<SUBMISSION>
<ACCESSION-NUMBER>0000950144-01-001758
<TYPE>10-Q
<PUBLIC-DOCUMENT-COUNT>5
<PERIOD>20001224
<FILING-DATE>20010202
<FILER>
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<CONFORMED-NAME>CREE INC
<CIK>0000895419
<ASSIGNED-SIC>3674
<IRS-NUMBER>561572719
<STATE-OF-INCORPORATION>NC
<FISCAL-YEAR-END>0627
</COMPANY-DATA>
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<ACT>34
<FILE-NUMBER>000-21154
<FILM-NUMBER>1522022
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<BUSINESS-ADDRESS>
<STREET1>4600 SILICON DR
<CITY>DURHAM
<STATE>NC
<ZIP>27703
<PHONE>9193135300
</BUSINESS-ADDRESS>
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<STREET1>4600 SILICON DR
<CITY>DURHAM
<STATE>NC
<ZIP>27703-8475
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<FORMER-CONFORMED-NAME>CREE RESEARCH INC /NC/
<DATE-CHANGED>19940224
</FORMER-COMPANY>
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<TYPE>10-Q
<SEQUENCE>1
<FILENAME>g66708e10-q.txt
<DESCRIPTION>FORM 10-Q
<TEXT>

<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

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

                For the quarterly period ended December 24, 2000


                         Commission file number: 0-21154


                                   CREE, 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, NORTH CAROLINA                                27703
(Address of principal executive offices)                    (Zip Code)


                                 (919) 313-5300
              (Registrant's telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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. [X] Yes [ ] No

The number of shares outstanding of the registrant's common stock, par value
$0.00125 per share, as of January 23, 2001 was 74,253,849.

<PAGE>   2

                                   CREE, INC.
                                    FORM 10-Q

                     For the Quarter Ended December 24, 2000


                                      INDEX


                                                                        Page No.
                                                                        --------
PART I.  FINANCIAL INFORMATION

Item 1.    Financial Statements

           Consolidated Balance Sheets at December 24, 2000
           (unaudited) and June 25, 2000                                       3

           Consolidated Statements of Income for the three and
           six months ended December 24, 2000 and December 26,
           1999 (unaudited)                                                    4

           Consolidated Statements of Cash Flow for the six
           months ended December 24, 2000 and December 26, 1999
           (unaudited)                                                         5

           Notes to Consolidated Financial Statements
           (unaudited)                                                         6

Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                          13

Item 3.    Quantitative and Qualitative Disclosures About Market Risk         19


PART II.  OTHER INFORMATION

Item 1.    Legal Proceedings                                                  19

Item 4.    Submission of Matters to a Vote of Security Holders                20

Item 6.    Exhibits and Reports on Form 8-K                                   21

SIGNATURES                                                                    22

                                        2

<PAGE>   3

PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS

                                   CREE, INC.
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                     December 24,          June 25,
                                                                                         2000                2000
                                                                                   -----------------    ---------------
ASSETS                                                                               (Unaudited)
<S>                                                                                   <C>                   <C>
Current assets:
       Cash and cash equivalents                                                      $ 59,496              $103,843
       Short-term investments held to maturity                                         190,392               142,461
       Marketable securities                                                             7,832                15,842
       Accounts receivable, net                                                         22,708                12,406
       Interest receivable                                                               4,393                 3,893
       Inventories                                                                      13,335                 9,320
       Deferred income tax                                                                 139                   --
       Prepaid expenses and other current assets                                         1,541                 1,254
                                                                                   -----------------    ---------------
              Total current assets                                                     299,836               289,019

       Property and equipment, net                                                     185,393               137,118
       Long-term investments held to maturity                                              --                 41,965
       Deferred income taxes                                                            10,624                10,624
       Patent and license rights, net                                                    2,618                 2,324
       Other assets                                                                     26,821                 5,152
                                                                                   -----------------    ---------------
              Total assets                                                            $525,292              $486,202
                                                                                   =================    ===============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
       Accounts payable, trade                                                        $ 18,119              $ 14,204
       Accrued salaries and wages                                                        1,775                 3,133
       Deferred income tax                                                              10,174                   455
       Other accrued expenses                                                            5,950                 5,270
                                                                                   -----------------    ---------------
              Total current liabilities                                                 36,018                23,062
Long term liabilities:
       Long term liability                                                                 437                   --
                                                                                   -----------------    ---------------
              Total long term liabilities                                                  437                   --

Shareholders' equity:
       Preferred stock, par value $0.01; 3,000 shares authorized at December               --                    --
         24, 2000 and June 25, 2000; none issued and outstanding
       Common stock, par value $0.00125; 200,000 and 120,000 shares authorized              89                    88
         at December 24, 2000 and June 25, 2000, respectively; shares issued and
         outstanding 71,577 and 70,696 at December 24, 2000 and June 25, 2000,
         respectively
       Additional paid-in-capital                                                      421,568               415,716
       Deferred compensation expense                                                    (1,476)               (1,755)
       Retained earnings                                                                74,671                48,156
       Accumulated other comprehensive income (loss), net of tax                        (6,015)                  935
                                                                                   -----------------    ---------------
              Total shareholders' equity                                               488,837               463,140
                                                                                   -----------------    ---------------
              Total liabilities and shareholders' equity                              $525,292              $486,202
                                                                                   =================    ===============
</TABLE>

                   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
                   OF THE CONSOLIDATED FINANCIAL STATEMENTS.

                                        3

<PAGE>   4

                                   CREE, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                      (In thousands, except per share data)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                        Three Months Ended                          Six Months Ended
                                              ---------------------------------------    ----------------------------------------
                                                December 24,         December 26,          December 24,          December 26,
                                                    2000                 1999                  2000                  1999
                                              -----------------    ------------------    ------------------    ------------------
<S>                                               <C>                   <C>                   <C>                   <C>
Revenue:
    Product revenue, net                          $37,587               $22,137               $71,898               $40,385
    Contract revenue, net                           3,907                 2,677                 7,238                 5,290
                                              -----------------    ------------------    ------------------    ------------------
      Total revenue                                41,494                24,814                79,136                45,675

Cost of revenue:
    Product revenue                                16,163                10,075                30,652                19,571
    Contract revenue                                3,257                 2,012                 5,844                 3,900
                                              -----------------    ------------------    ------------------    ------------------
      Total cost of revenue                        19,420                12,087                36,496                23,471
                                              -----------------    ------------------    ------------------    ------------------

Gross profit                                       22,074                12,727                42,640                22,204

Operating expenses:
    Research and development                        2,295                 1,911                 4,396                 2,842
    Sales, general and administrative               3,010                 2,767                 6,967                 4,823
    Other (income) expense                             62                    (8)                   62                    93
                                              -----------------    ------------------    ------------------    ------------------

      Income from operations                       16,707                 8,057                31,215                14,446

Other non operating income (loss)                     (11)                  --                    (99)                  --
Interest income, net                                4,322                   573                 9,105                 1,126
                                              -----------------    ------------------    ------------------    ------------------

      Income before income taxes                   21,018                 8,630                40,221                15,572

Income tax expense                                  7,157                 2,983                13,706                 5,371
                                              -----------------    ------------------    ------------------    ------------------
      Net income                                  $13,861               $ 5,647               $26,515               $10,201
                                              =================    ==================    ==================    ==================

Other comprehensive income, net of tax:
      Unrealized holding gain (loss)               (5,532)                1,981                (6,950)                (437)
                                              -----------------    ------------------    ------------------    ------------------
Comprehensive income                              $ 8,329               $ 7,628               $19,565               $ 9,764
                                              =================    ==================    ==================    ==================
Earnings per share:
      Basic                                         $0.19                 $0.09                 $0.37                 $0.16
                                              =================    ==================    ==================    ==================
      Diluted                                       $0.18                 $0.08                 $0.35                 $0.15
                                              =================    ==================    ==================    ==================

Shares used in per share calculation:
      Basic                                        71,495                62,870                71,154                62,620
                                              =================    ==================    ==================    ==================
      Diluted                                      75,200                67,084                75,230                66,705
                                              =================    ==================    ==================    ==================
</TABLE>

                   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
                   OF THE CONSOLIDATED FINANCIAL STATEMENTS.

                                        4

<PAGE>   5

                                   CREE, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                       Six Months Ended
                                                                          -------------------------------------------
                                                                              December 24,            December 26,
                                                                                  2000                    1999
                                                                          ---------------------     -----------------
Operating activities:                                                                    (Unaudited)
<S>                                                                              <C>                   <C>
       Net income                                                                $ 26,515              $ 10,201
       Adjustments to reconcile net income to net cash
         provided by operating activities:
       Depreciation and amortization                                                9,050                 4,588
       Loss on disposal of property, equipment and patents                             62                    44
       Amortization of patent rights                                                   87                    70
       Issuance and amortization of deferred compensation                             279                  (101)
       Deferred income taxes                                                       13,161                   --
       Loss (gain) on available for sale securities                                (1,182)                  --
       Changes in operating assets and liabilities:
           Accounts receivable                                                    (10,802)               (2,152)
           Inventories                                                             (4,015)                 (632)
           Prepaid expenses and other assets                                         (287)                  (35)
           Accounts payable , trade                                                 3,915                (1,354)
           Accrued expenses and long-term liability                                  (243)                5,847
                                                                          ---------------------     -----------------
           Net cash provided by operating activities                               36,540                16,476
                                                                          ---------------------     -----------------

Investing activities:
       Purchase of available for sale securities                                   (7,176)                  --
       Proceeds from sale of available for sale securities                          5,837                   --
       Purchase of property and equipment                                         (57,388)              (23,042)
       Purchase of securities held to maturity                                    (56,606)                  --
       Proceeds from securities held to maturity                                   50,640                   --
       Increase in other long-term assets                                         (21,670)                  --
       Purchase of patent rights                                                     (381)                 (304)
                                                                          ---------------------     -----------------
           Net cash used in investing activities                                  (86,744)              (23,346)
                                                                          ---------------------     -----------------

Financing activities:
       Acquisition fees for purchase accounting transaction                          (674)                  --
       Net proceeds from the issuance of short-term debt                              --                    200
       Net proceeds from issuance of common stock                                   6,531                 2,459
                                                                          ---------------------     -----------------
           Net cash provided by financing activities                                5,857                 2,659
                                                                          ---------------------     -----------------

Net decrease in cash and cash equivalents                                         (44,347)               (4,211)

Cash and cash equivalents:
       Beginning of period                                                        103,843                42,545
                                                                          =====================     =================
       End of period                                                             $ 59,496              $ 38,334
                                                                          =====================     =================

Supplemental disclosure of cash flow information:
       Cash paid for interest, net amounts capitalized                           $      0              $      0
                                                                          =====================     =================
       Cash paid for income taxes                                                $    414              $    268
                                                                          =====================     =================
</TABLE>

                   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
                   OF THE CONSOLIDATED FINANCIAL STATEMENTS.

                                        5

<PAGE>   6

                                   CREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


BASIS OF PRESENTATION

The consolidated balance sheet as of December 24, 2000, the consolidated
statements of income for the three and six months ended December 24, 2000 and
December 26, 1999, and the consolidated statements of cash flow for the six
months ended December 24, 2000 and December 26, 1999 have been prepared by the
Company and have not been audited. In the opinion of management, all normal and
recurring adjustments necessary to present fairly the financial position,
results of operations and cash flow at December 24, 2000, and all for periods
presented have been made. The balance sheet at June 25, 2000 has been derived
from the audited financial statements as of that date.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's fiscal 2000 Form 10-K. The results of
operations for the period ended December 24, 2000 are not necessarily indicative
of the operating results that may be attained for the entire fiscal year.

ACCOUNTING POLICIES

Business Combination

On May 1, 2000 the Company acquired Nitres, Inc. in a business combination
accounted for as a pooling of interests. Nitres, Inc., became a wholly owned
subsidiary (Cree Lighting Company) of the Company through the exchange of
3,695,492 shares of the Company's common stock for all of the outstanding stock
of Nitres, Inc. In addition, the Company assumed outstanding stock options and
warrants, which after adjustment for the exchange represented a total of 304,446
options and warrants to purchase shares of Cree's common stock. All prior period
consolidated financial statements have been restated to include the results of
operations, financial position and cash flows of Nitres, Inc., as though Nitres,
Inc. had been a part of the Company for all periods presented.

Principles of Consolidation

The consolidated financial statements include the accounts of Cree, Inc., and
its wholly-owned subsidiaries, Cree Lighting Company ("Cree Lighting"), Cree
Research FSC, Inc., Cree Funding LLC, Cree Employee Services Corporation and
Cree Technologies, Inc. All material intercompany accounts and transactions have
been eliminated in consolidation.

                                        6

<PAGE>   7

Reclassifications

Certain 2000 amounts in the accompanying consolidated financial statements have
been reclassified to conform to the 2001 presentation. These reclassifications
had no effect on previously reported net income or shareholder's equity.

Fiscal Year

The Company's fiscal year is a 52 or 53 week period ending on the last Sunday in
the month of June. Accordingly, all quarterly reporting reflects a 13-week
period in fiscal 2001 and fiscal 2000. The Company's current fiscal year extends
from June 26, 2000 through June 24, 2001.

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.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, short-term and long-term
investments, available for sale securities, accounts and interest receivable,
accounts payable, debt and other liabilities approximate fair value at December
24, 2000 and June 25, 2000.

Investments

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 and losses excluded from earnings and reported as a
                  separate component of shareholders' equity.

As of December 24, 2000, the Company's short-term investments held to maturity
included $190.4 million consisting of $134.2 million in high-grade corporate
bonds, $26.6 million in government securities, and $29.6 million in a closed end
mutual fund investing in high grade corporate securities. The company purchased
the investments with a portion of the proceeds from its public stock offering in
January 2000. The Company has the intent and ability to hold

                                        7

<PAGE>   8

these securities until maturity; therefore, they are accounted for as
"securities held-to maturity" under SFAS 115. The securities are reported on the
balance sheet at amortized cost, as a short-term investment with unpaid interest
included in interest receivable.

At December 24, 2000 and December 26, 1999, the Company held a short-term equity
investment in common stock of Microvision, Inc. ("MVIS"). The Company purchased
268,600 common shares in a private equity transaction in May 1999 at a price of
$16.75 per share, or $4.5 million. Pursuant to an agreement signed March 17,
2000, the Company committed to increase its equity position in MVIS by investing
an additional $12.5 million in MVIS common stock. This additional investment was
completed on April 13, 2000, when the Company purchased 250,000 shares at a
price of $50.00 per share. In June 2000, 162,500 MVIS shares were sold for $6.3
million, with a gain for $3.6 million realized from the sale. The Company has
also purchased other securities for investment purposes. Management views these
transactions as investments, and the shares are accounted for as "available for
sale" securities under SFAS 115. Therefore unrealized gains or losses are
excluded from earnings and are recorded in other comprehensive income or loss,
net of tax.

During the first six months of fiscal 2001, the Company realized a gain of $1.2
million from the sale of available-for-sale securities.

Inventories

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

                               December 24,                 June 25,
                                   2000                       2000
                           ----------------------      --------------------
                                           (In thousands)
  Raw materials                  $  2,850                  $  2,415
  Work-in-progress                  4,569                     3,094
  Finished goods                    5,916                     3,811
                           ----------------------      --------------------
  Total Inventory                $ 13,335                  $  9,320
                           ======================      ====================

Research and Development Accounting Policy

The U.S. Government provides funding through research contracts for several of
the Company's current research and development efforts. The contract funding may
be based on either a cost-plus or a cost-share arrangement. The amount of
funding under each contract is determined based on cost estimates that include
direct costs, plus an allocation for research and development, general and
administrative and the cost of capital expenses. 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
paid to the Company. Activities performed under 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.

                                        8

<PAGE>   9

The revenue and expense classification for contract activities is based on the
nature of the contract. For contracts where the Company anticipates that funding
will exceed direct costs over the life of the contract, funding is reported as
contract revenue and all direct costs are reported as costs 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, costs are reported 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 included in research and development
expenses:


<TABLE>
<CAPTION>
                                        Three Months Ended                             Six Months Ended
                             -----------------------------------------     ------------------------------------------
                               December 24,           December 26,            December 24,           December 26,
                                   2000                   1999                    2000                   1999
                             -----------------     -------------------     --------------------    ------------------
                                                                 (In thousands)
<S>                              <C>                      <C>                    <C>                    <C>
Net R&D costs                    $174                     $ 134                  $ 239                  $ 174
Government funding                314                       331                    660                    398
                             -----------------     -------------------     --------------------    ------------------
Total direct costs
incurred                         $488                     $ 465                  $ 899                  $ 572
                             =================     ===================     ====================    ==================
</TABLE>

Significant Sales Contract

In July 2000, the Company entered into a new Purchase Agreement with Osram Opto
Semiconductors GmbH & Co. ("Osram"), pursuant to which Osram agreed to purchase
and the Company is obligated to ship certain quantities of standard brightness,
high brightness and ultra-brightness LED chips and silicon carbide wafers
through September 2001.

The agreement calls for certain quantities of standard brightness, high
brightness and ultra-brightness LED chips to be delivered by month. In the event
the Company is unable to ship at least 85% of the cumulative quantity due to
have been shipped each month, Osram is entitled to liquidated damages. These
damages are calculated at one percent per week of the purchase price of the
delayed product, subject to a maximum of ten percent of the purchase price. If
product shipments are delayed six weeks or more due to circumstances within the
Company's control, then in lieu of liquidated damages, Osram may claim damages
actually resulting from the delay up to forty percent of the purchase price of
delayed products.

The contract also gives Osram limited rights to defer shipments. For products to
be shipped in more than 24 weeks after initial notice, Osram can defer 30% and
25% of standard brightness LEDs and high brightness and ultra-brightness LEDs,
respectively. For products to be shipped in more than 12 weeks, but less than 24
weeks, Osram may defer 10% of scheduled quantities for standard brightness,
high brightness and ultra-brightness LEDs. In each case, Osram is required to
accept all products within 90 days of the original shipment date. In all other
cases, Osram may reschedule shipments only with the Company's mutual written
agreement.

Additionally, the Purchase Agreement provides for higher per unit prices early
in the contract with reductions in unit prices being available as the cumulative
volume shipped increases. The

                                        9

<PAGE>   10

higher prices were negotiated by the Company to offset higher per unit costs
expected earlier in the contract.

Income Taxes

The Company has established an estimated tax provision based upon an effective
rate of 34%. The estimated effective rate was based upon projections of income
for the fiscal year and the Company's ability to utilize remaining net operating
loss carryforwards and other tax credits. However, the actual effective rate may
vary depending upon actual pre-tax book income for the year or other factors.

EARNINGS PER SHARE

The Company presents earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 required the Company to change its method of computing, presenting and
disclosing earnings per share information.

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


<TABLE>
<CAPTION>
                                                           Three Months Ended                 Six Months Ended
                                                           ------------------                 ----------------
                                                     December 24,     December 26,      December 24,    December 26,
                                                         2000             1999*             2000            1999*
                                                    ---------------  ---------------- ---------------- ----------------
                                                                 (In thousands, except per share amounts)

<S>                                                   <C>                <C>               <C>             <C>
Net income                                            $ 13,861           $ 5,647           $26,515         $ 10,201
Weighted average common shares                          71,495            62,870            71,154           62,620
                                                    ---------------  ---------------- ---------------- ----------------
Basic earnings per common share                        $ 0.19             $0.09             $0.37            $0.16
                                                    ===============  ================ ================ ================

Net income                                             $13,861            $5,647          $ 26,515          $10,201
Diluted weighted average common shares:
Common shares outstanding                               71,495            62,870            71,154           62,620
Dilutive effect of stock options and warrants            3,705             4,214             4,076            4,085
                                                    ---------------  ---------------- ---------------- ----------------
Total diluted weighted average common shares            75,200            67,084            75,230           66,705
                                                    ---------------  ---------------- ---------------- ----------------
Diluted earnings per common share                       $0.18             $0.08             $0.35            $0.15
                                                    ===============  ================ ================ ================
</TABLE>

* Weighted average shares and per share amounts have been adjusted for the two
for one stock split effective December 1, 2000.

Potential common shares that would have the effect of increasing diluted income
per share are considered to be antidilutive. In accordance with SFAS No. 128,
1,034,441 shares for the three and six months ended December 24, 2000,
respectively, were not included in calculating diluted income per share for the
periods presented. For the three and six months ended December 26, 1999, there
were no potential shares considered antidilutive.

                                       10

<PAGE>   11

The Company effected a two-for-one split of its common stock in December 2000.
The stock split was effected by an amendment to the Company's Articles of
Incorporation that became effective at the close of business on December 1,
2000. Each issued and unissued authorized share of common stock, $0.0025 par
value per share, was automatically split into two whole shares of common stock,
$0.00125 par value per share. On December 8, 2000, the Company issued to each
holder of record of common stock a certificate evidencing the additional shares
of common stock resulting from the stock split. All references in this document
to common stock and per common share data have been adjusted to reflect the
common stock split, unless otherwise stated.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, The Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. In the first six months
of fiscal 2001, the Company adopted SFAS 133. Because of the Company's minimal
use of derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.

SUBSEQUENT EVENT

On December 29, 2000 the Company completed the acquisition of the UltraRF
division ("business") of Spectrian Corporation ("Spectrian"), through the
purchase of the assets of the business by Cree's wholly-owned subsidiary, Zoltar
Acquisition, Inc. The subsidiary was renamed UltraRF, Inc. ("UltraRF")
following the completion of the acquisition. UltraRF designs, manufactures and
markets a line of bipolar transistors and laterally diffused metal oxide
semiconductor ("LDMOS") radio frequency ("RF") power semiconductors. The asset
purchase was consummated pursuant to an Asset Purchase Agreement dated November
20, 2000 (the "Asset Purchase Agreement") between Spectrian and UltraRF.

Under the terms of the Asset Purchase Agreement, Cree's subsidiary, UltraRF,
acquired substantially all of the assets of the business, including inventories,
equipment and tangible property, intangible assets, contract rights, records,
supplies, rights associated with prepaid expenses, certain rights against third
parties, certain software and trade accounts receivable attributable to external
sales (offset by accounts payable, with no obligation of Cree, to collect
accounts receivable), and assumed certain specified liabilities of the business,
including obligations and liabilities under certain contracts, warranty
obligations and tax obligations and liabilities relating to the business, in
exchange for a total of 2,656,917 shares of Cree common stock. Of the total
shares issued, 191,094 shares were placed in escrow to secure Spectrian's
representations, warranties and covenants under the Asset Purchase Agreement.
The escrow period is one year, with 50% of the escrowed shares to be released
after six months if there have been no indemnification claims. The acquired
assets included equipment and other physical property used by the business is
designing, manufacturing and marketing bipolar and LDMOS RF power semiconductors
and Cree intends to continue such use through its UltraRF subsidiary.

                                       11

<PAGE>   12

The UltraRF facility is located in a building on one of two parcels of land in
Sunnyvale, California, that Spectrian leased in November 1996 for a 15-year term
(with three options to extend the lease for up to an additional fifteen years).
In connection with the acquisition of the assets of the business, Spectrian and
Cree's subsidiary, UltraRF, also entered into a sublease agreement with respect
to the UltraRF facility. Under the sublease, if Spectrian exercises its option
to extend the term of its master lease with its landlord, UltraRF may also
exercise an option to extend its sublease of the UltraRF facility. Cree has
guaranteed the obligations of its subsidiary under the sublease.

In addition, at the closing of the acquisition, Cree's subsidiary, UltraRF
signed a supply agreement with Spectrian. Under this agreement, Spectrian has
committed to purchase semiconductor components having a minimum aggregate
purchase price of approximately $58 million during the two years ended December
31, 2002. In addition, UltraRF agreed to allocate sufficient capacity to supply
Spectrian with quantities in excess of its minimum commitment by up to 20%. The
minimum purchase amounts are fixed for each quarter during the two-year term of
the agreement, with the aggregate of the eight quarters equaling $58.0 million.
Cree, UltraRF and Spectrian also entered into a development agreement, under
which Spectrian has agreed to provide funding of $2.4 million during calendar
2001. This work will support development by Cree and UltraRF directed to
improve high linearity and gain LDMOS power modules, and silicon carbide based
RF power transistors for potential use in Spectrian's power amplifier products.
The acquisition will be recorded using the purchase method of accounting.

                                       12

<PAGE>   13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Information set forth in this Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Act of 1934. These statements
represent the Company's judgment concerning the future and are subject to risks
and uncertainties that could cause our actual operating results and financial
position to differ materially. Such forward-looking statements can be identified
by the use of forward-looking terminology such as "may," "will," "anticipate,"
"believe," "plan," "estimate," "expect," and "intend" or the negative thereof or
other variations thereof or comparable terminology. The Company cautions that
such forward-looking statements are further qualified by important factors that
could cause the Company's actual operating results to differ materially from
those forward-looking statements. These factors include, but are not limited to,
uncertainty whether we can achieve our targets for increased yields and cost
reductions needed to permit lower product pricing without margin reductions;
risks associated with the production ramp-up for our new ultra-bright LED chips,
including the possibility of unexpected delays, increased costs and
manufacturing difficulties or less than expected market acceptance; the risk of
variability in our manufacturing processes that can adversely affect yields and
product performance; uncertain product demand; concentration of our business
among few customers; whether we can manage our growth and integrate acquired
businesses effectively; uncertainty whether our intellectual property rights
will provide meaningful protection; the possibility of adverse results in our
pending intellectual property litigation and general economic conditions. See
Exhibit 99.1 for further discussion of factors that could cause the Company's
actual results to differ.

Overview

Cree, Inc. is the world leader in developing and manufacturing semiconductor
materials and electronic devices made from silicon carbide ("SiC"). We recognize
product revenue at the time of shipment or in accordance with the terms of the
relevant contract. We derive the largest portion of our revenue from the sale of
blue and green light emitting diode ("LED") products. The Company offers LEDs at
three brightness levels: ultra-bright blue and green devices, high-brightness
blue and green products and standard brightness blue products. Our LED devices
are utilized by end users for automotive dashboard lighting, liquid crystal
display ("LCD") backlighting, including wireless handsets and other consumer
products, indicator lamps, miniature white lights, indoor sign and arena
displays, outdoor full color displays, traffic signals and other lighting
applications.

The Company's ultra-bright LED products were introduced to customers in sample
quantities in October 2000. During the second quarter of fiscal 2001, revenues
derived from these products represented 8% of the total LED sales mix. We
believe the ultra-bright chips are two-times brighter than our high-brightness
devices, and they will replace some of the demand for our older products over
time. The ultra-bright chips are priced slightly higher than the high-brightness
devices; therefore, the cost per lumen of brightness to the customer has been
substantially reduced with the introduction of this product. As a result, the
ultra-bright devices have gained

                                       13

<PAGE>   14

strong initial acceptance from our customers, but will require a design-in cycle
that is expected to continue for several months. The ultra-bright products may
allow new applications for Cree customers, including additional outdoor displays
and traffic signal designs as a result of the higher brightness level. We are
targeting these products to ramp quickly, and we believe they may account for up
to 25% of our LED chip volume in the March 2001 quarter if we meet our
production milestones. Historically, we have experienced lower margins with many
new product introductions, including the ultra-brightness products. We will
strive to make improvements to output and yield over the next several quarters
for these products.

During the second quarter of fiscal 2001, our high-brightness chips made-up the
largest portion of our revenue at 71% of LED sales. However, these sales have
declined as a percentage of total LED revenue from 82% in the three months ended
September 2000 due to the sales of our new ultra-bright products. We believe the
high-brightness chips will continue to decline as a percentage of our LED sales
if we meet our production targets for our ultra-bright devices. The
standard-brightness products are targeted to maintain a range of 15-20% of our
LED volume due to the low price and customers current designs requiring the
device. Through the first half of fiscal 2001, average sales prices for LEDs
have declined 13%. We target average sales prices for these products to decline
at a rate of 25% for the entire fiscal year; however, greater declines may be
necessary depending on future market conditions.

In anticipation of these declines in average sales prices, our management team
is focused on the execution of yield improvements in our LED production
processes. We have continued to make improvements to our LED output and yield;
however, during the first half of fiscal 2001, we did not meet our internal cost
reduction goals, as declines in cost only kept pace with reductions in average
sales prices. Wafer yield improvements will be critical to our success in the
next few quarters. In addition, the Company must continue to ramp capacity for
our ultra-bright LED products as we pursue market penetration and acceptance.
During the remainder of fiscal 2001, Cree must continue to focus on adding
capacity through yield improvements. If we are unable to meet yield improvement
objectives, continue the production ramp of our ultra-bright products and gain
new LED customers, future margins may decline or our revenue growth may slow.

We derive additional revenue from the sale of advanced materials made from SiC
that are used primarily for research and development for new semiconductor
applications. During the second quarter of fiscal 2001, sales of SiC wafers
increased by 40% over the September 2000 quarter. Strong demand from the
corporate and research communities is driving this growth, including new
interest in SiC for microwave and power devices from certain customers. During
the first half of fiscal 2001, we also sold SiC crystals to Charles & Colvard,
Ltd. ("C&C"), for use in gemstone applications. We anticipate little to no
revenue from the gemstone business over the next several quarters as they
balance their inventory levels. C&C sales made up approximately 5% of total
revenue during the second quarter of fiscal 2001. The balance of our revenue is
derived from government and customer research contract funding.

                                       14

<PAGE>   15

RESULTS OF OPERATIONS

Three Months Ended December 24, 2000 and December 26, 1999

Revenue. Revenue grew 67% from $24.8 million in the second quarter of fiscal
2000 to $41.5 million in the second quarter of fiscal 2001. This increase was
attributable to an increase in product revenue of 70% from $22.1 million in the
second quarter of fiscal 2000 to $37.6 million in the second quarter of fiscal
2001. This rise in product revenue was a result of the 114% increase in sales of
our LED products in the second quarter of fiscal 2001 compared to the second
quarter of fiscal 2000. LED volume rose 161% over the prior year due to a
significant increase in demand for ultra-bright and high-brightness blue and
green LED products, as well as greater capacity from our manufacturing facility.
Average sales prices for LED products have declined 18% in the second quarter of
fiscal 2001 compared to fiscal 2000 due to expected contractual volume discounts
and other factors.

Revenue attributable to sales of SiC materials was 6% lower in the second
quarter of fiscal 2001 than in the same period of fiscal 2000, due to a
significant decline in sales to C&C for gemstone materials. C&C ramped up their
gemstone business in the second quarter of fiscal 2000 and have since reduced
their orders as they balance their inventory. We anticipate little to no revenue
from the gemstone business over the next several quarters. SiC wafer sales have
increased 89% in the second quarter of fiscal 2001 compared to the same period
of fiscal 2000, due to demand from the corporate and research communities,
including new interest in SiC for microwave and power devices from certain
customers. Wafer units have increased 95%, while average sales prices have
declined 2% in the second quarter of fiscal 2001 compared to the three months
ended December 1999. Contract revenue received from U.S. Government agencies and
customers increased 46% during the second quarter of fiscal 2001 compared to the
second quarter of fiscal 2000 due to additional contract awards received in the
first half of fiscal 2001.

Gross Profit. Gross profit increased 73% to $22.1 million in the second quarter
of fiscal 2001. Compared to the prior year, gross margin increased to 53% from
51% of revenue due primarily to the higher throughput and manufacturing yield on
high brightness LEDs and materials products that have resulted in lower unit
costs. During the second quarter of fiscal 2001, we increased wages for
non-exempt employees one-dollar per hour. Without the hourly wage increase,
product margins would have been 57.6% of product revenue for the quarter. For
the remainder of fiscal 2001, we plan to continue the strategy of reducing LED
costs through higher production yields. Wafer costs for SiC material sales also
declined 23% in the second quarter of fiscal 2001 compared to the second quarter
of fiscal 2000 due to improved yields and greater throughput of materials.

Research and Development. Research and development expenses increased 20% in the
second quarter of fiscal 2001 to $2.3 million from $1.9 million in the second
quarter of fiscal 2000. Much of this increase was caused by greater investments
for research in the RF and microwave and optoelectronics programs. We believe
that research and development expenses will continue to grow during the
remainder of fiscal 2001 due to increased funding necessary to develop products
for future release; however, as a percentage of revenue theses expenses are
targeted to remain relatively even.

                                       15

<PAGE>   16

Sales, General and Administrative. Sales, general and administrative expenses
increased 9% in the second quarter of fiscal 2001 to $3.0 million from $2.8
million in the second quarter of fiscal 2000, due to greater spending to support
the overall growth of the business and additional legal expenses resulting from
the patent litigation. During the second quarter of fiscal 2001, the Company
changed its employee profit sharing bonus program. This plan was changed to
provide that, in lieu of a cash bonus, employees would be granted options to
purchase common stock of the Company upon achieving quarterly financial
objectives. This change reduced S,G&A expenses by $500,000 during the second
quarter of fiscal 2001 as compared to the same quarter in the prior year. For
the remainder of fiscal 2001, we anticipate that total sales, general and
administrative costs will increase in connection with the growth of our
business; however, we believe that as a percentage of revenue they will remain
constant.

Other (Income) Expense. Other expense has increased to $62,000 during the second
quarter of fiscal 2001 from income of $8,000 recognized for the second quarter
of fiscal 2000. In the second quarter of fiscal 2001, we instituted a physical
tagging system for fixed assets that resulted in the write-down of $62,000 of
assets.

Interest Income, Net. Interest income, net has increased $3.7 million to $4.3
million in the second quarter of fiscal 2001 from $573,000 in the prior year
period. This was due to higher average cash balances being available in the
second quarter of fiscal 2001 as a result of the public stock offering completed
in January 2000. Higher interest rates in the second quarter of fiscal 2001 also
improved interest income.

Income Tax Expense. Income tax expense for the second quarter of fiscal 2001 was
$7.2 million compared to $3.0 million in the second quarter of fiscal 2000. This
increase resulted from higher profitability during the second quarter of fiscal
2001 over the same period in fiscal 2000. Our tax rate provision was 34% for
both periods.

Six Months Ended December 24, 2000 and December 26, 1999

Revenue. Revenue increased 73% from $45.7 million in the first six months of
fiscal 2000 to $79.1 million in the first six months of fiscal 2001. This
increase resulted from a rise in product revenue of 78% from $40.4 million in
the first six months of fiscal 2000 to $71.9 million in the first six months of
fiscal 2001. Greater product revenue was largely a result of the 128% increase
in sales of our LED products in the first six months of fiscal 2001 compared to
the first six months of fiscal 2000. Our high brightness LED products
experienced the heaviest demand; however, our standard brightness chips also
increased 48% during the comparative period. Overall LED chip volume grew 140%
in the first six months of fiscal 2001 over units shipped in the first six
months of fiscal 2000, while our average sales prices for LEDs has declined 5%
during this time frame.

Revenue attributable to sales of SiC material was 4% lower in the first six
months of fiscal 2001 than in the same period of fiscal 2000, due to a
significant decline in sales to C&C for gemstone applications. C&C ramped up
their gemstone business in the first half of fiscal 2000 and have since reduced
their orders as they balance their inventory. We anticipate little to no revenue
from

                                       16

<PAGE>   17

the gemstone business over the next several quarters. SiC wafer sales have
increased 72% in the first six months of fiscal 2001 compared to the same period
of fiscal 2000, due to heavy demand from the corporate and research communities,
including new interest in SiC for microwave and power devices from certain
customers. Wafer units have increased 106%, while average sales prices have
declined 17% in the first half fiscal 2001 compared to the first six months of
fiscal 2000. Average sales prices have declined due to a shift in mix of
products sold. Contract revenue received from U.S. Government agencies and
customers increased 37% during the first six months of fiscal 2001 compared to
the first six months of fiscal 2000 due to new contract awards received in the
first half of fiscal 2001.

Gross Profit. Gross profit increased 92% from $22.2 million in the first six
months of fiscal 2000 to $42.6 million in the first six months of fiscal 2001.
This increase is due primarily to the rise in LED sales volumes combined with
LED cost declines that stayed ahead of reductions in average sales prices.
Average LED costs were lower due to higher throughput and manufacturing yield on
high brightness LEDs and materials products. Margins on wafer products have also
improved during the first six months of fiscal 2001 as higher yields have
reduced costs 27% compared to the same period of the prior year.

Research and Development. Research and development expenses increased 55% in the
first six months of fiscal 2001 to $4.4 million from $2.8 million in the first
six months of fiscal 2000. Much of this increase was caused by a greater
investment made for research in the RF and microwave and optoelectronics
programs. We anticipate that internal funding for development of new products
will continue to grow in future periods, while we believe that government
funding for our development activities will remain constant.

Sales, General and Administrative. Sales, general and administrative expenses
increased 44% in the first six months of fiscal 2001 to $7.0 million from $4.8
million in the first six months of fiscal 2000, due to greater spending to
support the overall growth of the business. We anticipate that total sales,
general and administrative costs will continue to increase in connection with
the growth of the business; however, we believe that as a percentage of revenue
theses costs will remain constant.

Other Expense. Other expense decreased 33% to $62,000 during the first six
months of fiscal 2001 from $93,000 for the first six months of fiscal 2000. In
the first six months of fiscal 2000, the Company incurred a greater amount of
fixed asset write-downs.

Other Non-Operating Expense. Other non-operating expenses for the first six
months of fiscal 2001 were $99,000 compared to $0 in the prior year period, due
to additional costs associated with the acquisition of Nitres, Inc. In addition,
during the first quarter of fiscal 2001, the Company realized a $1.2 million
gain on the sale of marketable securities. This gain was offset by a one-time
charitable contribution of $1.2 million made to the University of California at
Santa Barbara to endow a Cree chair in solid state lighting and displays.

Interest Income, Net. Interest income, net increased 709% to $9.1 million in the
first six months of fiscal 2001 from $1.1 million in the first six months of
fiscal 2000. This was due to higher average cash balances being available in the
first half of fiscal 2001 as a result of the public stock

                                       17

<PAGE>   18

offering completed in January 2000. Higher interest rates in the first half of
fiscal 2001 also improved interest income.

Income Tax Expense. Income tax expense for the first half of fiscal 2001 was
$13.7 million compared to $5.4 million in the six months ended December 1999.
This increase resulted from higher profitability during the first half of fiscal
2001 over the same period in fiscal 2000. Our tax rate provision was 34% for
both periods.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations to date through sales of equity, bank borrowings
and revenue from product and contract sales. As of December 24, 2000, we had
working capital of $263.8 million, including $257.7 million in cash and
short-term investments. Operating activities generated $36.5 million for the
first six months of fiscal 2001 compared with $16.5 million generated during the
comparative period in fiscal 2000. This increase was primarily attributable to
higher profitability.

Most of the $86.7 million used in investing activities in the first six months
of fiscal 2001 was related to the purchase of held to maturity investments and
capital improvements. We invested $57.4 million in capital expenditures during
the first six months of fiscal 2001 compared to $23.0 million during the same
period in the prior fiscal year. The majority of the increase in spending was
due to new equipment additions to increase manufacturing capacity in our
epitaxy, cleanroom and package and test areas. We are also nearing the
completion of a 125,000 square foot facility expansion at our production site
near Research Triangle Park, North Carolina. The increase in other long-term
assets of $21.7 million in the first six months of fiscal 2001 represents
strategic investments made in private companies such as Xemod, Inc. Cash
provided by financing activities during the first six months of fiscal 2001
related primarily to the receipt of $6.5 million in proceeds from the exercise
of stock options from the Company's employee stock option plan and the exercise
of outstanding stock warrants.

On January 18, 2001, Cree announced that its Board of Directors has authorized
the repurchase of up to four million shares, or about five percent, of its
outstanding common stock. The Company expects to use available cash to finance
purchases under the program, which extends to January 2002. At the discretion of
the Company's management, the repurchase program can be implemented through open
market or privately negotiated transactions. The Company will determine the time
and extent of repurchases based on its evaluation of market conditions and other
factors.

The Company may also issue additional shares of common stock for the acquisition
of complementary businesses or other significant assets. From time to time we
evaluate potential acquisitions of and investments in complementary businesses
and anticipate continuing to make such evaluations.

                                       18

<PAGE>   19


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

QUANTITATIVE DISCLOSURES

As of December 24, 2000, the Company maintains investments in equity securities
that are treated for accounting purposes under SFAS 115 as ""available for sale"
securities. These investments are carried at fair market value based on quoted
market prices of the investments as of December 24, 2000, with net unrealized
gains or losses excluded from earnings and reported as a separate component of
stockholder's equity. These investments are subject to market risk of equity
price changes. Management views these stock holdings as investments; therefore,
the shares are accounted for as "available for sale" securities under SFAS 115.
The fair market value of these investments as of December 24, 2000, using the
closing sale price of December 22, 2000 was $7.8 million.

During the first six months of fiscal 2001, the Company invested some of the
proceeds from its January 2000 public offering into other investments at fixed
interest rates that vary by security. No other material changes in market risk
were identified during the most recent quarter.

QUALITATIVE DISCLOSURES

Investments in the common stock of other public companies are subject to the
market risk of equity price changes. While the Company can not predict or manage
the future market price for such stock, management continues to evaluate its
investment position on an ongoing basis.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

As reported in the Company's statement on Form 10-Q filed November 3, 2000, the
Company filed a patent infringement lawsuit on September 22, 2000 against Nichia
Corporation and Nichia America Corporation in the United States District Court
for the Eastern District of North Carolina. The lawsuit seeks enforcement of a
patent relating to gallium nitride-based semiconductor devices that are
manufactured using lateral epitaxial overgrowth (LEO) technology. This
technology permits the growth of high quality gallium nitride-based materials
useful in manufacturing certain laser diodes and other devices ("the LEO
patent"). The LEO patent was issued to North Carolina State University in April
2000 and is licensed to Cree under a June 1999 agreement pursuant to which Cree
obtained rights to a number of LEO and related techniques. In its complaint,
Cree alleges that Nichia is infringing the LEO patent by, among other things,
importing, selling and offering for sale in the United States certain gallium
nitride-based laser diodes covered by one or more claims of the LEO patent. The
lawsuit seeks damages and an injunction against infringement. North Carolina
State University is a co-plaintiff in the action.

On November 30, 2000, Nichia America Corporation filed an answer and
counterclaim seeking a declaratory judgement of non-infringement and invalidity
of the LEO patent. On December 21, 2000, Nichia Corporation filed an answer and
counterclaim against the Company also seeking a

                                       19

<PAGE>   20

declaratory judgement of non-infringement and invalidity of the LEO patent. The
Nichia Corporation answer also included counterclaims asserting that Cree is
infringing four U.S. patents relating to nitride semiconductor technology and
further asserting misappropriation of trade secrets and related claims against
Cree and a former Nichia researcher now employed by a Cree subsidiary on a
part-time basis. The counterclaim filed by Nichia Corporation seeks damages and
an injunction. Although there can be no assurance of  success, management of
the Company believes the counterclaims asserted in the  case are without merit
and intends to defend against them vigorously.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's Annual Meeting of Shareholders was held on October 31, 2000. The
following proposals were introduced and voted upon:

PROPOSAL NO. 1 -- Election of directors*

     Name                            Votes For            Votes Withheld
     ----------------------   ---------------------    ---------------------
     F. Neal Hunter                 31,942,482                 53,294
     Charles M. Swoboda             31,940,912                 54,864
     John W. Palmour                31,942,353                 53,423
     Walter L. Robb                 31,907,453                 88,323
     William J. O'Meara             31,938,728                 57,048
     Dolph W. von Arx               31,130,416                865,360
     James E. Dykes                 31,940,447                 55,329

PROPOSAL NO. 2 -- Amendment of Articles of Incorporation to increase the number
of authorized shares of common stock*

         FOR                                             31,518,990
         AGAINST                                            446,233
         ABSTENTIONS AND BROKER NON-VOTES                    30,553

PROPOSAL NO. 3 -- Amendment to Equity Compensation Plan to increase the number
of shares authorized for awards*

         FOR                                             13,676,584
         AGAINST                                          7,789,950
         ABSTENTIONS AND BROKER NON-VOTES                10,529,242

PROPOSAL NO. 4 -- Selection of Ernst & Young LLP as auditors for the fiscal year
ending June 24, 2001*

         FOR                                             31,922,298
         AGAINST                                             37,929
         ABSTENTIONS AND BROKER NON-VOTES                    35,549


* Prior to adjustment for the Company's two-for-one stock split that was
effective December 1, 2000.

                                       20

<PAGE>   21

The matters listed above are described in detail in the Company's definitive
proxy statement dated September 27, 2000, for the Annual Meeting of Shareholders
held on October 31, 2000.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits:

                  3.1      Articles of Incorporation, as amended

                  10.1     Equity Compensation Plan, as amended and restated
                           December 1, 2000  *

                  10.2     Management Incentive Compensation Program - Fiscal
                           Year 2001 Plan  *

                  99.1     Certain Business Risks and Uncertainties

         (b)      Reports on Form 8-K:

                  On December 14, 2000 the Company filed a Form 8-K announcing a
                  two-for-one stock split of its outstanding common stock.


                  * Compensatory Plan



                                       21

<PAGE>   22

                                   SIGNATURES

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

                                   CREE, INC.


Date: February 1, 2001             /s/ Cynthia B. Merrell
                                   --------------------------------------------
                                   Cynthia B. Merrell
                                   Chief Financial Officer and Treasurer
                                   (Authorized Officer and Chief Financial and
                                   Accounting Officer)

                                       22

<PAGE>   23
                                  EXHIBIT INDEX


Exhibit
No.

3.1      Articles of Incorporation, as amended

10.1     Equity Compensation Plan, as amended and restated December 1, 2000*

10.2     Management Incentive Compensation Program - Fiscal Year 2001 Plan*

99.1     Certain Business Risks and Uncertainties



* Compensatory Plan







                                       23



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.1
<SEQUENCE>2
<FILENAME>g66708ex3-1.txt
<DESCRIPTION>ARTICLES OF INCORPORATION, AS AMENDED
<TEXT>

<PAGE>   1

                                                                     EXHIBIT 3.1

                            ARTICLES OF INCORPORATION
                                       OF
                                   CREE, INC.
                      (as amended through December 1, 2000)


                                    ARTICLE I

         The name of the Corporation is Cree, 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 203,000,000 shares divided into two classes
consisting of 200,000,000 shares of Common Stock with a par value of $0.00125
per share and 3,000,000 shares of Preferred Stock with a par value of $0.01 per
share. The Board of Directors is authorized from time to time to establish one
or more series of Preferred Stock and to determine the preferences, limitations
and relative rights of the Preferred Stock before issuance of any shares of
that class and of any series of Preferred Stock before issuance of shares of
that series.

                                    ARTICLE V

         The number of directors of the Corporation may be fixed by the bylaws.

                                   ARTICLE VI

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

                                   ARTICLE VII

         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

<PAGE>   2

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 55-8-33
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 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 55-2-02 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.

                                  ARTICLE VIII

         The name and address of the incorporator is Fred D. Hutchison, Suite
450, 2626 Glenwood Avenue, Raleigh, North Carolina 27608.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>3
<FILENAME>g66708ex10-1.txt
<DESCRIPTION>EQUITY COMPENSATION PLAN, AS AMENDED AND RESTATED
<TEXT>

<PAGE>   1

                                                                    EXHIBIT 10.1

                                   CREE, INC.
                            EQUITY COMPENSATION PLAN
                   (As amended and restated December 1, 2000)

                         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
Incentive Stock Options and Nonqualified Stock Options.

         1.3 The Cree, Inc. Equity Compensation Plan was initially adopted
effective August 2, 1989 and was amended and restated in the form of the Plan
effective as of July 1, 1995 (the "Effective Date").

                            ARTICLE II - DEFINITIONS

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

         2.1 "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.

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

         2.3 "Award" means an award granted to a Participant in accordance with
the provisions of the Plan, including an Incentive Stock Option or a
Nonqualified Stock Option.

         2.4 "Board" means the Board of Directors of Cree, Inc.

         2.5 "Change in Control" means the occurrence of an event defined in
Section 7.1 of the Plan.

         2.6 "Code" means the Internal Revenue Code of 1986, as now in effect or
as hereafter amended.

         2.7 "Committee" means the Compensation Committee of the Board or such
other committee consisting of two or more members of the Board as may be
appointed by the Board to administer this Plan pursuant to Article III.
Committee members may also be appointed for such limited purposes as may be
provided by the Board.

<PAGE>   2

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

         2.9 "Disability" means (i) with respect to a Participant who is
eligible to participate in the Company's program of long-term disability
insurance, a condition with respect to which the Participant is entitled to
commence benefits under such program of long-term disability insurance, and (ii)
with respect to any Participant (including a Participant who is eligible to
participate in the Company's program of long-term disability insurance), a
disability as determined under procedures established by the Committee or in any
Award.

         2.10 "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.

         2.11 "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.

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

                  (a) If the Stock is not listed for trading on a national
securities exchange but is listed on the Nasdaq National Market or The Nasdaq
Small-Cap Market of The Nasdaq Stock Market, then the Fair Market Value shall be
the last sale price of the Stock on the date of reference, as reported by the
Nasdaq-Amex Reporting Service, or such other source as the Board deems reliable.

                  (b) 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.

                  The Committee may establish an alternative method of
determining Fair Market Value.

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

<PAGE>   3

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

         2.15 "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.

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

                  (a) the date on which the Committee takes action to grant the
Stock Option to 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.

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

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

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

         2.20 "Stock" means shares of the Common Stock of Cree, Inc., par value
$.0025 per share, as may be adjusted pursuant to the provisions of Section 3.10.

         2.21 "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.

         2.22 "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.

<PAGE>   4

                          ARTICLE III - ADMINISTRATION

         3.1 This Plan shall be administered by the Committee. 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 any 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.

         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 The number of shares of Stock which are available for Award under
the Plan shall be Nineteen Million Eight Hundred Nineteen Thousand Eight Hundred
(19,819,800). 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 termination, expiration or
cancellation of a Stock Option, 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.

         3.6 Each Award granted under the Plan shall be evidenced by a written
Agreement. Each 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.

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

<PAGE>   5

                  (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.

         3.8 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.

         3.9 Except as provided otherwise in the Plan or in an 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.

         3.10 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 3.5 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 terms, conditions or restrictions of any Award and
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;
and

                  (d) the limitations on grants of Stock Options set forth in
Section 6.9 of the Plan.

<PAGE>   6

         3.11 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 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.

         3.12 The Committee may require each person purchasing shares of Stock
pursuant to an 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 and/or that he has met such other requirements as the
Committee determines may be applicable to such purchase. The certificates for
such shares of Stock may include any legend which the Committee deems
appropriate to reflect any restrictions on transfer.

         3.13 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 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.

         3.14 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 if the Participant (a) 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 as determined by
the Committee in its discretion; or (b) is terminated for cause as determined by
the Committee in its discretion.

                      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.

<PAGE>   7

         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
or her 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 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) Subject to any conditions on exercise set forth in the
corresponding Agreement, 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 Agreement, which period shall not 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
                  was still exercisable, in which event such period shall not
                  exceed one year after the date of death;

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

                  (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. If, for any
reason, an Incentive Stock Option fails to meet the requirements of Section 422
of the Code, the Option shall automatically be deemed a Nonqualified Stock
Option granted under Article V herein.

<PAGE>   8

         4.3 The Committee may at any time offer to buy out for a payment in
cash, or 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 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 without regard to
the limitations on transfer and 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 Agreement and shall not be less 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 specified by the Committee or in
the Agreement; provided, that, in any event, the Nonqualified 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 Nonqualified Stock Option Agreement, which period shall not exceed three
months unless:

                  (a) 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

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

                  (c) the Committee, in its discretion at the time of the option
grant, provides for a longer period, and such longer period is specified in the
Nonqualified Stock Option Agreement;

provided, further, that such period following a Termination of Employment shall
in no event extend the original exercise period of the Nonqualified Stock
Option.

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

<PAGE>   9

                     ARTICLE VI - INCIDENTS OF STOCK OPTIONS

         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 Except as provided below, a Stock Option shall be exercisable
during the lifetime of the Participant only by him or his guardian or legal
representative and shall not be transferable by the Participant other than (i)
by will or by the laws of descent and distribution, or (ii) to the extent
otherwise allowed by applicable law, pursuant to a qualified domestic relations
order as defined by the Code and the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder. However, the Committee may, in its
sole discretion, either pursuant to an Agreement or otherwise, permit a
Participant to transfer a Nonqualified Stock Option by gift or other donative
transfer without payment of consideration, conditioned upon and subject to
compliance with all applicable law (including, but not limited to, securities
law).

         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 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. 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 Sections 3.5 and 6.9 hereof.

         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.

<PAGE>   10

         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.

         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 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.

         6.9 The following limitations shall apply to grants of Stock Options:

                  (a) No Participant shall be granted, in any fiscal year of the
Company, Options to purchase more than 400,000 Shares.

                  (b) In connection with his or her initial service, a
Participant may be granted Stock Options to purchase up to an additional 400,000
Shares that shall not count against the limit set forth in Section 6.9(a) above.


                         ARTICLE VII - CHANGE IN CONTROL

         7.1 A "Change in Control" shall be deemed to have occurred upon the
happening of any of the following events:

                  (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

<PAGE>   11

(as defined in Section 2.8 of this Plan) and any employee benefit plan sponsored
or maintained by the Company (including any trustee of such plan acting as
trustee), who 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 20% or more of the then-outstanding
shares of Stock or the combined voting power of the then-outstanding securities
of the Company entitled to vote generally in the election of its directors. For
purposes of calculating the number of shares or voting power held by such Person
and its affiliates and associates under this Section 7.1(a), there shall be
excluded any securities acquired by such Person or its affiliates or associates
directly from the Company.

                  (b) A sale or other disposition of all or substantially all of
the Company's assets is consummated, other than such a sale or disposition that
would not have constituted a Change of Control under subsection (d) below had it
been structured as a merger or consolidation.

                  (c) The shareholders of the Company approve a definitive
agreement or plan to liquidate the Company.

                  (d) A merger or consolidation of the Company with and into
another entity is consummated, unless immediately following such transaction (1)
more than 50% of the members of the governing body of the surviving entity were
Incumbent Directors (as defined in subsection (e) below) at the time of
execution of the initial agreement providing for such transaction, (2) no
"Person" (as defined in Section 7.1(a) above), together with its "affiliates"
and "associates" (as defined in Section 7.1(a) above), is the "Beneficial Owner"
(as defined in Section 7.1 (a) above), directly or indirectly, of 20% or more of
the then-outstanding equity interests of the surviving entity or the combined
voting power of the then-outstanding equity interests of the surviving entity
entitled to vote generally in the election of members of its governing body, and
(3) more than 50% of the then-outstanding equity interests of the surviving
entity and the combined voting power of the then-outstanding equity interests of
the surviving entity entitled to vote generally in the election of members of
its governing body is "Beneficially Owned", directly or indirectly, by all or
substantially all of the individuals and entities who were the "Beneficial
Owners" of the shares of Stock immediately prior to such transaction in
substantially the same proportions as their ownership immediately prior to such
transaction.

                  (e) 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 7.1
(e), but excluding for this purpose any such individual whose initial assumption
of office is in connection with an actual or threatened election context subject
to Rule 14a-11 of Regulation 14A promulgated under the Act or other actual or
threatened solicitation of proxies or consents by or on behalf of a "Person" (as
defined in Section 7.1(a) above) other than the Board.

<PAGE>   12

         7.2 In the event of a Change in Control: (a) any or all then
outstanding Stock Options having an Option Grant Date on or before January 31,
1999, to the extent not previously fully vested and exercisable, shall
automatically become fully vested and, except to the extent such Options are
cashed out pursuant to Section 7.3 below, exercisable effective immediately
prior to the Change in Control; and (b) outstanding Stock Options having an
Option Grant Date after January 31, 1999 shall vest and become exercisable only
to the extent and in such manner as is provided in the applicable Agreement
evidencing the Stock Option.

         7.3 Upon the occurrence of a Change in Control, the Committee may in
its sole discretion and consistent with the requirements of applicable law
decide to cash-out the value of all outstanding Stock Options, in each case to
the extent vested pursuant to Sections 7.2 above or otherwise, on the basis of
the "Change in Control Price" (as defined in Section 7.4) less the exercise
price under such Award (if any) as of the date such Change in Control is
determined to have occurred or such other date prior to the Change in Control as
the Committee may determine.

         7.4 For purposes of Section 7.3, "Change in Control Price" means the
highest price per share of Stock paid in any transaction reported on the
exchange on which the Stock is then traded or on the Nasdaq Stock Market, as the
case may be, or paid or offered in any bona fide transaction related to a Change
in Control, at any time during the 120 day period immediately preceding the
occurrence of the Change in Control, as determined by the Committee.

         7.5 The Committee is authorized to take such actions that are not
inconsistent with Sections 7.2, 7.3 and 7.4 above as the Committee determines to
be necessary or advisable, and fair and equitable to Participants, with respect
to an Award in the event of a Change in Control. 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 Agreement, so as to provide for
earlier, later, extended or additional times for exercise or payment, differing
methods for calculating payments and alternate forms and amounts of payment. The
Committee may take such actions pursuant to this Section 7.5 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 Agreement, or by taking action with respect to
individual Participants.


                    ARTICLE VIII - AMENDMENT AND TERMINATION

         8.1 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 Code Section 422, 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 3.5, increase the maximum
number of shares of Stock or Stock Options which are available for Awards under
the Plan;

<PAGE>   13

                  (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;

                  (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 VIII.

         8.2 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 previously 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.

         8.3 If a Change in Control has occurred, no amendment or termination
shall impair the rights of any person with respect to an outstanding Award as
provided in Article VII.


                      ARTICLE IX - MISCELLANEOUS PROVISIONS

         9.1 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

<PAGE>   14

hereunder shall be paid from the general funds of the company, and no special or
separate fund shall be established and no segregation of assets shall be made to
assure payment of such amounts, except as otherwise provided by the Committee.

         9.2 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, 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.

         9.3 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.

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

         9.5 No award shall be transferable except as provided for herein.
Unless otherwise provided by the Committee or in an 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.

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

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

         9.8 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.

<PAGE>   15

         9.9 If any provision of this Plan or an Agreement is or becomes or is
deemed invalid, illegal or unenforceable in any jurisdiction, or would
disqualify the Plan or any 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 Agreement, it shall be stricken and the remainder of the Plan or the
Agreement shall remain in full force and effect.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>4
<FILENAME>g66708ex10-2.txt
<DESCRIPTION>MANAGEMENT INITIATIVE COMPENSATION PROGRAM
<TEXT>

<PAGE>   1

                                                                    EXHIBIT 10.2

                                   CREE, INC.

                    MANAGEMENT INCENTIVE COMPENSATION PROGRAM

                              FISCAL YEAR 2001 PLAN

1.0      INTENT

         The intention of the Cree, Inc. Management Incentive Compensation
         Program (the "Program") for Fiscal Year 2001 ("FY 2001") is to provide
         incentives to eligible members of the management team for achieving or
         surpassing established after-tax earnings per share ("EPS") goals for
         FY 2001.

2.0      MANAGEMENT PARTICIPANT QUALIFICATIONS

         2.1      Participation shall be limited to a small group of senior
                  management employees who have an important influence on the
                  operation, profits and future of the Company. Generally, only
                  executive officers and managers of major staff or line
                  functions shall be eligible to participate in the Program.

         2.2      Participation shall be determined by the CEO of the Company.

         2.3      An invitation to participate and the information divulged in
                  connection with the Program shall be considered private and
                  may not be discussed with others.

         2.4      Participants in the Program shall not be eligible to
                  participate in the Company's Employee Profit-Sharing Program
                  (the "Employee Program") or in any successor arrangement to
                  the Employee Program. Participants in the Program shall remain
                  eligible to receive other discretionary cash bonuses and to
                  participate in any retirement savings plans sponsored by the
                  Company for which they are otherwise eligible.

3.0      FUNDING OF THE INCENTIVE PLAN POOL

         3.1      General:

         A pool (the "Pool") shall be funded upon the achievement of the goals
         for after-tax EPS goals for FY 2001 as approved by the Compensation
         Committee of the Board of Directors. The Pool shall not be funded
         unless such goals are met at the pre-established threshold level of
         achievement fixed by the Compensation Committee. In addition, the Pool
         shall not be funded to the extent that such funding would reduce the
         amount of the Pool funded under the Employee Program for any fiscal
         quarter of FY 2001.

<PAGE>   2

         Upon admission to the Program, each participant shall be assigned an
         individual target award percentage to be applied to the individual's
         Base Salary for FY 2001 for calculating funding of the Pool and payouts
         as described below.

         3.2      Calculation of Pool Funding:

         The Pool at 100% of the target level shall be the aggregate Base
         Salaries of the participants as of the end of FY 2001 times their
         respective target award percentages. (A participant's Base Salary as of
         the end of FY 2001 times his or her target award percentage shall be
         the participant's "Target Payout Amount".) The Pool at 100% of the
         target level shall be adjusted in two steps. In Step One, the Pool
         shall be adjusted on the basis of the percentage of the EPS goals for
         FY 2001 actually achieved. Such adjustment shall be made according to
         the schedule approved by the Compensation Committee. In Step Two, the
         Pool as calculated in Step One shall be reduced to the extent necessary
         to prevent any reduction in the amount of the pool funded under the
         Employee Program for any fiscal quarter during FY 2001 that would
         otherwise result from funding the Pool at the level determined Step
         One.

         3.3      Calculation for Individual Payout:

         Each participant's payout amount shall be a pro rata portion of the
         Pool as funded under Section 3.2 above. Each payout amount shall be
         determined by multiplying the Pool times a fraction where (i) the
         numerator is the participant's Target Payout Amount and (ii) the
         denominator is the aggregate sum of all participants' Target Payout
         Amounts.

4.0      RULES

         4.1      EPS resulting from unusual or non-recurring charges or from
                  system changes shall be excluded for purposes of this Program.

         4.2      "Base Salary" shall mean a participant's total base
                  compensation paid as of the end of FY 2001, including any
                  amounts deferred under any deferred compensation plans of the
                  Company but excluding any incentive pay, bonus payments,
                  commission payments, income resulting from stock option
                  exercises, etc.

         4.3      The Company recognizes that certain unforeseen events or
                  inequities could develop in the Program as established. The
                  Compensation Committee shall have the discretion to consider
                  unusual circumstances. Such consideration shall be given only
                  at the end of the Fiscal Year, and any decision of the
                  Compensation Committee shall be final.


         4.4      Payments shall be made based on final annual financial
                  statements as audited by the Company's independent certified
                  public accountants. Individual payouts shall be paid on or
                  prior to August 1, 2001, or as soon thereafter as practicable.

<PAGE>   3

         4.5      The Compensation Committee shall determine an individual
                  target award percentage for the Chief Executive Officer of the
                  Company (the "CEO"). The CEO shall determine the individual
                  target award for each other participant. No individual target
                  award percentage shall be greater than that of the CEO unless
                  approved by the Compensation Committee.

         4.6      Only those who remain employees of the Company and members of
                  the eligible management group through the date of payout will
                  receive payments. No amount shall be deemed earned under this
                  Program unless and until actually paid.

         4.7      As business conditions, participants' positions and the
                  Company's needs change, the Compensation Committee shall have
                  the sole and absolute discretion to modify or cancel this
                  Program, or any individual's participation in the Program, at
                  any time prior to payment upon notice to the affected
                  participants. Participants should not presume continued
                  participation in the Program.

         4.8      The Program shall not confer on any participant any right to
                  continued employment with the Company, nor shall it interfere
                  with the participant's right or the Company's right to
                  terminate the participant's employment at any time, with or
                  without cause.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>5
<FILENAME>g66708ex99-1.txt
<DESCRIPTION>CERTAIN BUSINESS RISKS AND UNCERTAINTIES
<TEXT>

<PAGE>   1
                                                                    EXHIBIT 99.1

                    CERTAIN BUSINESS RISKS AND UNCERTAINTIES

Described  below  are  various  risks  and  uncertainties  that may  affect  our
business.  These  risks  and  uncertainties  are not  the  only  ones  we  face.
Additional risks and  uncertainties not presently known to us, that we currently
deem  immaterial  or that are similar to those faced by other  companies  in our
industry or business  in general  may also  affect our  business.  If any of the
risks  described below actually  occurs,  our business,  financial  condition or
results of future operations could be materially and adversely affected.

OUR OPERATING RESULTS AND MARGINS MAY FLUCTUATE SIGNIFICANTLY.

Although we have had significant revenue and earnings growth in recent years, we
may not be able to sustain  such  growth or  maintain  our  margins,  and we may
experience significant fluctuations in our revenue,  earnings and margins in the
future.  Our operating results and margins may vary  significantly in the future
due to many factors, including the following:

    -  our ability to develop, manufacture and deliver products in a timely and
       cost-effective manner;
    -  variations in the amount of usable product produced during manufacturing
       (our "yield");
    -  our ability to improve yields and reduce costs in order to allow lower
       product pricing without margin reductions;
    -  our ability to expand our production capacity for our new LED products;
    -  our ability to produce higher brightness and more efficient LED products;
    -  demand for our products and our customers' products;
    -  declining average sales prices for our products;
    -  changes in the mix of products we sell; and
    -  changes in manufacturing capacity and variations in the utilization of
       that capacity.

These or other factors could adversely affect our future  operating  results and
margins.  If our future operating  results or margins are below the expectations
of stock market analysts or our investors, our stock price may decline.

IF WE  EXPERIENCE  POOR  PRODUCTION  YIELDS,  OUR MARGINS  COULD DECLINE AND OUR
OPERATING RESULTS MAY SUFFER.

Our silicon  carbide (SiC) material  products and our LED and RF device products
are manufactured using technologies that are highly complex.  We manufacture our
SiC wafer  products  from  bulk SiC  crystals,  and we use  these SiC  wafers to
manufacture our LED products and SiC-based RF power semiconductors.  Our UltraRF
subsidiary  manufactures its RF power semiconductors on silicon wafers purchased
from others. During  manufacturing,  each wafer is processed to contain numerous
"die," which are the individual  semiconductor devices, and the RF power devices
are  further  processed  by  incorporating  them  into a  package  for sale as a

<PAGE>   2

packaged  component.  The number of usable  crystals,  wafers,  die and packaged
components  that result from our production  processes can fluctuate as a result
of many factors, including but not limited to the following:

    -  impurities in the materials used;
    -  contamination of the manufacturing environment;
    -  equipment failure, power outages or variations in the manufacturing
       process;
    -  losses from broken wafers or other human error; and
    -  defects in packaging.

We refer to the proportion of usable product produced at each manufacturing step
relative to the gross number that could be  constructed  from the materials used
as our manufacturing "yield." Because many of our manufacturing costs are fixed,
if our yields decrease our margins could decline and our operating results would
be  adversely  affected.  In the  past,  we  have  experienced  difficulties  in
achieving  acceptable yields on new products,  which has adversely  affected our
operating  results.  We may  experience  similar  problems  in the future and we
cannot predict when they may occur or their severity. In some instances, we also
offer   products  for  future   delivery  at  prices  based  on  planned   yield
improvements.  Reduced yields or failure to achieve  planned yield  improvements
could significantly affect our future margins and operating results.

OUR  BUSINESS  AND OUR ABILITY TO PRODUCE OUR PRODUCTS MAY BE IMPAIRED BY CLAIMS
WE INFRINGE INTELLECTUAL PROPERTY OF OTHERS.

The semiconductor  industry is characterized by vigorous  protection and pursuit
of intellectual  property  rights,  which have resulted in significant and often
protracted  and  expensive  litigation.  Litigation to determine the validity of
patents  or  claims  by  third  parties  of  infringement  of  patents  or other
intellectual  property rights could result in significant expense and divert the
efforts  of our  technical  personnel  and  management,  even if the  litigation
results in a determination favorable to us. In the event of an adverse result in
such litigation, we could be required to:

    -  pay substantial damages;
    -  indemnify our customers;
    -  stop the manufacture,  use and sale of products found to be infringing;
    -  discontinue  the  use  of  processes  found  to  be  infringing;
    -  expend significant resources to develop non-infringing products and
       processes; and/or
    -  obtain a license to use third party technology.

Where we consider it necessary or desirable,  we may seek licenses under patents
or other  intellectual  property  rights.  However,  we cannot be  certain  that
licenses  will be available or that we would find the terms of licenses  offered
acceptable or  commercially  reasonable.  Failure to obtain a necessary  license
could  cause us to incur  substantial  liabilities  and costs and to suspend the
manufacture of products.  In addition,  if adverse results in litigation made it
necessary  for us to seek a license or to  develop  non-infringing  products  or
processes,  there is no  assurance we would be  successful  in  developing  such
products or processes or in  negotiating  licenses upon
<PAGE>   3

reasonable terms or at all. Our results of operations,  financial  condition and
business could be harmed if such problems were not resolved in a timely manner.

Our  distributor  in Japan is presently a party to patent  litigation  in Japan,
brought by Nichia Corporation, in which the plaintiff claims that certain of our
LED products  infringe  two  Japanese  patents it owns.  The  complaints  in the
proceedings  seek  injunctive  relief that would prohibit our  distributor  from
further sales of these products in Japan. An adverse result in these cases would
impair our ability to sell the  affected  LED  products in Japan and could cause
customers  not to purchase  other LED products from us.  Subject to  contractual
limitations,  we have an  obligation  to indemnify  our  distributor  for patent
infringement claims.

We have also  initiated  patent  infringement  litigation  in the United  States
against  Nichia  Corporation  and  one of  its  subsidiaries,  asserting  patent
infringement  with respect to certain  Nichia  nitride  semiconductor  products,
including  laser  diode  products.   Nichia  has  responded  with  counterclaims
alleging,  among other things,  patent  infringement  claims against us based on
four U.S. patents directed to nitride semiconductor  technology and trade secret
misappropriation  and related claims  against us and a former Nichia  researcher
who is now employed by of one of our subsidiaries on a part-time basis.

The litigation in Japan and the U.S.  remains pending as of January 31, 2001. We
believe the claims  asserted  against our products in the Japanese cases and the
counterclaims asserted by the defendants in the U.S. case are without merit, and
we intend to  vigorously  defend  against  the  charges.  However,  we cannot be
certain that we will be  successful,  and  litigation  may require us to spend a
substantial  amount of time and money and  could  distract  management  from our
day-to-day operations.

THERE  ARE   LIMITATIONS  ON  OUR  ABILITY  TO  PROTECT  OUR  BUSINESS   THROUGH
INTELLECTUAL PROPERTY RIGHTS.

Our intellectual  property  position is based in part on patents owned by us and
patents  exclusively  licensed  to us by N.C.  State and  others.  The  licensed
patents  include  patents  relating to the SiC crystal  growth  process  that is
central to our SiC materials and device business.  We intend to continue to file
patent  applications  in the  future,  where  appropriate,  and to  pursue  such
applications  with U.S. and foreign  patent  authorities,  but we cannot be sure
that patents will be issued on such  applications or that our existing or future
patents will not be  successfully  contested.  Also,  since  issuance of a valid
patent does not prevent other companies from using  alternative,  non-infringing
technology,  we cannot be sure that any of our  patents  (or  patents  issued to
others and licensed to us) will provide significant commercial protection.

In  addition  to  patent  protection,  we also rely on trade  secrets  and other
non-patented  proprietary  information  relating to our product  development and
manufacturing   activities.   We   try  to   protect   this   information   with
confidentiality  agreements  with our employees and other parties.  We cannot be
sure that these  agreements  will not be breached,  that we would have  adequate
remedies for any breach or that our trade secrets and proprietary  know-how will
not otherwise become known or independently discovered by others.
<PAGE>   4


Where  necessary,  we may  initiate  litigation  to enforce  our patent or other
intellectual  property  rights,  but  there  is no  assurance  that  we  will be
successful in any such litigation.  Moreover, litigation may require us to spend
a substantial  amount of time and money and could distract  management  from our
day-to-day operations.

IF WE ARE UNABLE TO PRODUCE ADEQUATE QUANTITIES OF OUR HIGH BRIGHTNESS AND ULTRA
BRIGHT LEDs WITH IMPROVED YIELDS, OUR OPERATING RESULTS MAY SUFFER.

We believe that higher volume production and lower production costs for our high
brightness  and ultra bright blue and green LEDs will be important to our future
operating  results.  We must  reduce  costs of these  products  to avoid  margin
reductions  from the lower selling  prices we may offer to meet the  competition
and prior  contractual  commitments.  Achieving  greater volumes and lower costs
requires improved  manufacturing yields for these products.  In addition, in the
case of our ultra bright LED  products,  we only  recently  begun  manufacturing
these products in volume and may encounter delays and manufacturing difficulties
as we ramp up our capacity to make these products.  Failure to produce  adequate
quantities  and improve the yields of our high  brightness  and ultra bright LED
products  could  have a  material  adverse  effect on our  business,  results of
operations and financial condition.

OUR OPERATING  RESULTS ARE  SUBSTANTIALLY  DEPENDENT ON THE  DEVELOPMENT  OF NEW
PRODUCTS BASED ON OUR CORE SIC TECHNOLOGY.

Our future  success will depend on our ability to develop new SiC  solutions for
existing  and new  markets.  We must  introduce  new  products  in a timely  and
cost-effective  manner, and we must secure production orders from our customers.
The  development  of new SiC products is a highly complex  process,  and we have
historically  experienced  delays in completing the development and introduction
of new products.  Products currently under development include high power RF and
microwave devices,  power devices,  blue laser diodes,  high temperature devices
and higher brightness LED products.  The successful development and introduction
of these products depends on a number of factors, including the following:

    -  achievement of technology breakthroughs required to make commercially
       viable devices;
    -  the accuracy of our predictions of market requirements and evolving
       standards;
    -  acceptance of our new product designs;
    -  the availability of qualified development personnel;
    -  our timely completion of product designs and development;
    -  our ability to develop repeatable processes to manufacture new products
       in sufficient quantities for commercial sales;
    -  our customers' ability to develop applications incorporating our
       products; and
    -  acceptance of our customers' products by the market.

If any of these  or  other  factors  become  problematic,  we may not be able to
develop and introduce these new products in a timely or cost-efficient manner.

<PAGE>   5


WE RELY ON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PART OF OUR REVENUES.

Historically, a substantial portion of our revenue has come from large purchases
by a small number of customers.  We expect that trend to continue.  For example,
for fiscal 2000 our top five  customers  accounted for 82% of our total revenue.
Accordingly,  our future operating  results depend on the success of our largest
customers  and on our success in selling  large  quantities  of our  products to
them.  The  concentration  of our revenues with a few large  customers  makes us
particularly  dependent on factors  affecting those customers.  For example,  if
demand for their products  decreases,  they may stop purchasing our products and
our operating  results will suffer.  If we lose a large customer and fail to add
new customers to replace lost revenue, our operating results may not recover.

WE FACE CHALLENGES RELATING TO EXPANSION OF OUR PRODUCTION AND MANUFACTURING
FACILITY.

In order to increase  production at our new  facility,  we must add critical new
equipment,  move existing  equipment and complete the  construction and upfit of
buildings.  Expansion activities such as these are subject to a number of risks,
including unforeseen  environmental or engineering problems relating to existing
or new facilities or unavailability or late delivery of the advanced,  and often
customized,  equipment  used in the  production of our  products,  and delays in
bringing  production  equipment  on-line.  These and other  risks may affect the
construction  of new  facilities,  which could  adversely  affect our  business,
results of operations and financial condition.

THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE.

The  markets  for  our  LED  and RF  power  semiconductor  products  are  highly
competitive.  Our competitors currently sell LEDs made from sapphire wafers that
are brighter than the high brightness  LEDs we currently  produce and similar in
brightness to our newest ultra bright LED products. In addition,  new firms have
begun offering or announced  plans to offer blue and green LEDs. In the RF power
semiconductor  field, both the products  manufactured by our UltraRF  subsidiary
and our  SiC-based RF devices  compete with  products  offered by  substantially
larger  competitors.  The market for SiC wafers is also becoming  competitive as
other firms have in recent years begun  offering SiC wafer products or announced
plans to do so. We also  expect  significant  competition  for  products  we are
currently developing, such as near ultraviolet LEDs targeted for the solid state
white lighting market.

We expect  competition  to  increase.  This  could  mean  lower  prices  for our
products,  reduced demand for our products and a corresponding  reduction in our
ability to recover  development,  engineering and  manufacturing  costs.  Any of
these  developments  could have an adverse  effect on our  business,  results of
operations and financial condition.

<PAGE>   6


WE FACE SIGNIFICANT CHALLENGES MANAGING OUR GROWTH.

We have  experienced  a period  of  significant  growth  that has  strained  our
management and other resources. We have grown from 188 employees on December 31,
1996 to 680  employees on June 25, 2000 and from  revenues of $44.0  million for
the fiscal year ended June 28, 1998 to $108.6  million for the fiscal year ended
June 25, 2000.  In December  2000,  we added another 139 employees in connection
with our  acquisition  of the  assets of the  UltraRF  business  from  Spectrian
Corporation. To manage our growth effectively, we must continue to:

    -  implement and improve operation systems;
    -  maintain adequate manufacturing  facilities and equipment to meet
       customer demand;
    -  add experienced senior level managers; and
    -  attract and retain qualified people with experience in engineering,
       design and technical marketing support.

We will  spend  substantial  amounts of money in  supporting  our growth and may
incur additional  unexpected costs. Our systems,  procedures or controls may not
be adequate to support our operations,  and we may not be able to expand quickly
enough to exploit potential market  opportunities.  Our future operating results
will also depend on expanding sales and marketing, research and development, and
administrative  support.  If we cannot attract qualified people or manage growth
effectively,  our business,  operating results and financial  condition could be
adversely affected.

OUR  OPERATING  RESULTS  COULD BE ADVERSELY  AFFECTED IF WE  ENCOUNTER  PROBLEMS
TRANSITIONING LED PRODUCTION TO A LARGER WAFER SIZE.

We currently  plan to begin  shifting LED  production  from  two-inch  wafers to
three-inch wafers in fiscal 2002. We must first qualify our production processes
on systems  designed  to  accommodate  the larger  wafer  size,  and some of our
existing production equipment must be refitted for the larger wafer size. Delays
in this process could have an adverse  effect on our business.  In addition,  in
the past we have  experienced  lower  yields  for a period of time  following  a
transition  to a  larger  wafer  size  until  use of the  larger  wafer is fully
integrated  in  Production  and we begin to achieve  production  efficiency.  We
anticipate that we will experience similar temporary yield reductions during the
transition to the three-inch wafers, and we have factored this into our plan for
production capacity.  If this transition phase takes longer than we expect or if
we are unable to attain expected yield  improvements,  our operating results may
be adversely affected.

WE RELY ON A FEW KEY SUPPLIERS.

We depend on a limited number of suppliers for certain raw materials, components
and equipment used in  manufacturing  our products,  including key materials and
equipment used in critical stages of our manufacturing  processes.  We generally
purchase  these  limited  source  items  with  purchase  orders,  and we have no
guaranteed supply arrangements with such suppliers.  If we were to lose such key
suppliers,  our manufacturing efforts could be hampered significantly.  Although
we believe our  relationship  with our  suppliers is good,  we cannot assure you
that we
<PAGE>   7

will continue to maintain good  relationships  with such  suppliers or that such
suppliers will continue to exist.

IF  GOVERNMENT  AGENCIES OR OTHER  CUSTOMERS  DISCONTINUE  THEIR FUNDING FOR OUR
RESEARCH AND DEVELOPMENT OF SIC TECHNOLOGY, OUR BUSINESS MAY SUFFER.

In the past,  government  agencies and other customers have funded a significant
portion  of  our  research  and  development  activities.  If  this  support  is
discontinued  or reduced,  our ability to develop or enhance  products  could be
limited and our business; results of operations and financial condition could be
adversely affected.

IF OUR PRODUCTS  FAIL TO PERFORM OR MEET CUSTOMER  REQUIREMENTS,  WE COULD INCUR
SIGNIFICANT ADDITIONAL COSTS.

The manufacture of our products involves highly complex processes. Our customers
specify quality, performance and reliability standards that we must meet. If our
products  do not meet these  standards,  we may be required to replace or rework
the  products.  In some cases our products may contain  undetected  defects that
only  become  evident  after  shipment.  We have  experienced  product  quality,
performance or reliability  problems from time to time.  Defects or failures may
occur in the future. If failures or defects occur, we could:

    -  lose revenue;
    -  incur increased costs such as warranty expense and costs  associated with
       customer  support;
    -  experience delays, cancellations or rescheduling of orders for our
       products; or
    -  experience increased product returns.

WE ARE SUBJECT TO RISKS FROM INTERNATIONAL SALES.

Sales to customers located outside the U.S. accounted for about 69%, 59% and 58%
of our  revenue in fiscal  2000,  1999 and 1998,  respectively.  We expect  that
revenue from  international  sales will continue to be a significant part of our
total revenue.  International sales are subject to a variety of risks, including
risks arising from  currency  fluctuations,  trends in use of the Euro,  trading
restrictions,  tariffs,  trade  barriers and taxes.  Also,  U.S.  Government  or
military  export  restrictions  could limit or prohibit  sales to  customers  in
certain   countries   because  of  their  uses  in  military   or   surveillance
applications.  Because all of our foreign sales are denominated in U.S. dollars,
our products become less price competitive in countries with currencies that are
low or are declining in value against the U.S.  dollar.  Also, we cannot be sure
that our  international  customers will continue to place orders  denominated in
U.S. dollars.  If they do not, our reported revenue and earnings will be subject
to foreign exchange fluctuations.

IF WE FAIL TO INTEGRATE ACQUISITIONS SUCCESSFULLY, OUR BUSINESS WILL BE HARMED.

We completed  two  strategic  acquisitions  during  calendar  year 2000. We will
continue to evaluate strategic  opportunities  available to us and we may pursue
other  product,  technology  or
<PAGE>   8

business  acquisitions.  Such  acquisitions  can  present  many  types of risks,
including the following:

    -  we may fail to successfully integrate the operations and personnel of
       newly acquired companies with our existing business;
    -  we may experience difficulties integrating our financial and operating
       systems;
    -  our ongoing business may be disrupted or receive insufficient management
       attention;
    -  we may not cost effectively and rapidly incorporate acquired technology;
    -  we may not be able to recognize cost savings or other financial benefits
       we anticipated;
    -  acquired businesses may fail to meet our performance expectations;
    -  we may lose key employees of acquired businesses;
    -  we may not be able to retain the existing customers of newly acquired
       operations;
    -  our corporate culture may clash with that of the acquired businesses; and
    -  we may incur undiscovered liabilities associated with acquired businesses
       that are not covered by indemnification we may obtain from the seller.

We may not  successfully  address these risks or other  problems that arise from
our recent or future  acquisitions.  In  addition,  in  connection  with  future
acquisitions,  we may issue equity  securities  that could dilute the percentage
ownership of our existing stockholders, we may incur debt and we may be required
to amortize expenses related to intangible assets that may negatively affect our
results of operations.

</TEXT>
</DOCUMENT>
</SUBMISSION>
