According to the Company’s FORM 10-Q For the quarterly period ended December 28, 1997, the consolidated securities class action lawsuits previously pending against the Company and certain of its directors and officers were dismissed with prejudice on November 28, 1997. The dismissal was pursuant to a stipulation of the named parties entered after the court granted the defendants' motions to dismiss the consolidated complaint for failure to state a claim. No payments were made to the plaintiffs to obtain the dismissal. The suits, filed in the U.S. District Court for the Middle District of North Carolina in October and December 1996 and subsequently consolidated, alleged that the defendants made material misrepresentations and omissions during the period from February 1, 1996 to July 2, 1996 and sought damages on behalf of persons who purchased the Company's stock within that period. By stipulating to the dismissal with prejudice, the plaintiffs waived any right to re-file the action or to appeal the court's order of dismissal.

As previously reported by the Company’s FORM 10-Q for the quarterly period ended September 28, 1997, the court on October 17, 1997 issued a ruling granting defendants' motions to dismiss the complaint and ordering the case dismissed without prejudice. As of October 20, 1997, the Company has received no notice of appeal.

The complaint charges Cree and certain of its directors and officers (the "Individual Defendants") with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and related state law. Specifically, the complaint alleges that on or around February 1, 1996, defendants stated that Cree would produce 1.5 million blue light-emitting diode chips ("LEDs") in the fiscal third quarter ending March 31, 1996, and 6 million in the fiscal fourth quarter ending June 30, 1996. Following this announcement, the company reported record results for its second and third quarters of fiscal year 1996 and continued to represent that it was successfully meeting its production goals for its blue LEDs. Against this backdrop of positive announcements, the price of Cree common stock rose sharply from $14.125 per share, at the beginning of the Class Period, to a Class Period high of $20.625 per share. After the end of the Class Period, the s tock price declined to $10 per share following the belated disclosure of the facts which had been misrepresented or omitted during all relevant times.

The complaint alleges that the Individual Defendants took advantage of the artificially inflated price at which Cree stock traded during the Class Period by selling substantial portions of their holdings of Cree common stock to the investing public -- receiving total proceeds of $3,747,025. The Complaint alleges that, at the same time, defendants knew or recklessly disregarded that Cree was experiencing significant operational problems relating to design and quality defects and other difficulties which were operating to increase costs and reduce sales of its blue LEDs. Indeed, Cree's blue LEDS suffered from a significant design defect that caused them to burn out after only 500 to 1000 hours of use, rendering them unsuitable and uneconomical for many applications. In addition, Cree's blue LEDs suffered from severe and persistent quality problems and limitations which resulted in returns and/or exchanges of the product and depressed sales. These problems, among others, increased Cree's operating costs and hampered the company's ability to attain its publicly projected production and sales levels for its blue LEDs.

The complaint further alleges that on or around July 2, 1996, defendants revealed that the company would have a loss for the fourth fiscal quarter of 1996 ending June 30, 1996, because of higher production costs associated with production of its blue LEDs and that the company had been only able to produce three million blue LEDs. Negative market reaction was swift. The price of Cree common stock dropped from $15.75 per share to $13.50 per share, a decrease of 14 percent and subsequently declined further to $10.125 per share on July 12, 1996, a range where it continued to trade for a substantial period thereafter.