UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                     For The Fiscal Year Ended June 28, 1998

                 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the transition period from ____ to _____

                           Commission File No. 0-21154

                               CREE RESEARCH, INC.
             (Exact name of registrant as specified in its charter)

North Carolina                                                       56-1572719
(State or other jurisdiction of                                (I.R.S. Employer
incorporation or organization)                              Identification No.)

               4600 Silicon Drive, Durham,             NC 27703
       (Address of principal executive offices)       (Zip Code)

       Registrant's telephone number, including area code: (919) 361-5709

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:


                          Common Stock, $.005 par value
                          -----------------------------
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of common stock held by non-affiliates of the
registrant as of August 7, 1998 was approximately $149,174,000 (based on the
closing sale price of $14.125 per share).

The number of shares of the registrant's Common Stock, $0.005 par value per
share, outstanding as of August 7, 1998 was 12,991,038.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held November 3, 1998
are incorporated by reference into Part III.


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                               CREE RESEARCH, INC

                                    FORM 10-K

                     For The Fiscal Year Ended June 28, 1998

                                      INDEX


Part I                                                                      Page


Item  1.        Business                                                       3


Item  2.        Properties                                                    15


Item  3.        Legal Proceedings                                             16


Item  4.        Submission of Matters to a Vote of Security Holders           16



Part II


Item  5         Market for Registrant's Common Equity and Related
                Stockholder Matters                                           16


Item  6.        Selected Financial Data                                       16


Item  7.        Management's Discussion and Analysis of Financial
                Condition and Results of Operations                           18


Item  8.        Financial Statements and Supplementary Data                   24


Item 9.         Changes in and Disagreements with Accountants on
                Accounting and Financial Disclosures                          45


Part III


Item 10.        Directors and Executive Officers of the Registrant            46


Item 11.        Executive Compensation                                        46


Item 12.        Security Ownership of Certain Beneficial Owners and
                Management                                                    46


Item 13.        Certain Relationships and Related Transactions                46


Part IV


Item 14.        Exhibits, Financial Statement Schedules and Reports on
                Form 8-K                                                      46

                Signatures                                                    49

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<PAGE>


                                     PART I


Item 1.  Business

General
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         Cree Research, Inc. ("Cree" or "the Company"), a North Carolina
corporation, was established in 1987 to commercialize the production of silicon
carbide ("SiC") material and to develop and market SiC-based wafers and devices
and other wide bandgap compound semiconductor products. In December 1987, the
Company acquired an exclusive license to certain technology, developed at North
Carolina State University ("NCSU") relating to silicon carbide, including a
process for bulk growth of single crystalline SiC. The Company has refined and
improved this technology over the past eleven years and is now a world leader in
the design, development, manufacture and marketing of SiC-based semiconductor
materials and electronic devices. The Company incorporates its proprietary
silicon carbide technology to produce compound semiconductors for use in
back-lighting, indicator lamps, displays and other lighting applications. The
Company also manufactures SiC crystals that are sold for use in gemstone
products and SiC wafers that are sold for research directed to optoelectronic,
microwave and power devices. The Company believes that, for certain electronic
applications, SiC-based compound semiconductor devices offer significant
advantages over competing products based on sapphire, silicon, gallium arsenide
and other materials.

         The original application of the Company's SiC technology was the
world's first commercially viable blue light-emitting diode ("LED"). The Company
markets its blue LED chip products principally to customers who incorporate them
into packaged lamps for use as indicator lights and in back-lighting
applications, including automotive dashboard instrumentation, cellular handset
products and liquid crystal displays ("LCD"). The LED product is also
incorporated in full color display products used for advertising and in sports
arena video replay boards.

         The Company also believes that it supplies much of the worldwide demand
for SiC wafer products to corporate, government, and university laboratories.
These customers utilize the material in the research and development of
optoelectronic devices, including LED products, microwave devices for use in
wireless transmission and digital ultra high frequency ("UHF") broadcast and
high power devices, including power rectifiers and switches, as well as other
applications.

         One customer, C3, Inc. ("C3") uses SiC as a gemstone material. The
product is sold in bulk crystal form and then cut, faceted and polished by C3 to
create gemstones with diamond-like characteristics. Physical properties of SiC
are similar to those of diamond as they are both carbon-based minerals with a
similar hardness.

         In August 1994, the Company formed a wholly-owned subsidiary, Real
Color Displays, ("RCD"), to develop and market full color LED moving message
displays. As an entry into this business, RCD acquired the assets of a Hong-Kong
based company engaged in the sale of moving message signs. Vertical integration
into the LED display market was seen as a means for the Company to enhance its
core position in LED chip production. RCD's strategy was to target the low-end
full color moving message display market, which is comprised of one and two-line
message signs that display text messages and single graphics, however, these
products have been de-emphasized in recent years. During the second half of
fiscal 1996, Cree introduced a new LED based product, marketed as the "Real
Color Module TM" component, which the Company sells to original equipment
manufacturers ("OEMs") for use in building large area video display systems.
This product has become the primary focus for the future of the Company's
display business.

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<PAGE>

         The Company performs research directed to developing future products
using SiC, and believes that it leads an advanced study of these devices
worldwide. This research focuses on optoelectronic, microwave and power devices.
A substantial amount of Cree's internal research projects are funded by Federal
government agencies and departments.

         The Company's products are manufactured in a manner similar to other
semiconductor materials and devices. Silicon carbide is combined with other
materials and then fabricated into single crystals. The crystals are then sliced
into wafers and polished and either sold as bare wafer material, or processed
for further manufacture. Very thin layers of additional material may be grown on
the bare wafer using a process referred to as epitaxial deposition. Wafers with
these epitaxial layers may be sold outright or used to manufacture other
devices. Wafers that continue for device manufacture are then fabricated in a
clean room environment through various processing steps. The devices fabricated
on the wafer are then tested and cut into chips for sale as LED or other
products.


Description of Business                                                 Products
- --------------------------------------------------------------------------------

Blue LEDs

         Cree introduced the world's first commercially viable blue LED chip
product in 1989 and has since developed several generations of blue LED
products, including a more robust conductive buffer chip introduced in fiscal
1998 that is brighter, easier to manufacture and has a lower unit cost. Prior to
1989, a blue LED was not readily available as the semiconductor materials used
in red, amber and yellow-green LEDs, are not able to emit blue light. Blue LEDs
offered by others at this time were laboratory samples that could not be
produced in volumes necessary for commercialization. Inexpensive red, amber and
yellow-green LED lamps have been available for more than 20 years and are
used in everyday applications such as indicator lights on printers, computers
and other equipment, and traffic signal lighting for red devices. Groups of
these lights are also used for single or multicolor electronic displays. The
commercial availability of the blue LED, in conjunction with red and green, is
critical to enable the creation of multiple chip lamps and displays capable of
producing any color in the visible spectrum. Combinations of blue, green and red
light in a single cell can create any color light, including white light, making
it possible to create large video displays using LED technology. In addition,
blue LEDs can be used as indicator lamps, in back-lighting and in various other
applications in which red, amber and yellow-green LEDs are used today. LEDs
offer substantial advantages over the small incandescent bulb, including longer
life, lower maintenance and energy consumption and smaller space requirements.

           The Company believes that its approach of manufacturing a blue LED
based on a two inch diameter SiC substrate offers a more cost effective design
and process than its competitors, who use a sapphire substrate. The Cree
approach is compact and uses the same top and bottom contact arrangement that is
employed in standard red, amber and yellow-green LED products. Most competitors
place both the positive and negative contact on the top of the diode because the
sapphire substrate material used in their products is not electrically
conductive. Cree's smaller chip design enables the diode to use less material
and permits more devices to be fabricated on each wafer processed. Competitors
offer the blue LED at selling prices higher than the Company's prices. The
Company has been working continuously to reduce the cost of its blue LED chip as
it believes the rate of market acceptance for blue LED products is significantly
dependent on pricing. The Company also anticipates the market for single blue
LED lamps will increase significantly once the pricing of these products is
similar to that of the red, amber and yellow-green LED products available today.
During fiscal 1998, the Company was able to reduce its cost to manufacture an
improved blue LED product by more than 50% through higher throughput, improved
yields, smaller die size, larger wafer size and other attributes of the
conductive buffer process. If the Company can continue this trend, it


                                       4

<PAGE>

will allow greater flexibility in pricing to customers in the future. There is
no assurance, however, that the Company will be able to achieve lower costs in
the future or that lower costs will produce increased sales.

         Presently, the Company's blue LED chips are primarily used for
back-lighting purposes in automotive dashboard, cellular handsets, LCD displays
and other applications. In addition, they are also used in office equipment
indicator lighting, indoor full-color video display technology, such as stadium
video replay boards, moving message advertising and informational signs.

         The Company supplies blue LED chips to LED component manufacturers who
assemble the chip into a lamp and then manufacture solid-state lighting
components to supply to OEMs. The majority of the market for LED-based display
applications is in the Pacific Rim. The Company's principal customers who serve
the display market are located in China, Taiwan and Japan. Cree also sells the
LED product to European and domestic accounts.

Wafer Products

         The Company believes that it is the leading manufacturer of
semiconductor quality silicon carbide in the world today. Cree grows its own
crystals using a proprietary process. The crystals are sliced into wafers,
polished and then prepared for the Company's own manufacturing line or for sale
to corporate, government and university programs that are using SiC for the
development of electronic components. Each order may be sold as a bare wafer or
customized by adding epitaxial films, depending upon the nature of the
development program. These customers utilize the material as the basis for
research in optoelectronic, microwave and high power devices. For the past
several years, the Company has worked to improve the quality of its wafers while
increasing the size. The absence of crystal defects is critical to the
development of high power devices in SiC. During fiscal 1998, the Company has
been able to reduce these defects by approximately 50%. Cree is developing two
inch diameter wafers and expects that these wafers will constitute the majority
of material sales during fiscal 1999, although development delays could defer
such sales. This larger sized wafer will replace the 1 3/8 inch product which
comprised the majority of sales in 1998. The larger diameter wafer is expected
to enable lower wafer costs per chip for customers by substantially increasing
the total amount of chips per wafer. The potential market for wafers depends on
whether the Company's customers are successful in creating commercial products
using SiC materials.

Silicon Carbide Crystals for Gemstone Applications

         During fiscal 1998, the Company worked under development agreements
with C3. C3 was founded to develop gemstone products from SiC crystals. These
agreements, which were amended and restated in July 1998 as a single agreement,
call for the development of improved processes for the manufacture of near
colorless, large volume silicon carbide crystals for use in lab created gemstone
products. While the focus of this agreement is currently to increase crystal
size and volume, longer term goals include the development of crystals with a
higher color range. The development agreement will enable the Company to perform
further research in the creation of larger volume SiC crystals that may
eventually be employed in other products.

         The Company also provides SiC crystals to C3 pursuant to an exclusive
supply agreement. C3 cuts and polishes the product to fabricate diamond-like
gemstones. Recently, C3 has ordered additional crystal grower equipment from
Cree and contracted to increase volume requirements. The potential for
increasing demand depends on Cree's ability to meet C3's requirements for color,
clarity and yield. Future demand is also dependent on C3's ability to cut, facet
and effectively market its gemstone products.



Modules and Moving Message Signs

                                       5

<PAGE>

         The Company markets a modular LED-based component to customers as a
building block for indoor video and display systems. The product is a low
profile full-color LED sub-assembly for use in both large and small scale
full-color LED display systems. It uses surface mount pixels which combine the
three primary color LED chips which are assembled into very thin modules. The
modules can be combined to form any size display.

         Due to the diverse market for LED display systems, the Company cannot
effectively address all opportunities at the display system level and has
therefore chosen a strategy of supplying modules directly to well established
LED display system suppliers. This approach maximizes the efficiency of the
Company's sales resources, minimizes the capital investments that would need to
be made as a systems supplier, and does not place the Company in competition
with potential display system customers.

         The Company's RCD subsidiary has been manufacturing full color moving
message sign products since its inception in August 1994. The Company is able to
produce a variety of color moving message products. The sign products range in
brightness from indoor to high-bright, which is suitable for store window
applications. These products provide a low cost and effective way of displaying
text messages which can be easily changed and updated. The applications for
these displays include point-of-sale advertising and informational signs.

         The Company is currently reviewing the business plans for both of these
product lines to maximize sales for fiscal 1999. The Company is developing a
brighter blue and pure green LED product which is expected to be introduced
during fiscal 1999, although development delays could defer the product
introduction. The new LEDs are expected to provide the display business a low
cost, high performance product suitable for outdoor applications. This
expected upgrade in technology is anticipated to change market opportunities for
these products.



                                                             Product Development
- --------------------------------------------------------------------------------

         The Company is engaged in a number of research and development
projects. Some projects have the goal of developing commercial products for the
market in the near term. Other projects have longer term goals. There can be no
assurance as to the successful development of commercial products or the timing
thereof. All of the products under development are based on SiC materials grown
using the Company's proprietary processes.

         The Company partners with the Federal government in many of its current
research and development efforts. Contracts are awarded to the Company to fund
both short-term and long-term research projects. Funding for projects with near-
term applications for the Company typically include a cost-share arrangement.
Projects that may not have readily available production applications or projects
that relate to longer term development are normally awarded on a cost-plus basis
with built-in margins exceeding 5%. Pursuant to each contract, the amount of
funding is determined based on cost estimates that include direct costs, plus an
allocation for research and development, general and administrative costs, and a
cost of capital expense. Cost-plus funding is determined based on actual costs
plus a set percentage margin. For cost-share contracts, the actual costs are
divided between the U.S. Government and the Company based on the terms of the
contract. The government's cost-share is then funded to the Company. The
contracts typically require the submission of a written report to document the
results of such research. The government may terminate contracts with the
Company at its convenience and typically obtains a nonexclusive license to use
any inventions made in the course of the research solely for government
purposes.

                                       6

<PAGE>

         For financial reporting purposes, the Company includes funding for all
cost-plus and cost-share contracts, where the Company anticipates that total
funding will exceed direct costs over the life of the contract, as contract
revenue. All associated direct costs for these contracts are reported as a cost
of contract revenue. For cost-share contracts where the Company anticipates that
costs will exceed funding over the life of the contract, funding is reflected as
a reduction of research and development expenses, while the associated direct
costs are reported as research and development expenses. During fiscal years
1998, 1997 and 1996, the Company spent $8,474,000, $9,411,000, and $5,572,000,
respectively, for direct expenditures relating to product research and
development activities. During the same periods, the U.S Government funded
$8,241,000, $8,760,000 and $5,721,000, respectively, for direct and indirect
expenses. In addition, customers have also sponsored research activities
relating to the development of new products. During fiscal years 1998 and 1997,
customers spent $3,477,000 and $66,000, respectively, for product research and
development activities. In fiscal 1996, customers did not provide significant
funding for research activities. The Company expects to continue to perform
substantial research and product development projects during the next fiscal
year.

         The following applications are currently under research and development
by the Company. The Company expects several of these applications to be
completed in fiscal 1999, although delays could occur. Other development
projects, such as power devices and blue laser research are not expected to
produce commercial results until later years.

Silicon Carbide Material

         The Company continually conducts research aimed at improving the
quality of its wafers and enhancing its epitaxial (active layer) process. The
Company believes it can increase the diameter of its wafers while lowering
manufacturing costs and permitting the development of more complex devices. The
key determinant that will enable the manufacture of a more complex device, such
as power semiconductors, is the substrate quality and wafer size. Epitaxial
thickness, lower defect density and the elimination of variation are important
factors to improve yield, marketability and lower cost. The larger two inch
wafer size, which the Company expects will comprise the majority of fiscal 1999
wafer sales, is considered a minimum standard for many niche fabrication
facilities. The Company continues work on a $7.6 million contract awarded by the
Defense Advanced Research Projects Agency ("DARPA") to fund this research and
development. The contract has $1,702,000 in funds remaining and extends through
May 1999.

Lower Cost Blue LED Chips

         In fiscal 1998, Cree developed a blue LED that was brighter than its
prior generation blue LED. The brighter chip was developed by using a new
process that allows a chip design in which current flows vertically through the
device. This design, which is currently manufactured on a two inch wafer, yields
more chips per wafer and requires fewer manufacturing steps; therefore, it is
produced at a lower cost.

         In order for the product to approach the acceptance and marketability
of red, amber and yellow-green LEDs, the Company's management believes the price
of the chip must be further reduced. In order to reduce the cost of production,
the Company must attain success in increasing volume throughput by expanding the
customer base, and develop additional manufacturing yield improvements. These
modifications are expected to significantly reduce unit costs by improving the
die per wafer yield and spreading fixed costs over more units. There can be no
assurance that these goals will be achieved. If the Company does not achieve
sufficient increases in yields and volume throughput, then costs would fail to
decline significantly and the Company's ability to generate higher margins or to
maintain margins while reducing chip prices would be impaired.

Brighter Blue and Green LED Chips

                                       7

<PAGE>

         The Company is working to develop brighter blue and green LEDs
that would be cost-effective for outdoor applications. This design employs
indium gallium nitride layers on silicon carbide. The current generation of the
Company's blue LED products are primarily used in indoor applications, as the
brightness of the product is not as high as some competing products. The Company
believes that this chip will open new markets with a low cost platform. Cree is
also developing two new green LED products that employ the same technology as
the new brighter blue offering. These products are expected to be suitable for
the outdoor LED display market and for traffic signal applications,
respectively. Samples of these new products are expected to be released in the
first quarter of fiscal 1999, although introduction could be delayed by
unforeseen development problems.

High-Power Radio Frequency and Microwave Transistors

         The Company is currently developing high-power transistors that operate
at radio and microwave frequencies. Such devices could have important
applications in cellular phone base stations, high-power solid-state broadcast
systems for television and radio, and radar search and detection equipment.

         The Company also continues development of a SiC-based device which is
designed for use in base stations for wireless systems. This device, which is
not expected to be released commercially before late fiscal 1999, can be used
for frequency band applications above 1.8 gigahertz, such as the personal
communications system ("PCS") base station network currently being installed by
some wireless carriers. The Company believes that silicon carbide transistors
will be superior to current silicon and gallium arsenide devices due to greater
power per transistor. The higher output power available from SiC devices is
expected to allow wireless systems to use fewer transistors per base station and
less complex circuitry, at a lower cost. This power density is four to five
times higher than that achieved with equivalent silicon or gallium arsenide
devices. In addition, SiC's ability to dissipate heat more rapidly than other
materials reduces the need for costly cooling equipment. In March 1998, the
Company demonstrated a device with 53 watts of power from a single chip. Cree
expects to offer a product that emits 75-100 watts of power from a single chip
in order to reach commercial viability. During fiscal 1998, the Company
continued to work on several contracts from Naval Research Laboratories, DARPA,
and the Army Research Laboratories to advance this research. These contracts
extend through August 1999.

         During fiscal 1998, the Company reported the demonstration of gallium
nitride on SiC transistors that, although low in total output power, operate at
a power density of 6.8 watts per millimeter at 10 gigahertz. This power density
is the highest ever reported for a solid state field effect transistor operating
at radio or microwave frequency and is eight times higher than that achieved
with equivalent silicon or gallium arsenide devices. A commercial device capable
of emitting power at this level is not expected during the next fiscal year.

Blue and Ultraviolet ("UV") Laser Diodes

         The storage capacity of optical disk drives can be increased
significantly by utilizing a laser diode capable of emitting short wavelength
light. The Company has demonstrated a laser diode fabricated from indium gallium
nitride and related materials deposited on SiC substrates that emits a shorter
wavelength blue light than that of the red or infrared lasers used today. This
technology could potentially increase the storage capability of optical disk
drives by a factor of four to five. This increased storage capability could lead
to advances in CD-ROM data storage and audio and video compact disc
applications.

         Government funds were last allocated to development of the blue laser
diode in June of 1996 when DARPA awarded a $4.3 million contract to the Company
to be spent over a three year period. Most of these funds have now been
exhausted. As a part of this development, in July 1997 the Company announced
that it 


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<PAGE>

had demonstrated a continuous wave laser operation at room temperature.
Substantial work is still needed to produce a blue laser suitable for commercial
application. There can be no assurance that a commercial product will result
from this research and development effort.

High-Power Semiconductors

         The Company is working on the development of prototype high power
devices that, if successfully developed, could have many significant uses. Such
devices could be employed in applications involving power conditioning as well
as switching power to allow electricity to flow to other electronic components.
SiC based power devices have the potential to handle up to fifty times more
power density than current silicon based devices. SiC devices are expected to
operate at significantly higher temperatures and voltages, have superior
switching capabilities, yet retain a die size almost twenty times smaller than a
silicon based device. Potential applications include power drive components for
electric vehicles, lighting ballast components, industrial motor controls, and
power supplies with minimal interruption used in power transmission. These power
devices are not anticipated to be commercially available during the next fiscal
year.

         The Company recently entered into a three year, up to $3 million,
project with Kansai Power Electric Company, the fourth largest power company in
the world, for research in switching systems in power transmission networks. The
Company continues to make progress in improving the quality of its SiC material,
improving processes for fabricating devices and improving device designs.
However, there is no assurance that further work will result in improvements in
processes, material quality and end products that are necessary to introduce
such products to market. Also, it is anticipated that the Company will need to
develop methods to reliably produce wafers of a three inch or greater diameter
in order to make such devices economically viable. There can be no assurance
that this will be accomplished. The Company continues to work under contracts
with the government and other sources for research in this area. Work is
currently being performed for the Office of Naval Research and other sources.
These contracts extend through September 2000.

Gemstone Applications

         During fiscal 1998, the Company worked under development agreements
with C3. These agreements, which were amended and restated in July 1998 as a
single agreement, call for the development of improved processes for the
manufacture of colorless, large volume silicon carbide crystals for use in lab
created gemstone products. The agreement obligates C3 to pay Cree's direct costs
of the development effort, plus an overhead charge on certain costs. Work to be
performed under this contract during the next year will target the development
of larger sized crystals and is expected to result in a three inch diameter
crystal for possible use in other product applications.

High-Temperature Devices

         The Company has developed prototype SiC-based transistors and
rectifiers that operate at higher temperatures than comparable silicon devices.
These high-temperature semiconductors have potential applications in the
automotive, energy and aerospace industries. For example, these devices could be
used to amplify low level sensor signals directly on the engine block of an
automobile engine to measure engine performance. This allows the optimization of
fuel economy by adjusting engine performance during operation. In addition,
these devices could find use in applications such as down hole drilling
equipment and space-based power systems. Although prototype devices have been
developed, additional development work is needed to achieve commercial
viability. Work is currently being performed for the Defense Special Weapons
Agency and other sources.


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                                                             Strategic Alliances
- --------------------------------------------------------------------------------

         The Company believes that the formation of strategic alliances with
other companies is a viable strategy for the immediate development of its
technology to bring certain products to market.

         Cree and Siemens A.G. ("Siemens") entered into a Development, License
and Supply Agreement in fiscal 1996 to work jointly on the development of a
green LED on silicon carbide substrates, as well as improvements to Cree's blue
LED product. Siemens is a manufacturer of LED lamps for its merchant components
business. In addition to undertaking the joint development program, Siemens paid
a $1.5 million license fee to license certain epitaxial and fabrication
technology from Cree for use in the manufacture of green and blue LEDs. The
agreement also includes provisions under which Cree will supply a portion of
Siemens' requirements for blue and green LEDs and wafer products required for
the manufacture of such LEDs. In September 1996, the Company entered into a
Purchase Agreement with Siemens, pursuant to which Siemens agreed to purchase
blue LED chips made using the Company's gallium nitride-on-silicon carbide
technology. In December 1997, the Purchase Agreement was amended to provide for
additional shipments of LED products through December 1998. The Company is
currently negotiating an extension of this agreement with Siemens.

         Also, in September 1996, the Company entered into a License and
Technology Transfer Agreement and a related Supply Agreement with Shin-Etsu
Handotai Co. Ltd. ("Shin-Etsu") and other parties. Pursuant to these agreements,
the Company granted Shin-Etsu a license to use certain epitaxial and device
fabrication process technology for the manufacture of the Company's blue LED
product and agreed to supply silicon carbide wafers required to manufacture the
licensed product. The license agreement provided for a payment of a $2.6 million
license fee and royalties based on a percentage of sales of products
made using the licensed technology.



                                                          Sales and Distribution
- --------------------------------------------------------------------------------

         The Company markets its blue LED chips domestically and in a number of
foreign countries. Because the production of lamp and display products
incorporating LED chips is concentrated among a relatively small number of
manufacturers, the Company uses an executive sales approach to market its LED
chips. In Japan the Company markets its LED products and SiC wafers through its
distributors Sumitomo Corporation and Shin-Etsu Handotai Co., Ltd. pursuant to a
Distributorship Agreement signed in 1995. The Company markets its LED and SiC
wafer products throughout the rest of the world via a small direct sales staff.

         The Company currently distributes the majority of its LED-based modules
directly to OEMs. The OEMs in turn manufacture, sell and generally install
modular based display systems at their customers' sites.

         The majority of moving message signs are sold through the Company's
subsidiary, RCD, via a network of international distributors and sales
representatives in South America, the United Kingdom, the Pacific Rim and
Canada. RCD also employs a direct sales program and uses a dealer network to
market a portion of its products in the United States.

         The Company also sells SiC crystal materials for use in gemstone
applications directly to C3 under an exclusive supply agreement.



                                                                     Competition
- --------------------------------------------------------------------------------

                                       10

<PAGE>

         The semiconductor industry is intensely competitive and is
characterized by rapid technological change, price erosion, and intense foreign
competition. The Company believes that it currently enjoys a favorable position
in the existing and potential emerging markets for SiC-based products and
materials primarily as a result of its proprietary SiC-based technology.
However, the Company faces actual and potential competition from a number of
established domestic and international compound semiconductor companies. Many of
these companies have greater engineering, manufacturing, marketing, and
financial capabilities than the Company.

         The Company's primary competition for the blue LED product comes from
Nichia Chemical Industries, Ltd. ("Nichia") and Toyoda Gosei Co. Ltd.
("Toyoda"), companies headquartered in Japan, and from The Hewlett-Packard
Company ("HP"), who currently market blue LED products that are brighter than
the Company's LED device. The sales price for Cree's LED is presently lower than
the standard price of the product offered by these companies. However, there can
be no assurance that these companies will not offer lower pricing in the future.

         Cree's LED product is made by growing epitaxial layers on SiC
substrates for the subsequent fabrication of the blue LED. Competing blue LED
products employ a sapphire substrate. Cree's vertical chip has a lower cost
primarily as a result of its size. Cree's chip has a surface area that is 57% of
the size of the current competitive chip. Thus, SiC substrates can be more
expensive than sapphire and still be competitive on a price per chip basis. The
sapphire substrate requires a larger chip because sapphire is an insulator
material, and as such, requires a horizontal device with both contact points at
the top of the device. The Cree SiC product is a conductive substrate, which
allows one contact point on the top and the other on the bottom, allowing for a
smaller vertical device. Furthermore, because red, amber and yellow-green chips
are vertical devices, Cree's vertical structure facilitates easier use in
existing LED component assembly operations.

         The ability of the Company to compete successfully in existing and
future markets for its products will depend on factors both within and outside
its control. These factors include, but are not limited to, success in
manufacturing new higher brightness SiC based products that are suitable for
outdoor applications, improvements to existing products, improvements in its
SiC-based process technology, increasing production capacity of LED products,
protection of its products by effective utilization of intellectual property
laws, diversity of product line, the rate at which customers incorporate the
Company's components into their products, product introductions by the Company's
competitors, and general domestic and international economic conditions. The
Company; however, expects that price will be a determining factor for many of
its products and it devotes substantial efforts to reduce production costs (See
"Product Development"). There is no assurance that the Company's competitive
position will not be adversely affected by one or more of these factors in the
future, particularly in view of the fast pace of technological change in the
semiconductor industry.






                                       Sources and Availability of Raw Materials
- --------------------------------------------------------------------------------

         The Company depends on single or limited source of suppliers for a
number of raw materials and components used in its SiC wafer products and LEDs,
including certain key materials and equipment used in its crystal growth,
wafering, polishing, epitaxial deposition, device fabrication, and device test
processes. The Company generally purchases these single or limited source
materials and components pursuant to 


                                       11

<PAGE>

purchase orders and has no guaranteed supply arrangements with such suppliers.
In addition, the availability of these materials and components to the Company
is dependent, in part, on the Company's ability to provide its suppliers with
accurate forecasts of its future requirements. Production of many materials used
in semiconductor manufacturing is limited to one or a few manufacturing
facilities worldwide. Disruption of production at one or more of these
facilities represents a risk for the entire semiconductor industry. However,
smaller companies, such as Cree, may be at greater risk than larger companies if
supplies of any materials become scarce as suppliers may favor their larger
customers in allocating their products. Any interruption in the supply of these
key materials or components could have a significant adverse effect on the
Company's operations.



                                                                       Customers
- --------------------------------------------------------------------------------

         During fiscal 1998, sales to Siemens A.G. accounted for more than 10%
of total revenue. The loss of Siemens' business would have a material adverse
effect on the results of operations if the Company were unable to replace the
volume with another customer. In addition, sales to C3, Inc. and the Department
of Defense each comprised more than 10% of total Company revenue for fiscal
1998. For the year ended June 30, 1997, revenue from Siemens and the Department
of Defense each accounted for more than 10% of total revenue. For the year ended
June 30, 1996, Siemens, Sumitomo and the Department of Defense revenues each
accounted for more than 10% of total revenue.



                                                                         Backlog
- --------------------------------------------------------------------------------


         As of June 28, 1998, the Company had a firm backlog of approximately
$12.6 million consisting of approximately $7.2 million of product orders and
$5.4 million of executed research contracts with the U.S. Government. This
compares to a firm backlog level of $17.5 million as of June 30, 1997, which
consisted of approximately $9.2 million of product orders and approximately $8.3
million of executed research contracts with the U.S. Government.



                                                  Patents and Proprietary Rights
- --------------------------------------------------------------------------------

         The Company has an exclusive license to ten U.S. patents from North
Carolina State University ("NCSU"), and holds 40 additional domestic patents of
its own or owned jointly. Cree licensed 12 foreign patents issued on the same
NCSU technology and holds 19 foreign patents issued on Cree applications which
are counterparts to the U.S. patents. The Company also holds exclusive license
rights to inventions owned by NCSU which are subject to one pending U.S. patent
application and two foreign applications, which are counterparts of the U.S.
patent applications. Cree has 27 patent applications of its own pending in the
United States and also has 79 foreign patent applications pending. In addition
to its patent rights, the Company relies upon certain proprietary know-how and
trade secrets in its manufacturing process and has entered into non-disclosure
agreements to protect its proprietary technology with both employees and parties
outside of the Company.

         The Company earns a material amount of its revenues in overseas
markets. See "Customers". While the Company has applied for patent protection
for certain of its technologies and products in some of these markets, there can
be no assurance that such markets will be subject to the Company's intellectual
property rights.

                                       12

<PAGE>

         The NCSU License. In 1987, the Company entered into a license agreement
with NCSU pursuant to which the Company was granted a worldwide, fully paid,
exclusive license to manufacture, use, and sell products and processes covered
by the claims of ten U.S. patent applications filed by NCSU relating to SiC
materials and SiC-based semiconductor devices, some of which also have been
filed in foreign countries. Ten patents were subsequently issued with respect to
eight of those applications, with expiration dates between 2007 and 2009. Twelve
of the foreign filings have been issued with expiration dates from 2006 through
2012. Under the terms of the license, the U.S. Office of Naval Research has
retained an interest in the licensed technology for certain military
applications.

         Cree's Patents. Since its inception, the Company has been granted 40
U.S. patents of its own or jointly owned. These patents expire between 2008 and
2016. The Company has filed a number of these patent applications in foreign
countries, 17 of which have been issued. In addition, the Company has, in
the past, entered into joint research and development programs to develop new
SiC-based devices. These efforts have resulted in four jointly-owned patents,
one with Purdue University, two joint patents with General Electric Corporation,
and one joint patent with NCSU.

         Although the Company has not received any claims that its products
infringe on the proprietary rights of third parties, there can be no assurance
that third parties will not assert infringement claims against the Company in
the future with respect to current or future products or that such assertion may
not require the Company to enter into royalty arrangements, prevent the Company
from selling products, or result in protracted or costly litigation.

         Because of rapid technological developments in the semiconductor
industry and the broad and rapidly developing field of patent law, the patent
position of any semiconductor device manufacturer, including that of the
Company, is subject to uncertainties and may involve complex legal and factual
issues. Consequently, although the Company holds certain patents, is licensed
under other patents, and is currently pursuing additional patent applications,
there can be no assurance that patents will be issued from any pending
applications or that claims allowed by any existing or future patents issued or
licensed to the Company will not be challenged, invalidated, or circumvented, or
that any rights granted thereunder will provide adequate protection to the
Company. Moreover, the Company may be required to participate in interference
proceedings to determine the priority of inventions, which could result in
substantial costs to the Company.



                                                        Environmental Regulation
- --------------------------------------------------------------------------------

         The Company uses and disposes of hazardous substances and wastes in its
manufacturing and research and development activities and is thus subject to a
variety of federal, state and local government laws and regulations related to
the storage, use and disposal of such materials. The Company is also subject to
laws and regulations related to the discharge of environmental pollutants. The
Company believes that it is in compliance with all applicable laws regulating
hazardous materials and environmental pollutants and is not presently aware of
any contamination at any of its premises for which it could be responsible under
applicable law. However, the failure to comply with present or future laws or
regulations relating to such materials could result in fines or other
liabilities being imposed on the Company, or in suspension or cessation of
operations, which events could have a material adverse effect on the Company's
business and prospects.



                                                                       Employees
- --------------------------------------------------------------------------------

                                       13

<PAGE>

         As of June 28, 1998, the Company employed 248 people, all of which are
located in the United States. None of the Company's employees are represented by
a labor union or subject to collective bargaining agreements. The Company
believes relations with its employees are strong.



                                                                    Risk Factors
- --------------------------------------------------------------------------------

         Ownership of the Company's securities is subject to a number of risks,
including the following:

Production Efficiency and Availability of Raw Materials

         The Company must continue to improve its production yields in order to
reduce costs. Production yield problems or missed efficiencies may have an
adverse effect on the Company's operations. Should the Company experience
protracted problems in the production of its key components or the operation of
its proprietary manufacturing systems, its ability to deliver its products could
be materially impacted. Such problems often occur as new products are introduced
or improvements are made to existing products. As the Company expects several
significant development projects to be completed in fiscal 1999, the Company may
be particularly vulnerable to this risk. The Company is also dependent on a
limited source of suppliers for a number of raw materials and components used in
its SiC wafer products and LEDs. An interruption in the supply of these items
could cause the Company's manufacturing efforts to be damaged and result in
customer dissatisfaction.

Concentration of Business

         The Company relies on a small number of customers for much of its
sales. At present, the majority of the LED sales are made to Siemens pursuant to
the parties' Purchase Agreement executed in September 1996 and amended in
December 1997. This agreement calls for shipments through December 1998, subject
to certain rescheduling provisions. Failure to extend this agreement could have
a material adverse effect on the business and prospects of the Company.
Dependence on one or a few customers may require the Company to agree to
unfavorable contract terms and conditions that could cause contracts to be
unprofitable. Likewise, the failure of the Company to diversify its customer
base could limit the prospects for the LED business.

Foreign Sales

         The Company has, and is expected to continue to have, a substantial
percentage of its sales to foreign companies, primarily in Asia and Europe.
There can be no assurance that the Company's current intellectual property
position will be enforceable in foreign countries to the extent it is
enforceable in the United States. In addition, the Company's international sales
may be subject to government controls and other risks, including export
licenses, federal restrictions, changes in demand resulting from currency
fluctuations, political instability, trade restrictions, changes in tariffs and
collection of accounts receivable. If the current slowdown in the economies of
certain Asian countries worsens, the Company may be materially adversely
affected.



Research and Development

         To remain competitive, the Company must continue to invest substantial
resources in research and development. The Company's prospects for both
near-term and long-term success are substantially dependent on its ability to
continue to increase the performance of its LED products and to increase
production efficiency. The successful introduction of the brighter blue and
green products and the expected


                                       14

<PAGE>

higher yield and lower costs of the conductive buffer product, is very important
for the Company to achieve its goals for fiscal 1999. Furthering the need for
enhanced efficiency, is the expected decline in the average sales price for the
LED products in fiscal 1999. Without the introduction of the brighter LED
products and yield and volume efficiencies of the conductive product, the
Company may not maintain or realize growth in the LED business. In addition, the
Company must also invest resources toward the introduction of microwave products
in fiscal 1999. See "Product Development". Near-term results may suffer due to a
lag between investment in development, marketing and production, and revenues
derived from the investment even if new or improved products are a long-term
success.

          The patents and other proprietary rights of the Company may not
prevent the competitors of the Company from developing noninfringing technology
and products that are more attractive to customers than the technology and
products of the Company. The technology and products of the Company could be
determined to infringe the patents or other proprietary rights of others. In
addition, defending such an infringement claim could have a material adverse
impact on the Company even if the claim were found to lack merit.

Dependence on Contracts With the U.S. Government

         Over the past several years, the Company has been awarded a number of
contracts from agencies of the United States government for purposes of
developing SiC material and SiC-based semiconductor devices. Government policy
is constantly changing, therefore, there can be no assurance that the Company
will enter into any additional government contracts, or, if such contracts are
entered into, that they will be profitable or produce contract revenue. In
addition, there can be no assurance that after any such contracts are entered
into, changing government regulations will not significantly alter the benefits
of such contracts that can be expected to inure to the Company. Cutbacks in, or
reallocations of Federal spending, including changes which could be proposed or
implemented in the future, could have a material adverse impact on the
Company's results of operations, as well as its ability to implement its
research and development programs.



I
tem 2.  Description of Property

         The Company purchased real property consisting of approximately 30
acres of land on which exists a 162,000 square foot production facility and a
total of 35,000 square feet of service and warehouse buildings. This property is
located in Durham County, North Carolina, in the vicinity of the Research
Triangle Park. The purchase price for the land and buildings was $3 million.
Since the acquisition of this facility, the Company has invested approximately
$8.4 million in building upfits and improvements. The Company plans to relocate
the majority of its operations to this facility over the next few years.

         The Company currently leases space for its manufacturing and primary
research and development facilities, which occupy 21,900, 1,900 and 1,900 square
feet, respectively, in the same building in Durham, North Carolina. The leases
expire in December 2001, May 1999 and October 1998, respectively. In addition,
the Company also leases approximately 13,200 square feet in a separate building
in Durham, North Carolina, for its device fabrication and test processes. This
lease term expires in August 2000. 


Item 3. Legal Proceedings

         The Company is not a party to any material litigation and is not aware
of any pending or threatened litigation that could have a material adverse
effect either upon the Company's business, operating results or financial
condition.



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

                                       15

<PAGE>

         No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1998.



                                     PART II



Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

         Common Stock Market Information. The Company's common stock is traded
in the NASDAQ National Market System and is quoted under the symbol "CREE". The
following table sets forth, for the quarters indicated, the high and low bid
prices as reported by NASDAQ. Quotations represent interdealer prices without an
adjustment for retail markups, markdowns or commissions and may not represent
actual transactions.

                       FY 1998                        FY 1997

                       High            Low            High            Low
                       ----            ---            ----            ---
First Quarter          $20-1/2         $11-3/4        $15-3/4         $8-1/4
Second Quarter         $29-1/5         $15-5/8        $14             $8-7/8
Third Quarter          $19-5/8         $13-1/2        $15-7/8         $9-3/8
Fourth Quarter         $17-5/8         $14            $15-1/8         $9-1/2



         Holders and Dividends.  There were approximately 381 holders of record
of the Company's Common Stock as of August 7, 1998.

         The Company has never paid cash dividends on its Common Stock and does
not anticipate that it will do so in the foreseeable future. There are no
contractual restrictions in place that currently materially limit, or are likely
in the future to materially limit, the Company from paying dividends on its
common stock, but applicable state law may limit the payment of dividends. The
present policy of the Company is to retain earnings, if any, to provide funds
for the operation and expansion of its business.



Item 6.  Selected Financial Data

         The consolidated statement of operations data set forth below with
respect to the years ended June 28, 1998, and June 30, 1997 and 1996, and the
consolidated balance sheet data at June 28, 1998 and June 30, 1997 are derived
from, and are qualified by reference to, the audited consolidated financial
statements included elsewhere in this report and should be read in conjunction
with those financial statements and notes thereto. The consolidated statement of
operations data for the years ended June 30, 1995 and 1994 and the consolidated
balance sheet data at June 30, 1996, 1995 and 1994 are derived from audited
consolidated financial statements not included herein.

                                       16

<PAGE>

<TABLE>
<CAPTION>
<S>     <C> 
                                                  Selected Financial Data
                                              (in thousands, except per share data)

                                                                           Years Ended
                                                  -----------------------------------------------------------
                                                   June 28,    June 30,    June 30,    June 30,     June 30,
                                                       1998        1997        1996        1995         1994
                                                   --------    --------    --------    --------     --------
Statement of Operations Data:
Product revenue, net                               $ 34,891    $ 19,823    $  9,689    $  5,989     $  3,534
Contract revenue, net                                 7,640       6,535       3,945       3,011        3,956
License fee income                                     --         2,615       1,423        --           --
                                                   --------    --------    --------    --------     --------
Total revenue                                        42,531      28,973      15,057       9,000        7,490

Net income (loss) from continuing operations          6,275       3,542         243         (17)        (431)

Basic earnings (loss) per common share             $   0.49    $   0.28    $   0.02    $   0.00     $  (0.04)
Dilutive earnings (loss) per common share          $   0.47    $   0.27    $   0.02    $   0.00     $  (0.04)

Weighted average shares outstanding                  13,493      13,126      12,615      10,367       10,337


                                                                           Years Ended
                                                  -----------------------------------------------------------
                                                   June 28,    June 30,    June 30,    June 30,     June 30,
                                                       1998        1997        1996        1995         1994
                                                   --------    --------    --------    --------     --------
Balance Sheet Data:
Working Capital                                    $ 27,603    $ 21,013    $ 18,596    $  9,971     $ 11,006
Total assets                                         72,724      50,137      43,796      20,924       20,018
Long-term obligations                                10,804       1,638        --          --             14
Shareholders' equity                               $ 54,865    $ 45,125    $ 40,672    $ 19,504     $ 19,334
</TABLE>

*  The Company has not declared a dividend on common stock since its inception

** The years ended June 28, 1998 and June 30, 1997, 1996 and 1995 include the
   Company's wholly owned subsidiary, Real Color Displays, Inc.


                                       17

<PAGE>


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Cautionary Statement Identifying Important Factors That Could Cause the
Company's Actual Results to Differ From Those Projected in Forward Looking
Statements

         Pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this report are advised that this
document contains both statements of historical facts and forward looking
statements. Forward looking statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
indicated by the forward looking statements. Examples of forward looking
statements include, but are not limited to (i) projections of revenues, income
or loss, earnings per share, capital expenditures, dividends, capital structure
and other financial items, (ii) statements of the plans and objectives of the
Company or its management or Board of Directors, including product enhancements,
or estimates or predictions of actions by customers, suppliers, competitors or
regulatory authorities, (iii) statements of future economic performance, and
(iv) statements of assumptions underlying other statements and statements about
the Company and its business.

         This report also identifies important factors which could cause actual
results to differ materially from those indicated by the forward looking
statements. These risks and uncertainties include the Company's ability to
complete development of and successfully introduce new LED and microwave
products, to lower LED and wafer costs, to gain a larger customer base, and to
increase product yields and wafer size, possible price competition, potential
failure to obtain expected volume increases from existing customers, potential
infringement claims by third parties, potential inability of the Company to
enforce its intellectual property rights against others, availability and
continuation of U.S. government funded research contracts, possible delays in
the introduction of other new products, and delays in customer acceptance of
products or services and other factors, which are described herein. See Item 1,
Business, Risk Factors.

         On September 24, 1997, the Board of Directors of Cree Research, Inc.
changed the Company's fiscal year from the twelve months ending June 30, to a 52
or 53 week year ending on the last Sunday in the month of June. The Company's
1998 fiscal year extended for the period from July 1, 1997 to June 28, 1998.

Results of Operations

         For the fiscal year ended June 28, 1998, Cree posted record revenue and
net income of $42,531,000 and $6,275,000, or $0.47 per diluted share,
respectively. These results reflect an increase in revenue and net income of
$13,558,000 and $2,733,000, respectively, over the prior year. Product revenue,
which includes LED, wafer and other material sales, module display products and
moving message sign sales, reflects a 76% increase over fiscal 1997 results.
Comparatively, product revenue also increased 105% during fiscal 1997 over 1996
amounts.

Product Revenue

         During fiscal 1998, a significant portion of the rise in product
revenue was directly attributable to the 132% increase in blue light-emitting
diode ("LED") volume pursuant to an amendment to a purchase agreement signed in
September 1996 with Siemens A.G. ("Siemens"). That agreement and two subsequent
amendments, provided for $6.8 million in additional sales to Siemens in fiscal
1998 over 1997. As amended, the agreement presently obligates Siemens to
purchase certain quantities of LED products through December 1998. Additionally,
the amendment provides for higher prices per unit on items shipped early in the
contract, with unit prices being reduced as volume increases in the latter part
of the contract. Further reductions in per unit costs are expected throughout
fiscal 1999 as a result of the full implementation to the conductive buffer
product, higher throughput and other plant asset efficiencies. There can be no
assurance that these


                                       18

<PAGE>

efficiencies will be achieved. LED sales also increased by 70% in fiscal 1997
over 1996 amounts due to volume stemming from the original agreement and first
amendment with Siemens.

         The Company continues to focus on obtaining additional LED customers
who are interested in ordering commercial quantities of the product. To meet
this goal the Company anticipates the release of new higher brightness blue and
green LED products, which are expected to be competitive in outdoor
applications, during the first half of fiscal 1999. Anticipated volume
associated with these new products, combined with lower LED pricing, are
expected to increase customer orders. If the Company is unable to expand its
customer base or release these new products, its revenue and earnings growth
potential could be adversely impacted. The Company believes that in order to
significantly grow market demand for LED products and to defray competition, it
must continue to substantially lower prices. During fiscal 1998, the Company's
average sales price per LED unit dropped 32% over 1997 levels. This decline in
price was more than offset by the 132% increase in product volume. The Company's
goal is to continue to lower sales prices to meet customer price points
throughout fiscal 1999. While the Company reported a lower average sales price
for LEDs during fiscal 1998, total product profitability increased due to higher
volumes and other efficiencies. Overall, average chip costs also declined in
fiscal 1998 due to a combination of a smaller chip size, the conversion to a two
inch diameter wafer, higher volume which spreads fixed costs over more units
and, in the latter half of the fourth quarter, benefits from the conductive
buffer technology.

         During 1999, the Company anticipates further reductions in chip costs
due to the full year benefits of the conductive buffer process, higher volume
throughput and greater yield. If the Company is unable to realize these
benefits, profits are anticipated to deteriorate during fiscal 1999 due to
declining per unit sales prices in the Company's contract with Siemens. Greater
volume, while maintaining margins per unit, has been and will continue to be
Cree's strategy in the LED marketplace. Many current and potential customers
for the Company's products are based in Asia. Poor economic conditions and
currency devaluation in some countries may adversely affect the Company's
ability to increase sales volume both as a result of lower demand by customers
and competition reducing the price of products.

         Wafer and other materials revenue has increased 56% in fiscal 1998 over
1997 due primarily to a 29% increase in wafer volume associated with a greater
interest in the worldwide research community for SiC-based products. The Company
continues to make improvements to the quality of its SiC material, thus
increasing the demand for research in microwave and power applications. These
wafer quality improvements have also led to corporate research funding,
including work performed toward the development of both microwave and power
devices during the year. Profits contributed by wafer sales are expected to rise
as the Company continues to improve quality while lowering costs due to higher
throughput and greater yield efficiency. During fiscal 1997, wafer sales grew
60% over 1996 amounts, due to the greater acceptance of the material in the
marketplace and a slight increase in the average sales price due to a greater
mix of premium wafer products available with low defect levels.

         In July 1997, the Company announced development and supply agreements
with C3, to develop and supply bulk single crystal silicon carbide for gemstone
applications. The development program included the development of improved
processes for manufacturing colorless single crystalline SiC for use in
gemstones with diamond-like characteristics. This research is particularly
important as it also funds the development of larger diameter crystals. In
addition to the development agreement, the Company also entered into an
exclusive supply agreement where the output of dedicated production was supplied
and priced at cost plus a stipulated margin. For fiscal 1999, pricing under the
supply agreement has been superseded by a separate agreement that allows output
from dedicated production to be priced based on the quality of the material. In
addition, C3 has agreed to pay the Company up to $3.4 million for the purchase
of additional equipment to increase available capacity at Cree. Over one half of
this equipment was billed to C3 during fiscal 1998, however this transaction was
not recorded as revenue. Total revenue for materials used in gemstone
applications increased 89% in fiscal 1998 as compared to 1997 as a result of
these two agreements. Material purchased 


                                       19

<PAGE>

by C3 under the supply agreement may be used solely for the fabrication and sale
of gemstones. During fiscal 1997 and 1996, the Company sold material products to
C3 at margins consistent with those achieved in connection with sales of similar
products to the Company's other customers.

         Financial results for the display product line includes sales of both
modules and sign products. Revenue for the modules business increased by 29% in
fiscal 1998 over the prior year due to increased interest among customers for
the video display indoor stadium sign. Moving message sign sales by RCD, the
Company's subsidiary, suffered a 72% decline in revenue compared to 1997 due to
a 71% decrease in volume and slightly reduced average sales prices. This
reduction was prompted by the Company's shift to the module product line. During
fiscal 1998, the Company primarily sold an existing inventory of moving message
signs and did not expand or refresh the product line. The Company is currently
reviewing the business plan of these product lines to maximize sales for fiscal
1999. The Company expects the release of low priced, high brightness LED
products that will compete in outdoor applications in fiscal 1999. These new
LEDs are anticipated to change market opportunities for display products.
Revenue for the display business grew 76% in fiscal 1997 from 1996 due to the
introduction of the modules line of business during that year.

Contract Revenue

         Research contract revenue increased 17% to $7,640,000 during fiscal
1998 as a result of the mix of funding from available contracts. Funding for
fiscal 1997 included a higher amount of proceeds recognized under two cost-share
arrangements. For these agreements, funds are recorded as a reduction in
research and development expense rather than as contract revenue. As funds
associated with these two programs were exhausted during the second quarter of
fiscal 1998, Company resources were shifted to programs under a cost-plus or
catalog price arrangement, in which funding is recorded as contract revenue.
Therefore, contract revenue was higher in fiscal 1998 than 1997. Contract
revenue grew 66% to $6,535,000 in fiscal 1997 as higher revenues were generated
as a result of more funding being made available from the U.S. government for
certain research contracts, primarily in the areas of microwave, power, blue
laser and basic material development.

License Fee Income

         Included in revenue for fiscal 1997 is a one-time license fee of
$2,615,000. This license fee was earned pursuant to a License and Technology
Transfer Agreement entered into in September 1996 with Shin-Etsu Handotai Co.
Ltd. ("Shin-Etsu"). Pursuant to this agreement, the Company granted Shin-Etsu a
license to use certain epitaxial and device fabrication process technology for
the manufacture of the Company's LED product. The Company also recorded an
accrued expense of $186,000 payable in July 1998 to a third party that brokered
the agreement. Results for fiscal 1996 include a one-time net license fee
revenue of $1,423,000. This license fee was earned pursuant to a Development
License and Supply Agreement entered in October 1995 with Siemens, in which the
Company granted Siemens a license to use certain technology to manufacture blue
and green LED products. No license fee arrangements were recorded by the Company
during fiscal 1998.

Cost of Revenue

         The Company's gross margin increased 47% to $14,552,000, or 34% of
revenue for fiscal 1998. The Company's gross margin as a percentage of sales was
34% and 24% in 1997 and 1996, respectively. License fee revenue, which has no
corresponding cost, is included in both 1997 and 1996 results. Without license
fees, gross margins would have been $7,263,000 or 28% of revenue for fiscal 1997
and $2,145,000 or 16% of revenue for the comparative period in 1996. The overall
increase in margin in 1998 stems from higher revenue and lower LED and materials
costs per unit. The lower unit costs were recognized due to higher 


                                       20

<PAGE>

throughput, which more effectively utilized plant capacity, and yield
efficiencies on LED and wafer products. This greater throughput enabled the
Company to spread fixed cost investments over a larger volume of product.
Greater yield in LED applications resulted from a combination of a new smaller
die size, the new two inch diameter wafer and the introduction of the conductive
buffer technology. Yield was also higher for LED and materials due to plant
processing efficiency and improvements and a higher quality of wafer materials.
Higher margins in the future are largely contingent on the Company's ability to
increase the volume of LEDs produced, by gaining a larger customer base,
successfully introducing new products and continued savings from the conductive
buffer technology. These factors are significant due to the anticipated decline
in the average LED per unit sales price to be received in 1999. If the Company
is unable to improve efficiency under the new chip standards or gain orders for
additional volume, gross margin could be negatively impacted. Gross margin
improved in 1997 from 1996 levels, due to higher revenue and throughput
associated with the Siemens agreement, and yield efficiencies, which lowered the
manufacturing cost per unit.

         The Company benefits from research and development efforts sponsored by
U.S. government contracts. Contracts are awarded to the Company to fund both
short-term and long-term research projects. For contracts under which the
Company anticipates that funding will exceed direct costs, all funding is
reported as contract revenue and direct costs are reported as cost of contract
revenue. For contracts under which the Company anticipates that direct costs
will exceed funding, costs are reflected as research and development expenses
with the related funding amounts offsetting these costs. Cost of contract
revenue has increased in fiscal 1998 over 1997 due primarily to the exhaustion
of funds available under two cost-share contracts during the first half of the
year. Costs for research under these two arrangements were included as research
and development expenses rather than a cost of contract revenue. When funding
under these two contracts was completed in the second quarter of fiscal 1998,
all resources were shifted to cost-plus and catalog priced contracts, where
expenses are recorded as a cost of contract revenue. Contract cost of revenue
was significantly higher in fiscal 1997 than 1996 as a result of more funding
being made available from the U.S. government for certain research contracts,
primarily in the areas of microwave, power, blue laser and basic material
development.

         Research and development costs have decreased by 3% to $1,774,000 in
1998 due to a reduction in work performed under two cost-share contracts to
further the blue laser research. Net costs to the Company for these projects
were $276,000 and $671,000 for fiscal 1998 and 1997, respectively. These
cost-share contracts concluded during the first half of 1998. Additionally,
research and development costs for 1997, included a one-time write off of
$93,000 for the closure of the Company's Eastern European Division. The Eastern
European Division, located in St. Petersburg, Russia, was a research group
performing some of the Company's basic material and device development work.
Work performed under cost-share arrangements in fiscal 1997 also explains 
why research and development costs were higher in that year than in 1996.

         Sales and general and administrative expenses decreased 4% to
$4,131,100 for fiscal 1998, compared to 1997 levels as increased costs to
support the growth of the business were offset by two one-time insurance
payments to the Company. As a result of the dismissal in November 1997 of a
securities class action lawsuit filed in October 1996, the Company was
reimbursed $216,000 by its insurance carrier for costs incurred in defense of
the suit. In addition, as a result of a negotiated cost cap, the Company
received a $220,000 reimbursement of medical expenses that were incurred under a
partially self insured health plan. As a percentage of revenue, these costs have
decreased to 10% in 1998 from 15% and 19% in 1997 and 1996, respectively. Total
sales and general and administrative expenses increased 47% in fiscal 1997 over
1996 amounts due to higher costs associated with additional sales personnel to
focus the business on gaining new LED customers, the SEH license agreement
commission fee (a net present value of $172,000) and greater legal fees in
connection with the defense of a securities class action lawsuit that has since
been dismissed. The Company anticipates that sales and general and
administrative expenses will continue to rise in future


                                       21

<PAGE>

periods to support the anticipated growth of the business, however, the cost as
a percentage of total revenue is expected to decline as economies of scale
continue to be realized.

         Other (income) expense includes a net loss recorded on the disposal of
certain fixed assets and the write-off of $66,000 for the remaining value of
goodwill associated with the acquisition of the Real Color Displays subsidiary.
In addition, the Company has entered into an agreement with C3 to sell equipment
manufactured by the Company at cost plus a reasonable overhead allocation. The
overhead allocation was recorded as "other operating income"; however, the
amount was more than offset by leasehold write-offs associated with the move to
the new facility and other asset disposals.

         Net interest income increased by $123,000 in 1998 over 1997 results and
decreased by $260,000 when comparing 1997 to 1996, due to higher investable cash
balances available in fiscal 1998 and 1996. Cash balances were high in fiscal
1998 as the Company generated over $12 million from operations compared to $6
million in fiscal 1997. Also, the Company concluded a private equity placement
in September 1995 that also increased available cash in 1996.

         The Company's income tax provision has increased to 29% for 1998 from a
5% effective rate experienced during 1997. The lower rate for 1997 resulted from
the utilization of net operating loss carryforwards. The Company anticipates a
slightly higher tax rate for fiscal 1999 as most carryforwards previously
available have now been utilized. The Company had no tax provision in 1996 as
the Company generated a net operating loss for tax purposes.

Liquidity and Capital Resources

         Net cash provided by operations reached a record $12,092,000 in 1998
compared with $6,097,000 in 1997, and cash used in operations of $1,636,000 in
1995. These increases reported in 1998 and 1997 resulted from profitable
operations of the Company. If the Company achieves its goals of increasing
customer demand while lowering production costs, the Company expects that cash
provided by operations will increase in 1999 and will be sufficient to fund all
anticipated capital additions. The Company will; however, consider opportunities
to raise capital and to fund development costs through strategic alliances and
other manners.

         The number of trade average days sales outstanding was reduced to 50
for 1998 from 57 and 96 days experienced in 1997 and 1996, respectively, due to
collections efforts during the year.

         The Company invested $15,287,000 in capital equipment during 1998
compared to $8,115,000 and $14,740,000 spent during 1997 and 1996, respectively.
The majority of the 1998 spending, or $11,400,000, was due to the acquisition
and upfit of a new production facility near Research Triangle Park, North
Carolina. The total capital outlay for this facility and associated upfit is
estimated to be approximately $15,000,000 and is expected to be completed over
the next six months. The Company currently has a loan commitment of up to
$10,000,000 from a commercial bank to finance a portion of these expenditures.
As of June 28, 1998, approximately $8,667,000 had been drawn against this loan.
At this time, the Company anticipates capital additions in 1999 to be 25% lower
than amounts spent in 1998 and intends to fund these additions with cash
provided by operations and cash on hand. In addition, the Company also expects
to draw the remaining $1,333,000 on the loan commitment and may consider other
financing alternatives. During 1997, investments were made for equipment
additions in the crystal growth and epitaxial departments. During 1996, a
significant investment was made for equipment related to the production of LED
and wafer products. Financing activities provided the Company $10,341,000 during
1998 mostly due to the proceeds from the issuance of long term debt discussed
above. In addition, financing activities yielded $20,924,000 during fiscal 1996.
The majority of the funding was provided by the September 1995 private placement
which netted approximately $17.5 million.

                                       22

<PAGE>

Year 2000

         The Company's products are of a nature that they are not subject to
failure because of Year 2000 issues. The Company however, has assigned full-time
information technology professionals to the task of identifying and resolving
Year 2000 problems that may affect the Company's business, and has adopted a
phased Year 2000 compliance plan. During the first phase, commenced in April
1998 and targeted for completion in December 1998, the Company will inventory
and collect documentation on all of its computers, computer related equipment,
and equipment with embedded processors. In addition, the Company will contact
critical vendors and suppliers to obtain assurances of their ability to ensure
smooth delivery of products and services after December 1999. In the second and
third phases, the Company will prioritize and implement necessary repairs or
replacements to equipment in order to achieve Year 2000 compliance, which it
expects to complete in the first quarter of 1999. The final phase will consist
of a testing program, scheduled for completion in the second quarter of 1999.
The Company has not prepared estimates of costs for correction of Year 2000
problems. Based on information available at this time, including the Year 2000
compliance status of equipment that has been examined as well as the anticipated
replacement schedule for equipment, the Company does not believe that the cost
of remedial actions will have a material adverse effect on the Company's results
of operations or financial condition. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with, the
implementation of corrections as the Year 2000 compliance plan is performed.
Failure to implement such changes could have an adverse effect on future results
of operations. In addition, unexpected costs of correcting equipment that has
not yet been fully evaluated could have an adverse effect on future results of
operations.


                                       23

<PAGE>


I
tem 8.  Financial Statements and Supplementary Data



                   Index to Consolidated Financial Statements
     

                                                                            Page
                                                                            ----
Report of Independent Accountants                                             25

Consolidated Balance Sheets as of June 28, 1998 and 
June 30, 1997                                                                 26

Consolidated Statements of Operations for the years ended 
June 28, 1998, and June 30, 1997 and 1996                                     27

Consolidated Statements of Cash Flows for the years ended 
June 28, 1998, and June 30, 1997 and 1996                                     28

Consolidated Statements of Shareholders' Equity for the years
ended June 28, 1998, and June 30, 1997 and 1996                               30

Notes to Consolidated Financial Statements                                    31


                                       24

<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS


July 22, 1998



Board of Directors and Shareholders
Cree Research, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and shareholders' equity,
present fairly, in all material respects, the financial position of Cree
Research, Inc. and subsidiaries at June 28, 1998 and June 30, 1997, and the
results of their operations and their cash flows for the year ended June 28,
1998 and for the two years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.





Raleigh, North Carolina


                                       25

<PAGE>

                               CREE RESEARCH, INC.
                           CONSOLIDATED BALANCE SHEETS
                      (in 000's, except per share amounts)

<TABLE>

<CAPTION>
<S>     <C>  
                                                                                     June 28,       June 30,
                                                                                       1998           1997
                                                                                     --------       --------
ASSETS

Current assets:
             Cash and cash equivalents                                               $ 17,680       $ 10,448
             Marketable securities                                                        657           --
             Accounts receivable, net                                                  10,479          7,694
             Inventories                                                                2,543          3,949
             Deferred income tax                                                        1,952          1,830
             Prepaid expenses and other current assets                                  1,347            466
                                                                                     --------       --------
                          Total current assets                                         34,658         24,387

             Property and equipment, net                                               36,476         24,333
             Patent and license rights, net                                             1,525          1,267
             Other assets                                                                  65            150
                                                                                     --------       --------
                          Total assets                                               $ 72,724       $ 50,137
                                                                                     ========       ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
             Accounts payable, trade                                                 $  5,595       $  2,248
             Current maturities of long term debt                                          17           --
             Accrued salaries and wages                                                   391            292
             Other accrued expenses                                                     1,052            834
                                                                                     --------       --------
                          Total current liabilities                                     7,055          3,374

Long term liabilities:
             Long term debt                                                             8,650           --
             Deferred income tax                                                        2,154          1,638
                                                                                     --------       --------
                          Total long term liabilities                                  10,804          1,638

Shareholders' equity:
             Preferred stock, par value $0.01; 2,750 shares authorized;
                          none issued and outstanding                                     --            --
             Common stock, $0.005 par value; 14,500 shares authorized;
                          shares issued and outstanding 12,989 at June 28, 1998
                          and 12,523 at June 30, 1997                                      65             62
             Additional paid-in-capital                                                49,676         46,214
             Retained earnings (deficit)                                                5,124         (1,151)
                                                                                     --------       --------
             Total shareholders' equity                                                54,865         45,125
                                                                                     --------       --------
             Total liabilities and shareholders' equity                              $ 72,724       $ 50,137
                                                                                     ========       ========
</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.


                                       26

<PAGE>

                               CREE RESEARCH, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                       (in 000's except per share amounts)

<TABLE>
<CAPTION>
<S>     <C>
                                                                                     June 28,   June 30,    June 30,
                                                                                       1998       1997        1996
                                                                                    --------    --------    --------
Revenue:
              Product revenue, net                                                  $ 34,891    $ 19,823    $  9,689
              Contract revenue, net                                                    7,640       6,535       3,945
              License fee income                                                        --         2,615       1,423
                                                                                    --------    --------    --------
                    Total revenue                                                     42,531      28,973      15,057


Cost of revenue:
              Product revenue, net                                                    21,727      13,388       8,411
              Contract revenue, net                                                    6,252       5,707       3,078
                                                                                    --------    --------    --------
                    Total cost of revenue                                             27,979      19,095      11,489

Gross margin                                                                          14,552       9,878       3,568

Operating expenses:
              Research and development                                                 1,774       1,826       1,286
              Sales, general and administrative                                        4,131       4,301       2,917
              Other (income) expense                                                     502         639         (11)
                                                                                    --------    --------    --------

                    Income (loss) from operations                                      8,145       3,112        (624)

Interest income, net                                                                     730         607         867
                                                                                    --------    --------    --------

                    Income before income taxes                                         8,875       3,719         243

Income tax expense                                                                     2,600         177        --
                                                                                    --------    --------    --------

                    Net income                                                      $  6,275    $  3,542    $    243
                                                                                    ========    ========    ========

                    Basic earnings per common share                                 $   0.49    $   0.28    $   0.02
                                                                                    ========    ========    ========

                    Diluted earnings per common share                               $   0.47    $   0.27    $   0.02
                                                                                    ========    ========    ========

                    Weighted Average Shares Outstanding                               13,493      13,126      12,615
                                                                                    ========    ========    ========
</TABLE>



The accompanying notes are an integral part of the consolidated financial
statements.


                                       27

<PAGE>

                               CREE RESEARCH, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (in 000's)

<TABLE>
<CAPTION>
<S>     <C>   
                                                                                     June 28,       June 30,       June 30,
                                                                                       1998           1997           1996
                                                                                     --------       --------       --------
Operating activities:                                                                                          
              Net income                                                             $  6,275       $  3,542       $    243
              Adjustments to reconcile net income to net cash
                           provided by operating activities:
              Depreciation and amortization                                             4,217          3,356          1,765
              Loss (gain) on disposal of property & equipment                             719            631             (8)
              Loss on write off of patents                                                 17            141           --
              Amortization of patent rights                                               102            108            126
              Amortization & write off of goodwill                                         86             41             41
              Purchase of marketable trading securities                                (1,500)          --             --
              Proceeds from sale of marketable trading securities                         421           --             --
              Loss on marketable trading securities                                        32           --             --
              Deferred income taxes                                                       394           (192)          --
              Tax benefits associated with stock options                                1,791             96           --
              Changes in assets & liabilities:
                           Accounts receivable                                         (2,398)          (891)        (3,258)
                           Inventories                                                  1,406           (723)        (1,549)
                           Deferred cost on research contracts                           --             --               81
                           Prepaid expenses & other assets                               (882)          (262)            49
                           Accounts payable, trade                                      1,092           (226)           714
                           Accrued expenses                                               320            476            160
                                                                                     --------       --------       --------
                           Net cash provided by (used in) operating activities         12,092          6,097         (1,636)
                                                                                     --------       --------       --------

Investing activities:
              Maturity of investment securities                                          --            1,787          2,124
              Purchase of property & equipment                                        (15,287)        (8,115)       (14,740)
              Proceeds from sale of assets                                                463             13             52
              Purchase of patent rights                                                  (377)          (310)          (310)
                                                                                     --------       --------       --------
                           Net cash used in investing activities                      (15,201)        (6,625)       (12,874)
                                                                                     --------       --------       --------

Financing activities:
              Proceeds from issuance of long-term debt                                  8,667           --             --
              Net proceeds from issuance of common stock                                2,936            926         20,924
              Repurchase of common stock                                               (1,262)          (112)          --
                                                                                     --------       --------       --------
                           Net cash provided by financing activities                   10,341            814         20,924
                                                                                     --------       --------       --------

Net increase in cash and cash equivalents                                            $  7,232       $    286       $  6,414
Cash and cash equivalents:
              Beginning of year                                                        10,448         10,162          3,748
                                                                                     --------       --------       --------
              End of year                                                            $ 17,680       $ 10,448       $ 10,162
                                                                                     ========       ========       ========

</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.


                                       28

<PAGE>

                               CREE RESEARCH, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (in 000's)
                                   (Continued)

<TABLE>
<CAPTION>
<S>     <C>  
                                                                               Years Ended
                                                                   -------------------------------------
                                                                      June 28,    June 30,      June 30,
                                                                       1998         1997          1996
                                                                   -------------------------------------

Supplemental disclosure of cash flow information:
     Cash paid for interest, net of amounts capitalized                 $ 74       $   -          $ 5
                                                                   =====================================

     Cash paid for income taxes                                        $ 336       $ 300          $ -
                                                                   =====================================
</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.

                                       29

<PAGE>

                               CREE RESEARCH, INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
              YEARS ENDING JUNE 28, 1998 AND JUNE 30, 1997 AND 1996
                                   (IN 000'S)

<TABLE>
<CAPTION>
<S>     <C>  

                                                  Common      Additional                                                 Total
                                                  Stock        Paid-in      Retained       Unearned     Treasury      Shareholders'
                                                Par Value      Capital      Earnings     Compensation    Stock           Equity
                                                ---------      -------      --------     ------------   --------      -------------
 Balance at June 30, 1995                       $     52      $ 24,427      $ (4,936)     $     (2)     $    (38)     $ 19,503
Common stock options exercised
     for cash, 122 shares                              1           412                                                     413
Common stock warrants exercised
     for cash, 665 shares                              3         2,916                                                   2,919
Compensation expense for
     common stock options                                                                        2                           2
Proceeds from sale of 1,079
     shares of common stock and
     300 common stock warrants,
     net of issuance costs of $625                     5        17,587                                                  17,592
Net income                                                                       243                                       243
                                                --------      --------      --------      --------      --------      --------
Balance at June 30, 1996                              61        45,342        (4,693)         --             (38)       40,672

Common stock options exercised
     for cash, 52 shares                                           160                                                     160
Common stock warrants exercised
     for cash, 203 shares                              1           766                                                     767
Purchase of common stock for the
     treasury, 10 shares                                                                                    (112)         (112)
Retirement of 20 treasury shares                                  (150)                                      150          --
Income tax benefits from stock
     option exercises                                               96                                                      96
Net income                                                                     3,542                                     3,542
                                                --------      --------      --------      --------      --------      --------
Balance at June 30, 1997                              62        46,214        (1,151)         --            --          45,125

Common stock options exercised
     for cash, 217 shares                              1         1,693                                                   1,694
Common stock warrants exercised
     for cash, 331 shares                              2         1,240                                                   1,242
Purchase of common stock for the
     treasury, 82 shares                                                                                  (1,262)       (1,262)
Retirement of 82 treasury shares                                (1,262)                                    1,262          --
Income tax benefits from stock
     option exercises                                            1,791                                                   1,791
Net income                                                                     6,275                                     6,275
                                                --------      --------      --------      --------      --------      --------
Balance at June 28, 1998                        $     65      $ 49,676      $  5,124      $   --        $   --        $ 54,865
                                                ========      ========      ========      ========      ========      ========
</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.

                                       30

<PAGE>

                               CREE RESEARCH, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       NATURE OF BUSINESS

         Cree Research, Inc. ("the Company" or "Cree"), a North Carolina
corporation, develops, manufactures, and markets silicon carbide-based
semiconductor devices. Revenues are primarily derived from the sale of blue
light emitting diodes ("LEDs"), silicon carbide ("SiC") based materials and
full-color LED based electronic displays and modules. The Company markets its
blue LED chip products principally to customers who incorporate them into
packaged lamps for resale to original equipment manufacturers. The Company also
sells SiC material products to corporate, government, and university research
laboratories. In addition, the Company is engaged in a variety of research
programs related to the advancement of SiC process technology and the
development of electronic devices that take advantage of SiC's unique physical
and electronic properties. These research projects are primarily funded by
Federal government agencies and departments. The Company recovers the costs of a
majority of its research and development efforts from revenues on these
contracts with agencies of the Federal government.


2.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

         The consolidated financial statements include the accounts of Cree
Research, Inc., and its wholly-owned subsidiaries, Real Color Displays,
Inc. ("RCD"), Cree Research FSC, Inc. and Cree Technologies, Inc. All
material intercompany accounts and transactions have been eliminated in
consolidation.

Change in Fiscal Year

         On September 24, 1997, the Board of Directors of Cree Research, Inc.
changed the Company's fiscal year from the twelve months ending June 30, to a 52
or 53 week year ending on the last Sunday in the month of June. Accordingly, all
quarterly reporting reflected a 13 week period in fiscal 1998, except that the
period ended September 28, 1997, which commenced July 1, 1997, reflected the
results of twelve weeks and five days. The Company's 1998 fiscal year extended
for the period from July 1, 1997 to June 28, 1998.

Estimates

         The preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
the disclosure of contingent assets and liabilities, at June 28, 1998 and June
30, 1997, and the reported amounts of revenues and expenses during the years
ended June 28, 1998 and June 30, 1997 and 1996. Actual amounts could differ from
those estimates.

Revenue Recognition

         The Company recognizes product revenue at the time of shipment or in
accordance with the terms of the relevant contract. Revenue from government
contracts is recorded on the percentage-of-completion method as expenses per
contract are incurred. License fee income is recognized when the transfer of
licensed technology is completed.

                                       31

<PAGE>

         Contract revenue represents reimbursement by various U.S. Government
entities to aid in the furthering of the development of the Company's technology
by supplementing the Company's research and development efforts. Any resulting
technology obtained by the Company through these efforts remain the property of
the Company after the completion of the contract, subject to certain license
rights obtained by the government. Contract revenue includes funding of direct
research and development costs and a portion of the Company's general and
administrative expenses and other operating expenses for contracts under which
funding is expected to exceed direct costs over the life of the contract. The
specific reimbursement provisions of the contracts, including the portion of the
Company's general and administrative expenses and other operating expenses that
are reimbursed, vary by contract. Such reimbursements are recorded as contract
revenue. For contracts under which the Company anticipates that direct costs
will exceed amounts to be funded over the life of the contract (i.e., certain
cost share arrangements), the Company reports direct costs as research and
development expenses with related reimbursements recorded as an offset to those
expenses.

         In September 1996, the Company entered into a license and supply
agreement with Shin-Etsu Handotai Co. LTD. ("Shin-Etsu") and other parties to
use certain LED fabrication technology and has agreed to supply silicon carbide
wafers required to manufacture the licensed product. The license agreement
provides for payment of a license fee and royalties based on a percentage of
sales of products made using the licensed technology. The license fee was
payable in installments which totaled $2,700,000. As of June 28, 1998, all
license fees have been received. The Company also has recorded a short-term
accrued expense of $186,000 payable in the first quarter of fiscal 1999 to the
third party that brokered the license agreement. Substantially all of the
Company's obligations to transfer the licensed technology were performed during
fiscal 1997, and the net present value of the license fee payments and
commission were recognized. In October 1995, the Company also entered into an
agreement to license its technology for the joint development and manufacture of
LEDs using Cree's technology to Siemens A.G. License fees are payable in
installments totaling $1,500,000. As of June 28, 1998, all fees have been
received. The Company's obligation to transfer the licensed technology was
substantially completed during fiscal 1996, and the net present value of the
license fee payments was recorded as revenue at that time.

Cash and Cash Equivalents

         Cash and cash equivalents consist of unrestricted cash accounts and
highly liquid investments with an original maturity of three months or less when
purchased.

Marketable Securities

         Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS No. 115) "Accounting for Certain Investments
in Debt and Equity Securities". This statement requires certain securities to be
classified into three categories:

         (a)  Securities Held-to-Maturity- Debt securities that the entity has
              the positive intent and ability to hold to maturity are reported
              at amortized cost.
         (b)  Trading Securities- Debt and equity securities that are bought and
              held principally for the purpose of selling in the near term are
              reported at fair value, with unrealized gains and losses included
              in earnings.
         (c)  Securities Available-for-Sale- Debt and equity securities not
              classified as either securities held-to-maturity or trading
              securities are reported at fair value with unrealized gains or
              losses excluded from earnings and reported as a separate component
              of stockholders' equity.

                                       32

<PAGE>

         The Company's short-term investments are comprised of equity securities
that are classified as trading securities, which are carried at their fair value
based upon quoted market prices of those investments at June 28, 1998, with net
realized and unrealized gains and losses included in net earnings.

         As of June 28, 1998, short-term investments consist of common stock
holdings in C3, Inc. ("C3"), a portion of which were purchased in November 1997.
The Company's president has, through a binding agreement, promised to indemnify
the Company for losses of up to $300,000, plus the lesser of $100,000 or the net
difference between the per share selling price and $9.375 per share for all
shares of C3 common stock sold by Cree. This indemnity covers losses that may
result from the sale of shares purchased in November 1997 below the purchase
price paid, offset by gains realized on shares acquired directly from C3 in
January 1997 (see below). Payment of this obligation is due within ten days
after receipt by the president of the Company's written demand made pursuant
to a vote of the majority of the members of the Board of Directors. At June 28,
1998, the Company had recorded a $390,000 receivable from the president
(included in net accounts receivable) based upon this agreement for the net
realized and unrealized losses on this investment. Realized losses on shares of
C3 stock sold by the Company during fiscal 1998 totaled $254,000, and unrealized
losses offset by the unrealized gain on shares acquired from C3 directly (see
below) were $168,000 at June 28, 1998. Approximately $32,000 of losses on the
investment in C3 stock is included in other income (expense) for fiscal 1998.

         In addition to the shares of C3 purchased in November 1997, the Company
acquired 24,601 shares of C3 common stock in January 1997. These shares were
issued pursuant to an option C3 granted to the Company in 1995. The option gave
the Company the right to acquire, for an aggregate consideration of $500, one
percent of the outstanding common stock of C3. C3 retained the right to waive
the consideration and issue the stock at any time, which it elected to do in
January 1997. The shares issued pursuant to the option are restricted securities
within the meaning of Rule 144 under the Securities Act of 1933, which permits
the sale of such securities without registration if certain conditions are met.
The shares first became eligible for sale under Rule 144 in the third quarter of
fiscal 1998.

Inventories

         Inventories are stated at the lower of cost or market, with cost being
determined under the first-in, first-out (FIFO) method. Inventories consists of
the following:

                                                    June 28,           June 30,
                                                      1998               1997
                                                 ---------------    ------------
         Raw materials                           $    999,000       $  1,559,000
         Work-in-progress                             752,000          1,374,000
         Finished goods                               792,000          1,016,000
                                                 ---------------    ------------
                                                 $  2,543,000       $  3,949,000
                                                 ===============    ============


Property and Equipment

         Property and equipment are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets, which range
from three to 20 years. Leasehold improvements are amortized over the life
of the related lease. Expenditures for repairs and maintenance are charged to
expense as incurred. The costs of major renewals and betterments are capitalized
and depreciated over their estimated useful lives. The cost and related
accumulated depreciation of the assets are removed from the accounts upon
disposition and any resulting gain or loss is reflected in operations.

                                       33

<PAGE>

         During the first quarter of fiscal 1996, the Company changed its
previous estimate on the useful lives of some of its manufacturing equipment
from five to nine years. The change in estimate was based on the Company's
experience with similar fixed assets. The net adjustment increased net income
approximately $280,000, or $0.02 per share, for fiscal 1996.

         The Company has entered into an agreement with C3 to sell crystal
growth equipment manufactured by the Company to C3 at cost plus a reasonable
overhead allocation. As a result of this transaction, the Company has recognized
the overhead allocation as "other operating income".

         In November 1997, the Company purchased real property consisting of
approximately 30 acres of land with a production facility of approximately
162,000 square feet and a total of approximately 35,000 square feet of service
and warehouse buildings. This property is located in Durham, North Carolina, in
the vicinity of the Research Triangle Park. The purchase price of the land and
buildings was $3,000,000. The Company moved most of its sales and administrative
personnel to this facility in January 1998. The Company anticipates it will
relocate several other operations to this facility over the next few quarters.
All areas, with the exception of certain crystal growth and wafer fabrication
assets, are expected to relocate during fiscal 1999.

         The Company assesses the realizability of the carrying value of its
investment in property and equipment whenever events or changes in circumstance
indicate that an impairment may have occurred in accordance with the provisions
of Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"),
"Accounting for Impairment of Long Lived Assets and Assets to be Disposed of".
As of June 28, 1998, the Company has not recorded any impairment in the carrying
value of its property and equipment.

Patent and License Rights

         Patent rights reflect costs incurred to enhance and maintain the
Company's intellectual property position. License rights reflect costs incurred
to use the intellectual property of others. Both are amortized on a straight
line basis. During fiscal 1997, the Company changed its previous estimate of the
useful lives of patents from 17 years beginning at the date of patent issue to
20 years from the date of patent application to conform to a legislative
amendment made to the U.S. patent laws which became effective in June 1995. This
change in estimate had no material impact to net income or earnings per share,
since the average period of time between patent application and issue is
generally about three years. Amortization expense was $102,000, $108,000 and
$126,000, for the years ended June 28, 1998 and June 30, 1997 and 1996,
respectively. Total accumulated amortization for patents was approximately
$560,000 and $460,000 at June 28, 1998 and June 30, 1997, respectively.

Goodwill

         Goodwill represented the amount by which the costs to acquire the net
assets of the Real Color Displays subsidiary exceeded their related fair value
at acquisition. Based on a review of undiscounted cash flows of the subsidiary
anticipated over the remaining amortization period, the Company determined that
goodwill had been impaired. As a result, the Company wrote off the remaining
$66,000 carrying value of such goodwill in the second quarter of fiscal 1998. As
required by generally accepted accounting principles, this charge was included
in the results of operations.

Research and Development Policy

         The Company partners with the Federal government in many of its current
research and development efforts. By entering into contracts, the Company has
most of its research and product development costs funded by the U.S.
government. The contract funding may be based on a cost-plus or a cost-share

                                       34

<PAGE>

arrangement. Pursuant to each contract, the amount of funding is determined
based on cost estimates that include direct costs, plus an allocation for
research and development, general and administrative and a cost of capital
expense. Cost-plus funding is determined based on actual costs plus a set
percentage margin. For the cost-share contracts, the actual costs are divided
between the U.S. government and the Company based on the terms of the contract.
The government's cost share is then funded to the Company. Activities performed
under both of these arrangements include research regarding silicon carbide and
gallium nitride materials. The contracts typically require the submission of a
written report that documents the results of such research.

         Funding on contracts under which the Company anticipates that funding
will exceed direct costs over the life of the contract is recorded as contract
revenue and related costs are reported as a cost of contract revenue. For
contracts under which the Company anticipates that direct costs will exceed
amounts to be funded over the life of the contract, direct costs are shown as
research and development expenses and related funding as an offset of those
expenses. The following table details information about contracts for which
direct expenses exceed funding by period as reflected in the statements of
operations:

                                                  Year ended (in 000's)
                                          June 28,        June 30,      June 30,
                                            1998            1997          1996
                                          --------        --------      --------
Net research and development costs        $  276          $  671        $  368
Government funding                           601           2,186         1,918
                                          ------          ------        ------
                                                                     
Total direct costs incurred               $  877          $2,857        $2,286
                                          ======          ======        ======

         As of June 28, 1998, all funding under contracts where the Company
anticipates that direct costs will exceed amounts to be funded has been
exhausted. Therefore, the Company anticipates that all future funding under
existing contracts will be reflected as contract revenue while direct costs will
be reported as contract cost of revenue.

Interest Capitalization

         During the year ended June 28, 1998, the Company capitalized interest
on funds used to construct property, plant and equipment in connection with the
newly acquired facility. Interest capitalized during fiscal 1998 was $128,000.

Credit Risk, Major Customers and Major Suppliers

         Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash equivalents and
accounts receivable. The Company's cash equivalents consist of U.S. Treasury
bills, government agency bonds and commercial paper. Certain bank deposits may
at times be in excess of the FDIC insurance limit.

         The Company sells its products to manufacturers and researchers
worldwide and generally requires no collateral. The Company maintains reserves
for potential credit losses, and such losses, in the aggregate, have generally
been within management's expectations. The Company presently derives primarily
all of its contract revenues from contracts with the U.S. Department of Defense.
Approximately 18% and 33%, respectively, of the Company's accounts receivable
balance at June 28, 1998 and June 30, 1997 was due from the Department of
Defense. In addition, the Company had amounts due from Siemens totaling 37% and


                                       35

<PAGE>


19%, of accounts receivable balances at June 28, 1998 and June 30, 1997,
respectively, and amounts due from C3 totaling 23% and 1%, of accounts
receivable balances at June 28, 1998 and June 30, 1997, respectively.

         The Company has derived its product revenue from sales primarily in the
United States, the Far East, and Europe as follows:

                                                  Year Ended
                                             1998     1997      1996
                                             ----     ----      ----
         United States ...................    26%      21%       31%
         Far East ........................    15%      33%       27%
         Europe ..........................    58%      44%       38%
         Other ...........................     1%       2%        4%
                                                   

         One customer accounted for 51% and 46% of product revenue for fiscal
1998 and 1997, respectively. Another customer accounted for 13% and 2% of
product revenue for fiscal 1998 and 1997, respectively. In addition, two
customers accounted for 32% of product revenue in fiscal 1996. The Department of
Defense accounted for 93%, 99% and 97% of contract revenues during fiscal 1998,
1997, and 1996, respectively.

         The Company depends on single or limited source suppliers for a number
of raw materials and components used in its SiC wafer products and LEDs. Any
interruption in the supply of these key materials or components could have a
significant adverse effect on the Company's operations.

Per Share Data

         Basic earnings per common share is computed using the weighted average
number of shares outstanding. Diluted earnings per common share is computed
using the weighted average number of shares outstanding adjusted for the
incremental shares attributed to outstanding options to purchase common stock.

         Incremental shares of 631,000, 670,000 and 789,000 in 1998, 1997 and
1996, respectively, were used in the calculation of diluted earnings per common
share.

Accounting for Stock Based Compensation

         In accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, no compensation is recorded for stock
options or other stock-based awards that are granted to employees with an
exercise price equal to or above the common stock price on the grant date.
Compensation related to performance share grants is recognized from the grant
date until the performance conditions are satisfied, based on the market price
of the Company's common stock.

         In October, 1995, the Financial Accounting Standards Board ("FASB")
issued Statement No. 123 ("FAS 123"), "Accounting for Stock Based Compensation."
This Statement establishes fair value as the measurement basis for equity
instruments issued in exchange for goods or services and stock-based
compensation plans. Fair value may be measured using quoted market prices,
option-pricing models or other reasonable estimation methods. FAS 123 permits
the Company to choose between adoption of the fair value based method or
disclosing pro forma net income information. The Statement is effective for
transactions entered into after December 31, 1995. The Company will continue to
account for stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25, as amended, and provide only the pro forma disclosures
required by FAS 123.



3.        ACCOUNTS RECEIVABLE

                                       36

<PAGE>

The following is a summary of accounts receivable:

                                           June 28, 1998        June 30, 1997
                                           -------------        -------------
Trade receivables                            $ 8,971,000         $ 5,210,000
Other short term receivables                   1,659,000           2,700,000
                                             -----------         -----------
                                              10,630,000           7,910,000
Allowance for doubtful accounts                  151,000             216,000
                                             -----------         -----------
Current receivables                           10,479,000           7,694,000
                                                                
Long term receivables                             56,000              54,000
                                             -----------         -----------
Total accounts receivable                    $10,535,000         $ 7,748,000
                                             ===========         ===========
                                                              

The following table summarizes the changes in the Company's allowance for
doubtful accounts for the years ended June 28, 1998, June 30, 1997 and 1996:

Allowance for Doubtful Accounts:
(dollars in thousands)

             Balance At        Charges To          Deductions        Balance At
Years        Beginning          Cost and           (Write-offs         End of
Ended        of Period          Expenses       Charged To Reserve)     Period 
- -----        ---------          --------       -------------------     ------ 
1998         $   216                50                (115)            $  151
1997         $    50               190                 (24)            $  216
1996         $    22               203                (175)            $   50


4.          PROPERTY AND EQUIPMENT

         The following is a summary of property and equipment:

                                          June 28, 1998     June 30, 1997
                                          ------------      -------------
Office equipment and furnishings.......    $1,372,000           $909,000
Land and buildings ....................     3,501,000                  -
Machinery and equipment................    28,136,000         22,312,000
Construction in progress...............     9,074,000          2,669,000
Leasehold improvements.................     4,697,000          5,420,000
                                          ------------      -------------
                                           46,780,000         31,310,000
Accumulated depreciation and
  amortization.........................   (10,304,000)        (6,977,000)
                                          ------------      -------------
                                          $36,476,000        $24,333,000
                                          ============      =============


         Depreciation and amortization of property and equipment totaled
$4,217,000, $3,356,000 and $1,765,000 for the year ended June 28, 1998, June 30,
1997 and June 30, 1996, respectively.

                                       37

<PAGE>


5.        SHAREHOLDERS' EQUITY

         The Board of Directors is authorized to issue 1,250,000 and 1,500,000
shares of Class A Voting and Class B Non-Voting preferred stock, respectively,
each with a par value of $0.01 per share, at its discretion. This preferred
stock may be issued in one or more series with the number of shares,
designation, relative rights, preferences, and limitations to be determined by
resolution of the Board of Directors.


6.        STOCK OPTIONS AND STOCK WARRANTS

         As permitted by FAS 123, "Accounting For Stock-Based Compensation", the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations and
amendments in accounting for its employee stock option plans.

         The Company's Amended and Restated Equity Compensation Plan has
authorized the grant of options for up to 2,540,000 shares of the Company's
common stock. All options granted have 10 year terms and vest and become fully
exercisable within 5 years. The Company had granted 96,000 options with a 10
year term for shares of the Company's common stock under the Stock Option Plan
for Non-Employee Directors (Directors Formula Plan). This Plan was terminated in
November 1997 and all 96,000 options granted under this plan are now fully
vested. The Company's current stock plans provide for grants of options with
exercise prices equal to or exceeding fair market value on the date of grant.

         Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of the
Statement. The fair value of these options was estimated at the date of grant
using a Black-Scholes option pricing model with weighted average risk free rates
of interest of 5.6% and 6.7%, for the years ended June 28, 1998 and June 30,
1997, respectively. The volatility factor of the expected market price of the
Company's common stock is .748 and the weighted-average expected life of the
options was 7 years for executives and directors and 5 years for other
employees.

         For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:

                                                   YEARS ENDED
                                      -----------------------------------------
                                      JUNE 28,       JUNE 30,         JUNE 30,
                                        1998           1997             1996
                                      ----------     ----------       ---------

Net income, as reported               $ 6,275,000    $ 3,542,000      $243,000

Pro forma net income, as adjusted
    for FAS 123                         4,405,000      1,418,000       243,000

Pro forma earnings per share:
          Basic                            $ 0.34         $ 0.11        $ 0.02
          If Diluted                       $ 0.33         $ 0.11        $ 0.02

                                       38

<PAGE>


The following table details the number of stock options outstanding and their
related exercise prices as of June 28:


          Number of Options Outstanding As Of June 28, 1998
          -------------------------------------------------

          Exercise     Number of        Weighted-Average
           Price       Options          Contractual Life
          --------     ---------        ---------------
              $ 0.42      5,497            2 years
              $ 3.13      8,000            6 years
              $ 3.63    250,200            5 years
              $ 3.75     13,317            3 years
              $ 4.00     78,700            6 years
              $ 4.38      6,000            6 years
              $ 6.82      6,700            5 years
              $ 7.38      6,000            6 years
              $ 9.38     26,600            9 years
             $ 10.25     14,500            9 years
             $ 11.19     16,800            8 years
             $ 12.98    409,100            9 years
             $ 14.38    203,400            7 years
             $ 15.75     48,000            8 years
             $ 16.38     43,500            10 years
             $ 17.75     19,000            10 years
             $ 18.75     40,000            9 years
             $ 19.38     10,000            10 years
                       ---------
                       1,205,314
                       =========


                                       39

<PAGE>

<TABLE>
<CAPTION>
<S>     <C>  

                                                      Total Option Activity
                             -------------------------------------------------------------------
                                  June 28, 1998          June 30, 1997           June 30, 1996
                                          Weighted                Weighted              Weighted
                             Options        Average   Options     Average   Options     Average
                             (in 000's)    Price      (in 000's)   Price    (in 000's)   Price
                             --------    -------      ------------------    --------------------

Outstanding-beginning of year    927        $ 4.76      632         $ 4.39     769          $ 4.23
Granted                          542        $13.98      381        $ 13.56       -          $ -
Exercised                        217        $ 7.80       52         $ 3.08     122          $ 3.39
Forfeited                         47        $ 8.67       34         $ 8.05      15          $ 4.36
                             --------                 ------                -------
Outstanding-end of year         1205        $10.19      927         $ 4.76     632          $ 4.39

Exercisable at end of year       599        $ 8.40      702         $ 7.44     439          $ 3.78
</TABLE>


         During fiscal year 1992, the Company issued stock warrants to
purchasers of Class B Non-Voting preferred stock, Series C. The warrants
entitled the holders to purchase 607,320 shares of common stock at $3.75 per
share. In September 1992, the Company issued stock warrants to additional
purchasers of Class B Non-Voting preferred stock, Series C. The warrants
entitled the holders to purchase 363,644 shares of common stock at $4.13 per
share. Warrants to purchase 331,326, 202,996 and 425,642 shares of common stock
were exercised during the years ended June 28, 1998, June 30, 1997 and 1996,
respectively. All remaining warrants expired effective February 8, 1998.

         In connection with the Company's September 1995 private placement, the
Company issued an additional 300,000 warrants, which have an exercise price of
$27.23 and expire September 2000. As of June 28, 1998, all of these warrants
remain outstanding and represent the only warrants outstanding.


7.       COMMITMENTS

         The Company currently leases three facilities under four separate lease
agreements. These facilities are comprised of both office and manufacturing
space. The first facility has a remaining lease period of approximately three
and one half years for a multi-suite block. Effective May 1, 1998, the Company
has notified the lessor of its intention to exercise a right to terminate for
all suites with the exception of the base suite. This right to terminate will be
effective May 1, 1999. Also associated with this facility is a sublease
agreement entered into in fiscal 1996 to lease an adjacent 1,900 square feet.
That sublease expires in October 1998 and will not be renewed. The lease term
for the second facility began in September 1995. This facility has a remaining
lease period of approximately two years with two options to renew for a total of
four additional years. All of these agreements provide for rental adjustments
for increases in property taxes, the consumer price index and general property
maintenance.

         Rent expense associated with these leases totaled $522,000, $549,000
and $388,000 for the years ended June 28, 1998, and June 30, 1997 and 1996,
respectively. Future minimum rentals as of June 28, 1998 under these leases are
as follows:

                                       40

<PAGE>



                                                 Minimal Rental
                                 Year Ended          Amount
                                 ----------       -----------
                                    1999          $   389,000    
                                    2000              334,000    
                                    2001              284,000    
                                    2002              138,000    
                               Total              $ 1,145,000    
                                                  
8.    LONG-TERM DEBT

         In November 1997, the Company entered into a term loan from a
commercial bank for up to $10,000,000 to finance the purchase and upfit of the
new main facility in Durham, North Carolina. Approximately $2,950,000 was
disbursed under the loan to finance the initial purchase of the facility with
the remaining proceeds expected to be disbursed on a monthly basis based on
actual expenditures incurred. Draws under the loan agreement may be made during
the eighteen month period ending in May 1999. The loan, which is collateralized
by the purchased property and subsequent upfits, accrues interest at a fixed
rate of 8% and carries customary covenants, including the maintenance of a
minimum tangible net worth and other requirements. Accrued interest is due
monthly through May 1999, at which time the outstanding principal balance will
be amortized over twenty years until 2011, when the loan balance becomes due. At
June 28, 1998, short term and long term borrowings associated with this loan
were $17,000 and $8,650,000, respectively, leaving $1,333,000 unused and
available.


         The aggregate maturities for long-term debt for the five years after
June 28, 1998 are :


                                              Amount
                  Year Ended                    Due
                  ----------               ------------
                       1999                $    17,000
                       2000                    213,000
                       2001                    230,000
                       2002                    250,000
                       2003                    270,000
                  Thereafter                 7,687,000
                                           ------------
                  Total                    $ 8,667,000
                                           ============

9. INCOME TAXES

         The Company accounts for its income taxes under the provisions of
Statement of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for
Income Taxes." Under the asset and liability method of FAS 109, deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. Under FAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

                                       41

<PAGE>

         The actual income tax expense attributable to earnings for the years
ended June 28, 1998, and June 30, 1997 and 1996 differed from the amounts
computed by applying the U.S. federal tax rate of 34 percent to pretax earnings
as a result of the following:

<TABLE>
<CAPTION>
<S>     <C>    
                                                                 1998             1997           1996
                                                             -------------    -----------     ----------
Federal income tax provision at statutory
 rate (34%)                                                  $  3,018,000     $ 1,265,000     $  83,000
State tax provision                                               166,000         193,000        36,000
Increase (decrease) in income tax expense
  resulting from:
     Foreign sales corporation                                   (214,000)             -              -
     Increase (decrease) in valuation allowance                  (358,000)     (1,279,000)     (106,000)
     Other                                                        (12,000)         (2,000)      (13,000)
                                                             -------------    -----------     ----------
Income tax expense                                           $  2,600,000      $  177,000      $     -
                                                             =============    ===========     ==========
</TABLE>


The following are the components of the provision for income taxes for the years
ended June 28, 1998 and June 30, 1997:


                                   1998               1997
                                 ----------         ---------
Current:
      Federal                   $  699,000          $ 54,000
      Foreign Tax Withholding       50,000           220,000
      State                        269,000            95,000
                                 ----------         ---------
                                 1,018,000           369,000

Deferred:
      Federal                    1,582,000          (442,000)
      State                              -           250,000
                                 ----------         ---------
                                 1,582,000          (192,000)

                                 ----------         ---------
      Net Provision            $ 2,600,000          $177,000
                                 ==========         =========


There is no tax provision for fiscal 1996.

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:

                                       42

<PAGE>


                                                       June 28,       June 30,
                                                         1998           1997
                                                       ----------    ----------
Deferred tax assets:               
Net operating loss carryforwards                     $ 1,304,000    $ 2,413,000
Research tax credits                                     169,000        157,000
Compensation                                              62,000        115,000
Inventory                                                120,000        199,000
Bad debt                                                  56,000         84,000
Goodwill                                                    --           31,000
Alternative minimum tax                                  261,000         64,000
Foreign tax credit                                       270,000        220,000
Other                                                       --           10,000
                                                     -----------    -----------
Total gross deferred tax assets                        2,242,000      3,293,000
Less valuation allowance                                (290,000)    (1,463,000)
                                                     -----------    -----------
Net deferred tax asset                                 1,952,000      1,830,000

Deferred tax liabilities:
Property and equipment, due
  to depreciation                                      2,154,000      1,638,000
                                                     -----------    -----------
Gross deferred tax liabilities                         2,154,000      1,638,000

                                                     -----------    -----------
Net deferred tax asset (liability)                    $ (202,000)   $   192,000
                                                     ===========    ===========

         The net change in the total valuation allowance for the years ended
June 28, 1998 and June 30, 1997 was $1,173,000 and $1,201,000, respectively.
Included in the valuation allowance is $0 and $815,000, respectively, for 1998
and 1997 to offset net operating losses ("NOL") generated by the exercise of
stock options. The reduction in the valuation allowance does not impact the 1998
tax provision as such taxes are reflected in additional paid in capital. The
primary reason for the reduction in the valuation allowance in 1998 and 1997 was
the greater likelihood of the utilization of future tax benefits from net
operating loss carryforwards. Realization of deferred tax assets associated with
the NOL carryforwards is dependent upon the Company generating sufficient
taxable income prior to their expiration. Management believes that there is a
risk that certain of the state NOL carryforwards may expire unused and,
accordingly, has established a valuation allowance against them. Although
realization is not assured for the remaining deferred tax assets, management
believes it is more likely than not that they will be realized through future
taxable earnings. However, the net deferred tax assets could be reduced in the
future if management's estimates of taxable income during the carryforward
period are significantly reduced.

         As of June 28, 1998, the Company has net operating loss carryforwards
for Federal purposes of $3,493,000 and $2,346,000 for state purposes. The
carryforward expiration period is 2011 to 2013 for Federal tax purposes and from
2000 to 2003 for state purposes.


                                       43

<PAGE>

10.      ACQUISITION

         In August 1994, the Company formed a North Carolina wholly-owned
subsidiary, RCD, to develop and market full color LED displays. Subsequently,
RCD acquired the net assets of Color Cells International, Ltd., a Hong-Kong
based company in this line of business, for cash consideration of $215,000 and
assumption of $152,000 of liabilities. The terms of the acquisition called for
an "Earn-Out Payment" based on calculated net profits, payable half in cash and
half in Cree common stock. Earn-Out Payments were subject to certain limitations
concerning the timing (calculation based on certain eligible shipments through
September 1997) and amount (maximum payments of $1.8 million) of any such
payments. As of the end of the earn-out period in September 1997, no amounts had
been earned or paid under this agreement.


11.      RETIREMENT PLAN

         The Company maintains an employee benefit plan (the "Plan") pursuant to
Section 401(k) of the Internal Revenue Code. Under the Plan, there is no fixed
dollar amount of retirement benefits, and actual benefits received by employees
will depend on the amount of each employee's account balance at the time of
retirement. All employees are eligible to participate under the Plan on the
first day of a new fiscal quarter after date of hire. The Plan is not insured by
the Pension Benefit Guaranty Corporation.

         The Company may, at its discretion, make contributions to the Plan.
However, the Company did not make any contributions to the Plan during the years
ended June 28, 1998, June 30, 1997 or 1996.


12.  CONTINGENCIES

         The consolidated securities class action lawsuits previously pending
against the Company and certain of its directors and officers in the U.S.
District Court for the Middle District of North Carolina were dismissed with
prejudice on November 28, 1997. The dismissal was pursuant to a stipulation of
the named parties entered after the court granted the defendant's motions to
dismiss the consolidated complaint for failure to state a claim. No payments
were made to the plaintiffs to obtain the dismissal. By stipulating to the
dismissal with prejudice, the plaintiffs waived any right to re-file the action
or to appeal the court's order of dismissal.


13.  EARNINGS PER SHARE

         The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share", as of December 28, 1997. SFAS No. 128
required the Company to change its method of computing, presenting and
disclosing earnings per share information. All prior period data presented has
been restated to conform to the provisions of SFAS No. 128.

         The following computation reconciles the differences between the basic
and diluted presentations:

                                       44

<PAGE>

<TABLE>
<CAPTION>
<S>     <C> 
                                                             Year Ended 
                                                ------------------------------------- 
                                                 June 28,     June 30,     June 30,
                                                    1998         1997         1996
                                                -----------   -----------  ----------
Basic: 
Net income                                      $ 6,275,000   $ 3,542,000   $ 243,000
                                                ===========   ===========  ==========

Weighted average common shares                  12,862,917     12,455,494  11,825,857
                                                ===========   ===========  ==========

Basic income per common share                       $ 0.49         $ 0.28      $ 0.02
                                                ===========   ===========  ==========

Diluted: 
Net income                                      $ 6,275,000   $ 3,542,000   $ 243,000
                                                ===========   ===========  ==========

Weighted average shares:
Common shares outstanding                        12,862,917    12,455,494  11,825,857

Dilutive effect of stock options & warrants         630,533       670,048     789,107
                                                -----------   -----------  ----------

Total shares and common share equivalents        13,493,450    13,125,542  12,614,964
                                                ===========   ===========  ==========

Diluted income per common share                      $ 0.47        $ 0.27      $ 0.02
                                                ===========   ===========  ==========
</TABLE>

14. NEW ACCOUNTING PRONOUNCEMENTS

         The Company will adopt Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" ("SFAS No. 130") for the year ended June
27, 1999. SFAS No. 130 requires the Company to display an amount representing
total comprehensive income for the period in a financial statement which is
displayed with the same prominence as other financial statements. Upon adoption,
all prior period data presented will be restated to conform to the provisions of
SFAS No. 130. The application of the new pronouncement is not expected to have a
material impact on the Company's financial statements.
         The Company will adopt Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131") for the year ended June 27, 1999. SFAS No. 131 requires the Company to
report selected information about operating segments in its financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The application of the new
pronouncement is not expected to have a material impact on the Company's
disclosures.



I
tem 9.Changes in and Disagreements with Accountants on Accounting and Financial
         Disclosure

         None.





                                    PART III


                                       45

<PAGE>


Item 10. Directors and Executive Officers


Item 11.   Executive Compensation


Item 12.    Security Ownership of Certain Beneficial Owners and Management


Item 13.   Certain Relationships and Related Transactions

The information called for in items 10 through 13 is incorporated by reference
from the Company's definitive proxy statement relating to its annual meeting of
stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after the end of fiscal 1998.



                                     PART IV


Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) (1) and (2) Financial statements and financial statement schedule - the
financial statements, financial statements schedule, and report of independent
accountants are filed as part of this report (see index to Consolidated
Financial Statements at Part II Item 8 on page 23 of this Form 10-K).

(a) (3) The following exhibits have been or are being filed herewith and are
numbered in accordance with Item 601 of Regulation S-K:

Exhibit
No.                                         Description

3.1                 Articles of Incorporation, as amended to date

3.2                 Bylaws, as amended to date

10.1                Amended and Restated Equity Compensation Plan of the
                    Company, as amended to date

10.2                Lease Agreements for Meridian Parkway facility dated
                    February 10, 1988, as amended from time to time through
                    August 25, 1992(1)

10.3                Amendments to Lease Agreements for the Meridian Parkway
                    facility dated April 12, 1993 and June 15, 1993(2)

10.3                License Agreement between the Company and North Carolina
                    State University dated December 3, 1987(1)

10.4                Amendment to License Agreement between the Company and
                    North Carolina State University dated September 11, 1989(1)

10.5                Agreement between General Instrument Corporation and the
                    Company dated June 24, 1988(1)

                                       46

<PAGE>

10.6                Letter Agreement with General Instrument Corporation dated
                    February 21, 1992, superseding agreement dated June 24,
                    1988(1)

10.7                Contract between the Company and Siemens A.G. dated
                    October 24, 1995(3)

10.8                Purchase Agreement between the Company and Siemens A.G.
                    dated September 11, 1996 (4)

10.9                License and Technology Transfer Agreement between the
                    Company and Shin- Etsu Handotai Co. Ltd dated September 30,
                    1996 (5)

10.10               Supply Agreement between the Company and Shin-Etsu
                    HandotaiCo. Ltd, dated September 30, 1996 (5)

10.11               First Amendment to Purchase Agreement between the Company
                    and Siemens A.G. dated April 22, 1997 (6)

10.12               Second Amendment to Purchase Agreement between the Company
                    and Siemens A.G. dated December 9, 1997 (7)

10.13               Agreement between the Company and F. Neal Hunter dated
                    December 28, 1997.

10.14               Amended and Restated Indemnity Agreement between the Company
                    and F. Neal Hunter dated June 26, 1998.

11.00               Computation of Per Share Earnings

21.00               Subsidiaries of Registrant

23.00               Consent of Independent Accountants

27.00               Financial Data Schedule (for SEC use only)
(1)Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form SB-2 and declared effective by the
Securities and Exchange Commission on February 8, 1993 and bearing Registration
#33-55998.

(2)Incorporated by reference herein. Filed as an exhibit to the Company's annual
report filed on Form 10-KSB with the Securities and Exchange Commission on
August 1, 1993.

(3)Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form S-3 (No. 33-98728) declared effective by
the Securities and Exchange Commission on December 27, 1995. Confidential
treatment of portions of this was granted by the Securities and Exchange
Commission pursuant to Rule 24 b-2 by order dated December 29, 1995.

(4)Incorporated by reference herein. Filed as an exhibit to the Company's
quarterly report filed on Form 10K with the Securities and Exchange Commission
on September 30, 1996. Confidential treatment of portions of this document was
granted by the Securities and Exchange Commission pursuant to Rule 24b-2 by
order dated November 21, 1996.

                                       47

<PAGE>

(5)Incorporated by reference herein. Filed as an exhibit to the Company's
quarterly report filed on Form 10Q with the Securities and Exchange Commission
on November 14, 1996. Confidential treatment of portions of this document was
granted by the Securities and Exchange Commission pursuant to Rule 24b-2 by
order dated February 3, 1997.

(6)Incorporated by reference herein. Filed as an exhibit to the Company's
quarterly report filed on Form 10Q with the Securities and Exchange Commission
on May 2, 1997. Confidential treatment of portions of this document was granted
by the Securities and Exchange Commission pursuant to Rule 24b-2 by order dated
June 26, 1997.

(7)Incorporated by reference herein. Filed as an exhibit to the Company's
quarterly report filed on Form 10Q with the Securities and Exchange Commission
on January 30, 1998. Confidential treatment of portions of this document was
granted by the Securities and Exchange Commission pursuant to Rule 24b-2 by
letter dated February 12, 1998.

(b)     Reports on Form 8-K filed during the last quarter of the period covered
        by this report. None.


                                       48

<PAGE>


SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                       CREE RESEARCH, INC.

                                       By: s/ F. Neal Hunter
                                           -------------------------------------
                                           F. Neal Hunter
Date: August 19, 1998                      President and Chief Executive Officer


         Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

      Signature                              Title                   Date
      ---------                              -----                   ----


s/F. Neal Hunter                    Chairman of the Board        August 19, 1998
- -------------------------------
F. Neal Hunter


s/Cynthia B. Merrell                Chief Financial Officer      August 19, 1998
- -------------------------------
Cynthia B. Merrell


s/Calvin H. Carter, Jr., Ph. D.     Director                     August 19, 1998
- -------------------------------
Calvin H. Carter, Jr., Ph.D.


s/James E. Dykes                    Director                     August 19, 1998
- -------------------------------
James E. Dykes


s/Michael W. Haley                  Director                     August 19, 1998
- -------------------------------
Michael W. Haley


s/Walter L. Robb, Ph.D.             Director                     August 19, 1998
- -------------------------------
Walter L. Robb, Ph.D.


s/Dolph W. von Arx                  Director                     August 19, 1998
- -------------------------------
Dolph W. von Arx


s/John W. Palmour, Ph.D.            Director                     August 19, 1998
- -------------------------------
John W. Palmour, Ph.D

                                       49









                                                                     EXHIBIT 3.1



                            ARTICLES OF INCORPORATION

                                       OF

                               CREE RESEARCH, INC.
                      (as amended through August 14, 1995)


     I, the undersigned, being a person of full age, do make and acknowledge
these Articles of Incorporation for the purpose of forming a business
corporation under and by virtue of the laws of the State of North Carolina.

                                    ARTICLE I

     The name of the corporation shall be Cree Research, Inc.

                                   ARTICLE II

     The period of duration of the corporation shall be perpetual.

                                   ARTICLE III

     The purpose for which the corporation is organized is to engage in any
lawful act or activity for which corporations may be organized under Chapter 55
of the General Statutes of North Carolina.

                                   ARTICLE IV

     The aggregate number of shares of capital stock which the Corporation shall
have authority to issue is 17,250,000 shares divided into three classes
consisting of 1,250,000 shares of Class A Voting Preferred Stock with a par
value of $0.01 per share, 1,500,000 shares of Class B Non-Voting Preferred Stock
with a par value of $0.01 per share, and 14,500,000 shares of Common Stock with
a par value of $0.005 per share. (The term "Preferred Stock," when used in this
Article IV without reference to a


<PAGE>
particular class, means both the Class A Voting Preferred Stock and the
 Class B
Non-Voting Preferred Stock.) The Board of Directors is authorized from time to
time to establish one or more series of any class of Preferred Stock and to
determine the preferences, limitations and relative rights, insofar as the same
are not fixed by these Articles of Incorporation, of each such series and the
number of shares and designation thereof (the resolutions so establishing and
determining each such series being hereinafter referred to as a "Series
Resolution"). The Board of Directors from time to time may increase the number
of shares of any series of Preferred Stock by providing that any unissued shares
of Preferred Stock of that class shall constitute part of such series or
decrease the number of shares of any series of Preferred Stock (but not below
the number of shares of such series outstanding) by providing that any unissued
shares of Preferred Stock of that class previously assigned to such series shall
no longer constitute a part of such series, and may alter the terms of any
series of Preferred Stock prior to the issuance of shares of such series.

     Subject to the foregoing powers of the Board of Directors, the preferences,
limitations and relative rights of the Preferred Stock and the Common Stock are
as follows:

A.   Dividends

     The holders of the Common Stock shall be entitled to receive dividends as,
     when and if declared by the Board of Directors out of funds legally
     available for the payment of dividends. The holders of the Preferred Stock
     shall be entitled to receive dividends on a parity with the holders of the
     Common Stock as, when and if declared by the Board of Directors out of
     funds legally available for the payment of dividends. Such dividends on
     shares of Preferred Stock shall be equal to the amount which would be paid
     to the holder thereof on the number of shares of Common Stock into which
     such shares of Preferred Stock are convertible on the record date for
     determining eligibility to receive such dividends.



<PAGE>


B.   Voting Rights

      (1)   The holders of Common Stock shall have the right to vote upon all
            matters submitted to the stockholders of the corporation and shall
            be entitled to one vote for each share of Common Stock held by them
            respectively.

      (2)   The holders of Class A Voting Preferred Stock shall be entitled to
            vote upon all matters upon which holders of Common Stock have the
            right to vote and, except as otherwise required by applicable law,
            each holder of shares of Class A Voting Preferred Stock shall be
            entitled to the number of votes equal to the number of whole shares
            of Common Stock into which such shares of Class A Voting Preferred
            Stock are convertible at the record date for determining the
            stockholders entitled to vote on such matters, such votes to be
            counted together with all other shares of capital stock having
            general voting powers and not separately as a class.

      (3)   Except as otherwise required by applicable law, the holders of Class
            B Nonvoting Preferred Stock shall have no voting power whatsoever
            and shall not have the right to vote on any matter or otherwise
            participate in any proceedings in which actions shall be taken by
            the Corporation or the shareholders thereof or be entitled to
            notification as to any meeting of the shareholders. In any case
            where applicable law requires voting by holders of Class B Nonvoting
            Preferred Stock, except as otherwise required by applicable law,
            each such holder shall be entitled to the number of votes equal to
            the number of whole shares of Common Stock into which such shares of
            Class B Voting Preferred Stock are convertible at the record date
            for determining the stockholders entitled to vote on such matters,
            such votes to be counted together with all other shares of capital
            stock having general voting powers and not separately as a group.



<PAGE>


      (4)   In any case where applicable law requires a separate vote by the
            holders of shares of a class of stock of the corporation or a series
            thereof, in taking such separate vote each holder of such shares
            shall be entitled to one vote for each such share held.

C.   Liquidation Preference

     In the event of any liquidation, dissolution or winding up of the
     corporation, either voluntary or involuntary, the holders of shares of the
     Preferred Stock shall be entitled to receive out of the assets of the
     corporation available for distribution to its stockholders, before any
     distribution or payment shall be made to the holders of the Common Stock,
     an amount per share determined in accordance with the Series Resolution
     applicable to such shares (which amount may be designated in the Series
     Resolution as the "Liquidation Preference" of such series), or, if no such
     amount is specified in the applicable Series Resolution, the par value of
     such shares. Written notice of such liquidation, dissolution or winding up,
     stating a payment date, the amount of such payment and the place where said
     payment shall be payable, shall be given by first-class mail, postage
     prepaid, not less than 30 days prior to the payment date stated therein to
     the holders of the Preferred Stock, such notice to be addressed to each
     such holder at his address as shown on the corporation's records. If upon
     such liquidation, dissolution or winding up of the corporation, the assets
     of the corporation available for distribution to its stockholders shall be
     insufficient to permit the payment in full of such amounts to the holders
     of the Preferred Stock, then the entire assets available for distribution
     shall be distributed among the holders of the Preferred Stock ratably in
     proportion to the full amount to which they would otherwise be respectively
     entitled. If upon such liquidation, dissolution or winding up of the
     corporation, the assets of the corporation available for distribution to
     its stockholders exceed such amounts to be

<PAGE>
     paid to the holders of the Preferred Stock, the assets remaining after
     payment of such amounts to the holders of the Preferred Stock shall be paid
     as follows:

      (1)   the holders of the Common Stock shall first be paid an amount for
            each share of Common Stock held by them respectively equal to the
            quotient obtained by dividing the aggregate amounts paid to the
            holders of the Preferred Stock pursuant to the preceding sentence by
            the number of shares of Common Stock into which all of the
            outstanding shares of Preferred Stock are convertible at the time of
            such distribution to holders of the Preferred Stock;

      (2)   then the entire remaining balance of such assets shall be paid to
            the holders of the Common Stock and the Preferred Stock in an amount
            for each share of Common Stock or Preferred Stock held by them
            respectively equal to the quotient obtained by dividing such balance
            by the aggregate number of outstanding shares of Preferred Stock and
            Common Stock, and for purposes of this distribution each share of
            Preferred Stock shall be deemed to have been converted into the
            number of shares of Common Stock into which such share of Preferred
            Stock is convertible at the time of such distribution.

     For purposes of this Paragraph C, no merger or consolidation of the
     corporation into or with any other corporation or entity, nor any voluntary
     sale, lease, exchange, transfer, mortgage, pledge or other disposition of
     all or substantially all of the corporation's assets, whether for cash,
     securities or otherwise, shall be deemed to be a liquidation, dissolution
     or winding up of the corporation. For purposes of this Paragraph C, if any
     assets distributed to stockholders upon liquidation of the corporation
     consist of property other than cash, the amount of such distribution shall
     be deemed to be the fair market value thereof at the time of such
     distribution, as determined in good faith by the Board of Directors.

D.   Conversion Rights [See Endnote (1)]

     If so provided in the Series Resolutions applicable to such shares, shares
     of Preferred Stock shall be convertible into Common Stock on the terms and
     conditions stated in such Series Resolution. If no provision is made for
     the conversion of shares of Preferred Stock into Common Stock by the Series
     Resolution applicable to such shares of Preferred Stock, then, solely for
     purposes of applying Paragraphs A, B and C hereof, such shares of Preferred
     Stock shall be treated as convertible into one share of Common Stock at any
     time and without adjustment.

                                    ARTICLE V

     The minimum amount of consideration to be received by the corporation for
its shares before it shall commence business is One Dollar ($1.00) in cash or
property of equivalent value.

                                   ARTICLE VI

     The address of the initial registered office of the corporation in North
Carolina is Suite 450, 2626 Glenwood Avenue, Raleigh, Wake County, North
Carolina 27608; and the name of the initial registered agent at such address is
Fred D. Hutchison.

                                   ARTICLE VII

     The number of Directors of the corporation may be fixed by the bylaws. The
number of the Directors constituting the initial Board of Directors shall be
three (3), and the names and addresses of the persons who are to serve as
Directors until the first meeting of the shareholders, or until their successors
be elected and qualify are:

<PAGE>


      Name                          Address
      -----                         -------
      Calvin H. Carter, Jr.         4400 Yates Pond Road
                                    Raleigh, North Carolina 27606

      F. Neal Hunter                621 Tinkerbell Road
                                    Chapel Hill, North Carolina 27514

      C. Eric Hunter                5639 Chapel Hill Road
                                    Apt. 910
                                    Durham, North Carolina  27707

                                  ARTICLE VIII

      The name and address of the incorporator is:

      Name                          Address
      ----                          --------
      Fred D. Hutchison             Suite 450, 2626 Glenwood Avenue
                                    Raleigh, North Carolina  27608

                                   ARTICLE IX

     There shall be no preemptive rights with respect to the shares of the
capital stock of the corporation.

                                    ARTICLE X

     No director of the Corporation shall have personal liability arising out of
an action whether by or in the right of the Corporation or otherwise for
monetary damages for breach of his or her duty as a director; provided, however,
that the foregoing shall not limit or eliminate the personal liability of a
director with respect to (i) acts or omissions not made in good faith that such
director at the time of such breach knew or believed were in conflict with the
best interests of the corporation, (ii) any liability under Section 55-32 of the
North Carolina General Statutes or any successor provision, (iii) any
transaction from which such director derived an improper personal benefit, or
(iv) acts or omissions occurring prior to the date of the effectiveness of this
Article. As used in this Article, the term "improper personal benefit" does not
include a director's compensation or other incidental benefit for or on account
of his

<PAGE>

or her service as a director, officer, employee, independent contractor,
attorney, or consultant of the corporation.

     Furthermore, notwithstanding the foregoing provision, in the event that
Section 55-7 or any other provision of the North Carolina General Statutes is
amended or enacted to permit further limitation or elimination of the personal
liability of a director, the personal liability of the corporation's directors
shall be limited or eliminated to the fullest extent permitted by the applicable
law.

     This Article shall not affect a charter or bylaw provision or contract or
resolution of the corporation indemnifying or agreeing to indemnify a director
against personal liability. Any repeal or modification of this Article shall not
adversely affect any limitation hereunder on the personal liability of a
director with respect to acts or omissions occurring prior to such repeal or
modification.

ENDNOTE (1)
- ----------------------------
The Corporation's Articles of Incorporation, all amendments thereto and all
outstanding Statements of Classification of Shares were amended by resolution
passed by the shareholders of the Corporation on January 5, 1993, as follows:

      "The Conversion Price adjustments which are presently included in the
      Corporation's Articles of Incorporation and Statements of Classification
      of Shares which relate to the Corporation's outstanding Class A Voting and
      Class B Non-voting Preferred Stock, which adjustments are to be made in
      the event that outstanding shares of Common Stock of the Corporation shall
      be subdivided or increased, by stock split or stock dividend, into a
      greater number of shares of Common Stock, shall be deleted so that in the
      event of a simultaneous stock split of the Corporation's Common and
      Preferred Stock, the proportionate interests of the shareholders of
      outstanding Common and Preferred Stock remains the same before and after
      the effectiveness of such stock split."




<PAGE>
                  CLASS A VOTING PREFERRED STOCK -- SERIES A
                 Preferences, Limitations and Relative Rights


1.    Designation

65,474 shares of the Preferred Stock, $0.01 par value, of Cree Research, Inc.
(the "Corporation") shall constitute a series of such Preferred Stock designated
as "Class A Voting Preferred Stock -- Series A."

2.  Liquidation Preference

The liquidation preference of each share of the Series A Preferred Stock shall
be the original issue price per share paid by the holder of such share.

3.    Voluntary Conversion

Each share of Series A Preferred Stock may be converted at any time without the
payment of any consideration, at the rate (the "Conversion Rate") of one share
of Common Stock of the Corporation for each share of Series A Preferred Stock so
converted, subject to adjustment in accordance with the provisions hereof. All
such conversions shall be at the option of the holder of such Series A Preferred
Stock.

Such option to convert shares of Series A Preferred Stock into shares of Common
Stock may be exercised as to all or any portion of such shares of Series A
Preferred Stock by, and only by, surrendering for such purpose to the
Corporation at its principal executive office or at such other place as may be
designated by the Corporation the certificate or certificates representing such
shares of Series A Preferred Stock, duly endorsed or accompanied by proper
instruments of transfer together with a written notice from the holder thereof
stating that he elects to convert the same and the name or names and addresses
to which certificates for Common Stock will be issued. No fractional shares of
Common Stock shall be issued upon conversion of Series A Preferred Stock. In
lieu of any fractional shares to which the holder would otherwise be entitled,
the Corporation shall pay to the holder cash equal to such fraction multiplied
by the Liquidation Preference divided by the number of shares of Common Stock
(including any fractional interest for such purpose) into which each share of
Preferred Stock may then be converted. The Corporation shall, as soon as
practicable thereafter, issue and deliver to such holder of Series A Preferred
Stock, or to a third party such holder may designate in writing, a certificate
or certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid and, a check payable to the holder in the amount of any
cash amounts payable as the result of conversion into fractional shares of
Common Stock plus declared but unpaid dividends, and if less than all the shares
of the Series A Preferred Stock represented by such certificates are converted,
a certificate representing the shares of Series A Preferred Stock not converted.
Such conversion shall be deemed to have been made immediately prior to the close
of business on

<PAGE>
the date of such surrender of the shares of Series A Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.

The number of shares of Common Stock into which each share of Series A Preferred
Stock may be converted shall be subject to the following adjustments:

      (a)   If the Corporation shall after the date of issuance of the Series
            A Preferred Stock subdivide the outstanding shares of Common
            Stock into a greater number of shares of Common Stock or combine
            the outstanding shares of Common Stock into a lesser number of
            shares, or issue by way of a stock dividend on its Common Stock
            or reclassification of its shares of Common Stock any shares of
            the Corporation, the number of shares of Common Stock into which
            each share of Series A Preferred Stock may be converted
            immediately prior thereto shall be adjusted so that the holder of
            the Series A Preferred Stock thereafter surrendered for
            conversion shall be entitled to receive for each share of Series
            A Preferred Stock the number of shares of Common Stock which he
            would have owned or been entitled to receive after the happening
            of any of the events described above if his Series A Preferred
            Stock had been converted immediately prior to the happening of
            such event, such adjustment to become effective concurrently with
            the time at which such subdivision or combination or
            reclassification, as the case may be, became effective.

      (b)   In the event of any consolidation with or merger of the
            Corporation with or into another corporation, or in case of any
            sale, lease or conveyance to another corporation of the assets of
            the Corporation as an entirety or substantially as an entirety,
            each share of Series A Preferred Stock shall after the date of
            such consolidation, merger, sale, lease or conveyance be
            convertible into the number of shares of stock or other
            securities or property (including cash) to which the Common Stock
            issuable (at the time of such consolidation, merger, sale, lease
            or conveyance) upon conversion of such share of Series A
            Preferred Stock would have been entitled upon such consolidation,
            merger, sale, lease or conveyance; and in any such case, if
            necessary, the provisions set forth herein with respect to the
            rights and interests thereafter of the holders of the shares of
            Series A Preferred Stock shall be appropriately adjusted so as to
            be applicable, as nearly as may reasonably be, to any shares of
            stock or other securities or property thereafter deliverable on
            the conversion of the shares of Series A Preferred Stock.

<PAGE>


      (c)   Upon any adjustment of the number of shares into which Series A
            Preferred Stock may be converted, then in each such case the
            Corporation shall give written notice thereof within 30 days of
            the occurrence of the adjustment, addressed to each registered
            holder of Series A Preferred Stock at the address of such holder
            as shown on the records of the Corporation, which notice shall
            state the Conversion Rate resulting from such adjustment and the
            increase or decrease, if any, in the number of shares issuable
            upon the conversion of Series A Preferred Stock setting forth in
            reasonable detail the method of calculation and the facts upon
            which such calculation is based.

4.    Mandatory Conversion

The Series A Preferred Stock shall automatically be converted into Common Stock
simultaneously with the closing of an underwritten public offering of the
Corporation's Common Stock pursuant to an effective registration statement filed
by the Corporation under the Securities Act of 1933, as amended. The provisions
of Section 3 regarding the number of shares of Common Stock which shall be
issuable upon the conversion of Series A Preferred Stock into Common Stock shall
be applicable to such mandatory conversion. The Corporation shall give written
notice of the date of such closing (the "Mandatory Conversion Date") to each
holder of record of Series A Preferred Stock, as promptly as practicable after
the Mandatory Conversion Date. Such notice shall be given by first-class mail,
postage prepaid, addressed to such holder at his address as shown on the records
of the Corporation, notifying such holder that the shares have been converted
and calling upon such holder to surrender to the Corporation the certificate
representing his shares of Series A Preferred Stock, duly endorsed or
accompanied by proper instruments of transfer.

Within 60 days after the Mandatory Conversion Date, each holder of shares of
Series A Preferred Stock shall present and surrender his certificate or
certificates for such shares to the Corporation at the principal executive
office of the Corporation or at such other place as may be designated by the
Corporation and shall be issued new certificates representing the shares of
Common Stock issuable upon such conversion. Upon the Mandatory Conversion Date,
each person who was a holder of Series A Preferred Stock on that date shall be
deemed to have become the holder of the Common Stock deemed to be issued on
conversion and not of the Series A Preferred Stock being converted. All rights
of the holders of such converted shares shall cease with respect to such shares
except for rights in connection with such shares which have become matured
obligations to such holders prior to such conversion and the right to receive
certificates of Common Stock representing the shares deemed to be issued upon
such conversion.



<PAGE>


                  CLASS A VOTING PREFERRED STOCK -- SERIES B
                 Preferences, Limitations and Relative Rights


1.    Designation

11,334 shares of the Preferred Stock, $0.01 par value, of the Corporation shall
constitute a series of such Preferred Stock designated as "Class A Voting
Preferred Stock -- Series B."

2.    Liquidation Preference

The Liquidation Preference of the Series B Preferred Stock shall be the price
per share received by the Corporation upon the original issuance of such shares.

3.    Voluntary Conversion

Each share of Series B Preferred Stock may be converted at any time, without the
payment of any consideration, at the rate (the "Conversion Rate") of one share
of Common Stock of the Corporation for each share of Series B Preferred Stock so
converted, subject to adjustment in accordance with the provisions hereof. All
such conversions shall be at the option of the holder of such Series B Preferred
Stock.

Such option to convert shares of Series B Preferred Stock into shares of Common
Stock may be exercised as to all or any portion of such shares of Series B
Preferred Stock by, and only by, surrendering for such purpose to the
Corporation at its principal executive office or at such other place as may be
designated by the Corporation the certificate or certificates representing such
shares of Series B Preferred Stock, duly endorsed or accompanied by proper
instruments of transfer together with a written notice from the holder thereof
stating that he elects to convert the same and the name or names and addresses
to which certificates for Common Stock will be issued. No fractional shares of
Common Stock shall be issued upon conversion of Series B Preferred Stock. In
lieu of any fractional shares to which the holder would otherwise be entitled,
the Corporation shall pay to the holder cash equal to such fraction multiplied
by the Liquidation Preference divided by the number of shares of Common Stock
(including any fractional interest for such purpose) into which each share of
Preferred Stock may then be converted. The Corporation shall, as soon as
practicable thereafter, issue and deliver to such holder of Series B Preferred
Stock, or to a third party such holder may designate in writing, a certificate
or certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid and, a check payable to the holder in the amount of any
cash amounts payable as the result of conversion into fractional shares of
Common Stock plus declared but unpaid dividends, and if less than all the shares
of the Series B Preferred Stock represented by such certificates are converted,
a certificate representing the shares of Series B Preferred Stock not converted.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Series B Preferred


<PAGE>
Stock to be converted, and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock on such date.

The number of shares of Common Stock into which each share of Series B Preferred
Stock may be converted shall be subject to the following adjustments:

      (a)   If the Corporation shall after the date of issuance of the Series
            B Preferred Stock subdivide the outstanding shares of Common
            Stock into a greater number of shares of Common Stock or combine
            the outstanding shares of Common Stock into a lesser number of
            shares, or issue by way of a stock dividend on its Common Stock
            or reclassification of its shares of Common Stock any shares of
            the Corporation, the number of shares of Common Stock into which
            each share of Series B Preferred Stock may be converted
            immediately prior thereto shall be adjusted so that the holder of
            the Series B Preferred Stock thereafter surrendered for
            conversion shall be entitled to receive for each share of Series
            B Preferred Stock the number of shares of Common Stock which he
            would have owned or been entitled to receive after the happening
            of any of the events described above if his Series B Preferred
            Stock had been converted immediately prior to the happening of
            such event, such adjustment to become effective concurrently with
            the time at which such subdivision or combination or
            reclassification, as the case may be, became effective.

      (b)   In the event of any consolidation with or merger of the
            Corporation with or into another corporation, or in case of any
            sale, lease or conveyance to another corporation of the assets of
            the Corporation as an entirety or substantially as an entirety,
            each share of Series B Preferred Stock shall after the date of
            such consolidation, merger, sale, lease or conveyance be
            convertible into the number of shares of stock or other
            securities or property (including cash) to which the Common Stock
            issuable (at the time of such consolidation, merger, sale, lease
            or conveyance) upon conversion of such share of Series B
            Preferred Stock would have been entitled upon such consolidation,
            merger, sale, lease or conveyance; and in any such case, if
            necessary, the provisions set forth herein with respect to the
            rights and interests thereafter of the holders of the shares of
            Series B Preferred Stock shall be appropriately adjusted so as to
            be applicable, as nearly as may reasonably be, to any shares of
            stock or other securities or property thereafter deliverable on
            the conversion of the shares of Series B Preferred Stock.



<PAGE>


      (c)   Upon any adjustment of the number of shares into which
            Series B Preferred Stock may be converted, then in each such
            case the Corporation shall give written notice thereof
            within 30 days of the occurrence of the adjustment,
            addressed to each registered holder of Series B Preferred
            Stock at the address of such holder as shown on the records
            of the Corporation, which notice shall state the Conversion
            Rate resulting from such adjustment and the increase or
            decrease, if any, in the number of shares issuable upon the
            conversion of Series B Preferred Stock setting forth in
            reasonable detail the method of calculation and the facts
            upon which such calculation is based.

4.    Mandatory Conversion

The Series B Preferred Stock shall automatically be converted into Common Stock
simultaneously with the closing of an underwritten public offering of the
Corporation's Common Stock pursuant to an effective registration statement filed
by the Corporation under the Securities Act of 1933, as amended. The provisions
of Section 3 regarding the number of shares of Common Stock which shall be
issuable upon the conversion of Series B Preferred Stock into Common Stock shall
be applicable to such mandatory conversion. The Corporation shall give written
notice of the date of such closing (the "Mandatory Conversion Date") to each
holder of record of Series B Preferred Stock, as promptly as practicable after
the Mandatory Conversion Date. Such notice shall be given by first-class mail,
postage prepaid, addressed to such holder at his address as shown on the records
of the Corporation, notifying such holder that the shares have been converted
and calling upon such holder to surrender to the Corporation the certificate
representing his shares of Series B Preferred Stock, duly endorsed or
accompanied by proper instruments of transfer.

Within 60 days after the Mandatory Conversion Date, each holder of shares of
Series B Preferred Stock shall present and surrender his certificate or
certificates for such shares to the Corporation at the principal executive
office of the Corporation or at such other place as may be designated by the
Corporation and shall be issued new certificates representing the shares of
Common Stock issuable upon such conversion. Upon the Mandatory Conversion Date,
each person who was a holder of Series B Preferred Stock on that date shall be
deemed to have become the holder of the Common Stock deemed to be issued on
conversion and not of the Series B Preferred Stock being converted. All rights
of the holders of such converted shares shall cease with respect to such shares
except for rights in connection with such shares which have become matured
obligations to such holders prior to such conversion and the right to receive
certificates of Common Stock representing the shares deemed to be issued upon
such conversion.


<PAGE>


                CLASS B NONVOTING PREFERRED STOCK -- SERIES A
                 Preferences, Limitations and Relative Rights



1.    Designation

48,000 shares of the Class B Nonvoting Preferred Stock, $0.01 par value, of the
Corporation shall constitute a series of such Preferred Stock designated as
"Class B Nonvoting Preferred Stock -- Series A." Such series is referred to
herein as the "Series A Preferred Stock."

2.    Liquidation Preference

The Liquidation Preference of the Series A Preferred Stock shall be $100.00 per
share.

3.    Voluntary Conversion

      A.    Right to Convert.  Each share of Series A Preferred Stock may be
            converted at any time, without the payment of any consideration,
            into fully paid and nonassessable shares of Common Stock of the
            Corporation at the Conversion Price (as hereinafter defined) in
            effect at the time of conversion determined as provided herein,
            and all such conversions shall be at the option of the holder of
            such Series A Preferred Stock; provided, however, that if within
            15 days after the certificate or certificates representing shares
            to be converted are surrendered as provided in the next paragraph
            (the "Objection Period"), the Board of Directors of the
            Corporation, by action of a majority of the directors then
            holding office, shall adopt a resolution objecting to the
            conversion of such shares under this Section 3, then the exercise
            of the option to convert such shares shall be null and void and
            the certificate or certificates surrendered shall be returned as
            soon as practicable thereafter to the holder of record of such
            shares.  Shares of Series A Preferred Stock attempted to be
            converted but as to which conversion an objection is made as
            provided herein shall again become eligible for conversion under
            this Section 3 upon return of the certificate or certificates
            representing such shares.

      B.    Mechanics of Conversion.  Subject to the preceding paragraph,
            such option to convert shares of Series A Preferred Stock into
            shares of Common Stock may be exercised as to all or any portion
            of such shares of Series A Preferred Stock by, and only by,
            surrendering for such purpose to the Corporation at its principal
            executive office or at such other place as may be designated by
            the Corporation the certificate or certificates representing such
            shares of Series A Preferred Stock, duly endorsed or accompanied
            by proper instruments of transfer together with a written notice
            from the holder thereof stating that he elects to

<PAGE>


            convert the same and the name or names and addresses to which
            certificates for Common Stock will be issued. No fractional shares
            of Common Stock shall be issued upon conversion of Series A
            Preferred Stock. In lieu of any fractional shares to which the
            holder would otherwise be entitled, the Corporation shall pay to the
            holder cash equal to such fraction multiplied by the then effective
            Conversion Price. The Corporation shall, within 20 days after
            surrender of the certificate or certificates as provided in this
            paragraph or as soon as practicable thereafter, unless a resolution
            objecting to the conversion is adopted the Board of Directors within
            the Objection Period as provided herein, issue and deliver to such
            holder of Series A Preferred Stock, or to such third party as such
            holder may designate in writing, a certificate or certificates for
            the number of shares of Common Stock to which he shall be entitled
            as aforesaid and, a check payable to the holder in the amount of any
            cash amounts payable as the result of conversion into fractional
            shares of Common Stock plus declared but unpaid dividends, and if
            less than all the shares of the Series A Preferred Stock represented
            by such certificates are converted, a certificate representing the
            shares of Series A Preferred Stock not converted. Unless a
            resolution objecting to the conversion is adopted by the Board of
            Directors within the Objection Period as provided herein, such
            conversion shall be deemed to have been made immediately prior to
            the opening of business on the date immediately following the
            expiration of the Objection Period, and the person or persons
            entitled to receive the shares of Common Stock issuable upon such
            conversion shall be treated for all purposes as the record holder or
            holders of such shares of Common Stock on such date.

      C.    Conversion Price.  For purposes of Sections 3, 4 and 5 hereof,
            each share of Series A Preferred Stock shall be convertible into
            the number of shares of Common Stock that results from dividing
            $100.00 by the Conversion Price per share in effect at the time
            of conversion.  The Conversion Price per share of Series A
            Preferred Stock shall initially be $100.00 and shall be subject
            to adjustment from time to time as provided in Section 5 and as
            follows:

            (1)   If the Corporation shall after the date of issuance of the
                  Series A Preferred Stock subdivide the outstanding shares of
                  Common Stock into a greater number of shares of Common Stock
                  or combine the outstanding shares of Common Stock into a
                  lesser number of shares, or increase the number of outstanding
                  shares of Common Stock by way of a stock dividend on its
                  Common Stock, the Conversion Price then in effect shall be
                  adjusted so that the holder of the Series A Preferred Stock
                  thereafter surrendered for conversion shall be

<PAGE>

                  entitled to receive for each share of Series A Preferred Stock
                  the number of shares of Common Stock which he would have owned
                  or been entitled to receive after the happening of any of the
                  events described above if his Series A Preferred Stock had
                  been converted immediately prior to the happening of such
                  event, such adjustment to become effective concurrently with
                  the time at which such subdivision or combination or stock
                  dividend, as the case may be, became effective.

            (2)   If the Common Stock issuable upon conversion of the Series A
                  Preferred Stock shall be changed into the same or a different
                  number of shares of any other class or classes of stock,
                  whether by capital reorganization, reclassification or
                  otherwise (other than a subdivision or combination of shares
                  provided for above), the Conversion Price then in effect
                  shall, concurrently with the effectiveness of such
                  reorganization or reclassification, be proportionately
                  adjusted such that the Series A Preferred Stock shall be
                  convertible into, in lieu of the number of shares of Common
                  Stock which the holders would otherwise have been entitled to
                  receive, a number of shares of such other class or classes of
                  stock equivalent to the number of shares of Common Stock that
                  would have been subject to receipt by the holders upon
                  conversion of the Series A Preferred Stock immediately before
                  that change.

            (3)   In the event of any consolidation with or merger of the
                  Corporation with or into another corporation, or in case of
                  any sale, lease or conveyance to another corporation of the
                  assets of the Corporation as an entirety or substantially as
                  an entirety, each share of Series A Preferred Stock shall
                  after the date of such consolidation, merger, sale, lease or
                  conveyance be convertible into the number of shares of stock
                  or other securities or property (including cash) to which the
                  Common Stock issuable (at the time of such consolidation,
                  merger, sale, lease or conveyance) upon conversion of such
                  share of Series A Preferred Stock would have been entitled
                  upon such consolidation, merger, sale, lease or conveyance;
                  and in any such case, if necessary, the provisions set forth
                  herein with respect to the rights and interests thereafter of
                  the holders of the shares of Series A Preferred Stock shall be
                  appropriately adjusted so as to be applicable, as nearly as
                  may reasonably be, to any shares of stock or other securities
                  or property thereafter deliverable on the conversion of the
                  shares of Series A Preferred Stock.

<PAGE>

            (4)   Upon any adjustment, under the provisions of this Section 3(C)
                  or the provisions of Section 5, of the number or character of
                  shares into which Series A Preferred Stock may be converted,
                  then in each such case the Corporation shall give written
                  notice thereof within 30 days of the occurrence of the
                  adjustment, addressed to each registered holder of Series A
                  Preferred Stock at the address of such holder as shown on the
                  records of the Corporation, which notice shall state the
                  Conversion Price resulting from such adjustment and the
                  increase or decrease, if any, in the number of shares issuable
                  upon the conversion of Series A Preferred Stock setting forth
                  in reasonable detail the method of calculation and the facts
                  upon which such calculation is based.

4.    Mandatory Conversion

Each share of Series A Preferred Stock shall automatically be converted into
fully paid and nonassessable shares of Common Stock at the then effective
Conversion Price simultaneously with the closing of an underwritten public
offering (a "Registered Public Offering") of the Corporation's Common Stock
pursuant to an effective registration statement filed by the Corporation under
the Securities Act of 1933, as amended. The provisions of Section 3 regarding
the number of shares of Common Stock which shall be issuable upon the conversion
of Series A Preferred Stock into Common Stock, and the amount of payment for any
fractional shares in lieu of the issuance thereof, shall be applicable to such
mandatory conversion. Upon the closing of a Registered Public Offering, the
outstanding shares of Series A Preferred Stock shall be converted automatically
without any further action on the part of the holders of such shares and
regardless of whether the certificate or certificates representing the converted
shares are surrendered, and all rights of the holders of such converted shares
shall cease with respect to the converted shares upon such conversion except for
rights to any declared but unpaid dividends with respect to such converted
shares and the right to receive certificates representing the shares of Common
Stock deemed issued upon such conversion and any payment for fractional shares
in accordance herewith. The Corporation shall give written notice of the date of
such closing (the "Mandatory Conversion Date") to each holder of record of
Series A Preferred Stock, as promptly as practicable after the Mandatory
Conversion Date. Such notice shall be given by first-class mail, postage
prepaid, addressed to such holder at his address as shown on the records of the
Corporation, notifying such holder that the shares have been converted and
calling upon such holder to surrender to the Corporation the certificate or
certificates representing his shares of Series A Preferred Stock. Each holder of
shares of Series A Preferred Stock shall present and surrender his certificate
or certificates for such shares to the Corporation at the principal executive
office of the Corporation or at such other place as may be designated by the
Corporation, duly endorsed or accompanied by proper instruments of transfer
together with a written notice from the holder


<PAGE>

thereof stating the name or names and addresses to which certificates for Common
Stock are to be issued, and the Corporation shall, as soon as practicable
thereafter, issue and deliver to such holder of Series A Preferred Stock, or to
such third party as such holder may designate in writing, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid and a check payable to the holder in the amount of any
cash amounts payable as the result of conversion into fractional shares of
Common Stock plus declared but unpaid dividends.

5.    Certain Adjustments to Conversion Price for Diluting Issues

      A.    Special Definitions.  For purposes of this Section 5, the
            following definitions shall apply:

            (1)   "Options" shall mean rights, options or warrants to subscribe
                  for, purchase or otherwise acquire either Common Stock or
                  Convertible Securities.

            (2)   "Convertible Securities" shall mean any evidences of
                  indebtedness, shares or other securities convertible into or
                  exchangeable for Common Stock and shall include, without
                  limitation, shares of the Class A Voting Preferred Stock and
                  the Class B Nonvoting Preferred Stock of the Corporation.

            (3)   "Original Issue Date" shall mean the date upon which the first
                  share of the Series A Preferred Stock was first issued by the
                  Corporation.

            (4)   "Additional Shares of Common" shall mean all shares of Common
                  Stock issued or, pursuant to Section 5(C), deemed to be
                  issued, by the Corporation after the Original Issue Date,
                  except shares of Common Stock issued or issuable at any time:

                  (a)   upon conversion of shares of the Series A Preferred
                  Stock as provided herein;

                  (b) to employees, officers or directors of the Corporation
                  pursuant to a stock grant, stock option plan or stock purchase
                  plan or other stock agreement or arrangement approved by the
                  Board of Directors of the Corporation;

                  (c) as a dividend or distribution on all outstanding shares of
                  all classes of the capital stock of the Corporation or a
                  dividend or distribution on all outstanding shares of all
                  classes of the Preferred Stock of the Corporation;

                  (d)   in the circumstances described in Section 3(C); or


<PAGE>

                  (e) pursuant to the exercise of Options outstanding on or
                  prior to the Original Issue Date or the conversion or exchange
                  of Convertible Securities outstanding on or prior to the
                  Original Issue Date.

      B.    Adjustments for Issuance of Additional Shares of Common.  No
            adjustment in the Conversion Price for any shares of Series A
            Preferred Stock shall be made in respect of the issuance of
            Additional Shares of Common except as expressly provided in this
            Section 5(B).  In the event the Corporation, at any time or from
            time to time within 120 days after the Original Issue Date, shall
            issue Additional Shares of Common (including Additional Shares of
            Common deemed issued pursuant to Section 5(C)) without
            consideration or for a consideration per share (determined
            pursuant to Section 5(D) hereof) less than the Conversion Price
            for a share of Series A Preferred Stock in effect on the date of,
            and immediately prior to such issue, then the Conversion Price
            shall be reduced, concurrently with such issue, to a price
            (calculated to the nearest one hundredth of a cent) equal to the
            consideration per share received by the Corporation for the
            Additional Shares of Common so issued.

      C.    Deemed Issue of Additional Shares of Common.  In the event the
            Corporation, at any time or from time to time within 120 days
            after the Original Issue Date, shall issue any Options or
            Convertible Securities, then the maximum number of shares of
            Common Stock (as set forth in the instrument relating thereto
            without regard to any provisions contained therein for a
            subsequent adjustment of such number) issuable upon the exercise
            of such Options or, in the case of Convertible Securities and
            Options therefor, the conversion or exchange of such Convertible
            Securities, shall (except as otherwise provided in Section
            5(a)(4)) be deemed to be Additional Shares of Common issued as of
            the time of such issue; provided, that Additional Shares of
            Common shall not be deemed to have been issued unless the
            consideration per share (determined pursuant to Section 5(D)
            hereof) of such Additional Shares of Common would be less than
            the Conversion Price in effect on the date of and immediately
            prior to such issue, and, provided further, that in any such case
            in which Additional Shares of Common are deemed to be issued:

            (1)   no further adjustment in the Conversion Price shall be made
                  upon the subsequent issue of shares of Common Stock or
                  Convertible Securities upon the exercise of such Options or
                  conversion or exchange of such Convertible Securities;

            (2)   if such Options or Convertible Securities by their terms
                  provide, with the passage of time or otherwise, for any change
                  in the amount of



<PAGE>

                  consideration payable to the corporation, or change in the
                  number of shares of Common Stock issuable, upon the exercise,
                  conversion or exchange thereof, the Conversion Price computed
                  upon the original issue thereof, and any subsequent
                  adjustments based thereon, shall, upon any such change
                  becoming effective, be recomputed to reflect an appropriate
                  increase or decrease reflecting such change insofar as it
                  affects such Options or the rights of conversion or exchange
                  under such Convertible Securities;

            (3)   upon the expiration of any such Options or any rights of
                  conversion or exchange under such Convertible Securities which
                  shall not have been exercised, the Conversion Price computed
                  upon the original issue thereof, and any subsequent
                  adjustments based thereon, shall, upon such expiration, be
                  recomputed as if:

                  (a) in the case of Convertible Securities or Options for
                  Common Stock, the only Additional Shares of Common issued were
                  shares of Common Stock, if any, actually issued upon the
                  exercise of such Options or the conversion or exchange of such
                  Convertible Securities and the consideration received therefor
                  was the consideration actually received by the Corporation for
                  the issue of all such Options, whether or not exercised, plus
                  the consideration actually received by the Corporation upon
                  such exercise, or for the issue of all such Convertible
                  Securities which were actually converted or exchanged, plus
                  the additional consideration, if any, actually received by the
                  Corporation upon such conversion or exchange, and

                  (b) in the case of Options for Convertible Securities, only
                  the Convertible Securities, if any, actually issued upon the
                  exercise thereof were issued at the time of issue of such
                  Options, and the consideration received by the Corporation for
                  the Additional Shares of Common deemed to have been issued was
                  the consideration actually received by the Corporation for the
                  issue of all such Options, whether or not exercised, and the
                  consideration deemed to have been received by the Corporation
                  upon the issue of the Convertible Securities with respect to
                  such Options as were actually exercised.

            (4)   in the case of any Options which expire by their terms not
                  more than thirty (30) days after the date of issue thereof, no
                  adjustment of the Conversion Price shall be made until the
                  expiration or exercise of all such Options, whereupon such
                  adjustment shall be made in the same manner provided in clause
                  (3) above.

<PAGE>

      D.    Determination of Consideration. For purposes of this Section 5, the
            consideration received by the Corporation for the issue of any
            Additional Shares of Common shall be computed as follows:

            (1)   Except as provided in Section D(2) below, such consideration
                  shall:

                  (a) insofar as it consists of cash, be computed at the
                  aggregate amount of cash received by the Corporation (before
                  commission or expenses) excluding amounts paid or payable for
                  accrued interest or accrued dividends;

                  (b) insofar as it consists of property other than cash, be
                  computed at the fair value thereof at the time of such issue,
                  as determined in good faith by the Board of Directors; and

                  (c) in the event Additional Shares of Common are issued
                  together with other shares or securities or other assets of
                  the Corporation for consideration which covers both, at the
                  proportion of such consideration so received, computed as
                  provided in clauses (a) and (b) above, as determined in good
                  faith by the Board of Directors.

            (2)   The consideration per share received by the Corporation for
                  Additional Shares of Common deemed to have been issued
                  pursuant to Section 5(C) shall be determined by dividing

                  (a) the total amount, if any, received or receivable by the
                  Corporation as consideration for the issue of such Options or
                  Convertible Securities, plus the minimum aggregate amount of
                  additional consideration (as set forth in the instruments
                  relating thereto, without regard to any provisions contained
                  thereof for a subsequent adjustment of such consideration)
                  payable to the Corporation upon the exercise of such Options
                  or the conversion or exchange of such Convertible Securities,
                  or in the case of Options for Convertible Securities, the
                  exercise of such Options for Convertible Securities and the
                  conversion or exchange of such Convertible Securities by

                  (b) the maximum number of shares of Common Stock (as set forth
                  in the instruments relating thereto, without regard to any
                  provision contained therein for a subsequent adjustment of
                  such number) issuable upon the exercise of such Options of the
                  conversion or exchange of such Convertible Securities.

<PAGE>

6.    Amendments to Articles of Incorporation

The Corporation shall not, without the affirmative vote or written consent in
lieu of a vote of the holders of such number of outstanding shares of Series A
Preferred Stock as may be required by applicable law (with such shares to be
counted either separately or as a group with other shares of the Corporation's
capital stock in the manner specified by applicable law), adopt any amendment to
its Articles of Incorporation which would: (a) adversely change the rights or
preferences of the Series A Preferred Stock; (b) create a new class of shares of
capital stock having rights or preferences with respect to distributions or to
dissolution that are prior or superior to the Series A Preferred Stock; or (c)
increase the rights or preferences of any class of capital stock that, after
giving effect to the amendment, have rights or preferences with respect to
distributions or to dissolution that are prior or superior to the Series A
Preferred Stock.

7.    Other Rights and Privileges

Holders of Series A Preferred Stock shall have the same relative rights and
privileges as are granted to holders of Common Stock by the Articles of
Incorporation (as the same may be amended from time to time), except as
otherwise provided in the Articles of Incorporation (as the same may be amended
from time to time) and in Sections 1 through 6 above.

<PAGE>


                               CREE RESEARCH, INC.
                  CLASS B NONVOTING PREFERRED STOCK -- SERIES B
                 Preferences, Limitations and Relative Rights


1.    Designation

19,200 shares of the Class B Nonvoting Preferred Stock, $0.01 par value per
share, of the Corporation shall constitute a series of such Preferred Stock
designated as "Class B Nonvoting Preferred Stock -- Series B." Such series is
referred to herein as the "Series B Nonvoting Preferred Stock."

2.    Liquidation Preference

The Liquidation Preference of the Series B Nonvoting Preferred Stock shall be
$100.00 per share.

3.    Conversion

      A.    Mandatory Conversion.  Each outstanding share of Series B
            Nonvoting Preferred Stock shall be converted into fully paid and
            nonassessable shares of Common Stock at the then effective
            Conversion Price (as defined below) simultaneously with the
            closing of an underwritten public offering (a "Registered Public
            Offering") of the Corporation's Common Stock pursuant to an
            effective registration statement filed by the Corporation under
            the Securities Act of 1933, as amended.  Upon the closing of a
            Registered Public Offering, the out-standing shares of Series B
            Nonvoting Preferred Stock shall be deemed automatically converted
            without any further action on the part of the holders of such
            shares and regardless of whether the certificate or certificates
            representing the converted shares are surrendered, and all rights
            of the holders of such converted shares shall cease with respect
            to the converted shares except for rights to any declared but
            unpaid dividends on such converted shares and the right to
            receive certificates representing the shares of Common Stock
            deemed issued upon such conversion and any payment for fractional
            shares in accordance herewith.  No fractional shares of Common
            Stock shall be issued upon conversion of Series B Nonvoting
            Preferred Stock.  In lieu of fractional shares to which the
            holder would otherwise be entitled, the Corporation shall pay to
            the holder, without interest, cash equal to such fraction
            multiplied by the Conversion Price in effect at the time of
            conversion.

      B.    Mechanics of Conversion. The Corporation shall, as promptly as
            practicable after the closing of a Regis-tered Public Offering, give
            written notice of the closing to each holder of record of the Series
            B Non-voting Preferred Stock thereby converted stating that the
            shares have been converted and calling upon such

<PAGE>
            holder to surrender to the Corporation the certificate or
            certificates representing his shares of Series B Nonvoting Preferred
            Stock. Such notice shall be given by first-class mail, postage
            prepaid, ad-dressed to such holder at his address as shown on the
            records of the Corporation. Each holder of shares of Series B
            Nonvoting Preferred Stock shall present and surrender his
            certificate or certificates for such shares to the Corporation at
            the principal executive office of the Corporation or at such other
            place as may be designated by the Corporation in its notice to the
            holder, duly endorsed or accompanied by proper instruments of
            transfer together with a written notice from the holder thereof
            stating the name or names and addresses to which certificates for
            Common Stock are to be issued, and the Corporation shall, as soon as
            practicable thereafter, issue and deliver to such holder of Series B
            Nonvoting Preferred Stock, or to such third party as such holder may
            designate in writing, a certificate or certificates for the number
            of shares of Common Stock to which he shall be entitled as aforesaid
            and a check payable to the holder for any cash amounts payable in
            lieu of fractional shares of Common Stock plus any declared but
            unpaid dividends on the converted shares.

      C.    Conversion Price. For purposes of this Section 3, each share of
            Series B Nonvoting Preferred Stock shall be convertible into the
            number of shares of Common Stock that results from dividing $100.00
            by the Conversion Price per share in effect at the time of
            conversion. The Conversion Price per share of Series B Nonvoting
            Preferred Stock shall initially be $100.00 and shall be subject to
            adjustment from time to time as follows:

            (1)   In the event the outstanding shares of Common Stock shall be
                  subdivided or increased, by stock split or stock dividend,
                  into a greater number of shares of Common Stock, the
                  Conversion Price then in effect shall, concurrently with the
                  effectiveness of such subdivision or payment of such stock
                  dividend, be proportionately decreased. In the event the
                  outstanding shares of Common Stock shall be combined or
                  consolidated, by reclassification or otherwise, into a lesser
                  number of shares of Common Stock, the Conversion Price then in
                  effect shall, concurrently with the effectiveness of such
                  combination or con-solidation, be proportionately increased.

            (2)   If the Common Stock issuable upon conversion of the Series B
                  Nonvoting Preferred Stock shall be changed into the same or a
                  different number of shares of any other class or classes of
                  stock of the Corporation, whether by capital reorganization,
                  reclassification or otherwise (other than a subdivision or
                  combination of shares provided for above), the Conversion
                  Price then in

<PAGE>

                  effect shall, concurrently with the effectiveness of such
                  reorganization or reclassification, be proportionately
                  adjusted such that the Series B Nonvoting Preferred Stock
                  shall be convertible into, in lieu of the shares of Common
                  Stock which the holders would otherwise have been entitled to
                  receive, a number of shares of such other class or classes of
                  stock equivalent to the number of shares of Common Stock that
                  would have been subject to receipt by the holders upon
                  conversion of the Series B Nonvoting Preferred Stock
                  immediately before such event.

            (3)   Upon each adjustment of the Conversion Price provided for
                  hereunder and upon each change in the number of shares of
                  Common Stock issuable upon conversion of the Series B
                  Nonvoting Preferred Stock pursuant to the provisions hereof,
                  the Corporation shall promptly give written notice thereof to
                  each registered holder of Series B Nonvoting Preferred Stock,
                  first-class mail, postage prepaid, addressed to such holder at
                  his address as shown on the records of the Corporation, which
                  notice shall state the Conversion Price resulting from such
                  adjustment and the increase or decrease, if any, in the number
                  of shares issuable upon conversion of Series B Nonvoting
                  Preferred Stock or specifying the other shares of stock,
                  securities or assets and the amount thereof so issuable and
                  setting forth in reasonable detail the method of calculation
                  and the facts upon which such calculation is based.

      D.    Consolidations and Mergers.  In the event of any con- solidation or
            merger of the Corporation with or into another corporation (other
            than a merger in which the Corporation is a continuing corporation
            and which does not result in any reclassification of the Common
            Stock of the Corporation), then as a condition of effecting such
            merger or consolidation lawful and adequate pro-visions shall be
            made whereby each holder of out-standing shares of Series B
            Nonvoting Preferred Stock shall be entitled to receive, upon the
            consummation of such consolidation or merger, such shares of stock,
            securities or assets to which such holder would have been entitled
            upon the consummation thereof if such shares of Series B Nonvoting
            Preferred Stock had been converted into Common Stock immediately
            prior thereto.  In any such case, upon the consummation of such
            consolidation or merger, all rights of holders of shares of Series B
            Nonvoting Preferred Stock shall cease with respect to such shares
            except for the right to receive shares of stock, securities or
            assets in accordance with the provisions made pursuant to the
            preceding sentence.

<PAGE>

                 CLASS B NONVOTING PREFERRED STOCK - SERIES C
                 Preferences, Limitations and Relative Rights


1.    Designation

53,500 shares of the Class B Non-voting Preferred Stock, $0.01 par value per
share, of the Corporation shall constitute a series of such Preferred Stock
designated as "Class B Non-voting Preferred Stock -- Series C.("Series C
Non-voting Preferred Stock").

2.    Liquidation Preference

The Liquidation Preference of the Series C Non-voting Preferred Stock shall be
$100.00 per share.

3.    Conversion

      A.    Mandatory Conversion.  Each outstanding share of Series C
            Non-voting Preferred Stock shall be converted into fully paid and
            nonassessable shares of Common Stock at the then effective
            Conversion Price (as defined below) simultaneously with the
            closing of an underwritten public offering (a "Registered Public
            Offering") of the Corporation's Common Stock pursuant to an
            effective registration statement filed by the Corporation under
            the Securities Act of 1933, as amended.  Upon the closing of a
            Registered Public Offering, the outstanding shares of Series C
            Non-voting Preferred Stock shall be deemed automatically
            converted without any further action on the part of the holders
            of such shares and regardless of whether the certificate or
            certificates representing the converted shares are surrendered,
            and all rights of the holders of such converted shares shall
            cease with respect to the converted shares except for rights to
            any declared but unpaid dividends on such converted shares and
            the right to receive certificates representing the shares of
            Common Stock deemed issued upon such conversion of Series C
            Non-voting Preferred Stock.  In lieu of fractional shares to
            which the holder would otherwise be entitled, the Corporation
            shall pay to the holder, without interest, cash equal to such
            fraction multiplied by the Conversion Price in effect at the time
            of conversion.

      B.    Mechanics of Conversion.  The Corporation shall, as promptly as
            practicable after the closing of a Registered Public Offering,
            give written notice of the closing to each holder of record of
            the Series C Non-voting Preferred Stock thereby converted stating
            that the shares have been converted and calling upon such holder
            to surrender to the Corporation the certificate or certificates
            representing his shares of Series C Non-voting Preferred Stock.
            Such notice shall be given by first-class mail, postage prepaid,
            addressed to such

<PAGE>

            holder at his address as shown on the records of the Corporation.
            Each holder of shares of Series C Non-voting Preferred Stock shall
            present and surrender his certificate or certificates for such
            shares to the Corporation at the principal executive office of the
            Corporation or at such other place as may be designated by the
            Corporation in its notice to the holder, duly endorsed or
            accompanied by proper instruments of transfer together with a
            written notice from the holder thereof stating the name or names and
            addresses to which certificates for Common Stock are to be issued,
            and the Corporation shall, as soon as practicable thereafter, issue
            and deliver to such holder of Series C Non-voting Preferred Stock,
            or to such third party as such holder may designate in writing, a
            certificate or certificates for the number of shares of Common Stock
            to which he shall be entitled as aforesaid and a check payable to
            the holder for any cash amounts payable in lieu of fractional shares
            of Common Stock plus any declared but unpaid dividends on the
            converted shares.

      C.    Conversion Price. For purposes of this Section 3, each share of
            Series C Non-voting Preferred Stock shall be convertible into the
            number of shares of Common Stock that results from dividing $100.00
            by the Conversion Price per share in effect at the time of
            conversion. The Conversion Price per share of Series C Non-voting
            Preferred Stock shall initially be $100.00 and shall be subject to
            adjustment from time to time as follows:

            (1)   In the event the outstanding shares of Common Stock shall be
                  subdivided or increase, by stock split or stock dividend, into
                  a greater number of shares of Common Stock, the Conversion
                  Price then in effect shall, concurrently with the
                  effectiveness of such subdivision or payment of such stock
                  dividend, be proportionately decreased. In the event the
                  outstanding shares of Common Stock shall be combined or
                  consolidated, by reclassification or otherwise, into a lesser
                  number of shares of Common Stock, the Conversion Price then in
                  effect shall, concurrently with the effectiveness of such
                  combination or consolidation, be proportionately increased.

            (2)   If the Common Stock issuable upon conversion of the Series C
                  Non-voting Preferred Stock shall be changed into the same or a
                  different number of shares of any other class or classes of
                  stock of the Corporation, whether by capital reorganization,
                  reclassification or otherwise (other than a subdivision or
                  combination of shares provided for above), the Conversion
                  Price then in effect shall, concurrently with the
                  effectiveness of such reorganization or reclassification, be
                  proportionately adjusted such that the Series C Non-voting 
                  Preferred Stock shall be convertible


<PAGE>

                  into, in lieu of the shares of Common Stock which the holders 
                  would otherwise have been entitled to receive, a number of 
                  shares of such other class or classes of stock equivalent to 
                  the number of shares of Common Stock that would have been 
                  subject to receipt by the holders upon conversion of the 
                  Series C Non-voting Preferred Stock immediately before such 
                  event.

            (3)   Upon each adjustment of the Conversion Price provided for
                  hereunder and upon each change in the number of shares of
                  Common Stock issuable upon conversion of the Series C
                  Non-voting Preferred Stock pursuant to the provisions hereof,
                  the Corporation shall promptly give written notice thereof to
                  each registered holder of Series C Non-voting Preferred Stock,
                  first-class mail, postage prepaid, addressed to such holder at
                  his address as shown on the records of the Corporation, which
                  notice shall state the Conversion Price resulting from such
                  adjustment and the increase or decrease, if any, in the number
                  of shares issuable upon conversion of Series C Non-voting
                  Preferred Stock or specifying the other shares of stock,
                  securities or assets and the amount thereof so issuable and
                  setting forth in reasonable detail the method of calculation
                  and the facts upon which such calculation is based.

      D.    Consolidations and Mergers.  In the event of any consolidation or
            merger of the Corporation with or into another corporation (other
            than a merger in which the Corporation is a continuing
            corporation and which does not result in any reclassification of
            the Common Stock of the Corporation), then as a condition of
            effecting such merger or consolidation lawful and adequate
            provisions shall be made whereby each holder of outstanding
            shares of Series C Non-voting Preferred Stock shall be entitled
            to receive, upon the consummation of such consolidation or
            merger, such shares of stock, securities or assets to which such
            holder would have been entitled upon the consummation thereof if
            such shares of Series C Non-voting Preferred Stock had been
            converted into Common Stock immediately prior thereto.  In any
            such case, upon the consummation of such consolidation or merger,
            all rights of holders of shares of Series C Non-voting Preferred
            Stock shall cease with respect to such shares except for the
            right to receive shares of stock, securities or assets in
            accordance with the provisions made pursuant to the preceding
            sentence.

<PAGE>

                 CLASS B NONVOTING PREFERRED STOCK - SERIES C
                      (WITH ALTERNATIVE LIQUIDATION PRICE)
                 Preferences, Limitations and Relative Rights


1.    Designation

In addition to the 53,500 shares of the Class B Non-voting Preferred Stock,
$0.01 par value per share, of the Corporation authorized by amendment to the
Articles of Incorporated dated June 24, 1991, and a second amendment dated May
12, 1992, an additional 40,910 shares shall constitute a part of the same series
of such Preferred Stock designated as "Class B Non-voting Preferred Stock --
Series C. (for a total authorized number of shares of 94,410)("Series C
Non-voting Preferred Stock").


2.    Liquidation Preference

The Liquidation Preference of the additional shares of Series C Non-voting
Preferred Stock which is the subject of this amendment shall be $110.00 per
share. The liquidation preference of all previously issued Series C Non-voting
Preferred Stock shall not be altered or changed by this amendment.

3.    Conversion

      A.    Mandatory Conversion.  Each outstanding share of Series C
            Non-voting Preferred Stock shall be converted into fully paid and
            nonassessable shares of Common Stock at the then effective
            Conversion Price (as defined below) simultaneously with the
            closing of an underwritten public offering (a "Registered Public
            Offering") of the Corporation's Common Stock pursuant to an
            effective registration statement filed by the Corporation under
            the Securities Act of 1933, as amended.  Upon the closing of a
            Registered Public Offering, the outstanding shares of Series C
            Non-voting Preferred Stock shall be deemed automatically
            converted without any further action on the part of the holders
            of such shares and regardless of whether the certificate or
            certificates representing the converted shares are surrendered,
            and all rights of the holders of such converted shares shall
            cease with respect to the converted shares except for rights to
            any declared but unpaid dividends on such converted shares and
            the right to receive certificates representing the shares of
            Common Stock deemed issued upon such conversion of Series C
            Non-voting Preferred Stock.  In lieu of fractional shares to
            which the holder would otherwise be entitled, the Corporation
            shall pay to the holder, without interest, cash equal to such
            fraction multiplied by the Conversion Price in effect at the time
            of conversion.

<PAGE>

      B.    Mechanics of Conversion.  The Corporation shall, as promptly as
            practicable after the closing of a Registered Public Offering,
            give written notice of the closing to each holder of record of
            the Series C Non-voting Preferred Stock thereby converted stating
            that the shares have been converted and calling upon such holder
            to surrender to the Corporation the certificate or certificates
            representing his shares of Series C Non-voting Preferred Stock.
            Such notice shall be given by first-class mail, postage prepaid,
            addressed to such holder at his address as shown on the records
            of the Corporation.  Each holder of shares of Series C Non-voting
            Preferred Stock shall present and surrender his certificate or
            certificates for such shares to the Corporation at the principal
            executive office of the Corporation or at such other place as may
            be designated by the Corporation in its notice to the holder,
            duly endorsed or accompanied by proper instruments of transfer
            together with a written notice from the holder thereof stating
            the name or names and addresses to which certificates for Common
            Stock are to be issued, and the Corporation shall, as soon as
            practicable thereafter, issue and deliver to such holder of
            Series C Non-voting Preferred Stock, or to such third party as
            such holder may designate in writing, a certificate or
            certificates for the number of shares of Common Stock to which he
            shall be entitled as aforesaid and a check payable to the holder
            for any cash amounts payable in lieu of fractional shares of
            Common Stock plus any declared but unpaid dividends on the
            converted shares.

      C.    Conversion Price.  For purposes of this Section 3, each share of
            Series C Non-voting Preferred Stock which is the subject of this
            amendment (40,910) shall be convertible into the number of shares
            of Common Stock that results from dividing $110.00 by the
            Conversion Price per share in effect at the time of conversion.
            The Conversion Price per share of Series C Non-voting Preferred
            Stock, which is the subject of this amendment, shall initially be
            $110.00 and shall be subject to adjustment from time to time as
            follows:

            (1)   In the event the outstanding shares of Common Stock shall be
                  subdivided or increase, by stock split or stock dividend, into
                  a greater number of shares of Common Stock, the Conversion
                  Price then in effect shall, concurrently with the
                  effectiveness of such subdivision or payment of such stock
                  dividend, be proportionately decreased. In the event the
                  outstanding shares of Common Stock shall be combined or
                  consolidated, by reclassification or otherwise, into a lesser
                  number of shares of Common Stock, the Conversion Price then in
                  effect shall, concurrently with the effectiveness of such
                  combination or consolidation, be proportionately increased.

<PAGE>

            (2)   If the Common Stock issuable upon conversion of the Series C
                  Non-voting Preferred Stock shall be changed into the same or a
                  different number of shares of any other class or classes of
                  stock of the Corporation, whether by capital reorganization,
                  reclassification or otherwise (other than a subdivision or
                  combination of shares provided for above), the Conversion
                  Price then in effect shall, concurrently with the
                  effectiveness of such reorganization or reclassification, be
                  proportionately adjusted such that the Series C Non-voting
                  Preferred Stock shall be convertible into, in lieu of the
                  shares of Common Stock which the holders would otherwise have
                  been entitled to receive, a number of shares of such other
                  class or classes of stock equivalent to the number of shares
                  of Common Stock that would have been subject to receipt by the
                  holders upon conversion of the Series C Non-voting Preferred
                  Stock immediately before such event.

            (3)   Upon each adjustment of the Conversion Price provided for
                  hereunder and upon each change in the number of shares of
                  Common Stock issuable upon conversion of the Series C
                  Non-voting Preferred Stock pursuant to the provisions hereof,
                  the Corporation shall promptly give written notice thereof to
                  each registered holder of Series C Non-voting Preferred Stock,
                  first-class mail, postage prepaid, addressed to such holder at
                  his address as shown on the records of the Corporation, which
                  notice shall state the Conversion Price resulting from such
                  adjustment and the increase or decrease, if any, in the number
                  of shares issuable upon conversion of Series C Non-voting
                  Preferred Stock or specifying the other shares of stock,
                  securities or assets and the amount thereof so issuable and
                  setting forth in reasonable detail the method of calculation
                  and the facts upon which such calculation is based.

            (4)   Consolidations and Mergers. In the event of any consolidation
                  or merger of the Corporation with or into another corporation
                  (other than a merger in which the Corporation is a continuing
                  corporation and which does not result in any reclassification
                  of the Common Stock of the Corporation), then as a condition
                  of effecting such merger or consolidation lawful and adequate
                  provisions shall be made whereby each holder of outstanding
                  shares of Series C Non-voting Preferred Stock shall be
                  entitled to receive, upon the consummation of such
                  consolidation or merger, such shares of stock, securities or
                  assets to which such holder would have been entitled upon the
                  consummation thereof if such shares of Series C Non-voting
                  Preferred Stock had been converted into Common Stock

<PAGE>

                  immediately prior thereto. In any such case, upon the
                  consummation of such consolidation or merger, all rights of
                  holders of shares of Series C Non-voting Preferred Stock shall
                  cease with respect to such shares except for the right to
                  receive shares of stock, securities or assets in accordance
                  with the provisions made pursuant to the preceding sentence.





                                                                     EXHIBIT 3.2
                                     BYLAWS

                                       OF

                               CREE RESEARCH, INC.
                       (as amended through July 28, 1998)


                                    ARTICLE I
                                     OFFICES

1. Principal Office. The principal office of the Corporation shall be located in
Durham County, North Carolina or such other place as is designated by the Board
of Directors.

2. Registered Office. The registered office of the Corporation required by law
to be maintained in the State of North Carolina may be, but need not be,
identical with the principal office.

3. Other Offices. The Corporation may have offices at such other places, either
within or without the State of North Carolina, as the Board of Directors may
from time to time determine or as the affairs of the Corporation may require.

                                   ARTICLE II
                            MEETINGS OF SHAREHOLDERS

1. Place of Meetings. All meetings of shareholders shall be held at the
principal office of the Corporation or at such other place, either within or
without the State of North Carolina, as shall be designated in the notice of the
meeting or agreed upon by a majority of the shareholders entitled to vote
thereat.

2. Annual Meeting. The annual meeting of the shareholders shall be held at the
principal office of the Corporation at ten o'clock (10:00) a.m., on the first
Tuesday in October of each year if not a legal holiday,
 and if such, the next
secular day following, for the purpose of electing Directors of the Corporation
and for the transaction of such other business as may be properly brought before
the meeting close.

     

<PAGE>
3. Substitute Annual Meeting. If the annual meeting shall not be held on the day
designated by these Bylaws, a substitute annual meeting may be called in
accordance with the provisions of paragraph 4 of this Article II. A meeting so
called shall be designated and treated for all purposes as the annual meeting.

4. Special Meetings. Special meetings of the shareholders may be called at any
time by the President, the Secretary or the Board of Directors of the
Corporation, or by any shareholder pursuant to the written request of the
holders of not less than one-tenth of all the shares entitled to vote at the
meeting.

5.    Notice of Meetings.

      (a) Written or printed notice stating the time and place of the meeting
shall be delivered not less than ten (10) nor more than fifty (50) days before
the date thereof, either personally or by mail, by or at the direction of the
President, the Secretary, or other person calling the meeting, to each
shareholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail
addressed to the shareholder at his address as it appears on the record of
shareholders of the Corporation, with postage thereon prepaid.

      (b) In the case of an annual or substitute annual meeting, the notice of
meeting need not specifically state the business to be transacted thereat unless
it is a matter, other than election of Directors, on which the vote of the
shareholders is expressly required by the provisions of the North Carolina
Business Corporation Act. In the case of a special meeting, the notice of
meeting shall specifically state the purpose or purposes for which the meeting
is called.
                                   2


<PAGE>

      (c) When a meeting is adjourned for thirty (30) days or more, notice of
the adjourned meeting shall be given as in the case of an original meeting. When
a meeting is adjourned for less than thirty (30) days in any one adjournment, it
is not necessary to give any notice of the time and place of the adjourned
meeting or of the business to be transacted thereat other than by announcement
at the meeting at which the adjournment is taken.

6. Voting Lists. At least ten (10) days before each meeting of shareholders the
Secretary of the Corporation shall prepare an alphabetical list of the
shareholders entitled to vote at such meeting or any adjournment thereof, with
the address of and number of shares held by each, which list shall be kept on
file at the registered office of the Corporation for a period of ten (10) days
prior to such meeting, and shall be subject to inspection by any shareholder at
any time during the usual business hours. This list shall also be produced and
kept open at the time and place of the meeting and shall be subject to
inspection by any shareholder during the whole time of the meeting.

7.    Quorum.

      (a) Unless otherwise provided by law, the holders of a majority of the
shares entitled to vote, represented in person or by proxy, shall constitute a
quorum at a meeting of shareholders. In the absence of a quorum at the opening
of any meeting of shareholders, such meeting may be adjourned from time to time
by the vote of a majority of the shares voting on the motion to adjourn, but no
other business may be transacted until and unless a quorum is present. At any
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the original meeting.

                                   3


<PAGE>

      (b) The shareholders at a meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the withdrawal of
sufficient shareholders to leave less than a quorum.

8.    Voting of Shares

      (a) Each outstanding share having voting rights shall be entitled to one
vote on each matter submitted to a vote at a meeting of shareholders.

      (b) Except in the election of Directors, the vote of a majority of the
shares voted on any matter at a meeting of shareholders, duly held and at which
a quorum is present, shall be the act of the shareholders on that matter, unless
the vote by a greater number is required by law or by the charter or Bylaws of
the Corporation.

      (c) Voting on all matters except the election of Directors shall be by
voice vote or by a show of hands unless the holders of one-tenth of the shares
represented at the meeting shall, prior to the voting on any matter, demand a
ballot vote on that particular matter.

9. Proxies. Shares may be voted either in person or by one or more agents
authorized by a written proxy executed by the shareholder or by his duly
authorized attorney-in-fact. A proxy is not valid after the expiration of eleven
(11) months from the date of its execution, unless the person executing it
specifies therein the length of time for which it is to continue in force, or
limits its use to a particular meeting, but no proxy, whether or not designated
as irrevocable, shall be valid after ten (10) years from the date of its
execution, unless renewed or extended at any time before its expiration for not
more than ten (10) years from the date of such renewal or extension.

                                   4

<PAGE>

Section 10.  Notice of Shareholder Business and Nominations.

      (a)   Annual Meetings of Shareholders.

            (i) Nominations of persons for election to the Board of Directors of
the Corporation and the proposal of business to be considered by the
shareholders may be made at an annual meeting of shareholders: (a) pursuant to
the notice of meeting pursuant to Article II, Section 5 of these Bylaws; (b) by
or at the direction of the Board of Directors; or (c) by any shareholder of the
Corporation who was a shareholder of record at the time of giving of notice
provided for in this Bylaw (Article II, Section 10), who is entitled to vote at
the meeting and who complies with the notice procedures set forth in this Bylaw.

            (ii) For nominations or other business to be properly brought before
an annual meeting by a shareholder pursuant to clause (c) of paragraph (a)(i) of
this Bylaw, the shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation and such other business must otherwise be a
proper matter for shareholder action. To be timely, a shareholder's notice shall
be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the 60th calendar day nor
earlier than the close of business on the 90th calendar day prior to the first
anniversary of the preceding year's annual meeting; PROVIDED, HOWEVER, that in
the event that the date of the annual meeting is more than 30 calendar days
before or more than 60 calendar days after such anniversary date, notice by the
shareholder to be timely must be so delivered not earlier than the close of
business on the 90th calendar day prior to such annual meeting and not later
than the close of business on the later of the 60th calendar day prior to such
annual meeting or the 10th calendar day following the calendar day on which
public announcement of 

                                        5


<PAGE>

the date of such meeting is first made by the Corporation. In no event shall the
public announcement of an adjournment of an annual meeting commence a new time
period for the giving of a shareholder's notice as described above. Such
shareholder's notice shall set forth: (a) as to each person whom the shareholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (b) as to any other
business that the shareholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such shareholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the shareholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
the name and address of such shareholder, as they appear on the Corporation's
books, and of such beneficial owner and the class and number of shares of the
Corporation which are owned beneficially and of record by such shareholder and
such beneficial owner.

      (b)   Special Meetings of Shareholders.

            (i) Only such business shall be conducted at a special meeting of
shareholders as shall have been brought before the meeting pursuant to the
notice of meeting under Article II, Section 5 of these Bylaws. If directors are
to be elected at a special meeting of shareholders pursuant to the notice of
meeting, nominations of persons for election to the Board of 

                                   6


<PAGE>

Directors at such meeting may be made (a) by or at the direction of the Board of
Directors, or (b) by any shareholder of the Corporation who is a shareholder of
record at the time of giving of notice provided for in this Bylaw, who shall be
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Bylaw.

            (ii) In the event a special meeting of shareholders is called for
the purpose of electing one or more directors to the Board of Directors, any
shareholder may, pursuant to clause (b) above, nominate a person or persons (as
the case may be) for election to such position(s) as specified in the notice of
meeting, if the shareholder shall have delivered notice containing the
information specified in paragraph (a)(ii) of this Bylaw to the Secretary at the
principal executive offices of the Corporation not earlier than the close of
business on the 90th calendar day prior to such special meeting and not later
than the close of business on the later of the 60th calendar day prior to such
special meeting or the 10th calendar day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting. In no
event shall the public announcement of an adjournment of a special meeting
commence a new time period for the giving of a shareholder's notice as described
above.

      (c)   General.

            (i) Only such persons who are nominated in accordance with the
procedures set forth in this Bylaw shall be eligible to serve as directors and
only such business shall be conducted at a meeting of shareholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this Bylaw. Except as otherwise provided by law, the Articles of Incorporation
or these Bylaws, the Chairman of the meeting shall 

                                        7


<PAGE>

have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed, as the case may
be, in accordance with the procedures set forth in this Bylaw and, if any
proposed nomination or business is not in compliance with this Bylaw, to declare
that such defective proposal or nomination shall be disregarded.

            (ii) For purposes of this Bylaw, "public announcement" shall mean
disclosure in a press release reported a national news service or in a document
publicly filed by the Corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.

            (iii) Notwithstanding the foregoing provisions of this Bylaw, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights
of shareholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.

11. Informal Action by Shareholders. Any action which is required or permitted
to be taken at a meeting of the shareholders may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
the persons who would be entitled to vote upon such action at a meeting, and
filed with the Secretary of the Corporation to be kept in the Corporate Minute
Book, whether done before or after the action so taken. Such consent shall have
the same force and effect as a unanimous vote of shareholders.


                                        8


<PAGE>


                                   ARTICLE III
                                    DIRECTORS

1. General Powers. The business and affairs of the Corporation shall be managed
by the Board of Directors or by such committees as the Board may establish
pursuant to these Bylaws.

2. Number, Term and Qualification. The number of Directors of the Corporation
shall be not less than three (3), the exact number of which shall be determined
from time to time by resolution of the shareholders. Each Director shall hold
office until his death, resignation, retirement, removal, disqualification, or
his successor is elected and qualifies. Directors need not be residents of the
State of North Carolina or shareholders of the Corporation.

3. Election of Directors. Except as provided in paragraph 6 of this Article III,
the Directors shall be elected at the annual meeting of shareholders; and those
persons who receive the highest number of votes shall be deemed to have been
elected. If any shareholder so demands, election of Directors shall be by
ballot.

4. Cumulative Voting. At each election for Directors, every shareholder entitled
to vote at such election shall have the right to vote, in person or by proxy,
the number of shares standing of record in his name for as many persons as there
are Directors to be elected and for whose election he has a right to vote, or to
cumulate his vote by giving one candidate as many votes as the number of such
Directors multiplied by the number of his shares shall equal, or by distributing
such votes on the same principle among any number of such candidates. This right
of cumulative voting shall not be exercised unless some shareholder or proxy
holder announces in open meeting, before the voting for Directors starts, his
intention so to vote cumulatively; and if such announcement is made, the chair
shall declare that all 

                                        9


<PAGE>

shares entitled to vote have the right to vote cumulatively and shall announce
the number of shares present in person and by proxy and shall thereupon grant a
recess of not less than one hour nor more than four hours, as he shall
determine, or of such other period of time as is unanimously then agreed upon.

5. Removal. Directors may be removed from office with or without cause by a vote
of shareholders holding a majority of the outstanding shares entitled to vote at
an election of Directors; provided, however, unless the entire Board is removed,
an individual Director may not be removed if the number of shares voting against
the removal would be sufficient to elect a Director if such shares were voted
cumulatively at an annual election. If any Directors are so removed, new
Directors may be elected at the same meeting.

6. Vacancies. A vacancy occurring in the Board of Directors, including a vacancy
created by an increase in the authorized number of Directors approved by the
shareholders in accordance with these Bylaws, may be filled by a majority of the
remaining Directors, though less than a quorum, or by the sole remaining
Director. The shareholders may elect a Director at any time to fill any vacancy
not filled by the Directors.

7. Chairman. There may be a Chairman of the Board of Directors elected by the
Directors from their number at any meeting of the Board. The Chairman shall
preside at all meetings of the Board of Directors and of shareholders and
perform such other duties as may be directed by the Board. Until a Chairman of
the Board of Directors is elected, the President of the Corporation shall
preside at the meetings of the Board of Directors and shareholders.

                                        10


<PAGE>


8. Compensation. The Board of Directors may compensate Directors for their
services as such and may provide for the payment of all expenses incurred by
Directors in attending regular and special meetings of the Board.

9.    Executive and Other Committees.

      (a) The Board of Directors, by resolution adopted by a majority of the
number of Directors then in office, may designate from among its members an
Executive Committee and one or more other committees, each consisting of two or
more directors, and each of which, to the extent provided in the resolution,
shall have and may exercise all of the authority of the Board of Directors,
except no such committee shall have authority as to the following matters:

            (i) The dissolution, merger or consolidation of the Corporation; or
the sale, lease or exchange of all or substantially all of the property of the
Corporation.

            (ii) The designation of any such committee or the filling of
vacancies in the Board of Directors or on any such committee.

            (iii) The fixing of compensation of the Directors for serving on the
Board or on any such committee.

            (iv) The amendment or repeal of the Bylaws or adoption of new
Bylaws.

            (v) The amendment or repeal of any resolution of the Board which by
its terms shall not be so amendable or repealable.

      (b) Any such committee, or any member thereof, may be discharged or
removed by action of the majority of the Board of 

                                        11


<PAGE>

Directors. Any resolutions adopted or other action taken by any such committee
within the scope of the authority delegated to it by the Board of Directors
shall be deemed for all purposes to be adopted or taken by the Board of
Directors.


                                   ARTICLE IV
                              MEETINGS OF DIRECTORS

1. Regular Meetings. A regular meeting of the Board of Directors shall be held
immediately after, and at the same place as, the annual meeting of shareholders.
In addition, the Board of Directors may provide, by resolution, the time and
place, either within or without the State of North Carolina, for the holding of
additional regular meetings.

2. Special Meetings. Special meetings of the Board of Directors may be called by
or at the request of the Chairman of the Board, if one has been duly elected,
the President or any two Directors. Such meetings may be held either within or
without the State of North Carolina.

3.    Notice of Meetings.

      (a) The Secretary shall give notice, at least two days before the meeting,
by any usual means of communication of any regular meeting of the Board of
Directors.

      (b) The person or persons calling a special meeting of the Board of
Directors shall, at least two days before the meeting, give notice thereof by
any usual means of communication. Such notice or waiver of notice shall specify
the business to be transacted at, or the purpose of, the meeting that is called.
Notice of an adjourned meeting need not be given if the time and place are fixed
at the meeting adjourning and if the period of adjournment does not exceed ten
(10) days in any one adjournment.

                                   12


<PAGE>

      (c) Attendance by a Director at a meeting shall constitute a waiver of
notice of such meeting, except where a Director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened.

4.    Quorum.  A majority of the Directors in office shall constitute a
quorum for the transaction of business at any meeting of the Board of
Directors.

5.    Manner of Acting.

      (a) Except as otherwise provided in Paragraph 5, the act of a majority of
the Directors then in office shall be the act of the Board of Directors, unless
a greater number is required by law, the charter of the Corporation, or a Bylaw
adopted by the shareholders.

      (b) The vote of a majority of the number of Directors then in office shall
be required to adopt a resolution constituting an Executive Committee or other
committee of the Board. The vote of a majority of the Directors then holding
office shall be required to adopt, amend or repeal a Bylaw, or to adopt a
resolution dissolving the Corporation without action by the shareholders, in
circumstances authorized by law. Vacancies in the Board of Directors may be
filled as provided in paragraph 6 of Article III of these Bylaws.

6. Informal Action by Directors. Action taken by the Directors or members of a
committee of the Board of Directors without a meeting is nevertheless Board or
committee action if written consent to the action in question is signed by all
of the Directors or members of the committee, as the case may be, and filed with
the minutes of the proceedings of the Board or committee, whether done before or
after the action so taken.

                                   13


<PAGE>

7. Attendance by Telephone. Any one or more Directors or members of a committee
may participate in a meeting of the Board or committee by means of a conference
telephone or similar communications device which allows all persons
participating in the meeting to hear each other, and such participation in the
meeting shall be deemed presence in person at such meeting.


                                    ARTICLE V
                                    OFFICERS

1. Number. The officers of the Corporation shall consist of a President, a
Secretary, a Treasurer, and such Vice Presidents, Assistant Secretaries,
Assistant Treasurers and other officers as the Board of Directors may from time
to time elect. Any two or more offices, other than that of President and
Secretary, may be held by the same person. In no event, however, may an officer
act in more than one capacity where action of two or more officers is required.

2. Election and Term. The officers of the Corporation shall be elected by the
Board of Directors. Such election may be held at any regular or special meeting
of the Board. Each officer shall hold office until his death, resignation,
retirement, removal, disqualification, or his successor is elected and
qualifies.

3. Removal. Any officer or agent elected or appointed by the Board of Directors
may be removed by the Board with or without cause; but such removal shall be
without prejudice to the contract rights, if any, of the person so removed.

4. Compensation. The compensation of all officers of the Corporation shall be
fixed by the Board of Directors.

                                        14


<PAGE>


5. President. The President shall be the chief executive officer of the
Corporation, and, subject to the control of the Board of Directors, shall
supervise and control the management of the Corporation in accordance with these
Bylaws.

He shall, in the absence of a Chairman of the Board of Directors, preside at all
meetings of the shareholders. He shall sign, with any other proper officer,
certificates for shares of the Corporation and any deeds, mortgages, bonds,
contracts, or other instruments which may be lawfully executed on behalf of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
delegated by the Board of Directors to some other officer or agent; and, in
general, he shall perform all duties incident to the office of President and
such other duties as may be prescribed by the Board of Directors from time to
time.

6. Vice Presidents. The Vice Presidents, in the order of their election, unless
otherwise determined by the Board of Directors, shall, in the absence or
disability of the President, perform the duties and exercise the powers of that
office. In addition, they shall perform such other duties and have such other
powers as the Board of Directors shall prescribe.

7. Secretary. The Secretary shall keep accurate records of the acts and
proceedings of all meetings of shareholders and Directors. He shall give all
notices required by law and by these Bylaws. He shall have general charge of the
corporate books and records and of the corporate seal, and he shall affix the
corporate seal to any lawfully executed instrument requiring it. He shall have
general charge of the stock transfer books of the Corporation and shall keep, at
the registered or principal office of the Corporation, a record of shareholders
showing the name and address of each shareholder and the number and class of 

                                   15


<PAGE>

the shares held by each. He shall sign such instruments as may require his
signature, and, in general, shall perform all duties incident to the office of
Secretary and such other duties as may be assigned him from time to time by the
President or by the Board of Directors.

8. Treasurer. The Treasurer shall have custody of all funds and securities
belonging to the Corporation and shall receive, deposit or disburse the same
under the direction of the Board of Directors. He shall keep full and accurate
accounts of the finances of the Corporation in books especially provided for
that purpose; and he shall cause a true statement of its assets and liabilities
as of the close of each fiscal year and of the results of its operations and of
changes in surplus for such fiscal year, all in reasonable detail, including
particulars as to convertible securities and options then outstanding, to be
made and filed at the registered or principal office of the Corporation within
four months after the end of such fiscal year. The statement so filed shall be
kept available for inspection by any shareholder of record for a period of ten
(10) years; and the Treasurer shall mail or otherwise deliver a copy of the
latest such statement to any shareholder upon his written request therefor. The
Treasurer shall, in general, perform all duties incident to his office and such
other duties as may be assigned to him from time to time by the President or by
the Board of Directors.

9. Assistant Secretaries and Treasurers. The Assistant Secretaries and Assistant
Treasurers shall, in the absence or disability of the Secretary or the
Treasurer, respectively, perform the duties and exercise the powers of those
offices, and they shall, in general, perform such other duties as shall be
assigned to them by the Secretary or the Treasurer, respectively, or by the
President or by the Board of Directors.

                                        16


<PAGE>

10. Bonds. The Board of Directors, by resolution, may require any or all
officers, agents and employees of the Corporation to give bond to the
Corporation, with sufficient sureties, conditioned on the faithful performance
of the duties of their respective offices or positions, and to comply with such
other conditions as may from time to time be required by the Board of Directors.


                                   ARTICLE VI
                          CONTRACTS, LOANS AND DEPOSITS

1. Contracts. The Board of Directors may authorize any officer or officers, or
agent or agents, to enter into any contract or execute and deliver any
instrument on behalf of the Corporation, and such authority may be general or
confined to specific instances.

2. Loans. No loans shall be contracted on behalf of the Corporation and no
evidence of indebtedness shall be issued in its name unless authorized by a
resolution of the Board of Directors. Such authority may be general or confined
to specific instances.

3. Checks and Drafts. All checks, drafts or other orders for the payment of
money issued in the name of the Corporation shall be signed by such officer or
officers, or agent or agents, of the Corporation and in such manner as shall
from time to time be determined by resolution of the Board of Directors.

4. Deposits. All funds of the Corporation not otherwise employed shall be
deposited from time to time to the credit of the Corporation in such depository
or depositories as the Board of Directors shall direct.

                                        17


<PAGE>

                                   ARTICLE VII
                  CERTIFICATES FOR SHARES AND OTHER TRANSFER

1. Certificates for Shares. Certificates representing shares of the Corporation
shall be issued, in such form as the Board of Directors shall determine, to
every shareholder for the fully paid shares owned by him. These certificates
shall be signed by the President or any Vice President or a person who has been
designated as the chief executive officer of the Corporation and by the
Secretary, Assistant Secretary, Treasurer or Assistant Treasurer and sealed with
the seal of the Corporation or a facsimile thereof. The signatures of any such
officers upon a certificate may be facsimiles or may be engraved or printed or
omitted if the certificate is countersigned by a transfer agent, or registered
by a registrar, other than the Corporation itself or an employee of the
Corporation. In case any officer who has signed or whose facsimile or other
signature has been placed upon such certificate shall have ceased to be such
officer before such certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer at the date of its issue. They
shall be consecutively numbered or otherwise identified; and the name and
address of the persons to whom they are issued, with the number of shares and
date of issue, shall be entered on the stock transfer books of the Corporation.

2. Transfer of Shares. Transfer of shares shall be made on the stock transfer
books of the Corporation only upon surrender of the certificates for the shares
sought to be transferred by the record holder thereof or by his duly authorized
agent, transferee or legal representative. All certificates surrendered for
transfer shall be canceled before new certificates for the transferred shares
shall be issued.

3. Closing Transfer Books and Fixing Record Date.

      (a) For the purpose of determining shareholders entitled to 

                                        18


<PAGE>

notice of or to vote at any meeting of shareholders or any adjournment thereof,
or entitled to receive payment of any dividend, or in order to make a
determination of shareholders for any other proper purpose, the Board of
Directors may provide that the stock transfer books shall be closed for a stated
period but not to exceed, in any case, fifty (50) days. If the stock transfer
books shall be closed for he purpose of determining shareholders entitled to
notice of or to vote at a meeting of shareholders, such books shall be closed
for at least ten (10) full days immediately preceding the date of such meeting.

      (b) In lieu of closing the stock transfer books, the Board of Directors
may fix in advance a date as the record date for any such determination of
shareholders, such date in any case to be not more than sixty (60) days and, in
case of a meeting of shareholders, not less than ten (10) full days immediately
preceding the date on which the particular action, requiring such determination
of shareholders, is to be taken.

      (c) If the stock transfer books are not closed and no record date is fixed
for the determination of shareholders entitled to notice of or to vote at a
meeting of shareholders, or of shareholders entitled to receive payment of a
dividend, the date on which notice of the meeting is mailed or the date on which
the resolution of the Board of Directors declaring such dividend is adopted, as
the case may be, shall be the record date for such determination of
shareholders.

      (d) When a determination of shareholders entitled to vote at any meeting
of shareholders has been made as provided in this Section 3, such determination
shall apply to any adjournment thereof regardless of its length except where the
determination has been made through the closing of the stock transfer books and
the stated period of closing has expired.

                                        19


<PAGE>

4. Lost Certificates. The Board of Directors may authorize the issuance of a new
share certificate in place of a certificate claimed to have been lost or
destroyed, upon receipt of an affidavit of such fact from the person claiming
the loss or destruction. When authorizing such issuance of a new certificate,
the Board may require the claimant to give the Corporation a bond in such sum as
it may direct to indemnify the Corporation against loss from any claim with
respect to the certificate claimed to have been lost or destroyed; or the Board
may, by resolution reciting that the circumstances justify such action,
authorize the issuance of the new certificate without requiring such a bond.


                                  ARTICLE VIII
                        INDEMNIFICATION AND REIMBURSEMENT
                            OF DIRECTORS AND OFFICERS

1. Expenses and Liabilities: The Corporation shall have the power to indemnify
any present or former director, officer, employee or agent of the Corporation,
or any person who has served or is serving in such capacity at the request of
the Corporation in any other corporation, partnership, joint venture, trust or
other enterprise or as a trustee or administrator under an employee benefit
plan, with respect to any liability or litigation expenses, including reasonable
attorneys' fees, incurred by any such person to the extent and upon the terms
and conditions provided by law. Therefore, to the extent and upon the terms and
conditions provided by law, the Corporation shall so indemnify any and all of
its officers and directors against liability and litigation expenses, including
reasonable attorneys' fees, arising out of their status as such or their
activities in any of the foregoing capacities (excluding, however, liability or
litigation expenses which any of the foregoing may incur on account of his or
her activities which were, at the time taken, known or believed by him or her to
be clearly in conflict with the best interest of the Corporation). 

                                        20


<PAGE>

Such officers and directors shall be entitled to recover from the Corporation,
and the Corporation shall pay, all reasonable costs, expenses, and attorneys'
fees in connection with the enforcement of rights to indemnification granted
herein. Any person who at any time after the adoption of this bylaw serves or
has served in either of the aforesaid capacities for or on behalf of the
Corporation shall be deemed to be doing or to have done so in reliance upon and
as consideration for the right of indemnification provided herein. Such right
shall inure to the benefit of the legal representatives of any such person and
shall not be exclusive of any other rights to which such person may be entitled
apart from the provisions of this bylaw.

The right of indemnification hereinabove provided for shall not be exclusive of
any rights to which any such director, officer, employee or agent may otherwise
be entitled under any bylaw, agreement, vote of the Board of Directors or
shareholders or otherwise with respect to any liability or litigation expenses
arising out of his activities in such capacity.

2. Advance Payment of Expenses. Expenses incurred by a director, officer,
employee or agent in defending a civil or criminal action, suit or proceeding
may be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding, as authorized by the Board of Directors in the
specific case, upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount unless it shall ultimately be
determined that he or she is entitled to be indemnified by the Corporation
against such expenses. Notwithstanding the above, the Corporation shall, upon
receipt of an undertaking by or on behalf of the director or officer involved to
repay the expenses described in the first paragraph of this Article VIII unless
it shall ultimately be determined that he or she is entitled to be indemnified
by the Corporation against such expenses, pay such expenses incurred by 

                                        21


<PAGE>

such director or officer in defending a civil or criminal action, suit or
proceeding in advance of the final disposition of such action, suit or
proceeding.

3. Insurance. The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise or as a trustee or administrator under
an employee benefit plan against any liability asserted against him and incurred
by him in such capacity, or arising out of his status as such, whether or not
the Corporation or other such enterprise would have the power to indemnify him
against such liability.


                                   ARTICLE IX
                               GENERAL PROVISIONS

1. Dividends. The Board of Directors may from time to time declare, and the
Corporation may pay, dividends on its outstanding shares in the manner and upon
the terms and conditions provided by law and by its charter.

2. Seal. The corporate seal of the Corporation shall consist of two concentric
circles between which is the name of the Corporation and in the center of which
is inscribed "1987", and such seal, as impressed on the margin hereof, is hereby
adopted as the corporate seal of the Corporation.

3. Waiver of Notice. Whenever any notice is required to be given to any
shareholder or Director under the provisions of the North Carolina Business
Corporation Act or under the provisions of the charter or Bylaws of the
Corporation, a waiver thereof in writing signed by the person or persons
entitled to such notice,

                                        22


<PAGE>

whether before or after the time stated therein, shall be equivalent to the
giving of such notice.

4. Fiscal Year. The fiscal year of the Corporation shall be determined by the
Board of Directors.

5. Form of Records. Any records maintained by the Corporation in the regular
course of its business, including its stock ledger, books of account, and minute
books, may be kept on, or be in the form of, punch cards, magnetic tape,
photographs, microphotographs, or any other information storage device; provided
that the records so kept can be converted into clearly legible form within a
reasonable time. The Corporation shall so convert any records so kept upon the
request of any person entitled to inspect the same.

6. Amendments. Except as otherwise provided herein, these Bylaws may be amended
or repealed and new Bylaws may be adopted by the affirmative vote of a majority
of the Directors then holding office at any regular or special meeting of the
Board of Directors or by affirmative vote of shareholders entitled to exercise a
majority of voting power of the Corporation.

The Board of Directors shall have no power to adopt a Bylaw:

      (1) Changing the statutory requirement for a quorum of Directors or action
by Directors or changing the statutory requirement for a quorum of shareholders
or action by shareholders;

      (2) Providing for the management of the Corporation otherwise than by the
Board of Directors or the committees thereof;


                                        23


<PAGE>


      (3)   Increasing or decreasing the number of Directors; or

      (4) Classifying and staggering the election of Directors.

No Bylaw adopted or amended by the shareholders may be altered or repealed by
the Board of Directors.


                                        24




                                                                  EXHIBIT 10.1


                             CREE RESEARCH, INC.

                             AMENDED AND RESTATED
                           EQUITY COMPENSATION PLAN
                    (as amended through November 11, 1997)

                      (formerly the Cree Research, Inc.
                         Employee Stock Option Plan)


                        ARTICLE I - GENERAL PROVISIONS

1.1   The Plan is designed, for the benefit of the Company, to attract and
      retain for the Company personnel of exceptional ability; to motivate
      such personnel through added incentives to make a maximum contribution
      to the Company; to develop and maintain a highly competent management
      team; and to be competitive with other companies with respect to
      executive compensation.

1.2   Awards under the Plan may be made to Participants in the form of (i)
      Incentive Stock Options; (ii) Nonqualified Stock Options; (iii)
      Restricted Stock; and (iv) Other Stock-Based Awards and such other
      forms of equity-based compensation as may be provided and are
      permissible under this Plan and the law.

1.3   The Cree Research, Inc. Employee Stock Option Plan (the "Stock Option
      Plan") was initially adopted effective August 2, 1989, and was amended
      and restated in the form of the Equity Compensation Plan effective as
      of July 1, 1995.  This amendment and restatement of the Stock Option
      Plan shall be effective as of September 17, 1996 (the "Effective
      Date").  Notwithstanding
 any other provision of this Plan, any Award
      granted to a Participant prior to the date on which the shareholders of
      the Company approve the Plan (which approval must be obtained within
      the 12-month period before the Effective Date or the 12-month period
      after the Effective Date in order for Incentive Stock Options to be
      granted under the Plan) shall be conditioned upon and subject to such
      shareholder approval to the extent required by Section 16(b) of the
      Act, or the rules thereunder, or Section 422 of the Code.  If an
      Incentive Stock Option is granted prior to the date on which such
      shareholder approval is obtained, and such approval is not obtained
      after the end of the 12-month period beginning on the effective date,
      such Incentive Stock Option shall be deemed a Nonqualified Stock Option
      granted pursuant to Article V.
 
                                      1

<PAGE>


                           ARTICLE II - DEFINITIONS

Except where the context otherwise indicates, the following definitions apply:

2.1   "Acceleration Event" means the occurrence of an event defined in
      Article IX of the Plan.

2.2   "Act" means the Securities Exchange Act of 1934, as now in effect or as
      hereafter amended.  All citations to sections of the Act or rules
      thereunder are to such sections or rules as they may from time to time
      be amended or renumbered.

2.3   "Agreement" means the written agreement evidencing each Award granted
      to a Participant under the Plan.

2.4   "Award" means an award granted to a Participant in accordance with the
      provisions of the Plan, including, but not limited to, a Stock Option,
      Restricted Stock, Other Stock-Based Awards, or any combination of the
      foregoing.

2.5   "Board" means the Board of Directors of Cree Research, Inc.

2.6   "Code" means the Internal Revenue Code of 1986, as now in effect or as
      hereafter amended.  All citations to sections of the Code are to such
      sections as they may from time to time be amended or renumbered.

2.7   "Committee" means the Compensation Committee or such other committee
      consisting of two or more members as may be appointed by the Board to
      administer this Plan pursuant to Article III.  To the extent required
      by Rule 16b-3 under the Act, the Committee shall consist of individuals
      who are members of the Board and Non-employee Directors.  Committee
      members may also be appointed for such limited purposes as may be
      provided by the Board.

2.8   "Company" means Cree Research, Inc., a North Carolina corporation, and
      its successors and assigns.  The term "Company" shall include any
      corporation which is a member of a controlled group of corporations (as
      defined in Section 414(b) of the Code, as modified by Section 415(h) of
      the Code) which includes the Company; any trade or business (whether or
      not incorporated) which is under common control (as defined in Section
      414(c) of the Code, as modified by Section 415(h) of the Code) with the
      Company; any organization (whether or not incorporated) which is a
      member of an affiliated service group (as defined in Section 414(m) of
      the Code) which includes the Company; and any other entity required to
      be aggregated with the Company pursuant to regulations under Section
      414(o) of the Code.  With respect to all purposes of the Plan,
      including, but not

                                       2

<PAGE>

      limited to, the establishment, amendment, termination, operation and
      administration of the Plan, Cree Research, Inc. shall be authorized to act
      on behalf of all other entities included within the definition of
      "Company".

2.9   "Disability" means a disability as determined under procedures
      established by the Committee or in any Award.

2.10  "Discount Stock Options" means Nonqualified Stock Options which provide
      for an exercise price of less than the Fair Market Value of the Stock
      at the date of the Award.

2.11  "Non-employee Director" shall have the meaning set forth in Rule 16b-3
      under the Act.

2.12  "Early Retirement" shall mean retirement from active employment with
      the Company, with the express consent of the Committee, pursuant to
      early retirement provisions established by the Committee or in any
      Award.

2.13  "Eligible Participant" means any employee of the Company, as shall be
      determined by the Committee, as well as any other person, including
      directors, whose participation the Committee determines is in the best
      interest of the Company, subject to limitations as may be provided by
      the Code, the Act or the Committee.

2.14  "Fair Market Value" means, with respect to any given day, the following:

      (i)   If the Stock is not listed for trading on a national securities
            exchange but is listed on the NASDAQ National Market System or
            the NASDAQ Small-Cap Market System, then the Fair Market Value
            shall be the last sale price of the Stock on the date of
            reference if a minimum of 100 shares are traded on such date or,
            if less than 100 shares are traded on such date, then the last
            sale price of the Stock as of the last date on which at least 100
            shares were traded, in either case as reported by the NASDAQ
            National Market System or the NASDAQ Small-Cap Market System, as
            the case may be.

      (ii)  If the Stock is listed for trading on any national securities
            exchange, then the Fair Market Value shall be the closing price
            of the Stock on such exchange on the date of reference if a
            minimum of 100 shares are traded on such date or, if less than
            100 shares are traded on such date, then the closing price of the
            Stock on such exchange as of the last date on which at least 100
            shares were traded.

      The Committee may establish an alternative method of 

                                       3

<PAGE>

      determining Fair Market Value.

2.15  "Incentive Stock Option" means a Stock Option granted under Article IV
      of the Plan, and as defined in Section 422 of the Code.

2.16  "Nonqualified Stock Option" means a Stock Option granted under Article
      V of the Plan.

2.17  "Normal Retirement" shall mean retirement from active employment with
      the Company on or after age 65, or pursuant to such other requirements
      as may be established by the Committee or in any Award.

2.18  "Option Grant Date" means, as to any Stock Option, the latest of:

      (a)   the date on which the Committee grants the Stock Option by
            entering into an Award Agreement with the Participant;

      (b)   the date the Participant receiving the Stock Option becomes an
            employee of the Company, to the extent employment status is a
            condition of the grant or a requirement of the Code or the Act; or

      (c)   such other date (later than the dates described in (a) and (b)
            above) as the Committee may designate.

2.19  "Participant" means an Eligible Participant to whom an Award has been
      granted and who has entered into an Agreement evidencing the Award.

2.20  "Plan" means the Cree Research, Inc. Equity Compensation Plan as set
      forth herein, and, as further amended or amended and restated from time
      to time.

2.21  "Restricted Stock" means an Award of Stock under Article VII of the
      Plan, which Stock is issued with the restriction that the holder may
      not sell, transfer, pledge, or assign such Stock and with such other
      restrictions as the Committee, in its sole discretion, may impose,
      including without limitation, any restriction on the right to vote such
      Stock, and the right to receive any cash dividends, which restrictions
      may lapse separately or in combination at such time or times, in
      installments or otherwise, as the Committee may deem appropriate.

2.22  "Restriction Period" means the period commencing on the date an Award
      of Restricted Stock is granted and ending on such date as the Committee
      shall determine.

                                       4

<PAGE>

2.23  "Retirement" shall mean Early Retirement or Normal Retirement.

2.24  "Stock" means shares of the Common Stock of Cree Research, Inc., par
      value $.005 per share, as may be adjusted pursuant to the provisions of
      Section 3.11.

2.25  "Stock Option" means an Award under Article IV or V of the Plan of an
      option to purchase Stock.  A Stock Option may be either an Incentive
      Stock Option or a Nonqualified Stock Option.

2.26  "Termination of Employment" means the discontinuance of employment of a
      Participant with the Company for any reason.  The determination of
      whether a Participant has discontinued employment shall be made by the
      Committee in its discretion.  In determining whether a Termination of
      Employment has occurred, the Committee may provide that service as a
      consultant or service with a business enterprise in which the Company
      has a significant ownership interest shall be treated as employment
      with the Company.  The Committee shall have the discretion, exercisable
      either at the time the Award is granted or at the time the Participant
      terminates employment, to establish as a provision applicable to the
      exercise of one or more Awards that during the limited period of
      exercisability following Termination of Employment, the Award may be
      exercised not only with respect to the number of shares of Stock for
      which it is exercisable at the time of the Termination of Employment
      but also with respect to one or more subsequent installments for which
      the Award would have become exercisable had the Termination of
      Employment not occurred.


                         ARTICLE III - ADMINISTRATION

3.1   This Plan shall be administered by the Committee.  A Committee member
      who is not a Non-employee Director, with respect to action to be taken
      by the Committee, shall not be able to participate in the decision to
      the extent prescribed by Rule 16b-3 under the Act.  The Committee, in
      its discretion, may delegate to one or more of its members such of its
      powers as it deems appropriate.  The Committee also may limit the power
      of any member to the extent necessary to comply with Rule 16b-3 under
      the Act or any other law.  Members of the Committee shall be appointed
      originally, and as vacancies occur, by the Board, to serve at the
      pleasure of the Board.  The Board may serve as the Committee, if by the
      terms of the Plan all Board members are otherwise eligible to serve on
      the Committee.

                                       5

<PAGE>

3.2   The Committee shall meet at such times and places as it determines.  A
      majority of its members shall constitute a quorum, and the decision of
      a majority of those present at any meeting at which a quorum is present
      shall constitute the decision of the Committee.  A memorandum signed by
      all of its members shall constitute the decision of the Committee
      without necessity, in such event, for holding an actual meeting.

3.3   The Committee shall have the exclusive right to interpret, construe and
      administer the Plan, to select the persons who are eligible to receive
      an Award, and to act in all matters pertaining to the granting of an
      Award and the contents of the Agreement evidencing the Award, including
      without limitation, the determination of the number of Stock Options,
      shares of Stock subject to an Award, and the form, terms, conditions
      and duration of each Award, and any amendment thereof consistent with
      the provisions of the Plan.  All acts, determinations and decisions of
      the Committee made or taken pursuant to grants of authority under the
      Plan or with respect to any questions arising in connection with the
      administration and interpretation of the Plan, including the
      severability of any and all of the provisions thereof, shall be
      conclusive, final and binding upon all Participants, Eligible
      Participants and their beneficiaries.

3.4   The Committee may adopt such rules, regulations and procedures of
      general application for the administration of this Plan, as it deems
      appropriate.

3.5   Without limiting the foregoing Sections 3.1, 3.2, 3.3 and 3.4, and
      notwithstanding any other provisions of the Plan, the Committee is
      authorized to take such action as it determines to be necessary or
      advisable, and fair and equitable to Participants, with respect to an
      Award in the event of an Acceleration Event as defined in Article IX.
      Such action may include, but shall not be limited to, establishing,
      amending or waiving the forms, terms, conditions and duration of an
      Award and the Award Agreement, so as to provide for earlier, later,
      extended or additional times for exercise or payments, differing
      methods for calculating payments, alternate forms and amounts of
      payment, an accelerated release of restrictions or other
      modifications.  The Committee may take such actions pursuant to this
      Section 3.5 by adopting rules and regulations of general applicability
      to all Participants or to certain categories of Participants, by
      including, amending or waiving terms and conditions in an Award and the
      Award Agreement, or by taking action with respect to individual
      Participants.

                                       6

<PAGE>
3.6   The number of shares of Stock which are available for Award under the
      Plan shall be 2,540,000 shares or any larger number of shares of Stock
      that, subsequent to the date this Plan is adopted, may be authorized
      for issuance by the Company.  Such shares of Stock shall be made
      available from authorized and unissued shares. If, for any reason, any
      shares of Stock awarded or subject to purchase under the Plan are not
      delivered or purchased, or are reacquired by the Company, for reasons
      including, but not limited to, a forfeiture of Restricted Stock or
      termination, expiration or cancellation of a Stock Option, or any other
      termination of an Award without payment being made in the form of
      Stock, whether or not Restricted Stock, such shares of Stock shall not
      be charged against the aggregate number of shares of Stock available
      for Awards under the Plan, and may again be available for Award under
      the Plan.

3.7   Each Award granted under the Plan shall be evidenced by a written Award
      Agreement.  Each Award Agreement shall be subject to and incorporate,
      by reference or otherwise, the applicable terms and conditions of the
      Plan, and any other terms and conditions, not inconsistent with the
      Plan, as may be imposed by the Committee.

3.8   The Company shall not be required to issue or deliver any certificates
      for shares of Stock prior to:

      (a)   the listing of such shares on any stock exchange on which the
            Stock may then be listed; and

      (b)   the completion of any registration or qualification of such
            shares of Stock under any federal or state law, or any ruling or
            regulation of any government body which the Company shall, in its
            discretion, determine to be necessary or advisable.

3.9   All certificates for shares of Stock delivered under the Plan shall
      also be subject to such stop-transfer orders and other restrictions as
      the Committee may deem advisable under the rules, regulations, and
      other requirements of the Securities and Exchange Commission, any stock
      exchange upon which the Stock is then listed and any applicable federal
      or state laws, and the Committee may cause a legend or legends to be
      placed on any such certificates to make appropriate reference to such
      restrictions.  In making such determination, the Committee may rely
      upon an opinion of counsel for the Company.

3.10  Subject to the restrictions on Restricted Stock, as provided in Article
      VII of the Plan and in the Restricted Stock Award Agreement, each
      Participant who receives an Award of Restricted Stock shall have all of
      the rights of a 

                                        7

<PAGE>

      shareholder with respect to such shares of Stock, including the right to 
      vote the shares to the extent, if any, such shares possess voting rights 
      and receive dividends and other distributions.  Except as provided 
      otherwise in the Plan or in an Award Agreement, no Participant awarded a 
      Stock Option shall have any right as a shareholder with respect to any 
      shares of Stock covered by his or her Stock Option prior to the date of 
      issuance to him or her of a certificate or certificates for such shares 
      of Stock.

3.11  If any reorganization, recapitalization, reclassification, stock
      split-up, stock dividend, or consolidation of shares of Stock, merger
      or consolidation of the Company or sale or other disposition by the
      Company of all or a portion of its assets, any other change in the
      Company's corporate structure, or any distribution to shareholders
      other than a cash dividend results in the outstanding shares of Stock,
      or any securities exchanged therefor or received in their place, being
      exchanged for a different number or class of shares of Stock or other
      securities of the Company, or for shares of Stock or other securities
      of any other corporation; or new, different or additional shares or
      other securities of the Company or of any other corporation being
      received by the holders of outstanding shares of Stock, then equitable
      adjustments shall be made by the Committee in:

      (a)   the limitation on the aggregate number of shares of Stock that
            may be awarded as set forth in Section 3.6 of the Plan;

      (b)   the number and class of Stock that may be subject to an Award,
            and which have not been issued or transferred under an
            outstanding Award;

      (c)   the purchase price to be paid per share of Stock under
            outstanding Stock Options; and

      (d)   the terms, conditions or restrictions of any Award and Award
            Agreement, including the price payable for the acquisition of
            Stock; provided, however, that all adjustments made as the result
            of the foregoing in respect of each Incentive Stock Option shall
            be made so that such Stock Option shall continue to be an
            Incentive Stock Option, as defined in Section 422 of the Code.

3.12  In addition to such other rights of indemnification as they may have as
      directors or as members of the Committee, the members of the Committee
      shall be indemnified by the Company against reasonable expenses,
      including attorney's fees, actually and necessarily incurred in
      connection with the defense of any action, suit or proceeding, or in
      connection
                                       8

<PAGE>

      with any appeal therein, to which they or any of them may be a
      party by reason of any action taken or failure to act under or in
      connection with the Plan or any Award granted thereunder, and against
      all amounts paid by them in settlement thereof, provided such
      settlement is approved by independent legal counsel selected by the
      Company, or paid by them in satisfaction of a judgment or settlement in
      any such action, suit or proceeding, except as to matters as to which
      the Committee member has been negligent or engaged in misconduct in the
      performance of his duties; provided, that within 60 days after
      institution of any such action, suit or proceeding, a Committee member
      shall in writing offer the Company the opportunity, at its own expense,
      to handle and defend the same.

3.13  The Committee may require each person purchasing shares of Stock
      pursuant to a Stock Option or other Award under the Plan to represent
      to and agree with the Company in writing that he is acquiring the
      shares of Stock without a view to distribution thereof.  The
      certificates for such shares of Stock may include any legend which the
      Committee deems appropriate to reflect any restrictions on transfer.

3.14  The Committee shall be authorized to make adjustments in performance
      based criteria or in the terms and conditions of other Awards in
      recognition of unusual or nonrecurring events affecting the Company or
      its financial statements or changes in applicable laws, regulations or
      accounting principles.  The Committee may correct any defect, supply
      any omission or reconcile any inconsistency in the Plan or any Award
      Agreement in the manner and to the extent it shall deem desirable to
      carry it into effect.  In the event the Company shall assume
      outstanding employee benefit awards or the right or obligation to make
      future such awards in connection with the acquisition of another
      corporation or business entity, the Committee may, in its discretion,
      make such adjustments in the terms of Awards under the Plan as it shall
      deem appropriate.

3.15  The Committee shall have full power and authority to determine whether, to
      what extent and under what circumstances, any Award shall be canceled or
      suspended.  In particular, but without limitation, all outstanding Awards
      to any Participant may be canceled if (a) the Participant, without the
      consent of the Committee, while employed by the Company or after
      termination of such employment, becomes associated with, employed by,
      renders services to, or owns any interest in, other than any insubstantial
      interest, as determined by the Committee, any business that is in
      competition with the Company or with any business in which the Company has
      a substantial interest as determined by the Committee; or (b) is
      terminated for cause as determined by the Committee.

                                       9

<PAGE>


                     ARTICLE IV - INCENTIVE STOCK OPTIONS

4.1   Each provision of this Article IV and of each Incentive Stock Option
      granted hereunder shall be construed in accordance with the provisions
      of Section 422 of the Code, and any provision hereof that cannot be so
      construed shall be disregarded.

4.2   Incentive Stock Options shall be granted only to Eligible Participants
      who are in the active employment of the Company, each of whom may be
      granted one or more such Incentive Stock Options for a reason related
      to his employment at such time or times determined by the Committee
      following the Effective Date through the date which is ten (10) years
      following the Effective Date, subject to the following conditions:

      (a)   The Incentive Stock Option price per share of Stock shall be set
            in the Award Agreement, but shall not be less than 100% of the
            Fair Market Value of the Stock on the Option Grant Date.  If the
            Eligible Participant owns more than 10% of the outstanding Stock
            (as determined pursuant to Section 424(d) of the Code) on the
            Option Grant Date, the Incentive Stock Option price per share
            shall not be less than 110% of the Fair Market Value of the Stock
            on the Option Grant Date.

      (b)   The Incentive Stock Option may be exercised in whole or in part
            from time to time within ten (10) years from the Option Grant
            Date (five (5) years if the Eligible Participant owns more than
            10% of the Stock on the Option Grant Date), or such shorter
            period as may be specified by the Committee in the Award;
            provided, that in any event, the Incentive Stock Option shall
            lapse and cease to be exercisable upon a Termination of
            Employment or within such period following a Termination of
            Employment as shall have been specified in the Incentive Stock
            Option Award Agreement, which period shall in no event exceed
            three months unless:

            (i)   employment shall have terminated as a result of death or
                  Disability, in which event such period shall not exceed one
                  year after the date of death or Disability; or

            (ii)  death shall have occurred following a Termination of
                  Employment and while the Incentive Stock Option or Stock
                  Right was still exercisable, in which event such period
                  shall not exceed one year after the date of death;

                                       10

<PAGE>

            provided, further, that such period following a Termination of
            Employment shall in no event extend the original exercise period
            of the Incentive Stock Option or any related Stock Right.

      (c)   To the extent the aggregate Fair Market Value, determined as of
            the Option Grant Date, of the shares of Stock with respect to
            which Incentive Stock Options (determined without regard to this
            subsection) are first exercisable during any calendar year by any
            Eligible Participant exceeds $100,000, such options shall be
         treated as Nonqualified Stock Options granted under Article V.

      (d)   The Committee may adopt any other terms and conditions which it
            determines should be imposed for the Incentive Stock Option to
            qualify under Section 422 of the Code, as well as any other terms
            and conditions not inconsistent with this Article IV as
            determined by the Committee.

4.3   The Committee may at any time offer to buy out for a payment in cash,
      Stock or Restricted Stock an Incentive Stock Option previously granted,
      based on such terms and conditions as the Committee shall establish and
      communicate to the Participant at the time that such offer is made.

4.4   If the Incentive Stock Option Award Agreement so provides, the
      Committee may require that all or part of the shares of Stock to be
      issued upon the exercise of an Incentive Stock Option shall take the
      form of Restricted Stock, which shall be valued on the date of
      exercise, as determined by the Committee, on the basis of the Fair
      Market Value of such Restricted Stock determined without regard to the
      deferral limitations and/or forfeiture restrictions involved.


                    ARTICLE V - NONQUALIFIED STOCK OPTIONS

5.1   One or more Stock Options may be granted as Nonqualified Stock Options
      to Eligible Participants to purchase shares of Stock at such time or
      times determined by the Committee, following the Effective Date,
      subject to the terms and conditions set forth in this Article V. 

5.2   The Nonqualified Stock Option price per share of Stock shall be
      established in the Award Agreement and may be less than or greater than
      100% of the Fair Market Value at the time of the grant.

5.3   The Nonqualified Stock Option may be exercised in full or in part from
      time to time within such period as may be 

                                       11

<PAGE>

      specified by the Committee or in the Award Agreement; provided, that, in 
      any event, the Nonqualified Stock Option and the related Stock Right shall
      lapse and cease to be exercisable three months following the Participant's
      Termination of Employment.

5.4   The Nonqualified Stock Option Award Agreement may include any other
      terms and conditions not inconsistent with this Article V or in Article
      VI, as determined by the Committee.


           ARTICLE VI - INCIDENTS OF STOCK OPTIONS AND STOCK RIGHTS

6.1   Each Stock Option shall be granted subject to such terms and
      conditions, if any, not inconsistent with this Plan, as shall be
      determined by the Committee, including any provisions as to continued
      employment as consideration for the grant or exercise of such Stock
      Option and any provisions which may be advisable to comply with
      applicable laws, regulations or rulings of any governmental authority.

6.2   A Stock Option shall not be transferable by the Participant other than
      by will or by the laws of descent and distribution, or, to the extent
      otherwise allowed by Rule 16b-3 under the Act or other applicable law,
      pursuant to a qualified domestic relations order as defined by the Code
      or the Employee Retirement Income Security Act, or the rules
      thereunder, and shall be exercisable during the lifetime of the
      Participant only by him or by his guardian or legal representative.

6.3   Shares of Stock purchased upon exercise of a Stock Option shall be paid
      for in such amounts, at such times and upon such terms as shall be
      determined by the Committee, subject to limitations set forth in the
      Stock Option Award Agreement.  Without limiting the foregoing, the
      Committee may establish payment terms for the exercise of Stock Options
      which permit the Participant to deliver shares of Stock, or other
      evidence of ownership of Stock satisfactory to the Company, with a Fair
      Market Value equal to the Stock Option price as payment.

6.4   No cash dividends shall be paid on shares of Stock subject to
      unexercised Stock Options.  The Committee may provide, however, that a
      Participant to whom a Stock Option has been granted which is
      exercisable in whole or in part at a future time for shares of Stock
      shall be entitled to receive an amount per share equal in value to the
      cash dividends, if any, paid per share on issued and outstanding Stock,
      as of the dividend record dates occurring during the period between the
      date of the grant and the time each such share of Stock is delivered
      pursuant to exercise of such Stock Option or the related Stock 

                                       12

<PAGE>


      Right. Such amounts (herein called "dividend equivalents") may, in the
      discretion of the Committee, be:

      (a)   paid in cash or Stock either from time to time prior to, or at
            the time of the delivery of, such Stock, or upon expiration of
            the Stock Option if it shall not have been fully exercised; or

      (b)   converted into contingently credited shares of Stock, with
            respect to which dividend equivalents may accrue, in such manner,
            at such value, and deliverable at such time or times, as may be
            determined by the Committee.

      Such Stock, whether delivered or contingently credited, shall be
      charged against the limitations set forth in Section 3.6.

6.5   The Committee, in its sole discretion, may authorize payment of
      interest equivalents on dividend equivalents which are payable in cash
      at a future time.

6.6   In the event of Disability or death, the Committee, with the consent of
      the Participant or his legal representative, may authorize payment, in
      cash or in Stock, or partly in cash and partly in Stock, as the
      Committee may direct, of an amount equal to the difference at the time
      between the Fair Market Value of the Stock subject to a Stock Option
      and the option price in consideration of the surrender of the Stock
      Option.

6.7   If a Participant is required to pay to the Company an amount with
      respect to income and employment tax withholding obligations in
      connection with exercise of a Nonqualified Stock Option, and/or with
      respect to certain dispositions of Stock acquired upon the exercise of
      an Incentive Stock Option, the Committee, in its discretion and subject
      to such rules as it may adopt, may permit the Participant to satisfy
      the obligation, in whole or in part, by making an irrevocable election
      that a portion of the total Fair Market Value of the shares of Stock
      subject to the Nonqualified Stock Option and/or with respect to certain
      dispositions of Stock acquired upon the exercise of an Incentive Stock
      Option, be paid in the form of cash in lieu of the issuance of Stock
      and that such cash payment be applied to the satisfaction of the
      withholding obligations.  The amount to be withheld shall not exceed
      the statutory minimum federal and state income and employment tax
      liability arising from the Stock Option exercise transaction.
      Notwithstanding any other provision of the Plan, any election under
      this Section 6.7 is required to satisfy the applicable requirements
      under Rule 16b-3 of the Act.

                                       13

<PAGE>

6.8   The Committee may permit the voluntary surrender of all or a portion of
      any Stock Option granted under the Plan to be conditioned upon the
      granting to the Participant of a new Stock Option for the same or a
      different number of shares of Stock as the Stock Option surrendered, or
      may require such surrender as a condition precedent to a grant of a new
      Stock Option to such Participant.  Subject to the provisions of the
      Plan, such new Stock Option shall be exercisable at the such price,
      during such period and on such other terms and conditions as are
      specified by the Committee at the time the new Stock Option is
      granted.  Upon surrender, the Stock Options surrendered shall be
      canceled and the shares of Stock previously subject to them shall be
      available for the grant of other Stock Options.


                        ARTICLE VII - RESTRICTED STOCK

7.1   Restricted Stock Awards may be made to certain Participants as an
      incentive for the performance of future services that will contribute
      materially to the successful operation of the Company.  Awards of
      Restricted Stock may be made either alone, in addition to or in tandem
      with other Awards granted under the Plan and/or cash payments made
      outside of the Plan.

7.2   With respect to Awards of Restricted Stock, the Committee shall:

      (a)   determine the purchase price, if any, to be paid for such
            Restricted Stock, which may be equal to or less than par value
            and may be zero, subject to such minimum consideration as may be
            required by applicable law;

      (b)   determine the length of the Restriction Period;

      (c)   determine any restrictions applicable to the Restricted Stock
            such as service or performance, other than those set forth in
            this Article VII;

      (d)   determine if the restrictions shall lapse as to all shares of
            Restricted Stock at the end of the Restriction Period or as to a
            portion of the shares of Restricted Stock in installments during
            the Restriction Period; and

      (e)   determine if dividends and other distributions on the Restricted
            Stock are to be paid currently to the Participant or paid to the
            Company for the account of the Participant.

                                       14

<PAGE>


7.3   Awards of Restricted Stock must be accepted within a period of 60 days,
      or such shorter period as the Committee may specify, by executing a
      Restricted Stock Award Agreement and paying whatever price, if any, is
      required.  The prospective recipient of a Restricted Stock Award shall
      not have any rights with respect to such Award, unless such recipient
      has executed a Restricted Stock Award Agreement and has delivered a
      fully executed copy thereof to the Committee, and has otherwise
      complied with the applicable terms and conditions of such Award.

7.4   Except when the Committee determines otherwise, or as otherwise
      provided in the Restricted Stock Award Agreement, if a Participant
      terminates employment with the Company for any reason before the
      expiration of the Restriction Period, all shares of Restricted Stock
      still subject to restriction shall be forfeited by the Participant and
      shall be reacquired by the Company.

7.5   Except as otherwise provided in this Article VII, no shares of
      Restricted Stock received by a Participant shall be sold, exchanged,
      transferred, pledged, hypothecated or otherwise disposed of during the
      Restriction Period.

7.6   To the extent not otherwise provided in a Restricted Stock Award
      Agreement, in cases of death, Disability or Retirement or in cases of
      special circumstances, the committee, if it finds that a waiver would
      be appropriate, may elect to waive any or all remaining restrictions
      with respect to such Participant's Restricted Stock.

7.7   In the event of hardship or other special circumstances of a
      Participant whose employment with the Company is involuntarily
      terminated, the Committee may waive in whole or in part any or all
      remaining restrictions with respect to any or all of the Participant's
      Restricted Stock, based on such factors and criteria as the Committee
      may deem appropriate.

7.8   The certificates representing shares of Restricted Stock may either:

      (a)   be held in custody by the Company until the Restriction Period
            expires or until restrictions thereon otherwise lapse, and the
            Participant shall deliver to the Company a stock power endorsed
            in blank relating to the Restricted Stock; and/or

      (b)   be issued to the Participant and registered in the name of the
            Participant, and shall bear an appropriate restrictive legend and
            shall be subject to appropriate stop-transfer orders.

                                       15

<PAGE>


7.9   Except as provided in this Article VII, a Participant receiving a
      Restricted Stock Award shall have, with respect to the shares of
      Restricted Stock covered by any Award, all of the rights of a
      shareholder of the Company, including the right to vote the shares to
      the extent, if any, such shares possess voting rights and the right to
      receive any dividends; provided, however, the Committee may require
      that any dividends on such shares of Restricted Stock shall be
      automatically deferred and reinvested in additional Restricted Stock
      subject to the same restrictions as the underlying Award, or may
      require that dividends and other distributions on Restricted Stock
      shall be paid to the Company for the account of the Participant.  The
      Committee shall determine whether interest shall be paid on such
      amounts, the rate of any such interest, and the other terms applicable
      to such amounts.

7.10  If and when the Restriction Period expires without a prior forfeiture
      of the Restricted Stock subject to such Restriction Period,
      unrestricted certificates for such shares shall be delivered to the
      Participant.

7.11  In order to better ensure that Award payments actually reflect the
      performance of the Company and the service of the Participant, the
      Committee may provide, in its sole discretion, for a tandem
      performance-based or other Award designed to guarantee a minimum value,
      payable in cash or Stock to the recipient of a Restricted Stock Award,
      subject to such performance, future service, deferral and other terms
      and conditions as may be specified by the Committee.


                   ARTICLE VIII - OTHER STOCK-BASED AWARDS

8.1   Other awards that are valued in whole or in part by reference to, or
      are otherwise based on, Stock ("Other Stock-Based Awards"), including
      without limitation, convertible preferred stock, convertible
      debentures, exchangeable securities, phantom stock and Stock awards or
      options valued by reference to book value or performance, may be
      granted either alone or in addition to or in tandem with Stock Options
      or Restricted Stock granted under the Plan and/or cash awards made
      outside of the Plan.

      Subject to the provisions of the Plan, the Committee shall have
      authority to determine the Eligible Participants to whom and the time
      or times at which such Awards shall be made, the number of shares of
      Stock subject to such Awards, and all other conditions of the Awards.
      The Committee also may provide for the grant of shares of Stock upon
      the completion of a specified Performance Period.

                                       16

<PAGE>

      The provisions of Other Stock-Based Awards need not be the same with
      respect to each recipient.

8.2   Other Stock-Based Awards made pursuant to this Article VIII shall be
      subject to the following terms and conditions:


            (a)   Subject to the provisions of this Plan and the Award
            Agreement, shares of Stock subject to Awards made under this
            Article VIII may not be sold, assigned, transferred, pledged or
            otherwise encumbered prior to the date on which the shares are
            issued, or, if later, the date on which any applicable
            restriction, performance or deferral period lapses.

      (b)   Subject to the provisions of this Plan and the Award Agreement
            and unless otherwise determined by the Committee at the time of
            the Award, the recipient of an Award under this Article VIII
            shall be entitled to receive, currently or on a deferred basis,
            interest or dividends or interest or dividend equivalents with
            respect to the number of shares covered by the Award, as
            determined at the time of the Award by the Committee, in its sole
            discretion, and the Committee may provide that such amounts, if
            any, shall be deemed to have been reinvested in additional Stock
            or otherwise reinvested.

      (c)   Any Award under this Article VIII and any Stock covered by any
            such Award  shall vest or  be forfeited to the extent so provided
            in the Award Agreement, as determined by the Committee, in its
            sole discretion.

      (d)   Upon the Participant's Retirement, Disability or death, or in
            cases of special circumstances, the Committee may, in its sole
            discretion, waive in whole or in part any or all of the remaining
            limitations imposed hereunder, if any, with respect to any or all
            of an Award under this Article VIII.

      (e)   Each Award under this Article VIII shall be confirmed by, and
            subject to the terms of, an Award Agreement.

      (f)   Stock, including securities convertible into Stock, issued on a
            bonus basis under this Article VIII may be issued for no cash
            consideration.

8.3   Other Stock-Based Awards may include a phantom stock Award, which is
      subject to the following terms and conditions:

                                       17

<PAGE>

      (a)   The Committee shall select the Eligible Participants who may
            receive phantom stock Awards. The Eligible Participant shall be
            awarded a phantom stock unit, which shall be the equivalent to a
            share of Stock.

      (b)   Under an Award of phantom stock, payment shall be made on the dates
            or dates as specified by the Committee or as stated in the Award
            Agreement and phantom stock Awards may be settled in cash, Stock, or
            some combination thereof as determined by the Committee in its sole
            discretion.

      (c)   The Committee shall determine such other terms and conditions of
            each Award as it deems necessary in its sole discretion.


                       ARTICLE IX - ACCELERATION EVENTS

9.1   For the purposes of the Plan, an Acceleration Event shall occur in the
      event of a "Potential Change in Control," or "Change in Control" or a
      "Board-Approved Change in Control", as those terms are defined below.

9.2   A "Change in Control" shall be deemed to have occurred if:

      (a)   Any "Person" as defined in Section 3(a)(9) of the Act, including
            a "group" (as that term is used in Sections 13(d)(3) and 14(d)(2)
            of the Act), but excluding the Company and any employee benefit
            plan sponsored or maintained by the Company, including any
            trustee of such plan acting as trustee, who:

            (i)   makes a tender or exchange offer for any shares of the
                  Company's Stock (as defined below) pursuant to which any
                  shares of the Company's Stock are purchased (an "Offer"); or

            (ii)  together with its "affiliates" and "associates" (as those
                  terms are defined in Rule 12b-2 under the Act) becomes the
                  "Beneficial Owner" (within the meaning of Rule 13d-3 under
                  the Act) of at least 20% of the Company's Stock (an
                  "Acquisition");

      (b)   The shareholders of the Company approve a definitive agreement or
            plan to merge or consolidate the Company with or into another
            corporation, to sell or otherwise dispose of all or substantially
            all of its assets, or to liquidate the Company (individually, a
            "Transaction"); or

                                       18

<PAGE>

      (c)   When, during any period of 24 consecutive months during the
            existence of the Plan, the individuals who, at the beginning of such
            period, constitute the Board (the "Incumbent Directors") cease for
            any reason other than death to constitute at least a majority
            thereof; provided, however, that a director who was not a director
            at the beginning of such 24 month period shall be deemed to have
            satisfied such 24 month requirement, and be an Incumbent Director,
            if such director was elected by, or on the recommendation of or with
            the approval of, at least two-thirds of the directors who then
            qualified as Incumbent Directors either actually, because they were
            directors at the beginning of such 24 month period, or by prior
            operation of this Section 9.2(c).

9.3   A "Board-Approved Change in Control" shall be deemed to have occurred if
      the Offer, Acquisition or Transaction, as the case may be, is approved
      by a majority of the Directors serving as members of the Board at the
      time of the Potential Change in Control or Change in Control.

9.4   A "Potential Change in Control" means the happening of any one of the
      following:

      (a)   The approval by shareholders of an agreement by the Company, the
            consummation of which would result in a Change in Control of the
            Company, as defined in Section 9.2; or

      (b)   The acquisition of Beneficial Ownership, directly or indirectly,
            by any entity, person or group, other than the Company or any
            Company employee benefit plan, including any trustee of such plan
            acting as such trustee, of securities of the Company representing
            five percent or more of the combined voting power of the Company's
            outstanding securities and the adoption by the Board of a
            resolution to the effect that a Potential Change in Control of the
            Company has occurred for the purposes of this Plan.

9.5   Upon the occurrence of an Acceleration Event, the Committee in its
      discretion may declare any or all then outstanding Stock option, not
      previously exercisable and vested as immediately exercisable and fully
      vested, in whole or in part.

9.6   Upon the occurrence of an Acceleration Event, the Committee in its
      discretion may declare the restrictions applicable to Awards of Restricted
      Stock or Other Stock-Based Awards to have lapsed, in which case the
      Company shall remove all restrictive legends and stop-transfer orders
      applicable to the certif-icates for such shares of Stock, and deliver such
      certificates to the Participants in whose names they are registered.

                                       19

<PAGE>


9.7   Upon the occurrence of an Acceleration Event, the value of all
      outstanding Stock Options, Restricted Stock and Other Stock-Based
      Awards, in each case to the extent vested, shall, unless otherwise
      determined by the Committee in its sole discretion at or after grant
      but prior to any Change in Control, be cashed out on the basis of the
      "Change in Control Price" (as defined in Section 9.8) as of the date
      such Change in Control or such Potential Change in Control is
      determined to have occurred or such other date as the Committee may
      determine prior to the Change in Control.

9.8   For purposes of Section 9.7, "Change in Control Price" means the
      highest price per share of Stock paid in any transaction reported on
      any exchange on which the Stock is then traded or on the NASDAQ
      National Market System or the NASDAQ Small-Cap Market System, as the
      case may be, or paid or offered in any bona fide transaction related to
      a Potential or actual Change in Control of the Company, at any time
      during the 60 day period immediately preceding the occurrence of the
      Change in Control, or, where applicable, the occurrence of the
      Potential Change in Control event, in each case as determined by the
      Committee.


                    ARTICLE X - AMENDMENT AND TERMINATION

10.1  The Board, upon recommendation of the Committee, or otherwise, at any
      time and from time to time, may amend or terminate the Plan.  To the
      extent required by Rule 16b-3 under the Act, no amendment, without
      approval by the Company's shareholders, shall:

      (a)   alter the group of persons eligible to participate in the Plan;

      (b)   except as provided in Section 3.6, increase the maximum number of
            shares of Stock or Stock Options which are available for Awards
            under the Plan;

      (c)   extend the period during which Incentive Stock option Awards may
            be granted beyond the date which is ten (10) years following the
            Effective Date.

      (d)   limit or restrict the powers of the Committee with respect to the
            administration of this Plan;

      (e)   change the definition of an Eligible Participant for the purpose
            of an Incentive Stock Option or increase the limit or the value
            of shares of Stock for which an Eligible Participant may be
            granted an Incentive Stock Option;

                                       20

<PAGE>


      (f)   materially increase the benefits accruing to Participants under
            this Plan;

      (g)   materially modify the requirements as to eligibility for
            participation in this Plan; or

      (h)   change any of the provisions of this Article X.

10.2  No amendment to or discontinuance of this Plan or any provision thereof
      by the Board or the shareholders of the Company shall, without the
      written consent of the Participant, adversely affect, as shall be
      determined by the Committee, any Award theretofore granted to such
      Participant under this Plan; provided, however, the Committee retains
      the right and power to:

      (a)   annul any Award if the Participant is terminated for cause as
            determined by the Committee;

      (b)   provide for the forfeiture of shares of Stock or other gain under
            an Award as determined by the Committee for competing against the
            Company; and

      (c)   convert any outstanding Incentive Stock Option to a Nonqualified
            Stock Option.

10.3  If an Acceleration Event has occurred, no amendment or termination
      shall impair the rights of any person with respect to an outstanding
      Award as provided in Article IX.


                    ARTICLE XI - MISCELLANEOUS PROVISIONS

11.1  Nothing in the Plan or any Award granted hereunder shall confer upon
      any Participant any right to continue in the employ of the Company, or
      to serve as a director thereof, or interfere in any way with the right
      of the Company to terminate his or her employment at any time.  Unless
      specifically provided otherwise, no Award granted under the Plan shall
      be deemed salary or compensation for the purpose of computing benefits
      under any employee benefit plan or other arrangement of the Company for
      the benefit of its employees unless the Company shall determine
      otherwise.  No Participant shall have any claim to an Award until it is
      actually granted under the Plan.  To the extent that any person
      acquires a right to receive payments from the Company under the Plan,
      such right shall, except as otherwise provided by the Committee, be no
      greater than the right of an unsecured general creditor of the
      Company.  All payments to be made hereunder shall be paid from the
      general funds of the company, and no special or separate fund shall be
      
                                       21

<PAGE>

      established and no segregation of assets shall be made to assure
      payment of such amounts, except as provided in Article VII with respect
      to Restricted Stock and except as otherwise provided by the Committee.

11.2  The Company may make such provisions and take such steps as it may deem
      necessary or appropriate for the withholding of any taxes which the
      Company is required by any law or regulation of any governmental
      authority, whether federal, state or local, domestic or foreign, to
      withhold in connection with any Stock Option or the exercise thereof,
      or in connection with any other type of equity-based compensation
      provided hereunder or the exercise thereof, including, but not limited
      to, the withholding of payment of all or any portion of such Award or
      another Award under this Plan until the Participant reimburses the
      Company for the amount the Company is required to withhold with respect
      to such taxes, or canceling any portion of such Award or another Award
      under this Plan in an amount sufficient to reimburse itself for the
      amount it is required to so withhold, or selling any property
      contingently credited by the Company for the purpose of paying such
      Award or another Award under this Plan, in order to withhold or
      reimburse itself for the amount it is required to so withhold.

11.3  The Plan and the grant of Awards shall be subject to all applicable
      federal and state laws, rules, and regulations and to such approvals by
      any United States government or regulatory agency as may be required.
      Any provision herein relating to compliance with Rule 16b-3 under the
      Act shall not be applicable with respect to participation in the Plan
      by Participants who are not subject to Section 16(b) of the Act.

11.4  The terms of the Plan shall be binding upon the Company, and its
      successors and assigns.

11.5  Neither a Stock Option, nor any other type of equity-based compensation
      provided for hereunder, shall be transferable except as provided for
      herein.  Unless otherwise provided by the Committee or in an Award
      Agreement, transfer restrictions shall only apply to Incentive Stock
      Options as required in Article IV and to the extent otherwise required
      by federal or state securities laws.  If any Participant makes such a
      transfer in violation hereof, any obligation of the Company shall
      forthwith terminate.

11.6  This Plan and all actions taken hereunder shall be governed by the laws
      of the State of North Carolina.

11.7  The Plan is intended to constitute an "unfunded" plan for incentive and
      deferred compensation.  With respect to any 

                                       22

<PAGE>

      payments not yet made to a Participant by the Company, nothing contained
      herein shall give any such Participant any rights that are greater than
      those of a general creditor of the Company. In its sole discretion, the
      Committee may authorize the creation of trusts or other arrangements to
      meet the obligations created under the Plan to deliver shares of Stock or
      payments in lieu of or with respect to Awards hereunder; provided,
      however, that, unless the Committee otherwise determines with the consent
      of the affected Participant, the existence of such trusts or other
      arrangements is consistent with the "unfunded" status of the Plan.

11.8  Each Participant exercising an Award hereunder agrees to give the
      Committee prompt written notice of any election made by such
      Participant under Section 83(b) of the Code, or any similar provision
      thereof.

11.9  If any provision of this Plan or an Award Agreement is or becomes or is
      deemed invalid, illegal or unenforceable in any jurisdiction, or would
      disqualify the Plan or any Award Agreement under any law deemed
      applicable by the Committee, such provision shall be construed or
      deemed amended to conform to applicable laws or if it cannot be
      construed or deemed amended without, in the determination of the
      Committee, materially altering the intent of the Plan or the Award
      Agreement, it shall be stricken and the remainder of the Plan or the
      Award Agreement shall remain in full force and effect.

                                       23



                                                                   EXHIBIT 10.13


                                    AGREEMENT


      AGREEMENT, made and entered into this the 28th day of December, 1997, by
F. NEAL HUNTER, an individual residing in Durham County, North Carolina
("Hunter"), and CREE RESEARCH, INC., a North Carolina corporation ("Cree").

                             W I T N E S S E T H:

      WHEREAS, Hunter presently serves as Cree's President and Chief Executive
Officer, and as a member and Chairman of its Board of Directors, and holds a
substantial number of shares of Cree's common stock; and

      WHEREAS, on November 14, 1997, pursuant to Hunter's direction after
consultation with its Board of Directors, Cree purchased 100,000 shares of the
common stock of C3, Inc., a North Carolina corporation ("C3"), at a price of $15
per share; and

      WHEREAS, in addition to the shares purchased on November 14, 1997, Cree
owns 24,601 shares of C3 common stock issued pursuant to an option contained in
the Assignment Agreement between Cree and C3 dated June 28, 1995; and

      WHEREAS, Hunter, for consideration deemed by him to be sufficient, desires
to provide legally binding assurances to Cree that, if Cree would otherwise
suffer a loss on the sale of the 100,000 shares of C3 stock purchased November
14, 1997, Hunter will indemnify Cree against such loss, up to a maximum of
$300,000;

      NOW, THEREFORE, for and in
 consideration of the foregoing premises and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, and intending to be legally bound hereby, Hunter agrees
with Cree as follows:

      1. Upon any sale by Cree of shares of C3 common stock at a price of less
than $15 per share, Hunter will pay Cree the difference between the per share
selling price and $15 per share, multiplied times the number of shares sold,
subject to and in accordance with the terms and conditions of this Agreement.
Commission and other trading expenses shall be disregarded in applying this
paragraph.

      2. This Agreement shall apply to all sales of shares of C3 common stock
from time to time made by Cree, whether the shares sold are held of record or in
a nominee account for the benefit of Cree, until Cree has sold an aggregate of
100,000 shares.



<PAGE>

      3. Payment of amounts due under this Agreement shall be made within ten
(10) days after Hunter is notified in writing of the number of shares of C3 sold
and the per share selling price.

      4. Hunter's maximum liability under this Agreement shall in no event
exceed the sum of $300,000.

      5. Hunter's obligations under this Agreement shall terminate in the event
Cree purchases any additional shares of C3 common stock.

      6. In the event of any stock split or stock dividend with respect to the
C3 common stock, the numbers of shares and per share prices provided for in this
Agreement shall be appropriately adjusted.

      7. This Agreement shall be binding upon and inure to the benefit of Hunter
and his heirs, personal representatives, successors and assigns and upon Cree
and its successors and assigns. This Agreement shall be governed by the laws of
the State of North Carolina. This Agreement shall not be amended except in a
document executed on behalf of both parties.

      IN WITNESS WHEREOF, the undersigned has executed this Agreement and
affixed his seal hereto on the date first stated in the preamble above.



                                       /s/ F. Neal Hunter           (SEAL)
                                       -----------------------
                                           F. Neal Hunter





                                                                   EXHIBIT 10.14


                              AMENDED AND RESTATED
                               INDEMNITY AGREEMENT

      AMENDED AND RESTATED INDEMNITY AGREEMENT (this "Agreement"), made and
entered into as of this the 26th day of June, 1998, by F. NEAL HUNTER, an
individual residing in Durham County, North Carolina ("Hunter"), and CREE
RESEARCH, INC., a North Carolina corporation ("Cree").

                             W I T N E S S E T H:

      WHEREAS, Hunter serves as Cree's President and Chief Executive Officer,
and as a member and Chairman of its Board of Directors, and holds a substantial
number of shares of Cree's common stock: and

      WHEREAS, Cree owns 24,601 shares of the common stock of C3, Inc., a North
Carolina corporation ("C3"), issued pursuant to an Assignment Agreement between
Cree and C3 dated June 28, 1995 which gave Cree the right to acquire one percent
of the outstanding common stock of C3 for $500 but permitted C3 to waive the
consideration and issue the stock at any time, which C3 elected to do in January
1997; and

      WHEREAS, C3 conducted an initial public offering of its common stock in
November 1997 and, pursuant to Hunter's direction after consultation with its
Board of Directors, Cree purchased 100,000 shares in the offering, at the
offering price of $15 per share, based upon the judgment that the market price
of the shares would
 likely increase and that the purchase would thus enhance
Cree's value; and

      WHEREAS, the market price of C3's common stock thereafter declined and, in
order to avoid having Cree record a loss as a result of its C3 holdings, Hunter
entered into an agreement with Cree on December 28, 1997 under which he promised
to indemnify Cree against any losses that might result from the sale of its C3
stock, up to a maximum of $300,000 (such agreement is referred to herein as the
"Original Agreement"); and

      WHEREAS, Cree subsequently sold 45,000 of its C3 shares, realizing a loss
for which Hunter is obligated under the Original Agreement and leaving a balance
of 79,601 shares of C3 stock owned by Cree at the date of this Agreement;

      WHEREAS, based on the market price of C3's common stock at the date of
this Agreement, Hunter's $300,000 maximum indemnity under the Original Agreement
would be insufficient to avoid realizing further losses if Cree were to
liquidate its remaining C3 stock; and


<PAGE>

      WHEREAS, Hunter believes it is in Cree's interest to continue holding its
remaining C3 stock and, in order to avoid having Cree record a further loss as a
result of its C3 holdings, Hunter has reached an agreement with Cree to increase
the maximum amount of his indemnity on the terms and conditions set forth below;
and

      WHEREAS, Hunter and Cree desire to memorialize their understanding and
agreement by amending and restating the provisions of the Original Agreement as
set forth below;

      NOW, THEREFORE, for and in consideration of the foregoing premises and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, and intending to be legally bound hereby, Hunter and Cree
agree that the Original Agreement is hereby amended and restated to read as
follows:

      1. For all shares of C3 common stock sold by Cree at a price less than $15
per share, Hunter will pay Cree the difference between the per share selling
price and $15 per share, subject to and in accordance with the terms and
conditions of this Agreement. Commissions and other trading expenses shall be
disregarded for purposes of this Agreement.

      2. This Agreement shall apply to all sales of C3 common stock from time to
time made by Cree after November 14, 1997, whether the shares sold are held of
record or in a nominee account for the benefit of Cree, until Cree has sold an
aggregate of 100,000 shares.

      3. Payment of amounts due under this Agreement shall be made within ten
(10) days after receipt by Hunter of Cree's written demand therefor setting out
the number of shares sold, the date sold and the per share selling price. The
demand must be made pursuant to the vote of a majority of the members of the
Board of Directors of Cree other than Hunter.

      4. Hunter's maximum liability under this Agreement shall in no event
exceed:

            (a)   $300,000; plus

            (b)   the lesser of

                  (i)   $100,000 and


                 (ii)  the difference between the per share selling price and
                        $9.375 per share for all shares of C3 common stock sold
                        by Cree, at a price less than $9.375 per share, after
                        June 26, 1998

<PAGE>

                        and prior to the date of the demand under
                        paragraph 3 of this Agreement;

                  minus

            (c)   the difference between the per share selling price and $9.375
                  per share for all shares of C3 common stock sold by Cree, at a
                  price greater than $9.375 per share, after June 26, 1998 and
                  prior to the date of the demand under paragraph 3 of this
                  Agreement.

      5. Hunter's obligations under this Agreement shall terminate in the event
Cree purchases any additional shares of C3 common stock.

      6. In the event of any stock split or stock dividend with respect to the
C3 common stock, the numbers of shares and per share prices provided for in this
Agreement shall be appropriately adjusted.

      7. This Agreement shall be binding upon and inure to the benefit of Hunter
and his heirs, personal representatives, successors and assigns and upon Cree
and its successors and assigns. This Agreement shall be governed by the laws of
the State of North Carolina. This Agreement shall not be amended except in a
document executed on behalf of both parties.

      IN WITNESS WHEREOF, the parties have executed this Agreement and affixed
their respective seals hereto as of the date first stated in the preamble above.



                               /s/ F. Neal Hunter      (SEAL)
                                ------------------
                                   F. Neal Hunter



                              CREE RESEARCH, INC.

(CORPORATE SEAL)

Attest:                       By:   /s/ Charles M. Swoboda
                                    -----------------------
                                         Charles M. Swoboda, Vice President

  /s/ Adam H. Broome
  -----------------------
      Adam H. Broome, Secretary




<TABLE>
<CAPTION>


                                           CREE RESEARCH, INC.
                                                EXHIBIT 11
                             STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE





                                                                              YEAR ENDED
                                                ---------------------------------------------------------------------
                                                  JUNE 28,       JUNE 30,      JUNE 30,     JUNE 30,      JUNE 30,
                                                    1998           1997          1996         1995          1994
                                                --------------  -----------   -----------  ------------  ------------
BASIC:
<S>                                               <C>           <C>           <C>           <C>           <C>       
Weighted average common shares outstanding        2,863,000     12,455,000    11,826,000    10,367,290    10,336,646

Net income (loss)                                 6,275,000      3,542,000       243,000       (17,000)     (431,000)
                                                --------------  -----------   -----------  ------------  ------------

Net Income (Loss) Per Common Share                   $ 0.49         $ 0.28        $ 0.02       $ (0.00)      $ (0.04)
                                                ==============  ===========   ===========  ============  ============

DILUTED:
Weighted average common shares outstanding        2,863,000     12,455,000    11,826,000    10,367,290    10,336,646

Dilutive Effect of Stock options & Warrants         630,000        671,000       789,000             -             -
                                                --------------  -----------   -----------  ------------  ------------

Total Shares                                     13,493,000     13,126,000    12,615,000    10,367,290    10,336,646
                                                -------------  -------------  ------------  ------------  ----------

Net income (loss)                                 6,275,000      3,542,000       243,000       (17,000)     (431,000)
                                                --------------  -----------   -----------  ------------  ------------

Net Income (Loss) Per Common Share                   $ 0.47         $ 0.27        $ 0.02       $ (0.00)      $ (0.04)
                                                ==============  ===========   ===========  ============  ============
</TABLE>






                                                                   EXHIBIT 21.00



                           SUBSIDIARIES OF REGISTRANT


                            Real Color Displays, Inc.
           Incorporated under the laws of the State of North Carolina


                             Cree Technologies, Inc.
           Incorporated under the laws of the State of North Carolina


                             Cree Research FSC, Inc.
                     Incorporated under the laws of Barbados







                                   EXHIBIT 23

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statements of
Cree Research, Inc. on Form S-8 (Numbers 33-98956 and 33-98958) and Form S-3
(Number 33-98728) of our reports dated July 22, 1998 on our audits of the
consolidated financial statements as of June 28, 1998 and June 30, 1997 and for
the year ended June 28, 1998 and for the two years in the period ended June 30,
1997 which reports are included in this annual report on Form 10-K.







<TABLE> <S> <C>

<ARTICLE>                                 5               
<CIK>                                 0000895419         
<NAME>                       CREE RESEARCH, INC.   CREE RESEARCH, INC.
<MULTIPLIER>                               1000                 
<CURRENCY>                          U.S. DOLLARS         
       
<S>                                       <C>                 <C>
<PERIOD-TYPE>                             3-MOS               12-MOS
<FISCAL-YEAR-END>                       JUN-28-1998         JUN-28-1998
<PERIOD-START>                          MAR-30-1998         JUL-1-1997
<PERIOD-END>                            JUN-28-1998         JUN-28-1998
<EXCHANGE-RATE>                                1                     1
<CASH>                                    17,680                17,680
<SECURITIES>                                 657                   657
<RECEIVABLES>                             10,479                10,479
<ALLOWANCES>                                 151                   151
<INVENTORY>                                2,543                 2,543
<CURRENT-ASSETS>                          34,658                34,658
<PP&E>                                    46,780                46,780
<DEPRECIATION>                            10,304                10,304
<TOTAL-ASSETS>                            72,724                72,724
<CURRENT-LIABILITIES>                      7,055                 7,055
<BONDS>                                        0                     0 
<COMMON>                                  49,741                49,741
<PREFERRED-MANDATORY>                          0                     0
<PREFERRED>                                    0                     0 
<OTHER-SE>                                 5,124                 5,124
<TOTAL-LIABILITY-AND-EQUITY>              54,865                54,865
<SALES>                                   11,548                42,531
<TOTAL-REVENUES>                          11,548                42,531
<CGS>                                      7,425                27,979
<TOTAL-COSTS>                             13,219                34,386
<OTHER-EXPENSES>                               0                     0
<LOSS-PROVISION>                               0                     0 
<INTEREST-EXPENSE>                          (217)                 (730)
<INCOME-PRETAX>                            2,669                 8,875
<INCOME-TAX>                                 790                 2,600
<INCOME-CONTINUING>                        1,879                 6,275
<DISCONTINUED>                                 0                     0
<EXTRAORDINARY>                                0                     0
<CHANGES>                                      0                     0
<NET-INCOME>                               1,879                 6,275
<EPS-PRIMARY>                               0.14<F1>             0.49<F1>
<EPS-DILUTED>                               0.14                 0.47
<FN>
<F1> EPS-BASIC
</FN>
        

</TABLE>