The modulation of an intense electromagnetic beam induced by the acousto‐optic (AO) effect has been analyzed in a strain‐dependent semiconductor crystal. The effect of the diffusion of charge carriers due to the doping of the medium has been investigated using the coupled‐mode theory. The origin of the AO interaction is assumed to lie in the induced nonlinear current density of the medium. The AO modulation process has been treated as a four‐wave parametric mixing process and the effective third‐order acousto‐optic susceptibility characterizing the instability process has been deduced. The AO modulation is greatly modified by propagation characteristics such as dispersion and diffraction due to dielectric relaxation of the acoustic mode. The threshold characteristics and the steady state growth rates are estimated from the acousto‐optic polarization of the medium. Analytical estimation reveals that the modulated beam can be amplified in a dispersionless acoustic wave interaction regime in the presence of enhanced diffusion due to excess charge carriers. The relative magnitude of the pump field at various doping levels exhibits entirely different steady‐state gain characteristics. A particular pump fieldErexhibits maximum gain in the lightly doped regime while the same field exhibits a minimum due to reverse energy flow from electromagnetic fields to the collision dominated space‐charge field in a heavily doped medium. At very high densities with the electron plasma frequency of the medium close to the pump frequency or under the influence of very high (drift) pump field the acoustoelectric domains are washed out due to domination of the drift process over diffusion instability process. This leads either to gain saturation in lightly doped regime or explosive increment of the gain constant in heavily doped regime. The magnitude of the third‐order nonlinear optical susceptibility for III‐V semiconductors obtained from our theoretical analyses is found to agree well with the previously reported values. ©1995 American Institute of Physics.