We have studied the lateral oxidation of AlxGa1−xAs (x=0.98 and 0.92) layers contained in vertical‐cavity lasers using cross‐sectional transmission electron microscopy. We find a fine‐grained (∼4 nm) cubic spinel phase of Al2O3 in both the 2% Ga‐ and 8% Ga‐oxidized layers. The 8% Ga‐oxidized layers contract vertically by 6.7% and not the expected 20% for a fully dense Al2O3 layer, with the 2% Ga‐oxidized layers showing a similar contraction. We observe a ∼17‐nm‐thick amorphous interface between the oxidized and unoxidized AlxGa1−xAs layers, which may account for the excellent electrical properties of these devices. We also observe metastable amorphous cavities associated with the moving reaction front. We infer the reaction proceeds from an initial amorphous phase that then transforms to a porous γ‐Al 2O3 layer.