intended
to be applicable in all respects to all categories of option holders. Therefore,
this summary does not replace the advice only your personal tax advisor may give
you.

If you are a citizen or resident of another country, the information contained
in this summary may not be applicable to you. You are advised to seek
appropriate professional advice as to how the tax or other laws in your country
apply to your specific situation.

OPTION EXCHANGE

We believe it is unlikely that you will be subject to tax as a result of the
exchange of an existing option for the right to receive a New Option, although
this result is not completely certain.

GRANT OF NEW OPTION

Under current law, you should not realize taxable income upon the grant to you
of a New Option.

EXERCISE OF NEW OPTION

Due to legal restrictions in China, you will only be able to exercise your New
Option using the cashless sell-all or cashless sell-to-cover method of exercise.
Under the cashless sell-all method of exercise, options are exercised without
any cash and all of your shares are sold immediately following exercise. You
will receive the proceeds of the sale, minus the exercise price, broker's fees
and any withholding taxes. Under the cashless sell-to-cover method of exercise,
options are exercised without any cash and a number of the shares are sold to
cover the exercise price, broker's fees and withholding taxes. The remaining
shares will be provided to you. When you exercise the new option, you will be
subject to income tax on the difference (or spread) between the fair market
value of the shares on the date of exercise and the exercise price. The spread
for tax purposes will be treated as additional salary or wages from your
employer.

SALE OF SHARES

If you acquire shares upon exercise of a New Option, when you subsequently sell
the shares, you will be subject to tax on any additional gain. This gain will
likely be treated as income from the transfer of securities and taxable at a
rate of 20%.

WITHHOLDING AND REPORTING

We expect that you will fully comply with your tax and other obligations in
connection with the receipt of benefits under your New Option, including paying
individual income tax. You also understand that we will likely be

required to make deductions from the amounts payable to you under the New Option
as a withholding agent under individual income tax and social insurance
legislation.

PLEASE CONSULT A TAX ADVISOR TO DETERMINE THE TAX CONSIDERATIONS AND TAX
CONSEQUENCES RELEVANT TO YOUR PARTICIPATION IN THE OFFER.

XXX, INC.

OFFER TO EXCHANGE OPTIONS: A GUIDE TO ISSUES IN TAIWAN

This supplement has been prepared to provide employees in Taiwan with a summary
of the tax and certain legal consequences of the proposed option exchange; that
is, the cancellation of eligible outstanding options to purchase shares of XXX,
Inc. ("XXX") by employees in exchange for the grant of new options to employees
six months and one day later. This summary is general in nature and does not
discuss all of the tax consequences that may be relevant to employees in light
of their particular circumstances. Please note that tax laws change frequently
and occasionally they change on a retroactive basis. We advise all option
holders considering participation in the exchange to consult with their own tax
or financial advisors.

If you are a citizen or resident of another country for local law purposes, the
information contained in this summary may not be applicable to you. You are
strongly advised to seek appropriate professional advice as to how the tax or
other laws in your country apply to your specific situation.

OPTION EXCHANGE

You will not be subject to tax as a result of the exchange of an eligible
outstanding option for a new option.

GRANT OF NEW OPTION

You will not be subject to tax when the new option is granted to you.

EXERCISE OF NEW OPTION

When you exercise the new option, you will not be subject to tax or social
insurance contributions.

SALE OF SHARES

If you acquire shares upon exercise, you will not be subject to tax when you
subsequently sell the shares.

WITHHOLDING AND REPORTING

Your employer is not required to withhold or report income tax or social
insurance contributions at the time of exercise or sale of shares. It is your
responsibility to report any pay all applicable taxes.

XXX, INC.

OFFER TO EXCHANGE OPTIONS: A GUIDE TO ISSUES IN JAPAN

This supplement has been prepared to provide employees in Japan with a summary
of the tax and certain legal consequences of the voluntary cancellation of
eligible outstanding options to purchase shares of XXX, Inc. ("XXX") by
employees for the right to receive a subsequent grant of new options to
employees six months and one day later. This summary is general in nature and
does not discuss all of the tax consequences that may be relevant to employees
in light of their particular circumstances. Please note that tax laws change
frequently and occasionally they change on a retroactive basis. We advise all
option holders considering participation in the program to consult with their
own tax or financial advisors.

CANCELLATION OF ELIGIBLE OUTSTANDING OPTIONS AND SUBSEQUENT GRANT OF NEW OPTIONS

It is possible that you will be subject to income tax as a result of the
cancellation of an eligible outstanding option for the right to receive a
subsequent grant of a new option, although this result is not certain. Please
consult your tax advisor to confirm the tax treatment.

GRANT OF NEW OPTION

You will not be subject to tax when the new option is granted to you.

EXERCISE OF NEW OPTION

When you exercise the new option, you will be subject to tax on the difference
between the fair market value of the shares on the date of exercise and the
option price. This gain likely will be treated as "remuneration income"
(although the proper income classification is currently being litigated in the
Japanese courts) and will be taxed at your marginal tax rate. Social insurance
contributions will not be due on gain at exercise.

SALE OF SHARES

If you acquire shares upon exercise, you will be subject to tax when you
subsequently sell the shares. You will be taxed on the difference between the
sale proceeds and the fair market value of the shares on the date of exercise.
As of January 1, 2003, the tax rate on net capital gains for certain listed
shares (including those listed on a foreign stock market) is 20% if they are
sold through a securities broker licensed in Japan. Additional favorable capital
gain tax treatment may apply on a temporary basis for shares sold between 2003
and 2007. This treatment will apply to shares of publicly listed companies
(including foreign listed companies) that satisfy certain additional conditions.

WITHHOLDING AND REPORTING

Your employer is not required to withhold income tax or social insurance
contributions when you exercise your option. It is your responsibility to file a
personal tax return and to report and pay any taxes resulting from the exchange,
the exercise of your option and the sale of shares.

ANNEX 1

ELECTION FORM

XXX, INC.
OFFER TO EXCHANGE OPTIONS

ELECTION FORM

I have received the Offer to Exchange dated May 27, 2003, the
memorandum from Xxxxxx X. Xxxxx dated May 27, 2003, this Election Form and the
Notice to Withdraw from the Offer (together, as they may be amended from time to
time, constituting the "Offer"), offering to eligible employees the opportunity
to exchange outstanding, unexercised, stock options with an exercise price
greater than $2.10 per share ("Old Options") for new stock options ("New
Options") to be granted on and having an exercise price determined by the fair
market value of a share of XXX, Inc. ("XXX") common stock on December 26, 2003.
The New Options will be granted under XXX'x 1997 Stock Option Plan. This offer
expires at 9:00 p.m., Pacific Time, on June 24, 2003.

If I elect to tender my unexercised Old Option for cancellation in
exchange for XXX'x promise to grant to me a New Option, the number of shares
subject to the New Option will be for three shares for every four shares subject
to the corresponding Old Option, rounded down to the nearest full share, subject
to adjustments for stock dividends, stock splits, reverse stock splits and other
similar events. I understand that the original vesting schedule and vesting
commencement date for each Old Option will be applied to the New Option that
replaces it. For each Old Option I tender, I will lose my right to all
unexercised shares under that option.

I UNDERSTAND THAT IF I ELECT TO TENDER ANY OPTIONS, ALL OPTIONS GRANTED
TO ME IN THE SIX MONTHS PRIOR TO THE COMMENCEMENT OF THIS OFFER (I.E., AFTER
NOVEMBER 26, 2002) WILL ALSO BE CANCELED AND REPLACED WITH NEW OPTIONS.

I UNDERSTAND THAT IF MY EMPLOYMENT TERMINATES FOR ANY REASON WHATSOEVER
BEFORE DECEMBER 26, 2003, I WILL LOSE ALL RIGHTS TO MY CANCELED OPTIONS, AND I
WILL NOT BE GRANTED NEW OPTIONS OR RECEIVE ANY OTHER PAYMENT OR CONSIDERATION IN
EXCHANGE FOR MY CANCELED OPTIONS.

I UNDERSTAND THAT THERE IS A POSSIBILITY THAT THE EXERCISE PRICE OF THE
NEW OPTIONS COULD BE HIGHER THAN THE EXERCISE PRICE OF THE OLD OPTIONS,
RESULTING IN A LOSS OF A POTENTIALLY SIGNIFICANT STOCK OPTION BENEFIT.

I UNDERSTAND THAT IF I AM A U.S. EMPLOYEE SUBJECT TO THE OVERTIME
COMPENSATION REQUIREMENTS OF THE FAIR LABOR STANDARDS ACT OF 1938, MY NEW
OPTION, ALTHOUGH VESTED, MAY NOT BE EXERCISED DURING THE PERIOD OF SIX MONTHS
FOLLOWING THE NEW OPTION GRANT DATE (EXCEPT IN THE EVENT OF MY DEATH,
DISABILITY, RETIREMENT, CHANGE IN CORPORATE OWNERSHIP OF XXX OR OTHER
CIRCUMSTANCES PERMITTED BY REGULATION) IN ACCORDANCE WITH THE WORKER ECONOMIC
OPPORTUNITY ACT.

I FURTHER UNDERSTAND THAT IF MY OLD OPTION WAS AN INCENTIVE STOCK
OPTION MY NEW OPTION WILL BE AN INCENTIVE STOCK OPTION ONLY TO THE MAXIMUM
EXTENT IT QUALIFIES AS AN INCENTIVE STOCK OPTION UNDER CURRENT U.S. TAX LAWS,
AND THAT THE NON-QUALIFYING PORTION OF MY NEW OPTION WILL BE GRANTED AS A
NONSTATUTORY STOCK OPTION.

IF I LIVE OR WORK OUTSIDE OF THE UNITED STATES, I UNDERSTAND AND AGREE
THAT, BY ACCEPTING THE OFFER, I AM SUBJECT TO ALL OF THE TERMS APPLICABLE TO ME
IN APPENDIX B ("GUIDE TO INTERNATIONAL ISSUES") TO THE OFFER TO EXCHANGE.

If, subject to the terms and conditions of the Offer, you wish to
participate in the Offer, please check the "YES" box below and indicate each
outstanding Old Option you elect to tender for cancellation and replacement with
a New Option pursuant to the Offer by circling on the Personnel Option Status
report delivered to you each Old Option you wish to exchange. If you elect to
tender any Old Option, your election MUST include all stock options granted to
you after November 26, 2002. You must attach and return with this Election Form
your Personnel Option Status report on which you have circled the Old Options
you wish to exchange.

If you do not wish to participate in the Offer, please check the "NO"
box. In that case, your Old Options will not be canceled, and you will not
receive New Options.

You may change the terms of your election to tender options for
exchange by submitting a new Election Form or a Notice to Withdraw from the
Offer at or before 9:00 p.m., Pacific Time, on June 24, 2003.

[ ] YES, I wish to tender for exchange under the terms and conditions of
the Offer each of the options I have specified on my Personnel Option
Status report which I have attached to this form, along with all
options granted to me after November 26, 2002 even if I have not
specified them on the attached report. I understand that all of these
Old Options will be irrevocably canceled on June 24, 2003. I agree to
all terms of the Offer.

[ ] I have attached my Personnel Option Status report on which I
have circled each Old Option I wish to tender for exchange
through the Offer.

[ ] NO, I do not wish participate in the Offer.

_____________________________ ___________________________________________
Employee Signature Social Security/National ID/Tax File Number

_____________________________ _________________________________ ______________________
Employee Name (Please Print) E-mail Address (if available) Date and Time
or Fax Number

RETURN ELECTION FORM AND
PERSONNEL STATUS REPORT INDICATING OPTIONS ELECTED FOR EXCHANGE, IF ANY

TO XXXX XXXX, SEC REPORTING MANAGER, AT XXX, INC.
NO LATER THAN 9:00 P.M., PACIFIC TIME, ON JUNE 24, 2003

VIA FACSIMILE AT (000) 000-0000

BY HAND DELIVERY, COURIER OR MAIL
TO XXXX XXXX

XXX, INC.
0000 XXXXXXXXXX XXXXX
XXXXXXX, XX 00000

XXX, INC. WILL SEND YOU AN E-MAIL CONFIRMATION
WITHIN 2 BUSINESS DAYS OF RECEIPT OF THIS ELECTION FORM

XXX, Inc.
0000 XXXXXXXXXX XXXXX
XXXXXXX, XX 00000

PERSONNEL OPTION SUMMARY

AS OF 5/27/2003

NAME ID NUMBER DATE PLAN/TYPE SHARES PRICE EXERCISED VESTED CANCELLED UNVESTED OUTSTANDING EXERCISABLE

INSTRUCTIONS TO THE ELECTION FORM

FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER

1. DELIVERY OF ELECTION FORM.

A properly completed and executed original of this Election Form (or a
facsimile of it), Personnel Option Status Report on which you have circled the
options you wish to tender for exchange and any other documents required by this
Election Form, must be received by Xxxx Xxxx either via hand delivery, courier
or mail at XXX, Inc., 0000 Xxxxxxxxxx Xxxxx, Xxxxxxx, Xxxxxxxxxx 00000, or via
facsimile at (000) 000-0000 on or before 9:00 p.m., Pacific Time, on June 24,
2003 (the "Expiration Date"). If the Offer is extended, you may submit the
Election Form at any time until the extended expiration of the Offer.

THE METHOD BY WHICH YOU DELIVER ANY REQUIRED DOCUMENTS IS AT YOUR
OPTION AND RISK, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED BY THE COMPANY. YOU MAY HAND DELIVER YOUR ELECTION FORM TO XXXX XXXX,
AT XXX, INC. (THE "COMPANY"), OR YOU MAY COURIER IT, MAIL IT OR FAX IT TO HIM AT
THE ADDRESS OR FAX NUMBER LISTED ABOVE. IN ALL CASES, YOU SHOULD ALLOW
SUFFICIENT TIME TO ENSURE TIMELY DELIVERY. WE INTEND TO CONFIRM THE RECEIPT OF
YOUR ELECTION FORM WITHIN TWO BUSINESS DAYS OF DELIVERY. IF YOU HAVE NOT
RECEIVED A CONFIRMATION OF RECEIPT, IT IS YOUR RESPONSIBILITY TO ENSURE THAT
XXXX XXXX HAS RECEIVED YOUR ELECTION FORM.

A confirmation of receipt is not by itself an acceptance of your
options for exchange. For purposes of the Offer, we will be deemed to have
accepted your options for exchange that are validly tendered and not properly
withdrawn as of when we give oral or written notice to the option holders
generally of our acceptance for exchange of such options, which notice may be
made by press release.

2. WITHDRAWAL.

Tenders of options made through the Offer may be withdrawn at any time
before the Expiration Date. If the Company extends the Offer beyond that time,
you may withdraw your tendered options at any time until the extended expiration
of the Offer. In addition, although the Company currently intends to accept your
validly tendered options promptly after the expiration of the Offer, unless the
Company accepts and cancels your tendered options before 9:00 p.m., Pacific
Time, on July 23, 2003, you may withdraw your tendered options at any time on
and after July 23, 2003. To withdraw tendered options you must fax (fax number
(000) 000-0000) or courier, mail or hand deliver to Xxxx Xxxx, XXX, Inc., 0000
Xxxxxxxxxx Xxxxx, Xxxxxxx, Xxxxxxxxxx 00000, a signed and dated Notice to
Withdraw from the Offer, with the required information, while you still have the
right to withdraw the tendered options. Withdrawals may not be rescinded, and
any eligible options withdrawn will thereafter be deemed not properly tendered
for purposes of the Offer unless the withdrawn options are properly re-tendered
before the Expiration Date by delivery of a new Election Form following the
procedures described in these Instructions. Upon the receipt of such a new,
properly filled out, signed and dated Election Form, any previously submitted
Election Form or Notice to Withdraw from the Offer will be disregarded and will
be considered replaced in full by the new Election Form.

3. CHANGE OF ELECTION.

As noted in the Offer to Exchange, you may select individual option
grants to be tendered for exchange. You do not have to tender all your option
grants, but for each individual grant you do choose to tender, you must tender
the entire outstanding, unexercised portion, as well as any other options issued
after November 26, 2002 (the six-month period prior to the commencement of the
Offer) regardless of their exercise price. You may change your mind about which
individual option grants you would like to tender for exchange at any time
before the Expiration Date. If the Company extends the Offer beyond that time,
you may change your election regarding particular option grants you tendered at
any time until the extended expiration of the Offer. To change your election
regarding any particular individual option grants you previously tendered while
continuing to elect to participate in the Offer, you

must deliver a signed and dated new Election Form, with the required information
and Personnel Option Status report on which you have indicated the options you
wish to tender for exchange, following the procedures described in these
Instructions. Upon the receipt of such a new, properly filled out, signed and
dated Election Form, any previously submitted Election Form will be disregarded
and will be considered replaced in full by the new Election Form.

The Company will not accept any alternative, conditional or contingent
tenders. Although it is our intent to send you a confirmation of receipt of this
Election Form, by signing this Election Form (or a facsimile of it), you waive
any right to receive any notice of the receipt of the tender of your options,
except as provided for in the Offer to Exchange. Any confirmation of receipt
sent to you will merely be a notification that we have received your Election
Form and does not mean that your options have been canceled. Your options that
are accepted for exchange will not be canceled until after 9:00 p.m. Pacific
Time on June 24, 2003, or a later date if we extend the Offer.

4. PERSONNEL OPTION STATUS REPORT.

You must indicate on the Personnel Option Status report delivered to
you the options you wish to tender for exchange through the Offer. You must make
this indication by circling each option you wish to tender. Your Personnel
Option Status report marked for options you wish to exchange must be delivered
with this Election Form, and will thereby be considered part of this Election
Form.

5. TENDERS.

The Company will not accept partial tenders of eligible options.
Accordingly, you may tender all or none of the unexercised shares subject to
each option you decide to tender. Also, if you intend to tender any of the
options that were granted to you, then you must tender all of your eligible
options that were granted to you during the six-month period prior to the
commencement of the Offer; therefore if you participate, all options granted to
you after November 26, 2002 will be canceled regardless of their exercise price.

6. SIGNATURES ON THIS ELECTION FORM.

If this Election Form is signed by the holder of the eligible options,
the signature must correspond with the name as written on the face of the option
agreement or agreements to which the options are subject without alteration,
enlargement or any change whatsoever. If your name has been legally changed
since your option agreement was signed, please submit proof of the legal name
change. If this Election Form is signed by a trustee, executor, administrator,
guardian, attorney-in-fact, officer of a corporation or other person acting in a
fiduciary or representative capacity, that person should so indicate when
signing, and proper evidence satisfactory to the Company of the authority of
that person to so act must be submitted with this Election Form.

7. OTHER INFORMATION ON THIS ELECTION FORM.

In addition to signing this Election Form, you must print your name and
indicate the date and time at which you signed. You must also include a current
e-mail address (or fax number if you do not have an e-mail address) and your
government identification number, such as your social security number, tax
identification number or national identification number, as appropriate.

8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.

Any questions or requests for assistance, as well as requests for
additional copies of the Offer to Exchange or this Election Form (which will be
furnished at the Company's expense) should be directed to:

Xxxx Xxxx
SEC Reporting Manager
XXX, Inc.
0000 Xxxxxxxxxx Xxxxx
Xxxxxxx, Xxxxxxxxxx 00000
(000) 000-0000, extension 208
Fax: (000) 000-0000

9. IRREGULARITIES.

All questions as to the number of option shares subject to options to
be accepted for exchange and the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of options will be determined
by the Company in its discretion. The Company's determinations shall be final
and binding on all parties. The Company reserves the right to reject any or all
tenders of options the Company determines not to be in proper form or the
acceptance of which may, in the opinion of the Company's counsel, be unlawful.
The Company also reserves the right to waive any of the conditions of the Offer
and any defect or irregularity in the tender of any particular options, and the
Company's interpretation of the terms of the Offer (including these
instructions) will be final and binding on all parties. No tender of options
will be deemed to be properly made until all defects and irregularities have
been cured or waived. Unless waived, any defects or irregularities in connection
with tenders must be cured within such time, as the Company shall determine.
Neither the Company nor any other person is or will be obligated to give notice
of any defects or irregularities in tenders, and no person will incur any
liability for failure to give any such notice.

IMPORTANT: THE ELECTION FORM (OR A FACSIMILE COPY OF IT) TOGETHER WITH
ALL OTHER REQUIRED DOCUMENTS MUST BE RECEIVED BY THE COMPANY, ON OR BEFORE 9:00
P.M., PACIFIC TIME, ON JUNE 24, 2003.

10. ADDITIONAL DOCUMENTS TO READ.

You should be sure to read the Offer to Exchange, all documents
referenced therein, and the memorandum from Xxxxxx X. Xxxxx dated May 27, 2003
before deciding to participate in the Offer.

11. IMPORTANT TAX INFORMATION.

You should refer to Section 14 of the Offer to Exchange, which contains
important U.S. federal income tax information. If you live or work outside of
the United States, you should refer to Appendix B to the Offer to Exchange for a
discussion of tax consequences that may apply to you.

12. MISCELLANEOUS.

(a) DATA PRIVACY. By accepting the Offer, you hereby
explicitly and unambiguously consent to the collection, use and transfer, in
electronic or other form, of your personal data as described in this document by
and among, as applicable, XXX, Inc. and/or any affiliate for the exclusive
purpose of implementing, administering and managing your participation in the
Offer.

You understand that XXX, Inc. and/or any affiliate may hold certain
personal information about you, including, but not limited to, your name, home
address and telephone number, date of birth, social insurance number or other
identification number, salary, nationality, job title, any shares of stock or
directorships held in the Company, details of all options or any other
entitlement to shares of stock awarded, canceled, exercised, vested, unvested or
outstanding in your favor, for the purpose of implementing, administering and
managing the stock option plan and this Offer ("Data"). You understand that Data
may be transferred to any third parties assisting in the implementation,
administration and management of the Offer, that these recipients may be located
in your country, or elsewhere, and that the recipient's country may have
different data privacy laws and protections than in your country. You authorize
the recipients to receive, possess, use, retain and transfer the Data, in
electronic or other form, for the purposes of implementing, administering and
managing your participation in the stock option plans and this Offer. You
understand that Data will be held only as long as is necessary to implement,
administer and manage your participation in the stock option plans and

this Offer. You understand that you may, at any time, view Data, request
additional information about the storage and processing of Data, require any
necessary amendments to Data or withdraw the consents herein by contacting in
writing your local human resources representative. You understand that
withdrawal of consent may affect your ability to participate in this Offer and
exercise or realize benefits from the stock option plans.

(b) ACKNOWLEDGEMENT AND WAIVER. By accepting this Offer, you
acknowledge that: (i) your acceptance of the Offer is voluntary; (ii) your
acceptance of the Offer shall not create a right to further employment with your
employer and shall not interfere with the ability of your employer to terminate
your employment relationship at any time with or without cause; and (iii) the
Offer, the Old Options and the New Options are not part of normal or expected
compensation or salary for any purposes, including, but not limited to,
calculating any severance, resignation, redundancy, end of service payments,
bonuses, long-service awards, pension or retirement benefits or similar
payments.

ANNEX 2

NOTICE TO WITHDRAW FROM THE OFFER

XXX, INC.
OFFER TO EXCHANGE OPTIONS

NOTICE TO WITHDRAW
FROM THE OFFER

I previously received a copy of the Offer to Exchange and an Election
Form. I signed and returned the Election Form, in which I elected to accept an
offer from XXX, Inc. ("XXX") to exchange some of or all of my options (the
"Offer"). I now wish to change that election and reject the Offer. I understand
that by signing this Notice and delivering it to Xxxx Xxxx by 9:00 p.m., Pacific
Time, on June 24, 2003, I will have withdrawn my acceptance of the Offer and
will have rejected the Offer instead.

I understand that in order to reject the Offer, I must sign, date and
deliver this Notice via facsimile (fax number (000) 000-0000) or by hand
delivery, courier or mail to Xxxx Xxxx at XXX, Inc., 0000 Xxxxxxxxxx Xxxxx,
Xxxxxxx, Xxxxxxxxxx 00000 by 9:00 p.m., Pacific Time, on June 24, 2003.

I understand that by rejecting the Offer, I will not receive any New
Options pursuant to the Offer, and I will keep the Old Options that I have. The
Old Options will continue to be governed by the stock plan under which they were
granted and by the existing option agreements between XXX and me.

I understand that I may change this rejection of the Offer, and once
again accept the Offer, by submitting a new Election Form via facsimile (fax
number (000) 000-0000) or by hand delivery, courier or mail to Xxxx Xxxx at XXX,
Inc., 0000 Xxxxxxxxxx Xxxxx, Xxxxxxx, Xxxxxxxxxx 00000 by 9:00 p.m., Pacific
Time, on June 24, 2003.

I have signed this Notice and printed my name exactly as it appears on
the Election Form.

I DO NOT ACCEPT THE OFFER TO EXCHANGE ANY OPTIONS.

__________________________ _____________________________________________________________
Employee Signature Social Security/National ID/Tax File Number

_______________________________ _________________________________ ________________________
Employee Name (Please Print) E-mail Address (if available) Date and Time
or Fax Number

RETURN TO XXXX XXXX AT XXX NO LATER THAN
9:00 P.M., PACIFIC TIME ON JUNE 24, 2003

VIA FACSIMILE AT (000) 000-0000

BY HAND DELIVERY, COURIER OR MAIL
TO XXXX XXXX AT

XXX, INC.
0000 XXXXXXXXXX XXXXX
XXXXXXX, XX 00000.

XXX, INC. WILL SEND YOU AN E-MAIL CONFIRMATION
WITHIN 2 BUSINESS DAYS OF RECEIPT OF THIS NOTICE TO WITHDRAW FROM THE OFFER

INSTRUCTIONS TO THE NOTICE TO WITHDRAW FROM THE OFFER

FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER

1. DELIVERY OF NOTICE TO WITHDRAW FROM THE OFFER.

A properly completed and executed original of this Notice to Withdraw
from the Offer (or a facsimile of it), and any other documents required by this
Notice to Withdraw from the Offer, must be received either via hand delivery,
courier or mail by Xxxx Xxxx at XXX, Inc., 0000 Xxxxxxxxxx Xxxxx, Xxxxxxx,
Xxxxxxxxxx 00000 or via facsimile (fax number (000) 000-0000) on or before 9:00
p.m., Pacific Time, on June 24, 2003 (the "Expiration Date"). If the Offer is
extended, you may submit a Notice to Withdraw from the Offer at any time until
the extended expiration of the Offer.

THE METHOD BY WHICH YOU DELIVER ANY REQUIRED DOCUMENTS IS AT YOUR
OPTION AND RISK, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED BY THE COMPANY. YOU MAY HAND DELIVER YOUR ELECTION FORM TO XXXX XXXX,
AT XXX, INC. (THE "COMPANY"), OR YOU MAY COURIER IT, MAIL IT OR FAX IT TO HIM AT
THE ADDRESS OR FAX NUMBER LISTED ABOVE. IN ALL CASES, YOU SHOULD ALLOW
SUFFICIENT TIME TO ENSURE TIMELY DELIVERY. WE INTEND TO CONFIRM THE RECEIPT OF
YOUR NOTICE TO WITHDRAW WITHIN TWO BUSINESS DAYS OF DELIVERY. IF YOU HAVE NOT
RECEIVED A CONFIRMATION OF RECEIPT, IT IS YOUR RESPONSIBILITY TO ENSURE THAT
XXXX XXXX RECEIVED YOUR NOTICE TO WITHDRAW.

Although by submitting a Notice to Withdraw from the Offer you have
withdrawn your tendered options from the Offer, you may change your mind and
re-accept the Offer until the expiration of the Offer. Tenders of options made
through the Offer may be made at any time before the Expiration Date. If the
Company extends the Offer beyond that time, you may tender your options at any
time until the extended expiration of the Offer. To change your mind and elect
to participate in the Offer, you must deliver a new signed and dated Election
Form, with the required information to the Company, while you still have the
right to participate in the Offer. Your options will not be properly tendered
for purposes of the Offer unless the withdrawn options are properly re-tendered
before the Expiration Date by delivery of the new Election Form following the
procedures described in the Instructions to the Election Form.

IF YOU DO NOT WISH TO WITHDRAW ALL OF YOUR TENDERED OPTIONS FROM THE
OFFER, YOU SHOULD NOT SUBMIT THIS NOTICE TO WITHDRAW FROM THE OFFER. IF YOU WISH
TO CHANGE YOUR ELECTION WITH RESPECT ONLY TO PARTICULAR OPTIONS, YOU SHOULD
SUBMIT A NEW ELECTION FORM INSTEAD.

As noted in the Offer to Exchange, you may select individual option
grants to be tendered for exchange. You do not have to tender all your option
grants, but for each individual grant you do choose to tender, you must tender
the entire outstanding, unexercised portion. You may change your mind about
which individual option grants you would like to tender for exchange. To change
your election regarding particular individual option grants you previously
tendered while continuing to elect to participate in the Offer, you must deliver
a signed and dated new Election Form, with the required information, following
the procedures described in the Instructions to the Election Form before the
Expiration Date or, if the Offer is extended, before the extended expiration of
the Offer. Upon receipt of such a new, properly filled out, signed and dated
Election Form, any previously submitted Election Form, or Notice to Withdraw
from the Offer will be disregarded and will be considered replaced in full by
the new Election Form.

Although it is our intent to send you a confirmation of receipt of this
Notice, by signing this Notice to Withdraw from the Offer (or a facsimile of
it), you waive any right to receive any notice of the withdrawal of the tender
of your options.

2. SIGNATURES ON THIS NOTICE TO WITHDRAW FROM THE OFFER.

If this Notice to Withdraw from the Offer is signed by the holder of
the eligible options, the signature must correspond with the name as written on
the face of the option agreement or agreements to which the options are subject
without alteration, enlargement or any change whatsoever. If your name has been
legally changed since your option agreement was signed, please submit proof of
the legal name change. If this Notice to Withdraw from the Offer is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
that person should so indicate when signing, and proper evidence satisfactory to
the Company of the authority of that person so to act must be submitted with
this Notice to Withdraw from the Offer.

3. OTHER INFORMATION ON THIS NOTICE TO WITHDRAW FROM THE OFFER.

In addition to signing this Notice to Withdraw from the Offer, you must
print your name and indicate the date and time at which you signed. You must
also include a current e-mail address (or fax number if you do not have an
e-mail address) and your government identification number, such as your social
security number, tax identification number or national identification number, as
appropriate.

4. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.

Any questions or requests for assistance, as well as requests for
additional copies of the Offer to Exchange or this Notice to Withdraw from the
Offer (which will be furnished at the Company's expense) should be directed to:

Xxxx Xxxx
SEC Reporting Manager
XXX, Inc.
0000 Xxxxxxxxxx Xxxxx
Xxxxxxx, XX 00000
(000) 000-0000, extension 208
Fax: (000) 000-0000

5. IRREGULARITIES.

All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of this withdrawal from the Offer will be determined by
the Company in its discretion. The Company's determinations shall be final and
binding on all parties. The Company reserves the right to reject any or all
Notices to Withdraw from the Offer that the Company determines not to be in
proper form or the acceptance of which may, in the opinion of the Company's
counsel, be unlawful. The Company also reserves the right to waive any of the
conditions of the Offer and any defect or irregularity in the Notice to Withdraw
from the Offer, and the Company's interpretation of the terms of the Offer
(including these instructions) will be final and binding on all parties. No
Notice to Withdraw from the Offer will be deemed to be properly made until all
defects and irregularities have been cured or waived. Unless waived, any defects
or irregularities in connection with Notices to Withdraw from the Offer must be
cured within the time as the Company shall determine. Neither the Company nor
any other person is or will be obligated to give notice of any defects or
irregularities in Notices to Withdraw from the Offer, and no person will incur
any liability for failure to give any such notice.

IMPORTANT: THE NOTICE TO WITHDRAW FROM THE OFFER (OR A FACSIMILE COPY
OF IT) TOGETHER WITH ALL OTHER REQUIRED DOCUMENTS MUST BE RECEIVED BY THE
COMPANY, ON OR BEFORE 9:00 P.M., PACIFIC TIME, ON JUNE 24, 2003.

6. ADDITIONAL DOCUMENTS TO READ.

You should be sure to read the Offer to Exchange, all documents
referenced therein, and the memorandum from Xxxxxx X. Xxxxx dated May 27, 2003
before making any decisions regarding participation in, or withdrawal from, the
Offer.

7. IMPORTANT TAX INFORMATION.

You should refer to Section 14 of the Offer to Exchange, which contains
important U.S. federal income tax information. If you live or work outside the
United States, you should refer to Appendix B to the Offer to Exchange for a
discussion of tax consequences that may apply to you.

Document Metadata

Table of Contents

AXT, INC.

Document Metadata