EXHIBIT 10.1





                                 August 10, 2005


Ms. Cynthia B. Merrell
c/o Cree, Inc.
4600 Silicon Drive
Durham, NC 27703

Dear Cindy:

     This  letter  is  intended  to  confirm  our  recent  discussions,  and the
agreement  we have reached  today,  regarding  your  decision to resign as Chief
Financial  Officer (CFO) and Treasurer of Cree,  Inc.  (the  "Company")  and its
subsidiaries.  We  appreciate  the  loyalty  and  dedication  you have shown the
Company over the past eight years and your  willingness  to assist us during the
transition process. To implement the transition, you and the Company have agreed
as follows:

     1. Your resignation as an officer of the Company and its subsidiaries  will
be effective on the date (the "Resignation  Effective Date") that is the earlier
of: (a) the date a successor CFO,  including any acting or interim CFO,  becomes
CFO by  appointment  of the Company's  Board of  Directors;  or (b) February 10,
2006. Prior to the Resignation Effective Date, you will continue to serve in the
office of CFO and Treasurer at the pleasure of the Board of Directors.

     2.  Subject  to the  provisions  of  this  letter  agreement  (the  "Letter
Agreement"),  from the date of this  letter you will  continue as an employee of
the Company for a period of twelve (12) months (the "Transition Period").  Prior
to the  Resignation  Effective  Date,  you will remain  employed in your current
position.  On and after the Resignation  Effective Date, you will be employed in
the  position  of Senior  Financial  Advisor  reporting  to the Chief  Executive
Officer (CEO) to assist with such matters as he may request from time to time on
which you worked or with which you had familiarity due to your employment  prior
to the Resignation  Effective Date and which relate to the business,  operations
or financial condition of the Company or to its financial or accounting matters,
including its filings with the U.S. Securities and Exchange Commission.

     3. Before the  Resignation  Effective  Date,  you will be  classified as an
exempt, regular, full-time employee regularly scheduled to work forty (40) hours
per week. On and after the  Resignation  Effective Date, you will be a part-time
employee of the Company  expected to perform up to eighty (80) hours of services
for the Company  each month.  It is  anticipated  that,  after your  Resignation
Effective Date, the Company will be able to honor your request to work from your
home or other off-site locations,  but the Company reserves the right to require
you to work in its offices in Durham, North Carolina and/or to travel on Company

<PAGE>
business as business needs may require from time to time. Any business  expenses
you incur  after the  Resignation  Effective  Date will remain  reimbursable  in
accordance with the Company's business expense  reimbursement  policy. After the
Resignation Effective Date, if you move to a primary residence that is more than
fifty (50) miles from your  residence on the  Resignation  Effective  Date,  the
Company will reimburse you for reasonable travel expenses if you are required to
report to the Company's offices in Durham, North Carolina.

     4. Nothing in this Letter Agreement constitutes a commitment by the Company
to employ you for any specific term. Your employment is at-will,  and either you
or the Company may terminate  your  employment at any time. For purposes of this
Letter  Agreement,  your final day of  employment  shall be  referred to as your
"Termination Date."

     5. During the Transition Period, you will be compensated as follows:

     (a) You will  continue to be  compensated  at your current base rate of pay
(in  effect  as of August  10,  2005),  less all  applicable  payroll  taxes and
authorized  withholdings,   payable  on  the  usual  Company  payroll  dates  in
accordance  with  Company  policies and  procedures,  subject to  adjustment  as
provided in subparagraph 5(b) below.

     (b) Prior to the Resignation  Effective Date, you will also remain eligible
to participate in all Company employee benefit plans, policies, and arrangements
that are applicable to regular, full-time employees of the Company in accordance
with the terms of such plans,  policies, and arrangements as they may exist from
time to time,  except  that you  acknowledge  that  you  will  not  receive  any
additional  stock  option  grants  or  other  equity  awards.  Beginning  on the
Resignation  Effective Date, you will only be eligible to participate in Company
employee  benefit  plans,  policies,  and  arrangements  that are  applicable to
part-time employees, except that you agree to waive your right to participate in
the  quarterly  Employee  Incentive  Compensation  Plan  after  the  Resignation
Effective  Date.  Your accrued and unused  paid-time off  accumulated  as of the
Resignation  Effective  Date will carry forward in your  part-time  status.  You
acknowledge  that,  beginning on the  Resignation  Effective  Date, you and your
dependents will no longer be eligible for coverage under the Company's  medical,
vision and dental plans (as presently in effect)  except for a limited period of
time at your expense if you make a timely coverage  election  pursuant to COBRA.
Beginning on the  Resignation  Effective  Date,  the Company will  increase your
monthly  compensation  by an amount  equal to the  applicable  COBRA  premium to
continue coverage under the Company's  medical,  vision and dental plans for you
and your  dependents who are enrolled on the  Resignation  Effective Date for so
long as you remain an employee of the  Company.  While you remain an employee of
the  Company  you will have the option of having  your COBRA  premiums  deducted
monthly on a pre-tax basis from your paycheck  pursuant to the Company's Pre-Tax
Premium Plan. By signing below you hereby  authorize the Company to withhold the
applicable  COBRA premium from your  paychecks on a pre-tax basis for so long as
you elect  COBRA  and  remain  employed  by the  Company.  The  Company  will be
responsible for remitting any COBRA payments withheld through payroll.

<PAGE>
     (c)  Your  existing  stock  options  will  continue  to vest  through  your
Termination  Date in accordance  with and subject to provisions of the Company's
Equity  Compensation  Plan and the  applicable  agreements  between  you and the
Company  (collectively,  the "Stock  Agreements").  The Company  agrees that its
October 1, 2004 grant of a non-qualified option for you to purchase up to 30,000
shares of the  Company's  common stock at an exercise  price of $31.24 per share
(option # 00011759),  which option  became  fully vested and  exercisable  as of
April 15, 2005 subject to certain contractual  restrictions on the sale or other
transfer of purchased shares, may be exercised  (including by cashless exercise)
after the date of this Letter Agreement free of such  contractual  restrictions,
subject to the expiration provisions set forth in the applicable Stock Agreement
and to the Company's trading window policy.

     (d) Before your  Resignation  Effective  Date, you also will be eligible to
participate  in the  Management  Incentive  Plan  provided  that your  incentive
payment  target each plan  measurement  period will be  pro-rated to reflect the
number of days in such period that you hold your current position (e.g., if your
Resignation  Effective Date is November 15, 2005, you will be eligible for up to
55% (50 days  divided  by 91 days) of the  individual  component  for the second
fiscal  quarter  of 2006 and up to 39% (141  days  divided  by 364  days) of the
annual  component for the 2006 fiscal year). In addition,  the Company agrees to
continue  reimbursing  you  (consistent  with past practices) for the reasonable
expenses of any continuing  professional  education  ("CPE") programs you attend
through June 30, 2006 to satisfy the annual CPE requirements  applicable to your
license as a certified public accountant in the State of Florida.

     6. In  consideration  of your commitment to assist us during the Transition
Period,  the Company agrees to pay you a severance payment under certain limited
circumstances.  First, if the Company  terminates your employment  without Cause
(as defined below) prior to the end of the Transition  Period,  the Company will
pay you an amount defined below as "Severance Payment A." Alternatively,  if you
should  remain  employed  with the  Company  through  the end of the  Transition
Period,  the Company will pay you an amount defined below as "Severance  Payment
B." If you terminate your employment  prior to the end of the Transition  Period
for any reason, or if the Company terminates your employment prior to the end of
Transition Period for Cause, the Company shall have no obligation to pay you any
severance  payment.  Any  severance  payment  will  be paid  pursuant  to and in
accordance  with the  Company's  Severance  Program.  Payment  of any  severance
payment is conditioned  upon your execution and return (and  non-revocation)  of
the  Release  of Claims  Agreement  attached  as Exhibit A to this  letter  (the
"Release")  (with such  modifications as may be necessary or desirable to comply
with any new or amended laws which may become  applicable  in the interim and to
complete all  information  left blank) as soon as provided in the Release  after
your  Termination  Date. You may choose not to execute and return the Release or
to revoke the Release  within the times  provided in the Release.  If you do not
execute  and return the  Release or if you revoke the  Release  within the times
provided in the Release,  the Company  shall have no  obligation  to pay you any
severance payment.

<PAGE>
     7. For  purposes of this Letter  Agreement,  "Cause"  shall mean:  (i) your
death;  (ii) your physical or mental  disability or incapacity to satisfactorily
perform the  essential  functions of your position for a period of six months as
determined under the Company's program of long-term disability; (iii) any act or
omission by you constituting gross negligence or willful misconduct,  including,
but not limited to: (a) willful, material violation of the Company's policies or
the  reasonable  and  lawful  orders  of its  Board of  Directors  and/or  Chief
Executive  Officer;  (b) fraud;  (c)  misappropriation  of Company  property  or
proprietary information; (d) embezzlement; or (e) your conviction of, or plea of
nolo contendere to, a crime that the Company reasonably believes has had or will
have a material detrimental effect on the Company's reputation or business; (iv)
your willful and continued failure to perform the duties and responsibilities of
your position that is not corrected  within a thirty (30) day correction  period
that begins upon delivery to you of a written  demand for  performance  from the
Company  that  describes  the basis for the  Company's  belief that you have not
substantially  performed your duties;  (v) your material breach of your Employee
Agreement  Regarding   Confidential   Information,   Intellectual  Property  and
Non-Competition (the "Confidentiality  Agreement"),  which breach is (if capable
of cure) not cured within  thirty (30) days after the Company  delivers  written
notice to you of the breach;  or (vi) prior to the  Resignation  Effective Date,
your  employment  by  another  entity  (whether  or  not  as  an  employee  or a
contractor,  in a  full-time  or  part-time  capacity,  or in  violation  of the
Confidentiality Agreement).

     8.  "Severance  Payment  A" shall  be  equal to the sum of:  (i) a lump sum
amount  equal to the base  salary  you would  have  earned  if you had  remained
employed from the Termination Date through the end of the Transition  Period (up
to a maximum of twelve  (12)  months of base  salary),  excluding  any  increase
pursuant to  subparagraph  5(b); (ii) a lump sum amount equal to any accrued and
unused vacation and holiday hours as of the Termination  Date multiplied by your
effective  hourly  rate of pay (based on 80 hours per pay  period);  and (iii) a
lump sum amount equal to the cost (grossed up for taxes at the  supplemental pay
tax rates) for you to continue  medical,  vision and dental  coverage  until the
first  anniversary of your Resignation  Effective Date under the Company's group
health plan for you and your dependents who are enrolled on the Termination Date
(up to a maximum of twelve (12)  months of  continuation  coverage).  "Severance
Payment B" shall be equal to the sum of the amounts  described in (ii) and (iii)
above only.  Any severance  payment will be made on the Company's  first regular
payroll date after all terms and  conditions  of this Letter  Agreement  and the
Release  have been  satisfied.  Any  severance  payment  will be  subject to all
applicable  payroll taxes and  authorized  withholdings.  After the  Termination
Date,  you will be solely  responsible  for remitting  COBRA  premiums when they
become due.

     9. This Letter Agreement,  together with the Confidentiality Agreement, the
Release,  and the Stock  Agreements  constitute  the  entire  understanding  and
agreement between you and the Company with respect to the subject matter of each
such  respective  agreement.  The terms of this Letter  Agreement  supersede any
prior negotiations, agreements and understandings, whether written or oral, with
respect to the subject  matter  hereof.  If any provision  hereof  becomes or is
declared by a court of competent jurisdiction to be illegal,  unenforceable,  or
void, this Letter  Agreement will continue in full force and effect without said


<PAGE>
provision.  Any  waiver,  modification  or  amendment  of any  provision  of the
Agreement  shall  be  effective  only if in  writing  and  signed  by you and an
authorized representative of the Company.

     10. This Letter  Agreement  will be governed by and construed  according to
the laws of the State of North  Carolina (but without  regard to its conflict of
laws  provisions).  You and the Company agree that any and all disputes  arising
out  of the  terms  of the  Letter  Agreement  or  the  attached  Release,  your
employment  by the Company,  your service as an officer of the Company or any of
its subsidiaries,  or your compensation and benefits, their interpretation,  and
any of the matters released,  will be subject to binding  arbitration in Durham,
North Carolina before the American  Arbitration  Association  under its National
Rules for the  Resolution  of  Employment  Disputes,  supplemented  by the North
Carolina Rules of Civil Procedure.  Provided,  however, that you and the Company
agree to select an arbitrator who is a retired judge,  or, if required to select
a panel of three  arbitrators,  you and the  Company  will  select  at least two
retired  judges to serve on the panel.  The  parties  agree that the  prevailing
party in any arbitration  will be entitled to injunctive  relief in any court of
competent  jurisdiction  to enforce  the  arbitration  award.  Unless  otherwise
specified  herein,  the  parties  hereby  agree to waive their right to have any
dispute  between  them  resolved  in a court  of law by a judge  or  jury.  This
paragraph will not prevent either party from seeking  injunctive  relief (or any
other  provisional  remedy) from any court having  jurisdiction over the parties
and the subject matter of their dispute relating to your  obligations  under the
Letter Agreement.

     If the provisions of this letter  accurately  set forth our  understanding,
please  acknowledge  your  agreement by signing the enclosed copy of this letter
and returning it to me.


                                   Sincerely,

                                   CREE, INC.


                             By:   /s/ Charles M. Swoboda
                                   -----------------------------------
                                   Charles M. Swoboda
                                   Chairman and Chief Executive Officer



Accepted and agreed to:


/s/ Cynthia B. Merrell       8/10/05
---------------------------------------
Cynthia B. Merrell            Date
<PAGE>
                                    EXHIBIT A

                           RELEASE OF CLAIMS AGREEMENT

     This Release of Claims  Agreement  (the  "Release") is entered into between
Cree, Inc., a North Carolina corporation with its principal place of business in
Durham County, North Carolina (the "Company"),  and Cynthia B. Merrell (referred
to herein as "I" or "me").

     WHEREAS,  the Company and I are parties to the Employee Agreement Regarding
Confidential   Information,   Intellectual  Property  and  Non-Competition  (the
"Confidentiality Agreement"), the Company's Equity Compensation Plan and related
stock option agreements (collectively,  the "Stock Agreements"),  and the August
10, 2005 letter agreement (the "Letter Agreement"); and

     WHEREAS,  capitalized  terms used in this Release without  definition shall
have the meanings assigned in the Letter Agreement;

     WHEREAS,  the Letter Agreement  provides for certain severance  benefits in
exchange for my release of the Company;

     WHEREAS,   I   understand   that  my   termination   is   effective  as  of
[                    ](the "Termination  Date"),  regardless of whether or not I
sign this Release.

     NOW, THEREFORE,  in consideration of the mutual promises and agreements set
forth  herein and for other good and  valuable  consideration,  the  receipt and
sufficiency  of which are hereby  expressly  acknowledged  by all  parties,  the
parties hereby agree as follows:

     In  consideration of the Company's  agreement to pay me severance  benefits
pursuant to the Letter  Agreement  (subject to the terms and  conditions  of the
Company's  Severance  Program),  and as  described  in  paragraph  1  below,  in
connection with my termination of my employment,  I, Cynthia Merrell,  on behalf
of myself and all of my heirs,  executors,  administrators  and assigns,  hereby
fully  and  forever   release  and   discharge  the  Company,   its   affiliated
corporations,  and their  respective  past or  present  shareholders,  partners,
directors, officers, employees, agents, representatives,  successors and assigns
(together  called the  "Company  Parties"),  from any and all claims,  lawsuits,
liabilities,  demands,  actions  or causes  of  action of any kind or  character
whatsoever,  known or unknown,  whether at law or equity,  which I now have, may
have in the  future  or may  ever  have had in the  past,  against  the  Company
Parties,  arising out of, on account of, or in any way relating to my employment
with the Company. Provided, however, that nothing in this Release will be deemed
to release a claim for  violation  of the Letter  Agreement  occurring  after my
execution of this Release and,  provided  further,  that nothing in this Release
will be  deemed  to  release  any  claims I may have for  indemnification  as an
officer,  employee or agent of the Company or its subsidiaries,  whether arising
under  corporate  bylaws  or  otherwise,  or any  claims  I may have  under  any
insurance  policies  providing  coverage  for acts or  omissions  as an officer,
employee or agent of the Company or its subsidiaries.

<PAGE>
     1. I  understand  that,  if I sign this Release and satisfy all other terms
and  conditions  of this  Release and the Letter  Agreement,  the  Company  will
provide  me  with  either  Severance  Payment  A or  Severance  Payment  B  (the
"Severance  Payment"),  as such terms are defined in and in accordance  with the
provisions of Paragraph 6 of the Letter Agreement,  as applicable,  based on the
circumstances of my employment termination. This Severance Payment is subject to
all applicable  withholdings  as required or authorized by state or federal law.
This Severance  Payment will be made on the Company's first regular payroll date
after all terms and  conditions  of this Release and the Letter  Agreement  have
been satisfied.

     2. I understand  and agree that this Release is a full and complete  waiver
of all claims, known or unknown, that I have, may have in the future or may ever
have had in the past, against the Company Parties arising out of, on account of,
or in any way  relating  to my  employment  with the  Company to the extent such
claims can be waived under applicable laws, including but not limited to, claims
of  employment   discrimination   or  harassment,   termination  of  employment,
constructive discharge, breach of contract, breach of the covenant of good faith
and fair dealing,  violation of public policy,  fraud,  defamation,  invasion of
privacy, personal injury or emotional distress and claims under Title VII of the
Civil  Rights  Act of 1964,  the  Equal  Pay Act of  1963,  the  Americans  With
Disabilities  Act,  the Civil  Rights  Act of 1866,  the Age  Discrimination  in
Employment Act of 1967 (ADEA),  the Older Workers Benefit Protection Act, Worker
Adjustment and  Retraining  Notification  Act (WARN),  or violation of any other
federal, state or local law or regulation,  as well as claims under the Employee
Retirement Income Security Act of 1974.

     3. To the extent  permitted by applicable law, I hereby expressly waive any
and all claims that are not known by me or  suspected by me to exist in my favor
at the time of  executing  this  Release,  even if such claims  would have had a
material effect on my decision to execute this Release if they had been known or
suspected by me, and regardless of whether my lack of knowledge is the result of
ignorance,  oversight,  error,  negligence or any other cause.  I understand and
acknowledge  that the significance and consequence of this waiver is that I will
not be able to make any claims for additional damages arising out of the matters
released by this  Release,  even if I should  eventually  suffer those  damages.
Furthermore, I acknowledge that I consciously intend these consequences.

     4. I also  hereby  agree  that  nothing  contained  in this  Release  shall
constitute  or be treated as an admission of liability or  wrongdoing  by either
party.

     5. If any provision of this Release is found to be unenforceable,  it shall
not affect the enforceability of the remaining  provisions,  and the court shall
enforce all remaining provisions to the fullest extent permitted by law.

     6.  The  Confidentiality   Agreement,   the  Letter  Agreement,  the  Stock
Agreements  and this Release each  constitute the entire  agreement  between the
Company  Parties and me with regard to the  respective  subject  matters of each
such agreement. The Release supersedes any other agreements,  representations or
understandings,  whether oral or written and whether  express or implied,  which
relate to the subject matter of this Release.  In signing this Release, no party
has relied upon any  representation  or promise except those expressly set forth

<PAGE>
herein  or in the  Letter  Agreement.  I  understand  that this  Release  may be
modified only in a written document signed by the Chief Executive Officer of the
Company and by me.

     7.  I  agree  that  at all  times  in the  future  I  shall  not  make  any
disparaging,  derogatory and/or negative statements to any third party regarding
the Company Parties.

     8. I understand  that if I materially  breach any of the provisions of this
Release,  the Company in its sole  discretion  immediately  may cease making any
severance  payments  to me,  and I shall  have no  further  rights  to any  such
payments or other benefits under the Letter Agreement.

     9. I hereby  acknowledge  that I have read and understand  this Release and
that I sign it voluntarily and without  coercion.  I further  acknowledge that I
was given an opportunity to consider and review this Release and to consult with
an  attorney  of my  own  choosing  at my own  expense  concerning  the  waivers
contained in this Release and that the waivers are knowing,  conscious  and with
full  appreciation  that at no time in the future may I pursue any of the rights
that I have waived in this Release.

     10. I acknowledge  that I have been advised and  encouraged to consult with
an attorney  before signing this Release.  I also  understand  that, as provided
under the Older  Workers  Benefit  Protection  Act of 1990,  I have a minimum of
twenty-one  (21) days after  receipt of this Release to review and consider this
Release,  discuss it with an attorney of my own choosing,  and to decide whether
or not to sign it. I also  understand  that I may revoke this  Release  during a
period of seven (7) days after I sign it (the "Revocation Period") and that this
Release  will not become  effective  until the eighth  (8th) day after I sign it
(and then only if I did not revoke it). In order to revoke this Release,  within
seven (7) days  after I sign  this  Release  I must  deliver a letter  expressly
stating that I am revoking this Release to Brenda F. Castonguay, Vice President,
Human Resources,  4600 Silicon Drive, Durham, North Carolina 27703. I understand
that if I choose to revoke this Release during the Revocation Period pursuant to
this paragraph,  I will not receive any severance benefits, and the Release will
have no effect.

     11. I understand and agree that I must consider and review this Release for
a minimum of seven (7) days after my Termination  Date prior to executing it and
that the Company will not accept an executed  Release prior to the expiration of
this  7-day  period  or a  Release  executed  prior to my  Termination  Date.  I
expressly  acknowledge that I have had the opportunity of a full twenty-one (21)
days to consider  this Release  before  signing it, and that if I have not taken
that full time  period,  that I  expressly  waive this time  period and will not
assert the invalidity of this Release or any portion  thereof on this basis.  In
any event,  I  understand  and agree  that,  in order to receive  the  severance
benefits  offered  herein,  the executed  Release must be delivered or mailed to
Brenda  Castonguay at the address  provided  above by no later than 5:00 p.m. on
eighth  (8th) day after my  Termination  Date (as  evidenced  by the postmark or
other proof of mailing).

<PAGE>
     12. Before signing my name to this Release, I state that:

         o I have read it;
         o I understand it;
         o I know that I am giving up important rights;
         o I understand that rights or claims under the Age Discrimination in
            Employment Act of 1967 (29 U.S.C. ss. 621, et seq.) that may arise
            after the date this Release is signed are not waived;
         o I am aware of my right to consult an attorney before signing it; and
         o I have signed it knowingly and voluntarily.

     13. This Release  shall be governed and  construed by the laws of the state
of North Carolina  without regard to its principles of conflicts of law, and any
disputes  regarding this Release are subject to arbitration as further  detailed
in the Letter Agreement.

Acknowledged and Agreed:
                                          CREE, INC.

Signature:                                By:
          -----------------------------      ---------------------------------
          Cynthia B. Merrell                 Name:
                                             Title:


    Date:                                 Date:
          -----------------------------         ------------------------------