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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The number of shares outstanding of the registrant’s common stock, par value $0.00125 per share, as of ~~April 22,~~October 15, 2008, was ~~89,669,120.~~88,328,205.


	March 30, 2008		June 24, 2007		September 28, 2008 (Unaudited)		June 29, 2008
	(Unaudited)				(Thousands, except share data)
ASSETS

Current assets:
Cash and cash equivalents	$	293,441	$	93,881	$	177,444	$	261,633
Short-term investments:						109,054		50,795
Held-to-maturity		—		132,074
Available-for-sale		43,524		16,700

Total cash, cash equivalents and short-term investments		336,965		242,655
Total cash, cash equivalents, and short-term investments						286,498		312,428

Accounts receivable, net		111,604		79,668		103,430		110,376
Income tax receivable and prepaid income taxes		2,000		7,947
Income tax receivable						9,938		9,825
Inventories, net		83,328		71,068		79,216		80,161
Deferred income taxes		20,886		23,573		5,032		4,578
Prepaid expenses and other current assets		11,918		8,920		13,167		13,000
Assets of discontinued operations		133		301		2,658		2,600

Total current assets		566,834		434,132		499,939		532,968

Property and equipment, net		351,222		372,345		342,059		348,013
Long-term investments, held-to-maturity		—		68,363
Long-term investments, available-for-sale		61,369		—
Long-term investments						52,566		58,604
Intangible assets, net		129,644		96,138		121,975		125,037
Goodwill		187,873		141,777		244,003		244,003
Other assets		9,349		3,475		6,344		4,782

Total assets	$	1,306,291	$	1,116,230	$	1,266,886	$	1,313,407


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable, trade	$	44,797	$	32,940	$	40,765	$	37,402
Accrued salaries and wages		14,337		10,241		16,191		13,471
Income taxes payable		—		4,504		7,290		5,314
Other current liabilities		8,101		6,259		3,462		7,938
Contingent payment due related to COTCO acquisition						—		60,000
Liabilities of discontinued operations		541		505		480		550

Total current liabilities		67,776		54,449		68,188		124,675
Long-term liabilities:
Deferred income taxes		55,937		38,758		37,035		38,048
Contingent tax reserves		4,852		5,792
Other long-term liabilities		162		129		4,199		4,199
Long-term liabilities of discontinued operations		835		1,103		745		745

Total long-term liabilities		61,786		45,782		41,979		42,992
Commitments and contingencies (Note 12)
Shareholders’ equity:
Preferred stock, par value $0.01; 3,000 shares authorized at March 30, 2008 and June 24, 2007; none issued and outstanding		—		—
Common stock, par value $0.00125; 200,000 shares authorized at March 30, 2008 and June 24, 2007; 89,665 and 84,675 shares issued and outstanding at March 30, 2007 and June 24, 2007, respectively		112		106
Preferred stock, par value $0.01; 3,000 shares authorized at September 28, 2008 and June 29, 2008; none issued and outstanding						—		—
Common stock, par value $0.00125; 200,000 shares authorized at September 28, 2008 and June 29, 2008; 88,327 and 88,088 shares issued and outstanding at September 28, 2008 and June 29, 2008, respectively						110		110
Additional paid-in-capital		851,362		713,778		816,392		811,015
Accumulated other comprehensive income, net of taxes		8,008		9,826		8,606		8,923
Retained earnings		317,247		292,289		331,611		325,692

Total shareholders’ equity		1,176,729		1,015,999		1,156,719		1,145,740

Total liabilities and shareholders’ equity	$	1,306,291	$	1,116,230	$	1,266,886	$	1,313,407

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


													Three Months Ended
	Three Months Ended						Nine Months Ended						September 28, 2008			September 23, 2007
	March 30, 2008			March 25, 2007			March 30, 2008			March 25, 2007			(Thousands, except per share data)
Revenue:
Product revenue, net	$	118,160		$	82,318		$	335,464		$	261,258		$	134,693		$	105,963
Contract revenue, net		6,826			7,935			21,907			21,695			5,685			7,423

Total revenue		124,986			90,253			357,371			282,953			140,378			113,386

Cost of revenue:
Product revenue, net		75,935			55,279			219,766			163,778			86,644			72,580
Contract revenue, net		5,502			6,002			17,520			16,934			4,371			6,066

Total cost of revenue		81,437			61,281			237,286			180,712			91,015			78,646

Gross margin		43,549			28,972			120,085			102,241
Gross profit														49,363			34,740

Operating expenses:
Research and development		15,405			15,619			43,083			44,272			17,275			12,777
Sales, general and administrative		21,076			13,115			57,449			37,636			22,918			18,164
Amortization of acquisition related intangibles		4,225			186			12,321			528
(Gain) loss on disposal and impairment of long-lived assets, net		(722	)		(154	)		487			28
Amortization of acquistion related intangibles														4,062			4,048
Loss on disposal or impairment of long-lived assets														405			734

Total operating expenses		39,984			28,766			113,340			82,464			44,660			35,723

Income from operations		3,565			206			6,745			19,777
Operating income (loss)														4,703			(983	)

Other income (expense), net:
Non-operating income:
Gain on sale of investments, net		—			—			14,117			11,411			12			14,117
Interest and other non-operating income, net		3,884			3,993			12,193			11,838

Total other income, net		3,884			3,993			26,310			23,249
Other non-operating income														185			12
Interest income, net														2,792			3,715

Income from continuing operations before income taxes		7,449			4,199			33,055			43,026			7,692			16,861

Income tax expense (benefit)		1,787			(9,846	)		7,885			(649	)
Income tax expense														1,754			3,994

Income from continuing operations		5,662			14,045			25,170			43,675			5,938			12,867
(Loss) income from discontinued operations, net of related income tax benefit		(2	)		7,085			(176	)		7,224
Loss from discontinued operations, net of related income taxes														(19	)		(154	)

Net income	$	5,660		$	21,130		$	24,994		$	50,899		$	5,919		$	12,713

Earnings (loss) per share:
Earnings per share:
Basic:
Income from continuing operations	$	0.06		$	0.18		$	0.29		$	0.57		$	0.07		$	0.15

(Loss) income from discontinued operations	$	—		$	0.09		$	—		$	0.09
Loss from discontinued operations													$	(0.00	)	$	(0.00	)

Net income	$	0.06		$	0.28		$	0.29		$	0.66		$	0.07		$	0.15

Diluted:
Income from continuing operations	$	0.06		$	0.18		$	0.29		$	0.56		$	0.07		$	0.15

(Loss) income from discontinued operations	$	—		$	0.09		$	—		$	0.09
Loss from discontinued operations													$	(0.00	)	$	(0.00	)

Net income	$	0.06		$	0.27		$	0.29		$	0.65		$	0.07		$	0.15

Shares used in per share calculation:
Basic		87,211			76,417			85,695			76,809			87,851			84,683

Diluted		88,905			77,134			87,506			77,729			88,732			86,566

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


							Three Months Ended
	Nine Months Ended						September 28, 2008			September 23, 2007
	March 30, 2008			March 25, 2007			(Thousands)
Cash flows from operating activities:
Net income	$	24,994		$	50,899		$	5,919		$	12,713
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		74,681			60,043			22,610			25,060
Stock-based compensation, net of capitalized amounts		11,314			9,167
Stock-based compensation								5,433			3,245
Excess tax benefit from share-based payment arrangements		(6,364	)		—			(106	)		(976	)
Loss on disposal or impairment of long-lived assets		487			22
Gain on sale of investments		(14,117	)		(11,411	)
Amortization of premium on investments		(411	)		(280	)
Deferred income taxes		—			(20,195	)
Impairment of inventory or loss on disposal or impairment of long-lived assets								405			734
Provision for doubtful accounts								117			391
Gain on sale of investment in securities								(12	)		(14,117	)
Amortization of premium/discount on investments								102			(108	)
Changes in operating assets and liabilities:
Accounts receivable		(30,642	)		9,065			7,104			(6,631	)
Inventories		(14,252	)		(19,265	)		602			6,147
Prepaid expenses and other assets		3,437			(3,440	)		(1,894	)		(4,338	)
Accounts payable, trade		9,857			3,587			3,423			(1,925	)
Accrued expenses and other liabilities		7,140			5,414			(1,583	)		5,361

Net cash provided by operating activities		66,124			83,606			42,120			25,556

Cash flows from investing activities:
Purchase of property and equipment		(37,542	)		(71,850	)
Purchase of patent and licensing rights		(5,471	)		(4,491	)
Purchase of LED Lighting Fixtures, Inc., net of cash acquired		(7,180	)		—
Purchase of INTRINSIC Semiconductor Corporation, net of cash acquired		—			(43,850	)
Purchase of business or net assets of business		—			(1,258	)
Purchase of investments		(115,022	)		(139,627	)
Purchases of property and equipment								(11,869	)		(11,225	)
Payment of contingent consideration related to COTCO acquisition								(60,000	)		—
Purchases of investments								(138,688	)		(2,151	)
Proceeds from maturities of investments		213,309			205,240			84,215			6,500
Proceeds from sale of property and equipment		1,046			178			18			25
Proceeds from sale of available-for-sale investments		17,000			16,722			1,039			17,000
Purchases of patent and licensing rights								(1,978	)		(1,718	)

Net cash provided by (used in) investing activities		66,140			(38,936	)
Net cash (used in) provided by investing activities								(127,263	)		8,431

Cash flows from financing activities:
Net proceeds from issuance of common stock		56,061			4,374			3,842			7,601
Excess tax benefit from share-based payment arrangements		6,364			—			106			976
Repayments of capital lease obligations		—			(519	)
Repurchase of common stock		(168	)		(18,742	)
Repurchases of common stock								(2,744	)		(168	)

Net cash provided by (used in) financing activities		62,257			(14,887	)
Net cash provided by financing activities								1,204			8,409

Effects of foreign exchange changes on cash and cash equivalents		5,039			(44	)		(250	)		—

Net increase in cash and cash equivalents		199,560			29,739
Net (decrease) increase in cash and cash equivalents								(84,189	)		42,396
Cash and cash equivalents:
Beginning of period	$	93,881		$	88,768			261,633			93,881

End of period	$	293,441		$	118,507		$	177,444		$	136,277

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

Cree, Inc. (collectively with its subsidiaries, the “Company”), a North Carolina corporation established in 1987, develops and manufactures semiconductor materials and devices primarily based on silicon carbide (“SiC”), gallium nitride (“GaN”) and related compounds. The physical and electronic properties of SiC and GaN offer technical advantages over traditional silicon, gallium arsenide (“GaAs”), sapphire and other materials used for certain electronic applications. The Company currently focuses on light emitting diode (“LED”) products, which consist of LED chips, LED components and LED lighting solutions. The Company also develops power and radio frequency (“RF”) products, including power switching and RF devices. The Company has products commercially available in each of these categories.

The Company derives the majority of its revenue from sales of its LED products. The Company also generates revenue from sales of SiC and GaN materials, and the Company earns revenue under government contracts that support some of its research and development programs.

The consolidated balance sheet at ~~March 30,~~September 28, 2008 and the consolidated statements of income for the three ~~and nine~~ months ended ~~March 30,~~September 28, 2008 and ~~March 25,~~September 23, 2007, and the consolidated statements of cash flows for the ~~nine~~three months ended ~~March 30,~~September 28, 2008 and ~~March 25,~~September 23, 2007 have been prepared by ~~Cree, Inc. (collectively with its subsidiaries,~~ the ~~“Company”)~~Company and have not been audited. In the opinion of management, all normal and recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows at ~~March 30,~~September 23, 2008, and for all periods presented, have been made. The consolidated balance sheet at June ~~24, 2007~~29, 2008 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 accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June ~~24, 2007.~~29, 2008 (“fiscal 2008”). The results of operations for the period ended ~~March 30,~~September 28, 2008 are not necessarily indicative of the operating results that may be attained for the entire fiscal ~~year.~~

~~The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.~~

~~The Company’s~~ year ending June 28, 2009 (“fiscal year is a 52- or 53-week period ending on the last Sunday in the month of June. The Company’s 2008 fiscal year extends from June 25, 2007 through June 29, 2008 and is a 53-week fiscal year, with the additional week included in the Company’s fiscal second quarter. The Company’s 2007 fiscal year extended from June 26, 2006 through June 24, 2007 and was a 52-week fiscal year.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, provision for doubtful accounts and sales returns, provision for inventory obsolescence, fair value of investments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, product warranty obligations, employee stock options, and contingencies and litigation, among others. The Company generally bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts could differ from those estimates.

In the first quarter of fiscal 2008, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,” (“FIN 48”2009”). ~~See Note 10, “Income Taxes” for a further discussion of the Company’s adoption of FIN 48.~~

The Company provides its customers with limited rights of return for non-conforming shipments. In addition, certain of the Company’s contractual sales arrangements provide for limited product exchanges and the potential for reimbursement of certain sales costs. As a result, the Company records an allowance, which is recorded as a reduction of product revenue in the consolidated statements of income and as a reduction to accounts receivable in the consolidated balance sheets.

The Company estimates its allowance in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 48, “Revenue Recognition When Right of Return Exists” (“SFAS 48”). Specifically, the Company reviews historical sales returns and other relevant data and matches returns or other credits to the quarter when the sales were originally recorded. Based on historical return percentages and other relevant factors, the Company estimates its potential future exposure on product sales that have been recorded. The allowance for sales returns at March 30, 2008 and June 24, 2007 was $5.1 million and $4.6 million, respectively.

In accordance with SFAS 48, the Company also records an estimate for the value of product returns that it believes will be returned to inventory in the future and resold. As of March 30, 2008 and June 24, 2007, the Company estimated the cost of future product returns at $1.9 million and $1.3 million, respectively, which is recorded in prepaid expenses and other current assets in the consolidated balance sheets.

Investments are accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). This statement requires certain securities to be classified into three categories:

~~Held-to-Maturity – Debt securities that the entity has the positive intent and ability to hold to maturity are reported at amortized cost.~~

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.

Available for Sale – Debt and equity securities not classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains or losses excluded from earnings and reported as a separate component of shareholders’ equity.

Investments in marketable securities with maturities beyond one year may be classified as short term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.

In accordance with SFAS 115, the Company reassesses the appropriateness of the classification (i.e. held-to-maturity, trading securities, or available-for-sale) of its investments at the end of each reporting period. At March 30, 2008, the Company determined that its marketable securities previously classified as held-to-maturity, should be reclassified to available-for-sale. This was based upon management’s determination during the quarter ended March 30, 2008, that it no longer had the positive intent to hold

the securities to maturity, as the underlying cash invested in these securities would be made available for operations. As a result of this determination, investments with amortized cost of approximately $102.6 million were transferred to available-for-sale. These investments are required to be carried at fair value, which resulted in a net increase in the carrying value of these investments of $2.3 million with a corresponding increase in accumulated other comprehensive income net of the related tax effect.

In accordance with SFAS No. 52, “Foreign Currency Translation” (“SFAS 52”), certain of the Company’s international operations use the local currency as their functional currency. For the Company’s international operations in which the functional currency is considered to be the local currency, the foreign currency is translated into the Company’s reporting currency, the U.S. Dollar, using exchange rates in effect at period end for assets and liabilities and average exchange rates during each reporting period for the results of operations. Adjustments resulting from the translation of these foreign subsidiaries’ financial statements are reported in accumulated other comprehensive income (loss). The foreign currency translation adjustment is not adjusted for income taxes since it relates to the Company’s indefinite investment in non-U.S. subsidiaries. Gains or losses on foreign currency transactions are recognized in current operations.

Certain fiscal ~~2007~~2008 amounts in the accompanying consolidated financial statements have been reclassified to conform to the fiscal ~~2008~~2009 presentation. These reclassifications had no effect on previously reported consolidated net income or shareholders’ equity.

In the first quarter of fiscal 2009, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 157 “Fair Value Measurements” (“SFAS 157”) for all financial assets and financial liabilities and for all non-financial assets and non-financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS 157 did not have a significant impact on the Company’s consolidated financial statements, and the resulting fair values calculated under SFAS 157 after adoption were not significantly different than the fair values that would

have been calculated under previous guidance. SFAS 157 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure. See Note 5 for the expanded disclosures required by this standard regarding the Company’s fair value measurements.

In addition, in February 2008 the Financial Accounting Standards Board (“FASB”) also released FASB Staff Position (FSP) FAS 157-1, which amended SFAS 157 to exclude certain leasing transactions from the scope of SFAS 157.

The Company ~~records~~adopted the provisions of SFAS 159, “The Fair Value Option for Financial Assets and Liabilities” (“SFAS 159”) at the beginning of its first fiscal quarter of 2009. The adoption of the provisions of SFAS 159 did not have a significant impact on the Company’s consolidated financial position, results of operations or cash flows, as the Company has currently chosen not to elect the fair value option for any items not already required to be measured at fair value in accordance with U.S. GAAP. SFAS 159 permits companies to make an election to carry certain eligible financial assets and liabilities at fair value on an instrument-by-instrument basis, even if fair value measurement has not historically been required for such assets and liabilities.

Nonrefundable Advance Payments for Use in Future Research and Development Activities

The Company adopted the provisions of Emerging Issues Task Force (“EITF”) Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (“EITF 07-3”). The Company’s adoption of EITF 07-3 did not have a significant impact on its consolidated financial statements. EITF 07-3 requires non-refundable advance payments to acquire goods or pay for services that will be consumed or performed in a future period in conducting research and development activities to be recorded as an asset and recognized as an expense when the research and development activities are performed.

The Company intends to adopt and apply the provisions of SFAS 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”) to business combinations prospectively beginning in its first quarter in fiscal 2010. Earlier adoption is prohibited. Under SFAS 141(R), an entity is required to recognize the assets acquired, ~~and~~ liabilities assumed, ~~in business combinations~~contractual contingencies, and contingent consideration at their ~~respective~~ fair ~~values at~~value on the ~~date~~acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of ~~acquisition, with any excess purchase price recorded as goodwill. Valuation of intangible assets and~~provision for income taxes. In addition, acquired in-process research and development ~~entails significant estimates~~is capitalized as an intangible asset and amortized over its estimated useful life.

The Company intends to adopt SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”) beginning in its first quarter of fiscal 2010. Early adoption is prohibited, but upon adoption SFAS 160 requires retrospective presentation and disclosure related to existing minority interests. The Company does not expect the impact of the adoption of SFAS 160 to be material to its consolidated financial statements. SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and the accounting for the deconsolidation of a subsidiary. SFAS 160 also clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest and requires that a parent recognize a gain or loss in net income when a

subsidiary is deconsolidated. The gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. In addition, SFAS 160 includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest.

The Company intends to adopt Staff Position No. FAS 142-3 “Determination of the Useful Life of Intangible Assets” (“FSP”) in the beginning of its fiscal year 2010. The Company is currently evaluating the impact, if any, that adoption of this FSP will have on its consolidated financial position, results of operations and cash flows. The FSP amends the factors that should be considered in developing renewal or extension assumptions ~~including, but not limited~~used to ~~determining~~determine the ~~timing~~useful life of a recognized intangible asset under FASB Statement No. 142 “Goodwill and ~~expected costs~~Other Intangible Assets” (“SFAS 142”). The FSP is intended to ~~complete development projects, estimating future~~improve the consistency between the useful life of an intangible asset determined under SFAS 142 and the period of expected cash flows ~~from product sales, developing appropriate discount rates, estimating probability rates for~~used to measure the ~~successful completion of development projects, continuation of customer relationships and renewal of customer contracts, and approximating the useful lives~~fair value of the ~~intangible assets acquired.~~asset under FASB Statement No. 141R (revised 2007) “Business Combinations” and other accounting principles generally accepted in the United States.

The Company intends to adopt SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”) beginning in the Company’s second quarter of fiscal 2009. As SFAS 161 does not change the accounting for derivative instruments, its adoption will not have a material impact on the Company’s consolidated financial statements. SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows.

The Company intends to adopt SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”) 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to current auditing standards codified in AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company does not expect the adoption of SFAS 162 to have any impact on its consolidated financial statements.SFAS 162 provides a framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities.

On February 29, 2008, the Company acquired LED Lighting Fixtures, Inc. (now Cree LED Lighting Solutions, Inc.) (“LLF”) through a wholly owned subsidiary. The Company acquired all of the outstanding share capital of LLF in exchange for total upfront consideration of $80.8 million, consisting of i)(1) $16.5 million in cash, ~~ii) 1,852,335~~(2) approximately 1.9 million shares of the Company’s common stock valued at $58.8 million, ~~iii)~~(3) the assumption of fully vested LLF employee stock options valued at $4.5 million, and ~~iv)~~(4) transaction costs of $1.0 million consisting primarily of professional fees incurred relating to attorneys, accountants and valuation advisors. Additional consideration of up to $26.4 million may be payable to the former shareholders of LLF if defined product development targets and key employee retention measures are achieved over the next three calendar years. If such contingent payments occur, these will be considered as additional purchase price and result in an increase in goodwill.

The ~~total purchase price for this acquisition is as follows (amounts in 000’s):~~

~~The purchase price for this acquisition has been preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows (amounts in 000’s):~~

~~The goodwill associated with the acquisition of LLF is not deductible for tax purposes.~~

~~The~~ assets, liabilities, and operating results of LLF have been included in the Company’s consolidated financial statements from the date of acquisition. ~~Pro forma information giving effect to this acquisition has not been presented because the pro forma information would not differ materially from historical results.~~

On March 30, 2007, ~~Cree, Inc.~~the Company acquired COTCO Luminant Device Limited, a Hong Kong company (now Cree Hong Kong Limited)~~, a Hong Kong company~~ (“COTCO”), from COTCO Holdings Limited, a Hong Kong company (now United Luminous International (Holdings) Limited)~~, a Hong Kong company~~ (“Holdings”). The Company acquired all of the outstanding share capital of COTCO in exchange for consideration consisting of ~~7,604,785~~approximately 7.6 million shares of the

Company’s common stock and ~~$77~~$77.3 million cash. Additional consideration of up to ~~$125~~$125.0 million may be payable to Holdings or its designees in the event COTCO achieves specific EBITDA targets over the Company’s ~~next~~ two full fiscal ~~years. The Company may elect to pay~~years following the acquisition.

COTCO reached the required EBITDA target for fiscal 2008 and earned the first traunch of the additional consideration ~~if any,~~ in ~~cash, shares~~the amount of the Company’s common stock or a combination of cash and stock, so long as the total number of shares of the Company’s common stock issued to Holdings relating to the transaction is less than 9.99% of the Company’s then outstanding common stock.

~~The total~~$60.0 million. This resulted in additional purchase price ~~for this acquisition is as follows (amounts~~and an increase to goodwill in ~~000’s):~~

~~The purchase price for this acquisition has been allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows (amounts in 000’s):~~

~~The goodwill associated with the acquisition of COTCO is not deductible for tax purposes.~~

~~The following unaudited pro forma information presents a summary of~~ the Company’s consolidated financial statements as of June 2008. The Company made a cash payment in the amount of $60.0 million to the former shareholder of COTCO in the first quarter of fiscal 2009. If certain defined EBITDA targets are met in fiscal 2009 by the operations acquired through the COTCO acquisition, an additional contingent payment of up to $65.0 million may be due to the former shareholder. This additional contingent payment may be settled in cash or common stock at the Company’s option, subject to certain limitations. If this remaining contingent payment were to occur, it would result in an increase to purchased goodwill.

The assets, liabilities, and operating results of ~~operations as if the~~ COTCO ~~transaction occurred at the beginning of the fiscal year for the period presented (amounts in 000’s, except per share data):~~

Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out (“FIFO”) method for finished goods and work-in-progress accounts. The Company uses the average cost method to value raw materials. The Company records a reserve against inventory once it hashave been determined that conditions exist which may not allow the Company to sell the inventory for its intended purpose, the inventory’s value is determined to be less than cost or it is determined to be obsolete. The charge for the inventory reserves is recorded in cost of revenueincluded in the Company’s consolidated financial statements from the date of ~~income. Reserves~~acquisition and are ~~adjusted quarterly to reflect inventory values~~reflected in ~~excess of forecasted sales, as well as overall inventory risk assessed by management.~~ all periods presented in the accompanying financial statements.

The following is a summary of ~~inventory:~~the components of accounts receivable, net (in thousands):

During the fourth quarter of fiscal 2007, Color Kinetics Incorporated (“Color Kinetics”) announced that it had been acquired. The transaction closed during the Company’s first fiscal quarter of 2008 ended September 23, 2007, and as a result the Company liquidated its remaining 500,000 shares of Color Kinetics stock. The Company no longer holds an equity investment in Color Kinetics. The Company received proceeds of $17.0 million and recognized a pre-tax gain of $14.1 million from this transaction in the consolidated statement of income during its first fiscal quarter of 2008 ended September 23, 2007.

Under SFAS 157, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., “the exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. SFAS 157 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas, unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1 - Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Level 2 - Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The financial assets for which the Company performs recurring fair value remeasurements are cash equivalents, short-term investments and long-term investments. The financial assets for which the Company may be required to perform non-recurring fair value remeasurements (e.g., an impairment of assets) are any investments in privately-held companies. As of September 28, 2008, financial assets utilizing Level 1 inputs included cash equivalents such as money market deposits, and other investments with quoted prices available for identical items in active markets. Financial assets utilizing Level 2 inputs included corporate bonds, municipal bonds and other instruments. The Company does not have any significant financial assets requiring the use of Level 3 inputs.

The following table sets forth financial instruments carried at fair value within the SFAS 157 hierarchy and using the lowest level of input (in thousands):

Realized gains and losses from the sale of investments are included in “Gain on sale of investments, net” and unrealized gains and losses are included as a separate component of equity, net of tax, unless the loss is determined to be “other-than-temporary.”

The Company evaluates its investments for possible impairment or a decline in fair value below cost basis that is deemed to be “other-than-temporary” on a periodic basis. It considers such factors as the length of time and extent to which fair value has been below cost basis, the financial condition of the investee, and its ability and intent to hold the investment for a period of time that may be sufficient for an anticipated recovery in market value.

The following table reflects the components of intangible ~~assets:~~assets (in thousands):

Total amortization expense, including the amortization of acquisition related intangibles, patents and license rights, recognized during the three ~~and nine~~ months ended ~~March 30,~~September 28, 2008 and September 23, 2007, was ~~$5.0~~$4.9 million and ~~$14.8~~$4.8 million, respectively. For the three and nine months ended March 25, 2007, total amortization expense, including the amortization of acquisition related intangibles, patents and license rights, was $900,000 and $2.6 million, respectively.

~~Customer relationships are amortized over ten years. Developed technologies are amortized over periods ranging from seven to fourteen years. Patent and license rights are amortized over twenty years.~~

~~The~~There were no changes in goodwill during the ~~nine~~three months ended ~~March 30,~~September 28, 2008.

As of September 28, 2008, ~~are as follows:~~there remained approximately 4.5 million shares of the Company’s common stock approved for repurchase under a repurchase program authorized by the Board of Directors that extends through June 2009. During the fiscal quarter ended September 28, 2008, the Company repurchased approximately 0.1 million shares at an average price of $21.18 per share with an aggregate value of approximately $2.7 million.

The following computation reconciles the differences between the basic and diluted earnings per share ~~presentations:~~presentations (in thousands, except per share amounts):

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be antidilutive. In accordance with SFAS No. 128, “Earnings per Share,” these shares were not included in calculating diluted earnings per share. For the three ~~and nine~~ months ended ~~March 30,~~September 28, 2008 ~~there were 4.6 million~~ and ~~4.3 million shares, respectively, not included in calculating diluted earnings per share because their effect was antidilutive. For the three and nine months ended March 25,~~September 23, 2007, there were ~~9.5~~6.3 million and ~~8.7~~3.8 million shares, respectively, not included in calculating diluted earnings per share because their effect was antidilutive.

The following presents a summary of activity in ~~shareholders’ equity for the nine months ended March 30, 2008 (dollars and shares in~~comprehensive income (in thousands):

The Company currently has one equity-based compensation plan from which stock-based compensation awards can be granted to employees and directors. In addition, the Company has plans that have been terminated as to future grants, but under which options are currently outstanding. The Company also has an Employee Stock Purchase Plan that provides employees with the opportunity to purchase the Company’s common stock at 85% of the fair market value of the common stock at two designated times each year.

The following table summarizes outstanding option ~~activity~~awards as of ~~March 30,~~September 28, 2008, and changes during the ~~nine~~three months then ~~ended:~~ended (in thousands, except per share amounts):

A summary of nonvested shares of restricted stock awards outstanding under the Company’s 2004 Long-Term Incentive Compensation Plan as of ~~March 30,~~September 28, 2008, and changes during the ~~nine~~three months then ended, ~~follows:~~follows (in thousands, except per share amounts):

The Company accounts for its employee stock-based compensation ~~plans~~plan using the fair value method. The fair value method requires the Company to estimate the grant date fair value of its stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term.

To estimate the fair value of the Company’s stock option awards ~~and employee stock purchase plan shares~~ the Company currently uses the Black-Scholes option-pricing model. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Due to the inherent limitations of option-valuation models available today, including future events that are unpredictable and the estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts expensed in the Company’s financial statements.

For restricted stock awards, grant date fair value is based upon the market price of the Company’s common stock on the date of the grant. This fair value is then amortized to compensation expense over the requisite service period or vesting term.

~~The weighted average assumptions used to value stock option grants and purchase rights under the Employee Stock Purchase Plan were as follows:~~

SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Forfeitures are based primarily upon historical experience.

Total ~~estimated share-based~~stock-based compensation expense, net of ~~estimated forfeitures and~~amounts capitalized ~~amounts, related to the Company’s stock options, restricted stock awards and employee stock purchase plan~~into inventory was ~~$4.1~~as follows (in thousands):

Approximately $0.7 million and ~~$11.3~~$1.2 million ~~respectively, for the three and nine months ended March 30, 2008 and $2.7 million and $9.2 million, respectively, for the three and nine months ended March 25, 2007.~~

~~Approximately $781,000 and $699,000~~ of stock-based compensation has been recorded in inventory in the Company’s consolidated balance sheets as of ~~March 30,~~September 28, 2008 and June ~~24, 2007,~~29, 2008, respectively.

The variation between ~~income taxes~~the Company’s effective tax rate and ~~income tax expense at~~ the U.S. statutory rate of ~~35%~~35 percent is primarily due to the consolidation of our foreign operations, which are subject to income taxes at lower statutory rates. A change in the mix of pretax income from these various tax jurisdictions can have a significant impact on the Company’s periodic effective tax rate.

Effective with the beginning of the first quarter of fiscal 2008, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN ~~48.~~48”). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is cumulatively more than 50% likely to be realized upon ultimate settlement.

~~As a result~~At June 29, 2008, the Company had recognized $17.8 million of unrecognized tax benefits. During the ~~implementation of FIN 48,~~three months ended September 28, 2008, the Company recognized ~~an increase~~a decrease in total unrecognized tax benefits of ~~$2.7~~$11.2 million, ~~and accounted for the increase~~ as a ~~cumulative effect~~result of the settlement of the Internal Revenue Service (“IRS”) examination for fiscal years 2006 and 2007 (and for fiscal years 1991-2005 for certain carryforward tax attributes claimed on the fiscal years 2006 and 2007 tax returns). As a ~~change in accounting principle that resulted in a decrease to retained earnings of $36,000 and an increase to~~result, the ~~goodwill associated with the acquisition of COTCO, of $2.7 million. The~~ total amount of ~~gross~~ unrecognized tax benefits as of ~~the date of adoption was $8.4 million. The total amount of gross unrecognized tax benefits as of March 30,~~September 28, 2008 is ~~$15.2~~$6.6 million. ~~The $6.8 million increase is comprised of newly acquired uncertain tax positions and re-measurement of existing uncertain tax positions relating to prior periods.~~ Of the ~~$15.2~~$6.6 million, ~~total unrecognized tax benefits, $7.9~~$6.2 million represents tax positions that, if recognized, would impact the effective tax ~~rate.~~rate, as of the effective date of SFAS 141(R). Under SFAS 141(R), changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period of an acquisition are to be recognized as a component of provision for income taxes rather than acquired goodwill. Although the ultimate timing of the resolution and/or closure onof audits is highly uncertain, the Company believes it is reasonably possible that approximately ~~$8.0~~$0.4 million of gross unrecognized tax benefits will ~~materially~~ change in the next 12 months.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the income tax expense line item in the consolidated statements of income. ~~This classification has not changed as a result of implementing the provisions of FIN 48.~~ As of ~~the date of adoption,~~September 28, 2008, the Company had accrued ~~$96,000 for the payment~~$1.1 million of interest ~~related to unrecognized tax benefits. During the third quarter, the Company continued to assess the COTCO pre-acquisition contingencies resulting in additional accrued~~and penalties ~~of $1.2 million, which~~(which was previously recorded ~~as an increase in goodwill.~~against goodwill).

The Company files U.S. federal, U.S. state, and foreign tax returns. For U.S. federal purposes, the Company is generally no longer subject to tax examinations for fiscal years ended June ~~26, 2005~~24, 2007 and prior. For foreign purposes, the Company is no longer subject to examination for tax periods ~~2000~~2001 and prior. ~~Certain carryforward tax attributes generated in~~During the three months ended September 28, 2008, the Company settled its examination by the Internal Revenue Service for fiscal years ~~prior, remain subject to examination~~2006 and ~~adjustment.~~2007. For U.S. state tax returns the Company is generally no longer subject to tax examinations for fiscal years prior to 1997. The Company is currently under examination by the North Carolina Department of Revenue for fiscal years 2004 – 2007.

Please refer to Part I, Item 3 of the Company’s Annual Report on Form 10-K for the fiscal year ended June ~~24, 2007 and Part II, Item 1 of the Company’s Quarterly Reports on Form 10-Q for the quarterly periods ended September 23, 2007 and December 30, 2007~~29, 2008 for a description of material legal proceedings.

From time to time, various claims and litigation are asserted or commenced against the Company arising from or related to contractual matters, intellectual property matters, product warranties and personnel and employment disputes. Based on information currently available, management does not believe the ultimate outcome of any pending matters will have a material adverse effect on the Company’s financial condition, results of operations or cash flows. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, the Company’s business, financial position, results of operations or cash flows could be materially and adversely affected.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). This new standard represents the outcome of the FASB’s joint project with the International Accounting Standards Board and is intended to improve, simplify and converge internationally the accounting for business combinations in consolidated financial statements.

SFAS 141R replaces SFAS No. 141, “Business Combinations,” however, it retains the fundamental requirements of the former standard that the acquisition method of accounting (previously referred to as the purchase method) be used for all business combinations and for an acquirer to be identified for each business. SFAS 141R defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141R is effective beginning in the Company’s fiscal 2010. SFAS 141R will be applied to business combinations that are consummated beginning in fiscal 2010.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”) to provide enhanced guidance when using fair value to measure assets and liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value and, while not requiring new fair value measurements, may change current practices. SFAS 157 is effective for the Company beginning in fiscal 2009. The Company is currently evaluating the impact SFAS 157 will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure certain financial assets and liabilities at fair value at specified election dates. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for the Company beginning in fiscal 2009. The Company has no yet determined the impact, if any, of the adoption of SFAS 159.

In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-1 and FSP FAS 157-2. FSP FAS 157-1 amends SFAS 157 to exclude SFAS No. 13, “Accounting for Leases” (“SFAS 13”) and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS 13. FSP 157-2 delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-1 will be effective beginning in the Company’s first quarter of fiscal 2009 upon adoption of SFAS 157 and FSP 157-2 is effective immediately. The Company continues to evaluate SFAS 157, which will become effective beginning in its first quarter of fiscal 2009, and has not yet determined whether it will result in a change to its fair value measurements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”) which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. SFAS 161 is effective beginning in the Company’s second quarter of fiscal 2009. The Company does not believe that SFAS 161 will have a material impact on its consolidated financial statements.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Information set forth in this Quarterly Report on Form 10-Q contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended ~~or the Securities Act,~~(Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended ~~or the Exchange Act.~~(Exchange Act). All information contained in this report relative to future markets for our products and trends in and anticipated levels of revenue, gross margins and expenses, as well as other statements containing words such as “believe,” “project,” “may,” “will,” “anticipate,” “target,” “plan,” “estimate,” ~~“expect,”~~“expect” and ~~“intend,”~~“intend” and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business, economic and other risks and uncertainties, both known and unknown, and actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements we make are as of the date made and we ~~do not intend~~have no duty to update them if our views later change. These ~~forward- looking~~forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this ~~quarterly report. To review risk factors~~Quarterly Report. Examples of risks and uncertainties that could cause actual results to differ ~~see~~materially from historical performance and any forward-looking statements include, but are not limited to, those described in “Risk Factors” in Part II, Item 1A of this ~~report.~~Quarterly Report.

The following discussion is designed to provide a better understanding of our unaudited consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended June ~~24, 2007.~~28, 2008. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.

~~We develop and manufacture~~Cree, Inc. (“Cree,” “we,” “our,” or “us,”) is a manufacturer of semiconductor materials and ~~electronic~~ devices primarily ~~made from~~based on silicon carbide ~~or SiC,~~(SiC), gallium nitride ~~or GaN,~~(GaN) and related ~~compounds, as well as~~compounds. We currently focus on light emitting diode (LED) products, which consist of LED chips, LED components and LED lighting solutions. ~~Our~~We also develop power and radio frequency (RF) products, ~~are manufactured at our main production facilities in Durham~~including power switching and ~~Research Triangle Park, North Carolina, our facility in Huizhou, China and contract manufacturers in Asia.~~RF devices. We generate revenues from the following product lines:

The majority of our products historically have been manufactured at our main production facilities in North Carolina. We also have been increasingly utilizing our facility in Huizhou, China for the manufacture of our LED components and use contract manufacturers in Asia for certain aspects of our manufacturing process.

We currently operate our business as one reportable segment. In fiscal 2005, we operated our business in two reportable segments. In the fourth quarter of fiscal 2005, we announced the closure of the Cree Microwave segment, our silicon-based RF and microwave semiconductor business located in Sunnyvale, California. Effective December 25, 2005, we reported Cree Microwave as a discontinued operation.

Our business is primarily focused on selling our LED ~~chips~~products. LEDs are currently used to provide energy-efficient lighting in the automotive, mobile phone, liquid crystal display (LCD) backlighting, gaming, signals, indoor and outdoor illumination and video screen markets. LED ~~components. Industry~~lighting products are in the initial stages of introduction to the general illumination market. As LED technology continues to develop and improve, the potential market for LED lighting applications is expanding.

Select industry factors affecting our business include, overall demand in products using high-brightness LEDs, an intense and constantly evolving competitive environment, and intellectual property issues. Average LED sales prices generally decline each year as market players implement pricing strategies to gain or protect market share. To remain competitive, LED producers generally must increase product performance and reduce costs to support lower average sales prices.among others:

The following is a summary of our financial results for the three months ended ~~March 30,~~September 28, 2008:

Our ~~revenue was $125.0 million.~~year over year revenues for the first fiscal quarter increased approximately 24% to $140.3 million;

Our year over year gross margin ~~was 35%~~(gross profit as a percent of ~~revenue.~~revenue) increased to 35.2% from 30.6% in the prior year quarter;

We ~~reported consolidated net~~achieved income from operations of ~~$5.7~~$4.7 million ~~and net~~in the first quarter of fiscal 2009 compared to a loss from operations of $1.0 million in the first quarter of fiscal 2008. Net income per diluted share was $0.07 compared to $0.15 for the first quarter of ~~$0.06.~~fiscal 2008;

We generated positive cash flow from operations of ~~$5.5 million.~~$42.1 million in the first quarter of fiscal 2009 compared to $25.6 million in the first quarter of fiscal 2008;

Combined cash, cash equivalents and marketable investments ~~totaled $398.3~~decreased $32.0 million or 9% to $339.0 million at ~~March 30, 2008.~~September 28, 2008 compared to $371.0 million at June 29, 2008;

The following table sets forth certain consolidated statement of income data for the periods indicated:


	Three Months Ended September 28, 2008					Three Months Ended September 23, 2007
(Dollars in Thousands, Except Per Share Amounts)	Dollars			% of Revenue		Dollars			% of Revenue
Net revenue	$	140,378		100.0	%	$	113,386		100.0	%
Cost of revenue		91,015		64.8	%		78,646		69.4	%

Gross profit		49,363		35.2	%		34,740		30.6	%

Research and development		17,275		12.3	%		12,777		11.3	%
Sales, general and administrative		22,918		16.3	%		18,164		16.0	%
Amortization of acquisition related intangibles		4,062		2.9	%		4,048		3.6	%
Loss on disposal or impairment of long-lived assets		405		0.3	%		734		0.6	%

Income (loss) from operations		4,703		3.4	%		(983	)	-0.9	%
Gain on sale of investments, net		12		0.0	%		14,117		12.5	%
Other non-operating income		185		0.1	%		12		0.0	%
Interest income, net		2,792		2.0	%		3,715		3.3	%

Income before income taxes		7,692		5.5	%		16,861		14.9	%
Income tax expense		1,754		1.2	%		3,994		3.5	%

Income from continuing operations		5,938		4.3	%		12,867		11.4	%
Loss from discontinued operations, net of tax		(19	)	0.0	%		(154	)	-0.1	%

Net income	$	5,919		4.3	%	$	12,713		11.3	%

Diluted earnings per share from continuing operations	$	0.07				$	0.15

~~On February 29,~~Revenues

Revenues for the first fiscal quarter of fiscal 2009 and fiscal 2008 ~~we closed~~were comprised of the following (in thousands, except percentages):


	Three Months Ended
	September 28, 2008			September 23, 2007			Change
LED products	$	123,536		$	93,464		$	30,072		32	%
Percent of total revenues		88	%		82	%
Material products		5,941			8,462			(2,521	)	-30	%
Percent of total revenues		4	%		7	%
Power and RF products		5,216			4,037			1,179		29	%
Percent of total revenues		4	%		4	%

Total product revenues		134,693			105,963			28,730		27	%
Percent of total revenues		96	%		93	%
Contracts		5,685			7,423			(1,738	)	-23	%
Percent of total revenues		4	%		7	%

Total revenues	$	140,378		$	113,386		$	26,992		24	%

LED Products

We derive the largest portion of our revenue from the sale of our LED products which comprised approximately 88% and 82% of our total revenues for the first quarter of fiscal 2009 and fiscal 2008, respectively. Our LED products consist of our LED chips, LED components, including our XLamp LED components and high-brightness LED components, and LED lighting solutions.

Revenue from our LED products increased approximately 32% to $123.5 million in the first quarter of fiscal 2009 from $93.5 million in the first quarter of fiscal 2008. Sales of LED components drove this growth and more than offset a slight decline in LED chip sales. Additionally, first quarter sales this year benefited from sales of LED lighting solutions products via the acquisition of LED Lighting Fixtures, Inc.~~, or LLF. LLF develops and markets LED lighting solutions for the general illumination market. The acquisition provides direct access to the lighting market and expands our total market opportunity.~~

We target the market for LED products will continue to expand for the remainder of our fiscal 2008, which ends on June 29, 2008. We target to expand our production capacity to meet the demand for LED components at our factory in Huizhou, China. We also target to continue our reliance on subcontractors in Asia for increased capacity as well to meet our customers’ demands for LED chips and LED lighting solutions products. The market for LED products is highly competitive and we expect it to remain this way into the foreseeable future. We also target to continue to expand our global sales, marketing, and distribution capabilities to support increased sales of our LED products during the remainder of fiscal 2008 and into fiscal 2009.

We plan to focus our research and development efforts on increasing the brightness and efficiency of our LED products. We target to continue cost reduction initiatives for both our LED products and high-power products through continued yield improvement efforts and increasing LED production at our factory in Huizhou, China and contract manufacturers in Asia. In addition, we target to invest a total of $45 million to $50 million in capital expenditures during fiscal 2008. This will support unit volume growth in our new product lines and is a critical part of our overall product cost reduction initiatives.

~~We plan to continue to evaluate strategic investments to expand and strengthen our technology and product portfolio as well as to increase access to our targeted markets.~~

The following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles

generally accepted in the United States of America. In preparing our financial statements, we must make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time the consolidated financial statements are prepared. On a regular basis, management reviews our accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with generally accepted accounting principles. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and we may be exposed to gains or losses that could be material.

Our significant accounting policies are discussed in Note 2, “Summary of Significant Accounting Policies and Other Matters,” of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended June 24, 2007. Management believes the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and related disclosures with the Audit Committee of our Board of Directors.


~~Description of Policy~~	~~Judgments and Uncertainties~~	~~Effect If Actual Results Differ From~~ ~~Assumptions and Adjustments Recorded~~
~~Valuation of Long-Lived Assets:~~

We review long-lived assets such as property, equipment, goodwill, definite lived intangible assets and patents for impairment on a routine basis and when events and circumstances indicate that the carrying value of the assets recorded in our financial statements may not be recoverable. For example, a portion of our equipment may be scrapped; certain of our patents or patent applications may be abandoned. In these cases, we would directly write off these long-lived assets. In addition, we evaluate property, equipment and definite lived intangible assets for potential impairment by comparing the carrying value of our assets to the estimated future cash flows of the assets (undiscounted and without interest charges). If the estimated undiscounted future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on estimated discounted future cash flows. We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset will be its new cost basis. For a depreciable (amortized) long-lived asset, the new cost basis will be depreciated (amortized) over the remaining useful life of that asset.	Our impairment loss calculations require management to apply judgment in estimating future cash flows and asset fair values, including estimating useful lives of the assets. To make these judgments, we may use internal discounted cash flow estimates, quoted market prices when available, and independent appraisals as appropriate to determine fair value. We derive the required cash flow estimates from our internal business plans.	If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be required to record additional impairment losses that could be material to our results of operations. Using this impairment review methodology, we recorded $0.3 million of impairments of long-lived assets during the three months ended March 30, 2008, and $1.3 million during the nine months ended March 30, 2008. We recorded no long-lived asset impairment charges during the three or nine months ended March 25, 2007.

~~Description of Policy~~

~~Judgments and Uncertainties~~

~~Effect If Actual Results Differ From~~

~~Assumptions and Adjustments Recorded~~

For goodwill, on at least an annual basis, we evaluate impairment in a two-step process. The first step compares the fair value of the reporting unit with its carrying value. If the fair value of the reporting unit exceeds its carrying value, no impairment is recorded. If the carrying amount of the reporting unit exceeds its fair value, the second step of the impairment analysis is performed. The second step is used to measure the amount of the impairment loss and compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount exceeds the implied fair value of the goodwill, an impairment loss is recognized for the excess. However, it should be noted that the loss recognized shall not be in excess of the carrying amount. Once a goodwill impairment loss is recognized, the adjusted carrying value shall be its new accounting basis.

~~We do not restore a previously recognized impairment loss if the asset’s carrying value decreases below its estimated fair value.~~


~~Description of Policy~~	~~Judgments and Uncertainties~~	~~Effect If Actual Results Differ From~~ ~~Assumptions and Adjustments Recorded~~
~~Tax Related Contingencies:~~

~~Uncertain Tax Positions:~~

We are subject to periodic audits of our income tax returns by federal, foreign, state and local agencies. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. In accordance with Financial Accounting Standards Board, or FASB, Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,” we evaluate the exposures associated with our various tax filing positions. We have recorded unrecognized tax benefits for what we have identified as representing those positions that are not more likely than not to be sustained based on technical merits of such positions. A number of years may elapse before a particular matter for which we have an unrecognized tax benefit is audited and fully resolved. ~~Valuation Allowance:~~ We have also established a valuation allowance for capital loss carryforwards where we believe that it is more likely than not that the tax benefits of the items will not be realized due to insufficient availability of capital gains in the carryforward period. When we establish or reduce the valuation allowance against our deferred tax assets, our income tax expense will increase or decrease, respectively in the period such determination is made.	The establishment of tax contingencies related to uncertain tax positions or the assessment of a valuation allowance involve a high degree of management judgment and estimation concerning such considerations as assessing the risk associated with a particular tax filing position and forecasting future taxable earnings.	To the extent we prevail in matters for which we have recorded an unrecognized benefit or are required to pay amounts in excess of what we have recorded our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement might require use of our cash and result in an increase in our effective rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.


~~Description of Policy~~	~~Judgments and Uncertainties~~	~~Effect If Actual Results Differ From~~ ~~Assumptions and Adjustments Recorded~~
~~Inventories:~~

~~We value our inventory at the lower of cost of the inventory or fair market value by establishing a write-down or an inventory loss reserve.~~ We base our lower of cost or market write-down on the excess carrying value of the inventory, which is typically its cost, over the amount that we expect to realize from the ultimate sale of the inventory based upon our assumptions regarding the average sales price to be received for the product.	Our inventory reserve is based on our analysis of sales levels by product and projections of future customer demand derived from historical order patterns and input received from our customers and our sales team. To mitigate uncertainties, we reserve for all inventory greater than twelve months old, unless there is an identified need for the inventory. In addition, we reserve for items that are considered obsolete based on changes in customer demand, manufacturing process changes or new product introductions that may eliminate demand for a product. When inventory is physically destroyed, we remove the inventory and the associated reserve from our financial records.	If our estimates regarding customer demand and physical inventory losses are inaccurate or changes in technology affect demand for certain products in an unforeseen manner, we may be exposed to losses or gains in excess of our established reserves that could be material. ~~As of March 30, 2008 the amount of our inventory reserve was $5.0 million.~~ ~~A 10% increase or decrease in our actual inventory reserve at March 30, 2008 would have affected net income by approximately $380,000 for the three months ended March 30, 2008.~~

~~Accruals for Other Liabilities:~~

~~We make estimates for the amount of costs that have been incurred but not yet billed for our self-funded medical insurance, general services, including legal fees, accounting fees and other expenses.~~	Our liabilities contain uncertainties because we must make assumptions and apply judgment to estimate the ultimate cost to settle claims and claims incurred but not reported as of the balance sheet date. When estimating our liabilities, we consider a number of factors, including interviewing our service providers for bills that have not yet been received. For self-insured liabilities, we estimate our liabilities based on historical claims experience.	~~If actual costs billed to us are not consistent with our assumptions and judgments, our expenses could be understated or overstated and these adjustments could materially affect our net income.~~

~~The following table shows our consolidated statements of income expressed as a percentage of total revenue from operations for the periods indicated:~~

~~Revenue~~. ~~Revenue increased 38.4% to $125.0 million~~ in the third quarter of fiscal ~~2008 from $90.3 million~~2008. The blended average selling price for our LED products increased 47% in the ~~third~~first quarter of fiscal ~~2007. Product revenue increased 43.5% to $118.2 million~~2009 from ~~$82.3 million. The increase in product revenue primarily resulted from an increase in LED components, which was partially offset by a decline in revenue from materials and contract revenue.~~

~~LED revenue increased 57.0% to $105.5 million in~~ the ~~third~~first quarter of fiscal 2008 from $67.2 million in the third quarter of fiscal 2007, making up 84% of our total revenue. Unit shipments of our LED products increased 4.4% from the third quarter of fiscal 2007. Our blended average LED sales price increased 50.4% and was attributabledue to a shift in product mix ~~towards~~to a higher proportion of revenues generated from sales of our LED components and LED lighting solutions.

These products include wafers that are based on SiC and/or GaN, which ~~includes the current year quarter of our high brightness product line acquired as part of the acquisition of COTCO~~are used in manufacturing LEDs, RF and microwave devices, power devices and for research and development. They also include SiC material in bulk crystal form, which is used in gemstone applications.

Revenue from materials products decreased 30% to $5.9 million in the ~~fourth quarter of 2007.~~

~~Materials revenue decreased 36.9% in the third~~first quarter of fiscal ~~2008 to $6.3 million~~2009 from ~~$10.0~~$8.5 million in the ~~third~~first quarter of fiscal ~~2007, making up 5%~~2008. This decrease resulted in material product sales comprising 4% of our ~~revenue. The decrease in materials revenue was attributable to changes~~total revenues in the ~~mix~~first quarter of ~~product sold and a decrease~~fiscal 2009, compared to 7% of our total revenues in the ~~amount~~first quarter of ~~revenue generated from~~fiscal 2008. The decline was due primarily to lower material products sales to Charles & Colvard, Ltd. ~~during the quarter.~~for use in gemstone applications.

These products include power switching devices made from SiC, which provide faster switching speeds than comparable silicon-based power devices, and also include RF devices made from SiC or GaN.

Revenue from ~~our high-power devices~~power and RF increased ~~23.0%~~approximately 29% to ~~$6.2~~$5.2 million in the ~~third~~first quarter of fiscal ~~2008~~2009 from ~~$5.0~~$4.0 million in the ~~third~~first fiscal quarter of 2008. For power products, the increase was due to an increase in unit shipments of products partially offset by a decrease in average selling prices. RF product revenues increased primarily due to a positive shift in product mix toward products with higher average selling prices. Revenues from our power and RF products comprised approximately 4% of our total revenues for the first quarter of fiscal ~~2007. This increase was~~2009 and fiscal 2008.

Government agencies provide us with funding to support the development of primarily ~~due to sales~~SiC and GaN based new technology. We record this funding as revenue on contracts where the funding received exceeds our direct costs of performing these activities. Revenues from our contracts comprised 4% and 7% of our ~~Schottky diode products.~~ total revenues for the first quarter of fiscal 2009 and fiscal 2008, respectively.

Revenues from ~~high-power devices were 5% of revenue~~contracts decreased 23% to $5.7 million in the ~~third~~first quarter of fiscal 2009 from $7.4 million in the first fiscal quarter of fiscal 2008. Fluctuations in contract revenue were generally due to changes in the timing of the initiation of new research contracts, the value of those contracts and timing of the work performed. However, it should be noted that we have seen a recent trend of the federal government reducing its traditional levels of funding for SiC and GaN research.

Cost of revenue ~~decreased 14.0%~~includes materials, labor and overhead costs incurred internally or paid to ~~$6.8~~contract manufacturers to produce our products. Gross profit and gross margin (gross profit as a percentage of revenue) were as follows (in thousands, except percentages):

Gross profit from continuing operations in the first quarter of fiscal 2009 increased approximately 42% to $49.4 million from $34.7 million in the ~~third~~first quarter of fiscal ~~2008~~2008. Our gross margin also increased from ~~$7.9~~30.6% to 35.2%. Factors contributing to the increase in gross margin were changes in product mix to higher margin products and lower per unit production costs due to greater utilization of our LED chip factory and higher XLamp yields.

Research and development (R&D) expenses include costs associated with the development of new products, enhancements of existing products and general technology research. These costs consist primarily of employee salaries and benefits, occupancy costs, consulting costs and the cost of development equipment, R&D materials and supplies.

The following sets forth our research and development expenses in dollars and as a percentage of revenues (in thousands, except percentages):

Research and development expenses in the first quarter of fiscal 2009 increased 35% to $17.3 million from $12.8 million in the ~~third~~first quarter of fiscal ~~2007, making up 5% of revenue.~~2008. The ~~decrease in revenue~~increase was ~~primarily~~ due to ~~delays in government spending.~~our continued research and development activities focusing on higher brightness LED chips, new and improved LED components, incremental expenditures related to the acquisition of LLF, transition to larger wafers and power and RF initiatives.

Sales, general and administrative expenses are composed primarily of costs associated with our sales and marketing personnel and our executive and administrative personnel (for example, legal, finance, information technology and human resources personnel) and consist of: salaries and related compensation costs, consulting and other professional services (such as litigation and other outside legal counsel fees, audit and other compliance costs), facilities and insurance costs, and travel and other costs. The following table sets forth our sales, general and administrative expenses in dollars and as a percentage of revenues (in thousands, except percentages):

Sales, general and administrative expenses from continuing operations in the ~~third~~first quarter of fiscal ~~2008~~2009 increased ~~50.3%~~26% to ~~$43.5~~$22.9 million from ~~$29.0~~$18.2 million in the ~~third~~first quarter of fiscal ~~2007. Our gross margin percentage increased from 32% to 35% of revenue in the quarter-to-quarter comparison.~~2008. The increase was due primarily to increased ~~utilization in our factories, manufacturing yield improvements and the transition of our high power devices to four-inch wafers.~~

~~Research and Development.~~Research and development expenses decreased 1.3% in the third quarter of fiscal 2008 to $15.4 million from $15.6 million in the third quarter of fiscal 2007. We have continued to make investments in ongoing research and development primarily related to the i) continued development of higher brightness LED chips, ii)LED components, iii) larger wafer process development and iv) high-power devices.

~~Sales, General and Administrative~~.Sales, general and administrative, or SG&A expenses increased 60.7% in the third quarter of fiscal 2008 to $21.1 million compared to $13.1 million in the third quarter of fiscal 2007. The increase in SG&A expenses is due to i) SG&A expenses related to the operations of COTCO which we acquired during our fourth fiscal quarter of 2007, ii) stock-based compensation expense, iii) higher costs incurred in connection with patent litigation, and iv) increased spending on sales and marketing as we look to ~~support~~expand our sales channels and penetrate new markets and the ~~growth of our LED component products.~~

~~Amortization of Acquisition Related Intangibles~~.Amortization of acquisition related intangibles was $4.2 million in the third quarter of fiscal 2008 compared to $200,000 in the third quarter of fiscal 2007. The increase in amortization of acquisition related intangibles is due to our acquisitions of COTCO in fiscal 2007, as well as, our acquisition of LLF during the third quarter of fiscal 2008. ~~Combined, these~~Additionally, costs increased due to the general expansion of our business, increased employee compensation costs and higher costs related to certain ongoing patent litigation.

As a result of our acquisitions, we have ~~resulted~~recorded various intangible assets that require amortization, principally customer relationships and developed technologies. Amortization of intangible assets related to our acquisitions is as follows (in thousands):

Amortization of acquisition related intangibles from continuing operations was $4.1 million in the ~~addition~~first quarter of ~~$99.6~~fiscal 2009 compared to $4.0 million in the first quarter of ~~amortizable intangible~~fiscal 2008. Year over year, amortization expense attributable to the intangibles acquired through the COTCO acquisition declined as certain assets ~~principally composed~~were fully amortized by the end of ~~developed technologies and customer relationships.~~the first quarter of fiscal 2009. This decline in amortization was offset by amortization of the intangibles acquired through the LLF acquisition that closed during the third quarter of fiscal 2008.

Loss ~~(Gain)~~ on Disposal ~~and~~or Impairment of Long-Lived Assets, net.

We operate a capital intensive business. As such, we dispose of a certain level of our equipment in the normal course of business as our production processes change, whether due to production improvement initiatives or product mix changes. Due to the risk of technological obsolescence or changes in our production process, we regularly review our equipment for possible impairments in value. The following table sets forth our loss on disposal or impairment of long-lived assets (in thousands):

We recorded a net ~~gain~~loss of ~~$700,000~~$0.4 million on the disposal ~~and impairment~~ of long-lived assets in the ~~third~~first quarter of fiscal 2009 compared to a net loss of $0.7 million in the first quarter of fiscal 2008. These losses are due to the impairment or disposal of certain equipment and the impairment of certain capitalized patent costs.

During the first quarter of fiscal 2009, we did not have any significant gains or losses realized from the sale of our investments. In the first quarter of fiscal 2008 we recorded a gain on the sale of investments of $14.1 million principally related to the sale of our remaining holdings of Color Kinetics Incorporated common stock.

We have historically invested portions of our available cash in fixed interest rate securities such as high-grade corporate debt, commercial paper, government securities, and other fixed interest rate investments. The primary objective of our investments is to preserve principal while maximizing our yields.

Net interest income was $2.8 million compared to ~~a net gain of $200,000 in~~$3.7 million for the ~~third~~first quarter of fiscal ~~2007 as a result of the long-lived assets disposed of or impaired in each comparative quarter.~~2009 and fiscal 2008, respectively. Year over year interest income decreased due to lower average investment balances and declining interest rates on our fixed rate securities and cash and cash equivalent holdings.

~~Interest and~~ Other ~~Non-Operating Income, Net~~. ~~Net interest and other~~ non-operating income ~~decreased 2.7% to $3.9 million in the third quarter~~is comprised primarily of ~~fiscal 2008 from $4.0 million in the third quarter of fiscal 2007. The decrease is due to an overall decline in interest rates that lowered our yield on our cash, cash equivalents~~foreign exchange gains and ~~investments.~~losses.

The following table sets forth our income tax expense in dollars and our effective tax rate from continuing operations (in thousands, except percentages):

The variation between the Company’s effective tax rate and the U.S. statutory rate of 35 percent is primarily due to the consolidation of our foreign operations, which are subject to income taxes at lower statutory rates. A change in the mix of pretax income from these various tax jurisdictions can have a significant impact on our periodic effective tax rate.

We recorded income tax expense of $1.8 million for an effective tax rate of 22.8% from continuing operations in the ~~third~~first quarter of fiscal ~~2008~~2009 as compared to income tax ~~benefit~~expense of ~~$9.8~~$4.0 million for an effective tax rate of 23.7% from continuing operations in the ~~third~~first quarter of fiscal ~~2007.~~2008. The ~~fluctuation is due primarily to certain discrete events~~decline in ~~the third quarter of 2007 that resulted in the release of certain contingent tax reserves and valuation allowances. We currently estimate~~ our effective tax rate ~~for fiscal~~is due to an increase in pretax income generated from our foreign operations.

On October 3, 2008, the U.S. government passed the Emergency Economic Stabilization Act of 2008 (H.R. 1424) which included a retroactive extension of the R&D tax credit. Any impact, if realized, is expected to have a positive effect on the projected annual effective tax rate and will be ~~approximately 24%.~~disclosed in our results for the second quarter of fiscal 2009, which includes the enactment date.

Income (Loss) from Discontinued Operations, Net of Related Income Tax ~~Benefit.~~Benefi ~~During~~t

In fiscal 2006, we discontinued the ~~third~~operations of our Cree Microwave subsidiary. The following table sets forth our income (loss) from discontinued operations, net of tax (in thousands):

Our losses from discontinued operations were not significant in the first quarter of fiscal ~~2008, we recorded~~2009 as compared to a ~~slight after-tax~~net loss of ~~$2,000 from discontinued operations versus $7.1~~$0.2 million ~~of after-tax income from discontinued operations~~ in the third quarter of fiscal 2007. The primary driver of the after-tax income amount in the third quarter of 2007 was the release of Cree Microwave contingent tax reserves as a result of the expected resolution of Internal Revenue Service audits of fiscal 2003, 2004, and 2005 in the amount of $7.3 million partially offset by continued expenses arising from the Cree Microwave Sunnyvale facility operating lease.

~~Revenue~~. Revenue increased 26.3% to $357.4 million in the first nine months of fiscal 2008 from $283.0 million in the first nine months of fiscal 2007. Product revenue increased 28.4% to $335.5 million from $261.3 million. The increase in product revenue resulted from an increase in our LED component products, which was partially offset by a decline in revenue from materials products.

LED revenue increased 38.2% to $297.8 million in the first nine months of fiscal 2008 from $215.3 million in the first nine months of fiscal 2007, making up 83% of our total revenue. Unit shipments of our LED products increased 3.2% over the first nine months of fiscal 2007 and our blended average LED sales price increased 34.0%. The increase in unit shipments is due to higher demand. The increase in the blended average sales price, is attributable to a shift to more LED components, which carry a higher average selling price. The component revenue during the first nine months of fiscal 2008 represents sales of our X-Lamp® components as well as high brightness components, which were acquired as part of the acquisition of COTCO, during the fourth quarter of 2007.

Materials revenue decreased 27.6% in the first nine months of fiscal 2008 to $22.3 million from $30.8 million in the first nine months of fiscal 2007, making up 6% of our revenue. The decrease in materials revenue in the first nine months of fiscal 2008 was due to changes in the mix of product sold and a decrease in the amount of sales to Charles & Colvard, Ltd. during the comparable period of fiscal 2007.

Revenue from our high-power devices increased slightly to $15.0 million in the first nine months of fiscal 2008 compared to $14.9 million in the first nine months of fiscal 2007. Revenue from high-power devices was 4% of revenue in the first nine months of fiscal 2008.

~~Contract revenue increased slightly by 1% to $21.9 million in the first nine months of fiscal 2008 from $21.7 million in the first nine months of fiscal 2007, making up 6% of total revenue.~~

~~Gross Margin.~~ Gross margin in the first nine months of fiscal 2008 increased 17.5% to $120.1 million from $102.2 million in the first nine months of fiscal 2007. Our gross margin percentage decreased from 36% to 34% of revenues in the nine-month comparison. The decrease was primarily due to lower gross margins on sales of LED chips and higher costs relating to our new LED component products.

~~Research and Development.~~Research and development expenses decreased 2.7% in the first nine months of fiscal 2008 to $43.1 million from $44.3 million in the first nine months of fiscal 2007. The decrease in research and development spending was due to the reallocation of research and development resources to support the manufacturing ramp-up of several new products during the first quarter of fiscal 2008. ~~We continue to invest in the development of higher brightness LED chips, LED components, larger wafer process development and development of high-power devices.~~

~~Sales, General and Administrative~~.SG&A expenses increased 52.6% in the first nine months of fiscal 2008 to $57.4 million compared to $37.6 million in the first nine months of fiscal 2007. The increase in SG&A expenses is due to i) SG&A expenses related to the operations of COTCO, which was acquired during our fourth fiscal quarter of 2007, ii) increased stock based compensation expense, iii) higher costs incurred in connection with patent litigation, and iv) increased spending on sales and marketing to support the growth of our LED component products.

~~Amortization of Acquisition Related Intangibles~~.~~Amortization of acquisition related intangibles~~Our losses were $12.3 million in the first nine months of fiscal 2008 compared to $500,000 in the first nine months of fiscal 2007. The increase in amortization of acquisition related intangibles is due to our acquisitions of COTCO, in fiscal 2007, as well as, our acquisition of LLF during the third quarter of fiscal 2008. Combined these acquisitions have resulted in the addition of $99.6 million of amortizable intangible assets principally composed of developed technologies and customer relationships.

~~Loss on Disposal and Impairment of Long-Lived Assets, net~~. We recorded $500,000 of net losses on the disposal and impairment of long-lived assets in the first nine months of fiscal 2008 compared to a loss of $28,000 in the first nine months of fiscal 2007 as a result of the long-lived assets disposed of or impaired in each comparative period.

~~Gain on Sale of Investments, Net~~. During the first nine months of fiscal 2008 we recorded a gain on sale of investments of $14.1 million as we liquidated our remaining shares of Color Kinetics Incorporated, or Color Kinetics, upon completion of its acquisition by Koninklijke Philips Electronics NV. During the first nine months of fiscal 2007, we sold 931,275 shares of Color Kinetics common stock for $16.7 million in proceeds and recognized a gain of $11.4 million.

~~Interest and Other Non-Operating Income, Net~~. ~~Net interest and other non-operating income increased 3.0% to $12.2 million in the first nine months of fiscal 2008 from $11.8 million in the first nine months of fiscal 2007~~ primarily ~~due to the higher average levels of cash, cash equivalents and investments in the current fiscal year.~~

~~Income Tax Benefit or Expense.~~ We recorded income tax expense of $7.9 million from continuing operations in the first nine months of fiscal 2008 as compared to income tax benefit from continuing operations of $600,000 in the first nine months of fiscal 2007. The fluctuation is due primarily to certain discrete events in the first nine months of fiscal 2007 that resulted in the release of certain contingent tax reserves and valuation allowances. We currently estimate our effective tax rate for fiscal 2008 will be approximately 24%.

~~Income (Loss) from Discontinued Operations, Net of Related Income Tax Benefit.~~ During the first nine months of fiscal 2008, we recorded a loss after tax from discontinued operations of $200,000 versus $7.2 million of after-tax income from discontinued operations recorded in the first nine months of fiscal 2007. The primary driver of the after-tax income amount in the first nine months of fiscal 2007 was the release of Cree Microwave contingent tax reserves as a result of the expected resolution of Internal Revenue Service audits of fiscal 2003, 2004, and 2005 in the amount of $7.3 million partially offset by continued expenses arising from the Cree Microwave Sunnyvale facility operating lease. The loss in the first nine months of fiscal 2008 related primarilyattributable to continued expenses arising from ~~the~~our Sunnyvale facility operating ~~lease.~~lease that was associated with the operations of our discontinued Cree Microwave subsidiary.

We require cash to fund our operating expenses and working capital requirements, including outlays for research and development, and to make capital expenditures, strategic acquisitions and investments. Our principal sources of liquidity are cash ~~generating capability~~on hand, marketable investments and ~~financial condition give us the financial~~cash generated from operations. Our ability to ~~grow our business. Our principal source of liquidity is operating~~generate cash ~~flows, which is derived~~ from ~~net income. This cash generating capability is~~operations has been one of our fundamental strengths and ~~provides~~has provided us with substantial flexibility in meeting our operating, financing and investing needs. We have no debt or ~~lines-of-credit~~lines of credit and have minimal lease commitments.

~~We plan~~ In the near term, we expect to ~~meet the~~fund our primary cash ~~needs for the business for the remainder of fiscal 2008~~requirements through cash generated from operations, and cash and cash equivalents on ~~hand and investments. Actual results may differ from our targets for a number of reasons addressed in this report.~~ hand.

From time to time, we evaluate strategic opportunities and potential investments in complementary businesses and we anticipate continuing to make such evaluations. We may also issue debt, additional shares of common stock, or use available cash on hand for the acquisition of complementary businesses or other significant assets or for other strategic opportunities.

~~At March 30,~~Our liquidity and capital resources depend on our cash flows from operations and our working capital. Our working capital increased to $434.6 million as of September 28, 2008 from $408.2 million at June 29, 2008, primarily due to positive cash flows from operations and cash generated through the exercise of employee stock options. The following table presents the components of our cash conversion cycle for our first fiscal quarter of 2009 and fourth fiscal quarter of 2008:

(b)

Days of supply in inventory (“DSI”) measures the average number of days from procurement to sale of our product. DSI is based on ending inventory and most recent quarterly cost of sales for each period. DSI is calculated by dividing inventory by average cost of goods sold per day for the current quarter (90 days).

(c)

Days in accounts payable (“DPO”) calculates the average number of days our payables remain outstanding before payment. DPO is based on ending accounts payable and most recent quarterly cost of sales for each period. DPO is calculated by dividing accounts payable by average cost of goods sold per day for the current quarter (90 days).

Overall our cash conversion cycle, or days to cash, improved by a net twelve days. We experienced sequential improvements in DSO, DSI and DPO as we made significant strides in managing our working capital. Most notable was the seven day improvement in our DSO.

As of June 29, 2008, substantially all of our investments had investment grade ratings, and any such investments that were in an unrealized loss position at September 28, 2008 were in such position due to interest rate changes, sector credit rating changes or company-specific rating changes. As we intend and believe that we have the ability to hold such investments for a period of time that will be sufficient for anticipated recovery in market value, we currently expect to receive the full principal or recover our cost basis in these securities. When evaluating our investments for possible impairment, we review factors such as the length of time and extent to which fair value has been below our cost basis, the financial condition of the entity in which the investment is made, and our ability and intent to hold the investment for a period of time that may be sufficient for anticipated recovery in market value. The declines in value of the securities in our portfolio are considered to be temporary in nature and, accordingly, we do not believe these securities are impaired as of September 28, 2008.

We believe our current working capital and anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations and capital expenditures for the remainder of fiscal 2009. We have and may continue to use a portion of our available cash and cash equivalents, or funds underlying our marketable securities, to repurchase shares of our common stock. With our strong working capital position, we believe that we have the ability to continue to invest in further development of our products and, when necessary or appropriate, make selective acquisitions or other strategic investments to strengthen our product portfolio, secure key intellectual properties, or expand our production capacity.

The following is a discussion of our primary sources and uses of cash in our operating, investing and financing activities.

Net cash provided by operating activities was $42.1 million in the first quarter of fiscal 2009 compared to $25.6 million in the first quarter of fiscal 2008. The increase in cash provided by operating activities during the first quarter of fiscal 2009 compared to the same period of the prior year is primarily due to higher operating income in the current year and the timing of cash receipts from our customers, offset somewhat by changes in our days of supply in inventory. In particular, DSO decreased by approximately seven days in the current quarter from year-end, whereas, DSO went up by approximately four days during the same period in the prior year. DSI improved by about two days in the current quarter from year-end, whereas, DSI went down by about seven days during the same period in the prior year.

Net cash used in investing activities was $127.3 million in the first quarter of fiscal 2009 compared to net cash provided by investing activities of $8.4 million in the first quarter of fiscal 2008. Our investing activities primarily relate to transactions within our investments, strategic acquisitions, purchase of property, plant and equipment and purchase of patent and license rights. Cash used in investing activities increased primarily as a result of ~~a strategic change~~the $60.0 million contingent consideration payment related to the COTCO acquisition and net higher amounts of available cash and equivalents utilized to acquire investment grade securities.

Net cash provided by financing activities was $1.2 million in the ~~use~~first quarter of ~~invested funds, changes in market factors surrounding certain underlying securities, and consideration of the current conditions~~fiscal 2009 compared to $8.4 million in the ~~capital markets,~~first quarter of fiscal 2008. Our cash flows from financing activities are principally composed of cash proceeds from the issuance of common stock primarily related to employee stock option exercises and employee stock plan purchases offset by cash outflows related to our repurchase of common stock. Cash provided by financing activities decreased year over year as we ~~determined that we would make our complete portfolio~~experienced a lower level of marketable securities available for current operations. As a result of this determination, investments with amortized cost of $102.6 million were transferred from held-to-maturity to available-for-sale. Investments classified as available-for-sale are required to be carried at fair value, which resulted in a net increasestock option exercise activity in the ~~carrying value~~first quarter of these investments of $2.3 million with a corresponding increase in accumulated other comprehensive income net of the related tax effects. Going forward, our investments in marketable securities will be accounted for at fair value with any unrealized gains or losses recognized through accumulated other comprehensive income net of the related tax effects.

~~As of March 30, 2008, our cash, cash equivalents and investments combined increased $87.3 million, or 28.1%, from balances reported~~fiscal 2009 as of June 24, 2007. Our net property and equipment has decreased by $21.1 million, or 5.7%, since June 24, 2007, as depreciation expense and disposals of fixed assets have exceeded capital additions during the period. Duringcompared to the first ~~nine months~~quarter of fiscal 2008, in addition to increased repurchases of our common stock in the current year.

We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we ~~spent $37.5 million on~~use other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital ~~purchases. Except~~resources are not subject to off-balance sheet risks from unconsolidated entities. As of September 28, 2008, we did not have any off-balance sheet arrangements, as ~~previously disclosed~~defined in ~~Note 3 “Acquisitions,” Note 14 “Lease Commitments,” and Note 16 “Commitments and Contingencies,” included~~Item 303(a)(4)(ii) of SEC Regulation S-K.

We have entered into operating leases in the normal course of business. These arrangements are often referred to as a form of off-balance-sheet financing. Please refer to Part II, Item 87 of our Annual Report on Form 10-K for the fiscal year ended June ~~24, 2007, we have no off-balance sheet obligations, commitments or contingencies or guarantees,~~29, 2008, in the section entitled “Contractual Obligations” for the future minimum lease payments due under our operating leases as of June 29, 2008.

Critical Accounting Policies and ~~we do not use special purpose entities for any transactions.~~Estimates

AsFor information about our other critical accounting policies and estimates, see the “Critical Accounting Policies and Estimates” section of ~~March 30, 2008, there remained approximately 4.4 million shares~~Item 7 of our ~~common stock approved~~Annual Report on Form 10-K for ~~repurchase under~~ the ~~repurchase program authorized by~~fiscal year ended June 29, 2008.

See Note 1, “Basis of Presentation and Changes in Significant Accounting Policies,” to our unaudited financial statements in Item 1 of this Quarterly Report for a description of recent accounting pronouncements, including the ~~Board~~expected dates of Directors that extends through June 2008. Since the inception of our stock repurchase program in January 2001, we have repurchased approximately 7.7 million shares of our common stock at an average price of $18.18 per share, with an aggregate value of $139.7 million. At the discretion of our management, the repurchase program can be implemented through open market or privately negotiated transactions. We will determine the timeadoption and ~~extent of repurchases based~~estimated effects, if any, on our ~~evaluation of market conditions and other factors.~~consolidated financial statements.

During the first nine months of fiscal 2008, our operations provided $66.1 million of cash as compared to $83.6 million of cash provided in the first nine months of fiscal 2007. This $17.5 million or 26.5% decrease is due principally to changes in operating assets and liabilities and lower net income than in the comparable nine-month period.

At March 30, 2008, our inventory days on hand were 92 days as compared to 81 days at June 24, 2007. The increase in inventory during the first nine months of fiscal 2008 primarily reflects increased levels of work-in-progress for our LED components to support a longer internal supply chain and to meet anticipated increases in demand. Accounts receivable days sales outstanding were 80 days at March 30, 2008 as compared to 64 days at June 24, 2007.

During the first nine months of fiscal 2008, we generated $66.1 million from investing activities as compared to $38.9 million of cash used in the first nine months of fiscal 2007. During the first nine months of fiscal 2008 we had cash inflows of $17.0 million related to the liquidation of our holdings in Color Kinetics and $98.3 million in net cash inflows from our investment portfolio. This was partially offset by cash outflows of a net amount of $7.2 million related to our acquisition of LLF, purchases of property and equipment of $37.5 million and $5.5 million of patent related expenditures. This compares to the first nine months of fiscal 2007, where we had cash inflows of $16.7 million related to the sale of a portion of our holdings in Color Kinetics and $65.6 million in net cash inflows from our investment portfolio. These inflows were exceeded by cash outflows of $43.9 million related to our acquisition of INTRINSIC Semiconductor Corporation, purchases of property and equipment of $71.9 million, and $4.5 million of patent related expenditures.

We generated $62.3 million of cash from financing activities in the first nine months of fiscal 2008, primarily from the issuance of common stock upon the exercise of stock options, as compared to $15.0 million of financing cash used in the first nine months of fiscal 2007, which primarily resulted from the repurchase of our common stock during the period.

~~During the first nine months of fiscal 2008, we fully liquidated~~For quantitative and qualitative disclosures about our ~~investments in the common stock of Color Kinetics. We received proceeds of $17.0 million and recognized a pre-tax gain of $14.1 million from the sale during the period.~~

We maintain an investment portfolio principally composed of high-grade corporate debt, commercial paper, government securities, and other investments at fixed interest rates that vary by security. These investments are initially made in “A” grade or better in accordance with our cash management policy. At March 30, 2008, we had $104.9 million invested in these securities, compared to $200.4 million at June 24, 2007. Although these securities generally earn interest at fixed rates, the historical fair values of such investments have not differed materially from the amounts reported in our consolidated balance sheets. The potential loss in fair value resulting from a hypothetical 10% decrease in quoted market ~~price was approximately $10.5 million at March 30, 2008 and $20.0 million at June 24, 2007.~~

We have made and may make future investments in companies having operations or technologies in areas within our strategic focus. These investments can be inherently risky as markets for the technologies or products of these companies may be in the early stages of development and may never materialize.

As we operate internationally and have transactions denominated in foreign currencies, we are exposed to currency exchange rate risks. Additionally, certain of our foreign entities operate with a functional currency other than the U.S. Dollar, our reporting currency. This requires that results of these foreign operations be translated at average exchange rates into U.S. Dollars for financial reporting purposes. As a result, fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities. Our primary exposures relate to the exchange rates between the U.S. Dollar, the Chinese Renminbi and Hong Kong Dollar. We have not entered into any foreign currency derivative financial instruments; however, we may choose to do so in the future in an effort to manage or hedge our foreign currency risk.

~~Except as previously disclosed in Note 3 “Acquisitions,” Note 14 “Lease Commitments,” and Note 16 “Commitments and Contingencies,” included in Part II,~~risks, see Item 87a of our Annual Report on Form 10-K for the fiscal year ended June ~~24, 2007, we have no off-balance sheet obligations, commitments, contingencies, or guarantees, nor do we use special purpose entities for any transactions.~~29, 2008.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Form 10-Q, our disclosure controls and procedures are effective in that they provide reasonable assurances that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the United States Securities and Exchange Commission’s rules and forms.

We routinely review our internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. There have been no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the ~~third~~first quarter of fiscal ~~2008~~2009 that we believe materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Please refer to ~~Part I,~~Note 12, “Commitments and Contingencies,” in our consolidated financial statements included in Item 38 of our Annual Report on Form 10-K for the fiscal year ended June ~~24, 2007 and Part II, Item 1 of the Company’s Quarterly Reports on Form 10-Q for the quarterly periods ended September 23, 2007 and December 30, 2007~~29, 2008 for a description of material legal proceedings.

We are currently a party to other legal proceedings incidental to our business. Although the resolution of these matters cannot be predicted with certainty, management’s present judgment is that the final outcome will not likely have a material adverse effect on our consolidated financial condition or results of operations. If an unfavorable resolution occurs, our business, results of operations and financial condition could be materially adversely affected.

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, both known and unknown, including ones 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 ~~occur,~~occurs, our business, financial condition or results of operations could be materially and adversely affected.

~~Although~~Current uncertainty in global economic conditions pose a risk to the overall economy as consumers and businesses may defer purchases in response to tighter credit and negative financial news, which could negatively affect product demand and other related matters. Consequently, demand could be different from our expectations due to factors including changes in business and economic conditions, including conditions in the credit market that could affect consumer confidence; customer acceptance of our and our competitors’ products; changes in customer order patterns including order cancellations; and changes in the level of inventory at customers.

In addition, we have experienced significant ~~fluctuation~~fluctuations in our revenue, earnings and margins over the past few years, ~~we may not be able to sustain such growth or maintain or grow our margins,~~ and we may continue to experience significant fluctuations in our revenue, earnings and margins in the future. Historically, the prices of our LEDs have declined based on market trends. We attempt to maintain our margins by constantly developing ~~improved~~new or ~~new~~improved products, which provide greater value and result in higher average selling prices, or by lowering the cost ofto manufacture our LEDs. If we are unable to do so, our margins will decline.

Our operating results and margins may vary significantly in the future due to many other factors, including the following:

average sales prices for our products declining at a greater rate than anticipated;

fluctuations in foreign currency as more of our revenue may be in non-U.S. currencies;

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 manufacturing costs in order to allow lower product pricing without margin reductions;

our increased reliance on subcontractors for production capacity and logistics support;

our ability to cost effectively ramp up production capacity at our factories ~~and~~or the facilities of our ~~subcontractors in Asia;~~subcontractors;

our ability to ramp up production ~~for our~~of new products;

our ability to convert ~~our~~ substrates used in our volume manufacturing to larger ~~diameters;~~diameters, which generally allows for a more cost effective manufacturing process;

our ability to produce more efficient, higher brightness ~~and more efficient~~ LED products that satisfy customer design requirements;

our ability to ~~develop~~continue improving our current products and developing new products to specifications that meet the evolving needs of our customers;

changes in demand for our products and our customers’ products that may in turn cause fluctuations in our revenue and result in possible inventory obsolescence;

raw material price ~~fluctuations;~~fluctuations, including certain commodities consumed in our production process;

effects of an economic ~~slow down on~~slow-down in both consumer ~~spending on such items as cell phones, electronic devices~~ and ~~automobiles;~~

~~effects of an economic slowdown in~~ non-consumer spending on ~~such items a video display boards, gaming machines and other general lighting applications;~~products that incorporate our products;

changes in the competitive landscape, such as inventions of new technology, availability of higher brightness LED products, higher volume production and lower pricing from competitors;

changes in the mix of products we sell, which may vary significantly;

~~other companies’ inventions of new technology that may make our products obsolete;~~

product returns or exchanges due to ~~quality related~~quality-related matters or improper use of our products;

changes in purchase commitments by our large customers, including those permitted under ~~our contracts with large customers;~~current contracts;

changes in production capacity and variations in the utilization of that capacity;

disruptions of manufacturing that could result from fire, flood, drought or other disasters, particularly in the case of our single site for SiC wafer and LED production or disruptions from some of our sole source vendors;

changes in legislation, regulations, or tax or accounting rules or changes in their interpretation; and

changes in ~~accounting rules.~~the amount of litigation costs we incur to protect our intellectual property rights.

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 will likely decline.

Our business may be adversely affected by our, or our customers’, ability to access the capital markets.

Although we believe we have adequate liquidity and capital resources to fund our operations internally, in light of current market conditions, our inability or the inability of our customers to access the capital markets, on favorable terms or at all, may adversely affect our financial performance. The inability to obtain adequate financing from debt or capital sources could force us to self-fund strategic initiatives or even forgo certain opportunities, potentially harming our performance.

Additionally, the inability of our customers to access capital efficiently could cause disruptions in their businesses, thereby negatively impacting ours. For example, if our customers do not have sufficient liquidity, they could reduce or limit new capital projects, which could result in lower demand to Cree and/or we may be at risk for any trade credit we have extended to them, due to their inability to repay us. This risk may increase if there is a general economic downturn affecting significant customers or a large number of our other customers and they are not able to adequately manage their business risks or do not properly disclose their financial condition to us.

If we fail to evaluate, implement and integrate strategic opportunities successfully, our business may suffer.

From time to time we evaluate strategic opportunities available to us for product, technology or business acquisitions. For example, in July 2006 we acquired INTRINSIC Semiconductor Corporation, in March 2007 we acquired COTCO, and in February 2008 we acquired LLF. If we choose to make acquisitions, we face certain risks, such as failure of the acquired business to meet our performance expectations, diversion of management attention, retention of existing customers of our current and acquired ~~business,~~businesses, and difficulty in integrating the acquired business’s operations, personnel and financial and operating systems into our current business. We may not be able to successfully address these risks or any other problems that arise from our recent or future acquisitions. Any failure to successfully evaluate strategic opportunities and address risks or other problems that arise related to any acquisition could adversely affect our business, results of operations ~~and~~or financial condition.

If we are unable to effectively develop and expand the distribution channels for our component products and lighting solution products, our operating results may suffer.

We have expanded into new business channels that are different from those that we have historically operated in as we grow our business and sell more LED components versus LED chips. If we are unable to penetrate these new distribution channels to ensure our products are reaching the appropriate customer base, our financial results may be impacted. In addition, if we successfully penetrate these new distribution channels, we cannot guarantee that customers will accept our components or that we will be able to manufacture and deliver them in the timeline established by our customers.

Our LED revenues are highly dependent on our customers’ ability to produce and sell more integrated products using our LED products.

Because our customers generally integrate our LED products into the products that they market and sell, our LED revenues depend on getting our LED products designed into a larger number of our customers’ products and our customers’ ability to sell those products. For example, some of our current customers, as well as prospective customers, create white LED components using our blue LEDs, in combination with phosphors. Sales of blue LED chips are highly dependent upon our customers’ ability to procure efficient phosphors, develop high quality and highly efficient white LED components and gain access to the necessary intellectual property rights. Even if our customers are able to develop competitive white LED components using our blue LED chips, there can be no assurance that our customers will be successful in the marketplace. We also have current and prospective customers that create lighting systems using our LED components. Sales of LED components for these applications are highly dependent upon our customers’ ability to develop high quality and highly efficient lighting products, including thermal design, optical design and power conversion. The lighting industry has traditionally not had this level of technical expertise for LED related designs, which may limit the success of ~~their~~our customers’ products. Even if our customers are able to develop efficient systems, there can be no assurance that our customers will be successful in the marketplace.

~~Our traditional LED customers may reduce orders as~~As a result of our entry into and continued expansion in new ~~markets.~~markets, such as packaged LEDs and LED lighting fixtures, our traditional customers may reduce orders.

~~We began shipping~~Through acquisitions and organic growth, we have moved into and continue to expand in new markets, such as packaged LEDs and LED ~~devices in fiscal 2005. As a result~~lighting fixtures. In these new markets, some of our ~~acquisition of COTCO, in fiscal 2007 and our acquisition of LLF in fiscal 2008, some of~~current customers may now perceive us as a competitor. In response, our customers may reduce their orders for our ~~LED products as they may see us as a competitor.~~products. This reduction in orders could occur faster than our ~~LED products can grow~~sales growth in ~~the near term,~~these new markets, which could ~~reduce~~adversely affect our ~~overall revenue and profitability.~~business, results of operations or financial condition.

Our operating results are substantially dependent on the development and acceptance of new products based on our technology.

Our future success may depend on our ability to develop new and lower cost solutions for existing and new markets and for customers to accept those solutions. We must introduce new products in a timely and cost-effective manner, and we must secure production orders for those products from our customers. The development of new products is a highly complex process, and we historically have experienced delays in completing the development and introduction of new products. ~~Products currently under development include larger, higher quality substrates and epitaxy, wide bandgap RF and microwave power devices, SiC power switches, LED products such as the EZBright~~^TM ~~LED, X-Lamp, other LED components and new LED lighting solutions 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 offor market requirements and evolving standards;

acceptance of our new product designs;

acceptance of new technology in certain markets;

the availability of qualified research and development personnel;

our timely completion of product designs and development;

our ability to expand sales and influence key customers to adopt our products;

our ability to develop repeatable processes to manufacture new products in sufficient quantities and at low enough costs for commercial sales;

our customers’ ability to develop competitive products incorporating our products; and

acceptance of our customers’ products by the market.

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

We have experienced a period of significant growth over the past few years that may challenge our management and other resources. We are also in the process of transforming our business to support a global components customer base. In order to manage our growth and change in our strategy effectively, we must continue to:

expand global sales, marketing and distribution;

implement and improve operating and information technology systems;

maintain adequate manufacturing facilities and equipment to meet customer demand;

maintain a sufficient supply of raw materials to support our growth;

~~improve~~expand the skills and capabilities of our current management team;

add experienced senior level managers;

attract and retain qualified ~~people~~employees with experience in engineering, design, sales and marketing; and

recruit and retain qualified manufacturing employees.

We expect to spend substantial amounts of money in supporting our growth and may have additional unexpected costs. 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 functions to support a global components customer base. If we cannot attract qualified ~~people~~employees or manage growth and change effectively, our business, ~~operating~~ results of operations and financial condition could be adversely affected.

~~Changes~~Litigation could adversely affect our operating results and financial condition.

We are defendants in pending litigation as described in Note 12, “Commitments and Contingencies,” in our ~~effective tax rate may have an adverse effect~~consolidated financial statements included in Item 8 of our Annual Report on Form 10-K for the fiscal year ended June 29, 2008 that alleges, among other things, patent infringement. Defending against existing and potential litigation will likely require significant attention and resources and, regardless of the outcome, result in significant legal expenses, which will adversely affect our results unless covered by insurance or recovered from third parties. If our defenses are ultimately unsuccessful, or if we are unable to achieve a favorable resolution, we could be liable for damage awards that could materially adversely affect our results of ~~operations.~~operations and financial condition.

Our business may be impaired by claims that we, or our customers, infringe intellectual property rights of others.

Vigorous protection and pursuit of intellectual property rights characterize the semiconductor industry. These traits 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;

incur asset impairment charges;

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.

There can be no assurance that third parties will not attempt to assert infringement claims against us, or our customers, with respect to our products. In addition, our customers may face infringement claims directed to the customer’s products that incorporate our products, and an adverse result could impair the customer’s demand for our products. We have also promised certain of our customers that we will indemnify them in the event they are sued by our competitors for infringement claims directed to the products we supply. Under this indemnification obligation we may be responsible for future payments to resolve infringement claims against them. From time to time we receive correspondence asserting that our products or processes are or may be infringing patents or other intellectual property rights of others. Where we believe the assertions may have merit or in other appropriate circumstances, we take appropriate steps to seek to obtain a license or to avoid the infringement. However, we cannot predict whether a license will be available or that we would find the terms of any license 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.

There are limitations on our ability to protect our intellectual property.

Our intellectual property position is based in part on patents owned by us and patents exclusively licensed to us by North Carolina State University, Boston University 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, ~~effective tax rates may~~where appropriate, and to pursue such applications with U.S. and foreign patent authorities.

However, our existing patents are subject to expiration and we cannot be ~~adversely affected~~sure that additional patents will be issued on any new applications around the covered technology or that our existing or future patents will not be successfully contested by third parties. Also, since issuance of a ~~number~~valid patent does not prevent other companies from using alternative, non-infringing technology, we cannot be sure that any of ~~factors including:~~our patents, or patents issued to others and licensed to us, will provide significant commercial protection, especially as new competitors enter the market.

~~changes in tax laws~~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 through appropriate efforts to maintain its secrecy, including requiring employees and third parties to sign confidentiality agreements. We cannot be sure that these efforts will be successful or ~~interpretation~~that the confidentiality agreements will not be breached. We also cannot be sure that we would have adequate remedies for any breach of such ~~tax laws and changes in generally accepted accounting principles;~~

~~the jurisdiction in which profits are determined to be earned and taxed;~~

~~the resolution of issues arising from tax audits with various authorities;~~

~~changes in the valuation~~agreements or other misappropriation of our ~~deferred tax assets~~trade secrets, or that our trade secrets and ~~liabilities;~~proprietary know-how will not otherwise become known or be independently discovered by others.

~~adjustments~~Where necessary, we may initiate litigation to ~~estimated taxes upon finalization~~enforce our patent or other intellectual property rights. Any such litigation may require us to spend a substantial amount of ~~various tax returns;~~

~~increases~~time and money and could distract management from our day-to-day operations. Moreover, there is no assurance that we will be successful in ~~expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairment of goodwill in connection with acquisitions;~~

~~changes in available tax credits;~~

~~changes in share-based compensation expense; and~~

~~the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes~~

~~Any significant increase in our future effective tax rates could adversely impact net income for future periods.~~any such litigation.

Our ~~acquisitions of COTCO~~,operations in foreign countries, including China and ~~LLF~~other Asian countries, expose us to ~~the~~certain risks inherent in doing business ~~in China,~~internationally, which may adversely affect our business, results of operations ~~and~~or financial condition.

As a result of ~~our recent~~ acquisitions ~~which~~and organic growth, we have operations, manufacturing facilities and subcontract arrangements in ~~China, we are exposed~~foreign countries that expose us to certain risks, ~~associated with operating in China,~~ including the following:

foreign exchange fluctuations, as we conduct operations and have sales denominated in non-U.S. ~~currency;~~currencies;

~~protecting~~protection of intellectual property and trade secrets;

tariffs and other barriers;

timing and availability of export licenses;

disruptions in ~~China’s domestic infrastructure;~~the infrastructure of the foreign countries where we operate;

difficulties in accounts receivable collections;

difficulties in staffing and managing ~~a distant~~ international ~~subsidiary;~~operations;

the burden of complying with foreign and international laws and treaties; and

the burden of complying with and changes in international taxation policies.

In ~~addition,~~some instances, we have been provided and may continue to receive incentives from foreign governments to encourage our investment in certain countries, regions, or areas. In particular, we have received and may continue to receive such incentives in connection with our operations in China, as the Chinese ~~government and provincial~~national and local governments ~~have provided, and continue to provide, various incentives~~seek to encourage the development of the technology industry in China. ~~Such~~Government incentives may include tax rebates, reduced tax rates, favorable lending policies and other measures, some or all of which may be available to us ~~with respect~~due to ~~the facility we have acquired in China.~~our foreign operations. Any of these incentives could be reduced or eliminated by governmental authorities at any time. Any ~~such~~ reduction or elimination of incentives currently provided to our operations could adversely affect our business and results of operations.

~~If we~~We are ~~unable~~subject to ~~produce and sell adequate quantities of our products and improve our yields and reduce costs, our operating results may suffer.~~risks related to international sales.

We ~~believe~~expect that ~~our ability~~revenue from international sales will continue to ~~gain customer acceptance~~represent the majority of our ~~products~~total revenue. International sales are subject to a variety of risks, including risks arising from currency fluctuations, tariffs, trade barriers, collection issues and taxes. Our international sales are subject to ~~achieve higher volume production and lower production costs for those products will be important to~~variability as our ~~future operating results. We must reduce costs of these products to avoid margin reductions from the lower~~ selling prices become less competitive in countries with currencies that are declining in value against the U.S. Dollar and more competitive in countries with currencies that are increasing in value against the U.S. Dollar.

In addition, international sales are subject to numerous U.S. and foreign laws and regulations, including, without limitation, regulations relating to import-export control, technology transfer restrictions, the International Traffic in Arms Regulation promulgated under the Arms Export Control Act, the Foreign Corrupt Practices Act and the anti-boycott provisions of the U.S. Export Administration Act. If we ~~may offer due~~fail to comply with these laws and regulations, we could be liable for administrative, civil or criminal liabilities, and in the extreme case, we could be suspended or debarred from government contracts or our competitive environment and/or to satisfy prior contractual commitments. Achieving greater volumes and lower costs requires improved production yields for these products. We may encounter manufacturing difficulties as we ramp up our capacity. Our failure to produce adequate quantities and improve the yields of any of these productsexport privileges could be suspended, which could have a material adverse effect on our ~~business, results of operations and financial condition.~~business.

Our results of operations, financial condition and business would be harmed if we were unable to balance customer demand and capacity.

As customer demand for our products, particularly new products, changes, we must be able to ramp up or adjust our production capacity to meet demand. We are ~~in the process of~~continually taking steps to address our manufacturing capacity needs for ~~certain~~our products. ~~For example, we have continued to expand capacity for our X-Lamp products at our factory in Huizhou, China.~~ If we are not able to increase our capacity or if we increase our capacity too quickly, our business and results of operations could be adversely impacted. If we experience delays or unforeseen costs associated with ~~this expansion,~~adjusting our capacity levels, we may not be able to achieve our financial targets.

In addition, if any of our large customers decreases their purchases from us, and we are not able to cost effectively adapt our production capacity accordingly, then our business and results of operations could be adversely impacted.

~~If we experience poor~~Variations in our production yields ~~or cannot~~impact our ability to reduce costs and could cause our margins ~~could~~to decline and our operating results ~~may~~to suffer.

~~Our materials products,~~All of our ~~LED products, and our high-power~~ 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 our SiC-based high-power semiconductors. During our manufacturing process, each wafer is processed to contain numerous die, which are the individual semiconductor devices. Our high-power devices and LED products are then further processed by incorporating them into packages for sale as packaged components. The number of usable ~~crystals, wafers, dies and packaged components that result~~items, or yield, from our production processes ~~can~~may fluctuate as a result of many factors, including but not limited to the following:

variability in our process repeatability and control;

contamination of the manufacturing environment;

equipment failure, power outages or variations in the manufacturing process;

lack of consistency and adequate quality and quantity of piece parts and other raw materials;

losses from broken wafers or human errors;

defects in packaging either within our ~~control~~facilities or at our subcontractors; and

~~transition of~~any transitions or changes in our ~~LED wafer~~ production ~~from three-inch to four-inch wafers.~~process, planned or unplanned.

~~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.~~

If our yields decrease, our ~~cost per wafer~~costs could increase, 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 may offer products for future delivery at prices based on planned yield improvements. Reduced yields or failure to achieve planned yield improvements could continue to significantly affect our margins and operating results.

We depend on a small number of sole source and limited source suppliers for certain raw materials, components, services and equipment used in manufacturing our products, including key materials and equipment used in critical stages of our manufacturing processes. Although alternative sources generally exist for these items, qualification of many of these alternative sources could take up to six months or longer. Where possible, we ~~are attempting~~attempt to identify alternative sources for our sole and limited source suppliers.

We generally purchase these sole or limited source items with purchase orders, and we have limited guaranteed supply arrangements with such suppliers. We do not control the time and resources that these suppliers devote to our business, and we cannot be sure that these suppliers will perform their obligations to us. In the past, we have experienced decreases in our production yields when suppliers have varied from previously agreed upon specifications that have impacted our cost of sales.

Additionally, the inability of our suppliers to access capital efficiently could cause disruptions in their businesses, thereby negatively impacting ours. This risk may increase if there is a general economic downturn affecting significant suppliers or a large number of our other suppliers in the event that they do not adequately manage their business. Any delay in product delivery or other interruption or variation in supply from these suppliers could prevent us from meeting commercial demand for our products. If we were to lose key suppliers, our key suppliers were unable to support our demand or we were unable to identify and qualify alternative suppliers, our manufacturing operations could be interrupted or hampered significantly.

The markets in which we operate are highly competitive and have evolving technology standards.

The markets for our ~~LED and high-power~~ products are highly competitive. In the LED market, we compete with companies that manufacture or sell nitride-based LED chips as well as those that sell packaged LEDs. Competitors are offering new blue, green and white LEDs with aggressive prices and improved performance. These competitors may reduce average sales prices faster than ~~our cost reduction,~~we are able to reduce costs, and competitive pricing pressures may accelerate the rate of decline of our average ~~sale~~sales prices. The market for SiC wafers is also becoming competitive as other firms in recent years have begun offering SiC wafer products or announced plans to do so.

Competition is increasing. In order to achieve our revenue growth objectives in fiscal ~~2008~~2009 and beyond, we need to continue to develop new products that enable our customers to win new designs and increase market share in key areas such as mobile products and general lighting class applications. One major supplier dominates ~~this~~the market in which products incorporating our LED chip products compete and we anticipate that the increased competition for these designs ~~has intensified and~~ will result in pressure to lower sales prices of our products. Therefore, our ability to provide higher performance LEDs at lower costs will be critical to our success. Competitors may also try to align with some of our strategic customers. 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. Competitors also could invent new technologies that may make our products obsolete. Any of these developments could have an adverse effect on our business, results of operations and financial condition.

~~Our business may be impaired by claims that we, or our customers, infringe intellectual property rights of others.~~

~~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.~~

There can be no assurance that third parties will not attempt to assert infringement claims against us, or our customers, with respect to our products. In addition, our customers may face infringement claims directed to the customer’s products that incorporate our products, and an adverse result could impair the customer’s demand for our products. We have also promised certain of our customers that we will indemnify them in the event they are sued by our competitors for infringement claims directed to the products we supply. Under this indemnification obligation we may be responsible for future payments to resolve infringement claims against them. From time to time we receive correspondence asserting that our products or processes are or may be infringing patents or other intellectual property rights of others. Our practice is to investigate such claims to determine whether the assertions have merit and, if so, we take appropriate steps to seek to obtain a license or to avoid the infringement. However, we cannot predict whether a license will be available or that we would find the terms of any license 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.

~~There are limitations on our ability to protect our intellectual property.~~

Our intellectual property position is based in part on patents owned by us and patents exclusively licensed to us by North Carolina State University, Boston University 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.

However, we cannot be sure that patents will be issued on such applications or that our existing or future patents will not be successfully contested by third parties. 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, especially as new competitors enter the market.

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 through appropriate efforts to maintain its secrecy, including requiring employees and third parties to sign confidentiality agreements. We cannot be sure that these efforts will be successful or that the confidentiality agreements will not be breached. We also cannot be sure that we would have adequate remedies for any breach of such agreements or other misappropriation of our trade secrets, or that our trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others.

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

~~Performance of our investments in other companies could affect our financial results.~~

We may make investments in other companies, which subjects us to risks inherent in the business of the company in which we have invested and to trends affecting the equity markets as a whole. Investments in private companies are subject to additional risks relating to the limitations on transferability of the interests due to the lack of a public market and to other transfer restrictions. Investments in publicly held companies are subject to market risks and may not be liquidated easily. As a result, we may not be able to reduce the size of our positions or liquidate our investments when we deem appropriate to limit our downside risk.

If government agencies discontinue or curtail their funding for our research and development programs, our business may suffer.

Changes in federal budget priorities could adversely affect our contract revenue. Historically, government agencies have funded a significant portion of our research and development activities. When the government changes budget priorities, such as in times of war, our funding has the risk of being redirected to other programs. Government contracts are also subject to the risk that the government agency may not appropriate and allocate all funding contemplated by the contract. In addition, our government contracts generally permit the contracting authority to terminate the contracts for the convenience of the government. The full value of the contracts would not be realized if they were prematurely terminated. Furthermore, we may be unable to incur sufficient allowable costs to generate the full estimated contract values and there is some risk that any technologies developed under these contracts may not have commercial value. If government funding 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.

Our failure to comply with applicable environmental laws and regulations worldwide could harm our business and results of operations.

The manufacturing, assembling and testing of our products require the use of hazardous materials that are subject to a broad array of environmental, health and safety laws and regulations. Our failure to comply with any of these applicable laws or regulations could result in:

regulatory penalties, fines and legal liabilities;

suspension of production;

alteration of our fabrication, assembly and test processes; and

curtailment of our operations or sales.

In addition, our failure to manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to increased costs or future liabilities. Existing and future environmental laws and regulations could also require us to acquire pollution abatement or remediation equipment, modify our product designs or incur other expenses associated with such laws and regulations. Many new materials that we are evaluating for use in our operations may be subject to regulation under existing or future environmental laws and regulations that may restrict our use of one or more of such materials in our manufacturing, assembly and test processes or products. Any of these restrictions could harm our business and results of operations by increasing our expenses or requiring us to alter our manufacturing and assembly and test processes.

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 or flaws 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:

incur increased costs, such as warranty expense and costs associated with customer support;

experience delays, cancellations or rescheduling of orders for our products;

write down existing inventory; or

experience product returns.

~~We expect that revenue from international sales will continue to represent the majority of~~Changes in our ~~total revenue. International sales are subject to a variety of risks, including risks arising from currency~~

fluctuations, tariffs, trade barriers and taxes. Our international sales are subject to variability as prices become less competitive in countries with currencies that are low or are declining in value against the U.S. Dollar and more competitive in countries with currencies that are high or increasing in value against the U.S. Dollar. In addition, international sales are subject to numerous U.S. and foreign laws and regulations, including, without limitation, regulations relating to import-export control, technology transfer restrictions, the International Traffic in Arms Regulation promulgated under the Arms Export Control Act, the Foreign Corrupt Practices Act, and the anti-boycott provisions of the U.S. Export Administration Act. If we fail to comply with these laws and regulations, we could be liable for administrative, civil, or criminal liabilities, and in the extreme case, we could be suspended or debarred from government contracts or our export privileges could be suspended, which couldeffective tax rate may have ~~a material~~an adverse effect on our ~~business.~~results of operations.

Our future effective tax rates may be adversely affected by a number of factors including:

changes in tax laws or interpretation of such tax laws and changes in generally accepted accounting principles;

the jurisdiction in which profits are determined to be earned and taxed;

the resolution of issues arising from tax audits with various authorities;

changes in the valuation of our deferred tax assets and liabilities;

adjustments to estimated taxes upon finalization of various tax returns;

increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairment of goodwill in connection with acquisitions;

changes in available tax credits;

changes in share-based compensation expense; and

the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.

Any significant increase in our future effective tax rates could adversely impact net income for future periods. In addition, the determination of our income tax provision requires significant judgment. To the extent our income tax liability materially differs from our income tax provisions and accruals due to factors, including the above, that were not anticipated at the time we estimated our tax provision, our net income or cash flows could be adversely affected.

~~Litigation~~In order to compete, we must attract, retain and motivate key employees, and our failure to do so could ~~adversely affect our operating results and financial condition.~~

We are defendants in pending litigation as described in Part II, Item 1, of this report that alleges, among other things, patent infringement. Defending against existing and potential litigation will likely require significant attention and resources and, regardless of the outcome, result in significant legal expenses, which will adversely affect our results unless covered by insurance or recovered from third parties. If our defenses are ultimately unsuccessful, or if we are unable to achieve a favorable resolution, we could be liable for damage awards that could materially adversely affectharm our results of ~~operations~~operations.

In order to compete, we must attract, retain and ~~financial condition.~~motivate executives and other key employees, including those in managerial, technical, sales, marketing and support positions. We generally do not have long-term employment agreements or other arrangements with our employees that would deter them from leaving. Hiring and retaining qualified executives, scientists, engineers, technical staff and sales personnel are critical to our business, and competition for experienced employees in our industry can be intense. To help attract, retain and motivate key employees, we use share-based incentive awards such as employee stock options and restricted stock. If the value of such stock awards does not appreciate, as measured by the performance of the price of our common stock, or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate employees could be weakened, which could harm our business and results of operations.

We are exposed to fluctuations in the market value of our investment portfolio and in interest rates, ~~through~~and therefore, impairment of our investments or lower investment ~~portfolio.~~income could harm our earnings.

We are exposed to market value and the inherent interest rate risk related to our investment portfolio. We have historically invested portions of our available cash in fixed interest rate securities such as high-grade corporate debt, commercial paper, government securities and other fixed interest rate investments. The primary objective of our investments is to preserve principal ~~while maximizing yields. Although~~and we only acquire investments ~~are made initially in~~rated “A” grade or ~~better~~better. However, our investments are not all FDIC insured and may lose value; in ~~accordance with our cash management policy,~~addition, declines in ~~the~~ underlying interest rates will have a negative impact on the income generated from our investments, which could materially adversely affect our results of operations.

Fluctuations in foreign currency exchange rates may affect our operating ~~results.~~

~~Certain~~results as costs of operating certain of our foreign ~~entities operate with a functional~~subsidiaries are incurred in other currencies.

We conduct business in countries outside the United States, which exposes us to fluctuations in foreign currency ~~other than the~~exchange rates. In addition, our financial statements are presented in U.S. ~~Dollar, our reporting currency. This~~Dollars, which requires that results of these foreign operations be translated at average exchange rates into U.S. Dollars for financial reporting purposes. As a result, fluctuations in exchange rates may affect our expenses and results of operations as well as the value of our assets and liabilities. We have not entered into any foreign currency derivative financial instruments; however, we may choose to do so in the future in an effort to manage or hedge our foreign exchange rate risk.

We may be required to record a significant charge to earnings if our goodwill or amortizable intangible assets become impaired.

We are required under generally accepted accounting principles to review our amortizable intangible assets and investments in equity interests for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our amortizable intangible assets or goodwill may not be recoverable include a decline in stock price and market capitalization and slower growth rates in our industry. We may be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our ~~goodwill or~~ amortizable intangible assets or goodwill is determined to exist. This could adversely impact our results of operations.

~~Our business~~Catastrophic events or geo-political conditions may ~~be adversely affected by~~disrupt our ~~or our customers’, ability to access the capital markets.~~business.

~~Although we believe we have adequate liquidity and capital resources to fund our operations internally, in light of current market conditions, our inability~~A disruption or ~~the inability~~failure of our ~~customers~~systems or operations in the event of a major earthquake, weather event, cyber-attack, terrorist attack or other catastrophic event could cause delays in completing sales or performing other mission-critical functions. A catastrophic event that results in the destruction or disruption to ~~access the capital markets, on favorable terms~~our supply chain or ~~at all, may adversely~~any of our critical business or information technology systems could severely affect our ~~financial performance. The inability~~ability to ~~obtain adequate financing from debt or capital sources~~conduct normal business operations and, as a result, our operating results could ~~force us to self-fund strategic initiatives or even forgo certain opportunities, potentially harming~~be adversely affected. Abrupt political change, terrorist activity and armed conflict pose a risk of general economic disruption in affected countries, which could result in an adverse effect on our ~~performance. Additionally, the inability~~business and results of ~~our customers to access capital efficiently could cause disruptions in their businesses, thereby negatively impacting ours.~~operations.

Our results of operations could vary as a result of the methods, estimates and judgments that we use in applying our accounting policies.

The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting ~~Policies”~~Policies and Estimates” in ~~Part I,~~ Item 27 of ~~this report)~~our Annual Report on Form 10-K for the fiscal year ended June 29, 2008). Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations.

~~Except as previously disclosed in our Current Report on Form 8-K filed March 3, 2008, there~~There were no sales of unregistered securities during the ~~third~~first quarter of fiscal ~~2008.~~2009. The following table summarizes our stock repurchase activity for the first quarter of fiscal 2009 (in thousands, except per share amounts):


	Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased (2)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs	Maximum Number of Shares that may yet be Purchased under the Program (1)
June 30 - July 27, 2008	—	$	—	—	4,597
July 28 - August 24, 2008	—	$	—	—	4,597
August 25 - September 28, 2008	153	$	21.50	130	4,467

Total	153	$	21.50	130	4,467

The following exhibits are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:


32.1		Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to the requirements 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.


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

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


		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of ~~March 30,~~September 28, 2008 (unaudited) and June ~~24, 2007~~29, 2008	3

	Consolidated Statements of Income for the three ~~and nine~~ months ended ~~March 30,~~ September 28, 2008 (unaudited) and ~~March 25,~~September 23, 2007 (unaudited)	4

	Consolidated Statements of Cash Flow for the ~~nine~~three months ended ~~March 30,~~ September 28, 2008 (unaudited) and ~~March 25,~~September 23, 2007 (unaudited)	5

	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1916

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3225

Item 4.	Controls and Procedures	3226

Item 4T.	Controls and Procedures	3326

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3327

Item 1A.	Risk Factors	3327

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4339

Item 3.	Defaults Upon Senior Securities	40

Item 4.	Submission of Matters to a Vote of Security Holders	40

Item 5.	Other Information	40

Item 6.	Exhibits	4340

SIGNATURES		4442


Cash consideration paid to LLF stockholders	$	16,450
Fair value of common stock issued by the Company		58,830
Fair value of vested LLF stock options assumed by the Company		4,486
Direct transaction fees and expenses		1,042

Total purchase price	$	80,808


Tangible assets:
Cash and cash equivalents	$	10,312
Accounts receivable		982
Inventories		1,603
Deferred tax assets		2,573
Property and equipment		596
Other assets		1,093

Total tangible assets		17,159


Intangible assets:
Customer relationships		1,300
Non-compete agreements		440
Developed technology		39,500
Goodwill		40,115

Total intangible assets		81,355


Liabilities assumed:
Accounts payable		1,525
Accrued expenses		770
Deferred tax liability		15,411

Total liabilities assumed		17,706

Net assets acquired	$	80,808


Cash consideration paid to COTCO shareholder	$	77,334
Fair value of common stock issued by the Company		126,943
Direct transaction fees and expenses		3,065

Total purchase price	$	207,342


Tangible assets:
Cash and cash equivalents	$	1,110
Accounts receivable		20,376
Inventories		25,065
Other current assets		54
Property and equipment		23,919

Total tangible assets		70,524


Intangible assets:
Customer relationships		51,000
Trade names and license agreements		150
Developed technology		7,220
In-process research and development charge		950
Goodwill		104,771

Total intangible assets		164,091


Liabilities assumed:
Accounts payable		10,871
Accrued expenses		5,576
Deferred tax liability		10,826

Total liabilities assumed		27,273

Net assets acquired	$	207,342


	Three Months Ended		Nine Months Ended
	March 25, 2007		March 25, 2007
Revenue	$	109,109	$	338,731
Income from continuing operations	$	13,255	$	54,103
Net income	$	29,269	$	60,530
Earnings per share, basic	$	0.35	$	0.72
Earnings per share, diluted	$	0.35	$	0.71


	As of (in 000’s)
	March 30, 2008			June 24, 2007
Raw material	$	19,129		$	13,941
Work-in-progress		37,619			28,108
Finished goods		31,599			31,661

		88,347			73,710
Inventory reserve		(5,019	)		(2,642	)

Total inventories, net	$	83,328		$	71,068


	September 28, 2008			June 29, 2008
Billed trade receivables	$	106,288		$	111,851
Unbilled contract receivables		5,085			6,188

		111,373			118,039
Allowance for sales return		(6,107	)		(5,944	)
Allowance for bad debts		(1,836	)		(1,719	)

Total accounts receivable, net	$	103,430		$	110,376


	Financial Instruments Carried at Fair Value
	Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Cash equivalents	$	153,783	$	—	$	—	$	153,783
Short-term investments		11,026		98,028		—		109,054
Long-term investments		13,607		38,959		—		52,566

Total assets	$	178,416	$	136,987	$	—	$	315,403


Balance at June 24, 2007	$	141,777
Addition due to the acquisition of LLF		40,115
Adjustments to goodwill primarily related the release of restructuring reserves established as part the acquisition of INTRINSIC		(312	)
Adjustments to goodwill principally relating to the estimated fair value of certain tax contingency reserves and other working capital fair value adjustments related to the acquisition of COTCO		6,293

Balance at March 30, 2008	$	187,873


	Three Months Ended (in 000’s except per share data)				Nine Months Ended (in 000’s except per share data)				Three Months Ended
	March 30, 2008		March 25, 2007		March 30, 2008		March 25, 2007		September 28, 2008		September 23, 2007
Basic:
Net income	$	5,660	$	21,130	$	24,994	$	50,899	$	5,919	$	12,713

Weighted average common shares		87,211		76,417		85,695		76,809		87,851		84,683

Basic earnings per share	$	0.06	$	0.28	$	0.29	$	0.66	$	0.07	$	0.15

Diluted:
Net income	$	5,660	$	21,130	$	24,994	$	50,899	$	5,919	$	12,713

Weighted average common shares—basic		87,211		76,417		85,695		76,809
Dilutive effect of stock options		1,694		717		1,811		920
Weighted average common shares - basic										87,851		84,683
Dilutive effect of stock options, unvested shares and ESPP purchase rights										881		1,883

Weighted average common shares—diluted		88,905		77,134		87,506		77,729
Weighted average common shares - diluted										88,732		86,566

Diluted earnings per share	$	0.06	$	0.27	$	0.29	$	0.65	$	0.07	$	0.15


	Common Stock
	Number of Shares		Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholders’ Equity
Balance at June 24, 2007	84,675		$	106	$	713,778		$	292,289		$	9,826		$	1,015,999
Exercise of stock options and issuance of shares under employee stock purchase plan	2,922			4		54,517			—			—			54,521
Issuance of restricted stock awards, net	151			—		—			—			—			—
Issuance of common stock for cash	71			—		1,806			—			—			1,806
Purchase and retirement of restricted stock awards	(6	)		—		(168	)		—			—			(168	)
Income tax benefits from stock option exercises	—			—		6,736			—			—			6,736
Shares issued in connection with the LED Lighting Fixtures, Inc. acquisition	1,852			2		58,828			—			—			58,830
Vested stock options assumed in the LED Lighting Fixtures, Inc. acquisition	—			—		4,486			—			—			4,486
Stock-based compensation	—			—		11,379			—			—			11,379
Net income	—			—		—			24,994			—			24,994
Cumulative effect of change in accounting principle	—			—		—			(36	)		—			(36	)
Foreign Currency Translation	—			—		—			—			5,384			5,384
Unrealized gain on available-for-sale securities, net of tax of $871	—			—		—			—			1,461			1,461
Reclassification of realized gain on sale of Color Kinetics’ stock, net of tax of $5,288	—			—		—			—			(8,663	)		(8,663	)

Comprehensive income															23,140

Balance at March 30, 2008	89,665		$	112	$	851,362		$	317,247		$	8,008		$	1,176,729


	Number of Shares (in 000’s)		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price
Outstanding at June 24, 2007	10,303		$	25.34
Outstanding at June 29, 2008					8,865		$	27.76
Granted	1,813		$	28.51	1,710		$	22.83
Assumed	322		$	3.18
Exercised	(2,922	)	$	18.60	(215	)	$	18.16
Forfeited or expired	(270	)	$	27.65	(185	)	$	26.45

Outstanding at March 30, 2008	9,246		$	27.25
Outstanding at September 28, 2008					10,175		$	27.16


	Number of Shares (in 000’s)		Weighted- Average Grant- Date Fair Value		Number of Shares		Weighted- Average Grant- Date Fair Value
Nonvested at June 24, 2007	215		$	20.56
Nonvested at June 29, 2008					290		$	24.44
Granted	151		$	27.80	167		$	22.90
Vested	(70	)	$	19.91	(3	)	$	22.53
Forfeited	(6	)	$	23.32	(92	)	$	23.19

Nonvested at March 30, 2008	290		$	24.44
Nonvested at September 28, 2008					362		$	24.06


	Three Months Ended
Income Statement Classification	September 28, 2008		September 23, 2007
Cost of goods sold	$	1,302	$	914
Research and development		1,446		897
Sales, general and administrative		2,685		1,434

Total operating expenses		4,131		2,331

Total	$	5,433	$	3,245


Exhibit No.		Description
10.1		Offer Letter Agreement, executed August 8, 2008, between Cree, Inc. and Steve Kelley (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated August 18, 2008, as filed with the Securities and Exchange Commission on August 19, 2008)

10.2		Fiscal 2009 Management Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated August 18, 2008, as filed with the Securities and Exchange Commission on August 22, 2008)

10.3		Notice of Grant to Charles M. Swoboda, dated August 18, 2008 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated August 18, 2008, as filed with the Securities and Exchange Commission on August 22, 2008)

10.4		Master Performance Unit Award Agreement, dated August 18, 2008, between Cree, Inc. and Charles M. Swoboda (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, dated August 18, 2008, as filed with the Securities and Exchange Commission on August 22, 2008)

10.5		Executive Change in Control Agreement, effective August 18, 2008, between Cree, Inc. and Charles M. Swoboda (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, dated August 18, 2008, as filed with the Securities and Exchange Commission on August 22, 2008)

10.6		Executive Change in Control Agreement, effective August 18, 2008, between Cree, Inc. and John T. Kurtzweil (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, dated August 18, 2008, as filed with the Securities and Exchange Commission on August 22, 2008)

10.7		Executive Change in Control Agreement, effective August 19, 2008, between Cree, Inc. and Stephen D. Kelley (incorporated herein by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K, dated August 18, 2008, as filed with the Securities and Exchange Commission on August 22, 2008)

10.8		Cree, Inc. Severance Plan for Section 16 Officers (incorporated herein by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K, dated August 18, 2008, as filed with the Securities and Exchange Commission on August 22, 2008)

31.1		Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


				CREE, INC.
Date: October 22, 2008
~~Date: April 24, 2008~~				/s/ John T. Kurtzweil
				John T. Kurtzweil
				Executive Vice President, Chief Financial Officer and Treasurer
				(Authorized Officer and Principal Financial and Chief ~~Financial and~~ Accounting Officer)

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