Document:

[ * ] - Certain  information  omitted and filed  separately  with the Commission
pursuant to a confidential treatment request under Commission Rule 24b-2.

                               PURCHASE AGREEMENT

                                     between

                                   CREE, INC.

                           Durham, North Carolina, USA
                                   ("Seller")

                                       and

                    OSRAM OPTO SEMICONDUCTORS GMBH & CO. OHG

                                   Regensburg
                           Federal Republic of Germany
                                  ("Purchaser")

                               Dated July 27, 2000
<PAGE>
                               PURCHASE AGREEMENT

PURCHASE AGREEMENT (this "Agreement"),  made and effective as of the 24th day of
July,  2000 (the  "Effective  Date"),  by and between  CREE,  INC.  (hereinafter
referred to as "Seller"), a corporation organized under the laws of the State of
North Carolina, the United States of America, and OSRAM OPTO SEMICONDUCTORS GMBH
& CO. OHG (hereinafter  referred to as "Purchaser"),  a joint venture  organized
under the laws of the Federal Republic of Germany.

                                    Recitals

WHEREAS,  Seller is engaged in the business,  among others, of manufacturing and
selling LED's in die form and silicon carbide (SiC) wafers; and

WHEREAS,  Purchaser is engaged in the business,  among others,  of manufacturing
LED's  packaged  in lamp form and  desires to  purchase  a  quantity  of LED die
products and SiC wafers from Seller; and

WHEREAS,  the parties have agreed on the terms and conditions under which Seller
will sell such LED's and wafers to  Purchaser  and  desire to  memorialize  such
terms in this Agreement; and

NOW,  THEREFORE,  in consideration  of the foregoing and the mutual  obligations
undertaken in this Agreement, the parties agree as follows:

1.     CONTRACT DOCUMENTS; DEFINITIONS

       1.1.   Documents.

              The  following  documents  are  annexed to and made a part of this
              Agreement:

              (a)    Schedule  1  -  Quantity   and  Shipment   Schedule   (with
                     Attachment A thereto)

              (b)    Schedule 2 - Price and Payment Schedule

              (c)    Schedule 3 - Product Specifications

        1.2.  Definitions.

              For purposes of this Agreement,  the terms defined in this Section
              1.2 shall have the meaning  specified and such  definitions  shall
              apply to both singular and plural forms:

              (a)    "Affiliates" of a designated corporation,  company or other
                     entity means all entities which control, are controlled by,
                     or are under common control with the named entity,  whether
                     directly  or  through  one  or  more  intermediaries.   For
                     purposes of this definition "controlled" and "control" mean
                     ownership  of  securities   representing  more  than  fifty
                     percent (50%) of the voting capital stock or other interest
                     having  voting  rights with  respect to the election of the
                     board of directors or similar governing authority.

              (b)    "Confidential  Information"  shall have the meaning defined
                     in Section 11.1.

              (c)    "Product Specifications" means the specifications set forth
                     or  referenced  in  Schedule  3, as the same may be amended
                     from  time to  time  by  mutual  written

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                     agreement  of the  parties  or  pursuant  to the  terms and
                     conditions set forth in such schedule.

              (d)    "Products"  mean LED chips and silicon  carbide  substrates
                     which  conform to the  applicable  Product  Specifications.
                     Products  supplied under this Agreement will be "GaN LEDs,"
                     "InGaN LEDs" and "SiC Wafers" as described in Schedule 3.

2.     PURCHASE AND SALE

       2.1.   Purchase Commitment.

              (a)    Purchaser will purchase from Seller and Seller will sell to
                     Purchaser  the  quantity of  Products  shown in Schedule 1,
                     subject to and in accordance  with the terms and conditions
                     of this Agreement.

              (b)    Purchaser  shall be entitled to cancel or otherwise  reduce
                     its  purchase  commitment  under  this  Agreement,   or  to
                     reschedule shipments of Products under this Agreement, only
                     to the extent expressly permitted by Schedule 1.

       2.2.   Price.

              (a)    The purchase price of the Products is set forth in Schedule
                     2.

              (b)    The  prices  stated  in  this   Agreement  do  not  include
                     transportation  or  insurance  costs,  or any  sales,  use,
                     excise or other taxes,  duties, fees or assessments imposed
                     by any jurisdiction.

              (c)    All applicable taxes,  duties,  fees or assessments imposed
                     by any  jurisdiction  with  respect to the  purchase of the
                     Products  (other than taxes on Seller's net income) will be
                     paid by Purchaser.  Any taxes,  duties, fees or assessments
                     at  any  time  paid  by  Seller  which  are to be  paid  by
                     Purchaser   under  this  Agreement  shall  be  invoiced  to
                     Purchaser and reimbursed to Seller.

       2.3.   Payment Terms.

              (a)    Purchaser will pay for Products to be purchased  under this
                     Agreement in accordance  with the payment terms in Schedule
                     2.

              (b)    Payment will be made in U.S. dollars by wire transfer to an
                     account designated in writing by Seller,  without reduction
                     for any currency exchange or other charges.

              (c)    Seller will provide  Purchaser an invoice  and/or  shipping
                     documentation   for  each  shipment  showing  the  quantity
                     shipped,  the  applicable  price,  any  amounts  prepaid by
                     Purchaser for the shipment,  and any taxes, duties, fees or
                     other  assessments  due from  Purchaser with respect to the
                     shipment.

              (d)    Amounts not paid when due under this Agreement shall accrue
                     interest at the rate of twelve  percent (12%) per annum or,
                     if less, the maximum rate permitted by law.

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July 27, 2000 Purchase Agreement                                          Page 2

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3.     DELIVERY

       3.1.   Purchase Orders; Forecasts.

              (a)    Purchaser will submit written  purchase  orders  evidencing
                     its commitment to purchase Products prior to each scheduled
                     shipment date set forth in Schedule 1. Purchase orders will
                     specify the particular  quantity of each Product type to be
                     shipped.  Purchase  orders  must be received at least sixty
                     (60) days prior to the monthly  period in which shipment is
                     scheduled according to Schedule 1.

              (b)    Purchase  orders may be  submitted  by  Purchaser or by its
                     Affiliates acting on Purchaser's behalf and in its name. If
                     Purchaser  requests  delivery  of  shipments  to a location
                     other  than  Regensburg,  Germany,  the  personnel  at such
                     location   shall  be  regarded  as  authorized  to  act  on
                     Purchaser's   behalf  with   respect  to   scheduling   and
                     acceptance of shipments and other matters relating thereto.

              (c)    The terms and conditions of this Agreement shall govern the
                     purchase of Products under this  Agreement  notwithstanding
                     any  contrary  provisions  of  any  purchase  order,  order
                     acknowledgment  or other similar  document issued by either
                     party.  Purchase  orders  issued under this  Agreement  are
                     intended as an administrative  convenience and, in the case
                     of InGaN LEDs, to specify the  selection of such  Products,
                     but  the   obligation  to  purchase   Products  under  this
                     Agreement is not  conditioned  upon  issuance of a purchase
                     order.

              (d)    Together with each purchase order,  Purchaser shall furnish
                     Seller  a  nonbinding  forecast  of  the  mix  of  Products
                     expected  to be to ordered  for  delivery  during the three
                     months following the period covered by the purchase order.

              (e)    Seller  will,  within  ten (10)  days  after  receipt  of a
                     purchase order  submitted in accordance with the foregoing,
                     issue a written order acknowledgment  advising Purchaser of
                     the scheduled shipment date(s) for the quantities ordered.

       3.2.     Shipment Schedule.

              (a)    Seller will use all commercially reasonable efforts to ship
                     Products in accordance with the shipment schedule set forth
                     in Schedule 1. Seller reserves the right to ship quantities
                     prior to the scheduled dates;  provided,  however,  that no
                     shipment  shall be made such that  Purchaser  receives  the
                     shipment  earlier  than  the  calendar  month   immediately
                     preceding the month such quantity was originally  scheduled
                     to be shipped.

              (b)    Seller shall be deemed in default due to a delay in meeting
                     the  shipment  schedule  set forth in  Schedule  1 only if,
                     immediately  after  the  last  day  of any  calendar  month
                     specified therein, the cumulative quantity actually shipped
                     by  Seller is less than  eighty-five  percent  (85%) of the
                     cumulative quantity due to have been shipped.

              (c)    In the event of a default by Seller as  provided in Section
                     3.2((b)), Purchaser shall be entitled to liquidated damages
                     of one percent (1%) per week of the  purchase  price of the
                     delayed Products, subject to a maximum of ten percent (10%)
                     of such purchase  price.  If Product  shipments are delayed
                     six  weeks or more  due to  circumstances  within  Seller's
                     reasonable   control,   then  in  lieu  of  the   foregoing

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<PAGE>
                     liquidated  damages  Purchaser may claim  damages  actually
                     resulting  from the delay up to forty  percent (40%) of the
                     purchase  price of the  delayed  Products.  This  paragraph
                     states  Purchaser's  sole claim for damages  resulting from
                     Seller's delay in delivering Products.

       3.3.   Packaging.

              Seller  will ship  Products  in  Seller's  standard  packaging  or
              packaged in such other manner as the parties may mutually agree in
              writing.

       3.4.   Manner of Shipment.

              Unless otherwise  mutually agreed Products shall be shipped F.C.A.
              Seller's manufacturing  facilities by delivery to a transportation
              company   designated  by  Purchaser.   Products  shall  be  deemed
              delivered  to  Purchaser  when  delivered  to  the  transportation
              company at the  shipping  point.  Title and risk of loss or damage
              shall pass to Purchaser upon delivery.  All transportation charges
              and  expenses,  including  the cost of  insurance  against loss or
              damage in transit,  shall be Purchaser's sole responsibility.  Any
              such  amounts  paid by  Seller  will be  invoiced  to and  paid by
              Purchaser.

4.     NON-CONFORMING SHIPMENTS

       4.1.   Reporting of Claims.

              Except  for  warranty  claims  under  Article  6, in the event any
              shipment  does  not  conform  to the  ordered  amount  and type of
              Product or suffers  other  faults or defects  clearly  discernible
              upon reasonable  inspection,  such non-conformity will be reported
              in writing to Seller as soon as possible and in any event no later
              than  forty-five  (45)  days  after  shipment  of the  Product  to
              Purchaser.  All  other  non-conformities  in  shipments  shall  be
              reported in writing to Seller promptly upon  discovery.  If not so
              reported, the non-conformity shall be deemed waived.

       4.2.   Remedies for Non-Conforming Shipments.

              Seller's sole obligation  with respect to shipments  determined to
              be  non-conforming  shall  be,  at  its  option,  to  replace  the
              non-conforming  Products (with shipment at Seller's expense) or to
              issue a credit to  Purchaser  in the  amount of the price paid for
              such  Products  with  interest  calculated  at the rate of  twelve
              percent  (12%) per annum  from the date of  payment to the date of
              credit.  This  paragraph  states  Seller's sole  obligations  with
              respect  to  non-conforming  shipments.  After  acceptance  of any
              shipment  Purchaser's  sole  remedies for defects in such shipment
              shall be as provided in the warranty provisions of this Agreement.

       4.3.   Compliance with Instructions.

              In  addition  to  such  other  duties  as may be  imposed  by law,
              Purchaser will comply with all of Seller's reasonable instructions
              regarding  rejected  goods.  If  Purchaser  incurs any expenses in
              complying with such instructions, Seller shall reimburse Purchaser
              for such  expenses  promptly upon receipt of  Purchaser's  written
              request therefor.

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July 27, 2000 Purchase Agreement                                          Page 4

<PAGE>

5.     TECHNICAL COOPERATION

       Seller and Purchaser agree to have their  representatives  meet in person
       from time to time,  at mutually  agreed upon times and  locations but not
       more frequently  than once each calendar  quarter,

X       to discuss potential improvements in and the markets for the InGaN LEDs.

6.     WARRANTIES

       6.1.   Limited Warranty.

              (a)    Seller  warrants to Purchaser that Products  purchased from
                     Seller under this  Agreement will conform to and perform in
                     accordance with the applicable Product Specifications.

              (b)    This  warranty is extended  only to Purchaser  and does not
                     constitute a warranty to Purchaser's customers or any other
                     person.  This  warranty  shall not  apply to any  defect or
                     failure  to  perform  resulting  in whole  or in part  from
                     improper use, application,  installation or operation,  and
                     Seller  shall have no  liability of any kind for failure of
                     any  equipment  or other  items in which the  Products  are
                     incorporated.

              (c)    All claims under this  warranty must be reported in writing
                     to Seller  (with such  report  accompanied  by the  Product
                     claimed to be defective, including the die "package" in the
                     case of Products sold in die form) as soon as possible, but
                     in any event no later than ***** days after shipment of the
                     Products  to  Purchaser.  If not so  reported,  such claims
                     shall be waived.

              (d)    Seller's   sole   obligation   with   respect  to  Products
                     determined not to meet the terms of this warranty shall be,
                     at its  option,  to  replace  such  Products  or to issue a
                     credit or refund to  Purchaser  in the  amount of the price
                     received by Seller for the Products.  This paragraph states
                     the exclusive  remedy against Seller with respect to breach
                     of the warranty  given herein or other  alleged  defects in
                     the Products.

       6.2.   Warranty Disclaimer.

              THE  WARRANTY  IN SECTION  6.1 ABOVE IS GIVEN IN LIEU OF ALL OTHER
              WARRANTIES,  WHETHER  ORAL OR  WRITTEN,  EXPRESS  OR  IMPLIED,  OR
              IMPOSED BY STATUTE OR OTHERWISE. ALL IMPLIED WARRANTIES OF FITNESS
              FOR  A  PARTICULAR  PURPOSE  AND   MERCHANTABILITY  ARE  EXPRESSLY
              DISCLAIMED BY SELLER.

7.     INDEMNIFICATION

       7.1.   By Seller.

              (a)    Seller at its  expense  will  defend any claim or  judicial
                     action  brought  against  Purchaser by a third  party,  and
                     indemnify  Purchaser against any liability for infringement
                     damages finally awarded in any such action,  insofar as the
                     same is based on a claim that Products purchased under this
                     Agreement infringe any patent of such third party.

              (b)    If any Products are held to be infringing  and their use or
                     sale enjoined,  or if in the opinion of Seller any Products
                     are  likely  to  become  the  subject  of such a  claim  of

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<PAGE>
                     infringement, Seller may, in its sole discretion and at its
                     own expense, procure a license which will protect Purchaser
                     against  such  claim  without  cost to  Purchaser,  replace
                     Seller's   inventory   of  Products   with   non-infringing
                     Products,   or  require  return  of  Products  in  Seller's
                     inventory  and refund the price paid by Purchaser  for such
                     Products.

              (c)    Seller  shall  have  no  obligation  hereunder  for or with
                     respect to claims, actions or demands alleging infringement
                     that arise by reason of combination of noninfringing  items
                     with any items not supplied by Seller.

              (d)    This Section 7.1 states the entire liability of Seller with
                     respect to any claim of infringement.

       7.2.   Conditions of Indemnification.

              Seller's  obligations under the foregoing indemnity are subject to
              the  condition  that the  Purchaser  give the  Seller:  (1) prompt
              written  notice  of any claim or action  for  which  indemnity  is
              sought; (2) complete control of the defense and settlement thereof
              by Seller;  and (3)  cooperation of the Purchaser in such defense.
              The obligations under the foregoing  indemnity are also subject to
              the condition  that the Purchaser not enter into any compromise or
              settlement  or make any  admission of liability  without the prior
              written consent of the Seller.

8.     LIMITATIONS OF LIABILITY

       Except as provided in article 7, neither  Seller nor Purchaser  will have
       any liability to the other for any consequential, incidental, indirect or
       special  damages  arising out of or in connection  with this agreement or
       the  use  or  performance  of  any  Products,  even  if  advised  of  the
       possibility  of such  damages.  This  limitation  applies  regardless  of
       whether  such  claim is based on tort,  contract,  warranty,  negligence,
       strict liability or any other theory.  This limitation shall not apply to
       the extent  liability  is  mandatory  by law,  as for example in cases of
       intent  or  gross   negligence,   and  cannot  be  lawfully   disclaimed.
       Additionally  this limitation  shall not apply to the extent Seller has a
       valid,  enforceable  and  collectable  claim against  Seller's  (Product)
       Liability  Insurer to recover  such damages  under its product  liability
       insurance  coverage and is otherwise  liable under the laws  mentioned in
       Article 13.11. Nothing herein shall be construed to impose any obligation
       on Seller with respect to such insurance.

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9.     FORCE MAJEURE

       Seller  shall not be in  default  or liable  for any delay or  failure in
       performance of this Agreement due to strike,  lockout,  riot,  war, fire,
       act of God,  accident,  delays caused by Purchaser or compliance with any
       law,  regulation,  order or direction,  whether valid or invalid,  of any
       governmental  authority or  instrumentality  thereof or due to any causes
       beyond its  reasonable  control,  whether  similar or  dissimilar  to the
       foregoing and whether or not foreseen.  Seller shall use all commercially
       reasonable  efforts to avoid or remove such causes of  non-performance or
       to limit  the  impact  of the  event on  Seller's  performance  and shall
       continue  performance  with the utmost dispatch  whenever such causes are
       removed.

10.    TERMINATION

       10.1.  Termination upon Default or Insolvency.

              Either party may terminate this Agreement by giving written notice
              of termination to the other:

              (a)    if  the  other  party  commits  a  material  breach  of its
                     obligations  under  this  Agreement  and does not cure such
                     breach within  thirty (30) after receipt of written  notice
                     of the breach from the non-breaching party; or

              (b)    if the other party becomes  insolvent,  or any voluntary or
                     involuntary  petition for bankruptcy or for  reorganization
                     is filed by or against  the other  party,  or a receiver is
                     appointed with respect to all or any substantial portion of
                     the assets of the other party, or a liquidation  proceeding
                     is commenced by or against the other party;  provided that,
                     in the case of any involuntary petition or proceeding filed
                     or  commenced  against a party,  the same is not  dismissed
                     within sixty (60) days.

       10.2.  Effect of Termination.

              Nothing in this Article 10 shall  affect,  be construed or operate
              as a waiver of any right of the party  aggrieved  by any breach of
              this Agreement to recover any loss or damage  incurred as a result
              of such breach,  either  before or after the  termination  hereof,
              subject,  however, to the limitations expressly set forth in other
              Articles of this Agreement.

11.    CONFIDENTIAL INFORMATION

       11.1.  Definition.

              "Confidential  Information" means any information  received by one
              party or its  Affiliates  (the  "receiving  party") from the other
              party or its Affiliates (the "disclosing  party") which relates to
              the subject matter of this Agreement and which the receiving party
              has  been  informed  or  has a  reasonable  basis  to  believe  is
              confidential to the disclosing party, unless such information: (1)
              was  known  to the  receiving  party  prior  to  receipt  from the
              disclosing  party; (2) was lawfully  available to the public prior
              to  receipt  from  the  disclosing  party;  (3)  becomes  lawfully
              available to the public after receipt from the  disclosing  party,
              through no act or omission on the part of the receiving party; (4)
              corresponds in substance to any information received in good faith
              by the receiving party from any third party without restriction as
              to  confidentiality;  or  (5)  is  independently  developed  by an
              employee or agent of the  receiving  party who has not received or
              had access to such information.

       11.2.  Identification.

              Information  which the disclosing  party wishes to have treated as
              Confidential  Information under this Agreement shall be identified
              at the time of disclosure as "confidential" by marking,  or in the
              case of oral  disclosures,  shall be  confirmed as such in writing
              within thirty (30) days following the oral disclosure.

       11.3.  Confidentiality Obligations.

              (a)    Each  party  agrees to  maintain  Confidential  Information
                     received from the other in

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                     confidence and neither use for any unauthorized purpose nor
                     disclose such Confidential  Information,  without the prior
                     written approval of the disclosing  party,  except for such
                     disclosures  as are  required to comply with any order of a
                     court  or any  applicable  rule,  regulation  or law of any
                     jurisdiction  or as provided in Section 11.4.  Confidential
                     Information  may be used  only in the  performance  of this
                     Agreement  and for such other  purposes  as the  disclosing
                     party may authorize in writing.

              (b)    In the event that a receiving party is required by judicial
                     or   administrative   process  to   disclose   Confidential
                     Information  of the  disclosing  party,  it shall  promptly
                     notify the disclosing  party and allow the disclosing party
                     a reasonable time to oppose such process.

              (c)    Within   each  party  and  their   respective   Affiliates,
                     Confidential  Information  shall  be  disclosed  only  on a
                     need-to-know  basis. Each party shall protect  Confidential
                     Information  of the other by using the same degree of care,
                     but not less than a reasonable  degree of care,  to prevent
                     unauthorized  disclosure  or  use as  that  party  uses  to
                     protect its own confidential information of like nature.

              (d)    The  foregoing  obligations  shall  remain  in  force  with
                     respect to each item of  Confidential  Information for five
                     (5)  years  following  the date such  information  is first
                     disclosed under this Agreement, notwithstanding any earlier
                     termination of this Agreement.

              (e)    Each party  represents  and  warrants to the other that its
                     employees,  agents  or  consultants  having  access  to any
                     Confidential  Information  of  the  other  party  shall  be
                     subject to a valid,  binding and  enforceable  agreement to
                     maintain such Confidential Information in confidence.

              (f)    Each party agrees upon request of the other party to return
                     all Confidential  Information received from the other party
                     under this Agreement.

       11.4.  Terms of Agreement.

              Purchaser and Seller agree that the terms of this Agreement  shall
              be treated as  Confidential  Information  of each other subject to
              this Article 11;  provided,  however,  that either party may, upon
              notice to the other, make such public  disclosures  regarding this
              Agreement as in the opinion of counsel for such party are required
              by applicable securities laws or regulations.

12.    ADDITIONAL UNDERTAKINGS

       12.1.  Use of Trademarks, Etc.

              Neither  party  will,  without  the prior  written  consent of the
              other,   (a)  use  in  advertising,   publicity  or  otherwise  in
              connection with any Products sold under this Agreement,  any trade
              name,  trademark,  trade device,  service mark, or symbol owned by
              the  other  party  or its  Affiliates;  or (b)  represent,  either
              directly  or  indirectly,  that any  product  of such party or its
              Affiliates  is a product  manufactured  by the other  party or its
              Affiliates, or vice versa.

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       12.2.  Use of SiC Wafers.

              Purchaser  agrees that it will not, without Seller's prior written
              consent,  use SiC Wafers supplied under this Agreement in the bulk
              growth of silicon  carbide or in the  development of processes for
              bulk growth of silicon carbide,  nor sell or otherwise transfer or
              make  available  any SiC  Wafers  to any other  person or  entity,
              including  Purchaser's  Affiliates,   except  as  provided  below.
              Purchaser may transfer SiC Wafers supplied under this Agreement to
              its Affiliates  that are not engaged in the bulk growth of silicon
              carbide or in the  development  of  processes  for bulk  growth of
              silicon carbide  provided the Affiliate  agrees to be bound by the
              restrictions   stated  in  this   paragraph.   Purchaser  will  be
              responsible for any breach of the restrictions by its Affiliate.

       12.3.  Resale of Products.

              Purchaser  agrees that it will not, without Seller's prior written
              consent, sell or otherwise transfer or make available LED Products
              supplied  under  this  Agreement  to any other  person or  entity,
              including Purchaser's Affiliates, in the form of LED die or in any
              form other than lamp or other  packaged  form,  except as provided
              below  or  permitted  with  respect  to the  sale  of LED  die for
              chip-on-board  solutions  by the  Development,  License and Supply
              Agreement between the Seller and Siemens AG dated October 25, 1995
              (which agreement was assigned to and assumed by Purchaser pursuant
              to the  Transformation  Agreement  between  Siemens AG, Seller and
              Purchaser effective January 1, 1999).  Purchaser may transfer such
              LED Products to its Affiliates in die form for packaging  provided
              the  Affiliate  agrees to be bound by the  restrictions  stated in
              this  paragraph.  Purchaser will be responsible  for any breach of
              the restrictions by its Affiliate.  If Purchaser's  inventories of
              LED Products  supplied under this Agreement  exceed its demand for
              packaged LEDs, or if due to technical  reasons Purchaser is unable
              to  supply  packaged  LEDs  in a  form  that  meets  a  particular
              customer's  requirements,  then at Purchaser's request Seller will
              in good faith discuss with Purchaser the possibility of giving its
              consent  to  the  resale  of LED  Products  in die  form  in  that
              circumstance.

13.    GENERAL

       13.1.  Notices.

              All notices under this  Agreement  shall be in writing and sent by
              prepaid  airmail  post,  by  reputable  courier  service,   or  by
              facsimile  or  electronic   message  (with  a  confirmation   copy
              concurrently   dispatched  by  prepaid  airmail  post  or  courier
              service),  to the addresses of the respective parties as set forth
              by their  signatures  below or to such other  address as the party
              may hereafter specify by written notice so given. Notices shall be
              effective upon receipt at the location of the specified address.

       13.2.  Authority; No Conflicting Obligations.

              Each party warrants that its has all requisite power and authority
              to  enter  into and  perform  this  Agreement,  and that it has no
              agreement with any third party or commitments or obligations which
              conflict in any way with its obligations hereunder.

       13.3.  Relationship of the Parties.

              The  relationship  of Purchaser and Seller under this Agreement is
              intended to be that of  independent  contractors.  Nothing  herein
              shall be construed to create any partnership, joint

--------------------------------------------------------------------------------
July 27, 2000 Purchase Agreement                                          Page 9

<PAGE>

              venture or agency  relationship of any kind. Neither party has any
              authority under this Agreement to assume or create any obligations
              on  behalf  of or in the  name of the  other  party or to bind the
              other party to any  contract,  agreement or  undertaking  with any
              third party.

       13.4.  Assignment.

              Except as expressly  provided for in this Agreement,  neither this
              Agreement  nor  any  right  or  obligations   hereunder  shall  be
              assignable by either party  without the prior  written  consent of
              the other party and any purported  assignment without such consent
              shall be void. Either party may assign this Agreement without such
              consent  in  connection  with  the  sale  or  transfer  of  all or
              substantially  all  of the  assets  of the  assigning  party.  Any
              permitted  assignee  shall assume all  obligations of its assignor
              under this  Agreement.  No  assignment  shall relieve any party of
              responsibility for the performance of its obligations hereunder.

       13.5.  Dispute Resolution.

              Any disputes or claims  arising from this  Agreement or its breach
              shall be  submitted  to and resolved  exclusively  by  arbitration
              conducted  in  accordance  with  the  Rules  of  Conciliation  and
              Arbitration  of  the  International   Chamber  of  Commerce.   The
              arbitration shall be conducted by three (3) arbitrators  appointed
              in accordance with such rules.  The place of arbitration  shall be
              in Geneva, Switzerland. An award rendered in the arbitration shall
              be final and binding  upon the parties and judgment may be entered
              thereon in any court of competent jurisdiction.

       13.6.  Severability.

              If  any   provision  of  this   Agreement  is  found   invalid  or
              unenforceable, the remaining provisions will be given effect as if
              the  invalid or  unenforceable  provision  were not a part of this
              Agreement.

       13.7.  Amendments; Waiver.

              This  Agreement may not be amended  except in a writing  signed by
              the authorized  representatives of both parties.  No waiver of any
              provision  of this  Agreement  shall be  effective  unless made in
              writing  and signed by the party  sought to be charged  therewith.
              The  failure of either  party to  enforce  any  provision  of this
              Agreement shall not constitute or be construed as a waiver of such
              provision or of the right to enforce it at a later time.

       13.8.  No Implied License.

              Nothing in this Agreement shall be construed to convey any license
              under any patent, copyright, trademark or other proprietary rights
              owned or  controlled  by either  party,  whether  relating  to the
              Products sold or any other matter.

       13.9.  Export Regulation.

              Purchaser   shall  comply  in  all  respects  with  all  laws  and
              regulations of the United States  government or any agency thereof
              pertaining to exports.

--------------------------------------------------------------------------------
July 27, 2000 Purchase Agreement                                         Page 10

<PAGE>

       13.10. Enforcement Costs.

              The prevailing party in any arbitration or judicial action brought
              to enforce the provisions of this  Agreement  shall be entitled to
              recover its costs and expenses,  including  reasonable  attorneys'
              fees, incurred in filing and prosecuting or defending such action.

       13.11. Governing Law.

              This  Agreement  shall be governed by and  construed in accordance
              with the internal laws of Switzerland, without regard to conflicts
              of laws principles.

       13.12. Construction.

              The captions  contained in this  Agreement are for reference  only
              and shall not be used in its construction or  interpretation.  The
              provisions of this  Agreement  shall be construed and  interpreted
              fairly to both parties  without  regard to which party drafted the
              same.

       13.13. United Nations Convention.

              The United Nations  Convention on Contracts for the  International
              Sale of Goods shall not apply to this Agreement.

       13.14. Entire Agreement.

              This Agreement sets forth the entire agreement between the parties
              with  respect to the  subject  matter  hereof and  supersedes  all
              previous  agreements  and  understandings   between  the  parties,
              whether oral or written, relating to such subject matter.

                                   * * * * *

--------------------------------------------------------------------------------
July 27, 2000 Purchase Agreement                                         Page 11

<PAGE>

IN WITNESS  WHEREOF,  the parties,  through  their  respective  duly  authorized
officers,  have executed this Agreement to be effective as of the Effective Date
set out in the preamble hereto.

CREE, INC.                                OSRAM OPTO SEMICONDUCTORS GMBH & CO.

By                                        By
     --------------------------------          --------------------------------
     F. Neal Hunter, Chairman & CEO            R. Mueller, President & CEO

Date                                      Date
     --------------------------------          --------------------------------

                                          By
                                               --------------------------------
                                               Robert Wittgen, CFO

                                         Date  --------------------------------

Address for Notices                      Address for Notices

Cree, Inc.                               OSRAM Opto Semiconductors GmbH & Co.OHG
4600 Silicon Drive                       Wernerwerkstr. 2
Durham, North Carolina 27703             93049 Regensburg
USA                                      Germany
Attention:  President                    Attention:  President
Fax No:  +1 (919) 313-5403               Fax No:  +49 341 202 2207

--------------------------------------------------------------------------------
July 27, 2000 Purchase Agreement                                         Page 12

<PAGE>

                                   SCHEDULE 1

                         Quantity and Shipment Schedule

A.     Quantity Commitment.

       1.     During the period commencing  October 1, 2000 and ending September
              23, 2001,  Purchaser  will purchase from Seller the  quantities of
              each Product type shown below:

                  GaN LEDs                                  *****
                  InGaN LEDs - Standard size                *****
                  InGaN LEDs - Small size                   *****
                  InGaN LEDs - Aton technology              *****
                  SiC Wafers                                *****  (50 mm dia.)

       2.     The InGaN LED - Aton technology part referenced above has not been
              developed  by  Seller  nor  qualified  by  Purchaser.  Purchaser's
              obligation  to buy and  Seller's  obligation  to sell such Product
              under this Agreement are subject to the condition that the parties
              mutually agree in writing on specifications  for the Product.  The
              parties shall cooperate diligently and in good faith with the goal
              of Seller developing the Product, Purchaser qualifying the Product
              and the parties  reaching mutual agreement on  specifications  for
              the Product such that  shipments of the Product may commence under
              this Agreement  beginning October 1, 2000. Seller will endeavor to
              deliver  engineering  samples and  preliminary  specifications  by
              August 31, 2000. Failure of the parties to agree on specifications
              for  such  Product  shall  not  give  either  party  the  right to
              terminate this Agreement.

B.     Shipment Schedule.

       1.     The shipment schedule is as follows:

              ------------------------------------------------------------------
                                             Quarterly (13-Week) Period Ending
                                           -------------------------------------
                             Product       12/24/00  3/25/01  6/24/01  9/23/01
              ==================================================================
              GaN LEDs                      *****     *****    *****    *****
              InGaN LEDs - Standard size    *****     *****    *****    *****
              InGaN LEDs - Small size       *****     *****    *****    *****
              InGaN LEDs - Aton technology  *****     *****    *****    *****
              SiC Wafers                    *****     *****    *****    *****
              ------------------------------------------------------------------

       2.     Subject to the  provisions  of this  Agreement,  unless  otherwise
              mutually agreed the quarterly  amounts shown above will be shipped
              in three shipments on the last day of the fourth, eighth and final
              week of  each  quarterly  period.  The mix of  Products  for  each
              shipment shall be in accordance with Attachment A to this Schedule
              1 except that Purchaser may, by written notice to Seller given not
              less than ninety (90) days prior to the scheduled  shipment  date,
              specify a different  mix of InGaN  LEDs,  provided  that:  (a) the
              aggregate  purchase price for all InGaN LEDs to be shipped in each
              quarterly  period is not less than the  aggregate for such quarter
              under  Attachment  A; and (b)  Seller has  manufacturing  capacity
              available  to  produce  the  requested  mix.  Seller  will  advise
              Purchaser in writing,  within  fifteen (15) days after  receipt of
              Purchaser's  notice specifying a different mix, whether Seller has
              manufacturing  capacity  available to produce the

--------------------------------------------------------------------------------
July 27, 2000 Purchase Agreement                                         Page 13

<PAGE>

              requested mix.  Seller will use its best  commercially  reasonable
              efforts to supply the requested mix.

C.     Rescheduling.

       1.     Purchaser may without charge reschedule shipments of quantities of
              GaN LEDs under the following terms:

              (a)    for   quantities   scheduled   to  be  shipped   more  than
                     twenty-four  (24)  weeks  following   Seller's  receipt  of
                     written  notice  from  Purchaser  requesting  rescheduling,
                     Purchaser may reschedule up to thirty percent (30%) of such
                     quantity  for up to ninety  (90) days after the  originally
                     scheduled  shipment  date but not later than  December  23,
                     2001; and

              (b)    for  quantities  scheduled  to be shipped  more than twelve
                     (12) weeks but  within  twenty-four  (24)  weeks  following
                     Seller's   receipt  of  written   notice   from   Purchaser
                     requesting rescheduling, Purchaser may reschedule up to ten
                     percent  (10%) of such  quantity for up to ninety (90) days
                     after the originally  scheduled shipment date but not later
                     than December 23, 2001.

       2.     Purchaser may without charge reschedule shipments of quantities of
              InGaN GaN LEDs under the following terms:

              (a)    for   quantities   scheduled   to  be  shipped   more  than
                     twenty-four  (24)  weeks  following   Seller's  receipt  of
                     written  notice  from  Purchaser  requesting  rescheduling,
                     Purchaser may reschedule up to twenty-five percent (25%) of
                     such  quantity  for  up  to  ninety  (90)  days  after  the
                     originally  scheduled  shipment  date  but not  later  than
                     December 23, 2001; and

              (b)    for  quantities  scheduled  to be shipped  more than twelve
                     (12) weeks but  within  twenty-four  (24)  weeks  following
                     Seller's   receipt  of  written   notice   from   Purchaser
                     requesting rescheduling, Purchaser may reschedule up to ten
                     percent  (10%) of such  quantity for up to ninety (90) days
                     after the originally  scheduled shipment date but not later
                     than December 23, 2001.

       3.     In all other cases  Purchaser may  reschedule  shipments only with
              Seller's mutual written agreement.

       4.     Purchaser's  notice  requesting   rescheduling  must  specify  the
              quantity  to be deferred  and the date on which  shipment is to be
              made. Subject to the foregoing,  a shipment may be rescheduled any
              number of times under this Paragraph (C).

--------------------------------------------------------------------------------
July 27, 2000 Purchase Agreement                                         Page 14

<PAGE>

SCHEDULE 1 - ATTACHMENT A                                CONFIDENTIAL TREATEMENT

       -------------------------------------------------------------  ------
****    **** **** **** **** **** **** **** **** **** **** **** ****    ****
       -------------------------------------------------------------  ------

--------------------------------------------------------------------------------

       -------------------------------------------------------------  ------
****    **** **** **** **** **** **** **** **** **** **** **** ****    ****
       -------------------------------------------------------------  ------

--------------------------------------------------------------------------------

       -------------------------------------------------------------  ------
****    **** **** **** **** **** **** **** **** **** **** **** ****    ****
       -------------------------------------------------------------  ------
       -------------------------------------------------------------  ------
****    **** **** **** **** **** **** **** **** **** **** **** ****    ****
       -------------------------------------------------------------  ------
       -------------------------------------------------------------  ------
****    **** **** **** **** **** **** **** **** **** **** **** ****    ****
       -------------------------------------------------------------  ------
       -------------------------------------------------------------  ------
****    **** **** **** **** **** **** **** **** **** **** **** ****    ****
       -------------------------------------------------------------  ------
       -------------------------------------------------------------  ------
****    **** **** **** **** **** **** **** **** **** **** **** ****    ****
       -------------------------------------------------------------  ------
       -------------------------------------------------------------  ------
****    **** **** **** **** **** **** **** **** **** **** **** ****    ****
       -------------------------------------------------------------  ------
       -------------------------------------------------------------  ------
****    **** **** **** **** **** **** **** **** **** **** **** ****    ****
       -------------------------------------------------------------  ------
       -------------------------------------------------------------  ------
****    **** **** **** **** **** **** **** **** **** **** **** ****    ****
       -------------------------------------------------------------  ------
       -------------------------------------------------------------  ------
****    **** **** **** **** **** **** **** **** **** **** **** ****    ****
       -------------------------------------------------------------  ------
       -------------------------------------------------------------  ------
****    **** **** **** **** **** **** **** **** **** **** **** ****    ****
       -------------------------------------------------------------  ------
       -------------------------------------------------------------  ------
****    **** **** **** **** **** **** **** **** **** **** **** ****    ****
       -------------------------------------------------------------  ------
       -------------------------------------------------------------  ------
****    **** **** **** **** **** **** **** **** **** **** **** ****    ****
       -------------------------------------------------------------  ------
       -------------------------------------------------------------  ------
****    **** **** **** **** **** **** **** **** **** **** **** ****    ****
       -------------------------------------------------------------  ------

--------------------------------------------------------------------------------
July 27, 2000 Purchase Agreement                                         Page 15

<PAGE>
                                   SCHEDULE 2

                           Price and Payment Schedule

A.     Prices.  Prices shall be determined as follows,  subject to Paragraph (B)
       of this Schedule 2:

       1.     GaN LEDs (Part No. *****)

              ------------------------------------- ------------------------
                      Incremental Quantities            Unit Price (US$)
              ===================================== ========================
                           0 to *****                       *****
                       ***** to *****                       *****
                       ***** to *****                       *****
                      ***** and greater                     *****
              ------------------------------------- ------------------------

       2.     InGaN LEDs - Standard size

              (a)    Blue: Part Nos. ***** and *****

               ------------------------------------- ------------------------
                      Incremental Quantities            Unit Price (US$)
               ===================================== ========================
                           *****                            *****
                       ***** to *****                       *****
                       ***** to *****                       *****
                      ***** and greater                     *****
               ------------------------------------- ------------------------

              (b)    Green: Part Nos. ***** and *****

               ------------------------------------- ------------------------
                      Incremental Quantities            Unit Price (US$)
               ===================================== ========================
                           *****                            *****
                       ***** to *****                       *****
                       ***** to *****                       *****
                      ***** and greater                     *****
               ------------------------------------- ------------------------

       3.     InGaN LEDs - Small size

              (a)    Blue: Part No. *****

               ------------------------------------- ------------------------
                      Incremental Quantities            Unit Price (US$)
               ===================================== ========================
                           *****                            *****
                       ***** to *****                       *****
                       ***** to *****                       *****
                      ***** and greater                     *****
               ------------------------------------- ------------------------

--------------------------------------------------------------------------------
July 27, 2000 Purchase Agreement                                         Page 16

<PAGE>

              (b)    Green: Part No. ****** *

               ------------------------------------- ------------------------
                      Incremental Quantities            Unit Price (US$)
               ===================================== ========================
                           *****                            *****
                       ***** to *****                       *****
                       ***** to *****                       *****
                      ***** and greater                     *****
               ------------------------------------- ------------------------

              *Specifications  for the ***** part shall be mutually  agreed upon
              in writing by the parties.

       4.     InGaN LEDs - Aton technology*

              (a)    Blue (part no. to be determined)

               ------------------------------------- ------------------------
                      Incremental Quantities            Unit Price (US$)
               ===================================== ========================
                           *****                            *****
                       ***** to *****                       *****
                       ***** to *****                       *****
                      ***** and greater                     *****
               ------------------------------------- ------------------------

              (b)    Green (part no. to be determined)

               ------------------------------------- ------------------------
                      Incremental Quantities            Unit Price (US$)
               ===================================== ========================
                           *****                            *****
                       ***** to *****                       *****
                       ***** to *****                       *****
                      ***** and greater                     *****
               ------------------------------------- ------------------------

              *Specification  for the Aton  technology  parts shall be mutually
              agreed upon in writing by the parties.

       5.     SiC Wafers

               ------------------------------------- ------------------------
                      Incremental Quantities            Unit Price (US$)
               ===================================== ========================
                           *****                            *****
                       ***** to *****                       *****
                       ***** to *****                       *****
                      ***** and greater                     *****
               ------------------------------------- ------------------------

       The parties  acknowledge  that the reduction in per unit prices  reflects
       Seller's expectation that it will improve manufacturing yields and reduce
       per unit cost.

B.     Exchange Rate Adjustments.

       Purchaser  and  Seller  will  share the risk of  currency  exchange  rate
       fluctuations,  as provided in this paragraph,  for units shipped pursuant
       to Schedule 1. The unit price for such shipments shall be adjusted by the
       applicable  percentage  below according to the value of the  "Euro-Dollar
       Exchange Rate"  calculated as of the last day of Seller's fiscal month in
       which the units were  shipped.

--------------------------------------------------------------------------------
July 27, 2000 Purchase Agreement                                         Page 17

<PAGE>

       (Seller's  fiscal months are the periods  ending on Sunday of the fourth,
       eighth  and final  week of each of  Seller's  fiscal  quarters.  Seller's
       fiscal quarters in which shipments are scheduled under this Agreement are
       the  13-week  periods  ending on the dates shown in  Paragraph  (B)(2) of
       Schedule 1.) For purposes of this paragraph,  the  "Euro-Dollar  Exchange
       Rate" means the average of the foreign  exchange rates for Euros per U.S.
       Dollar,  as published in the Wall Street  Journal  during the thirty (30)
       calendar  days  preceding the date as of which the  calculation  is to be
       made, for rates quoted in New York the preceding business day for trading
       among banks in amounts of $1 million or more.

       -------------------------------------------------------------------------
       Euro-Dollar Exchange rate                               Percentage Price
                                                                  Adjustment
       =========================================================================
       Equal to or greater than *****                               -*****
       Equal to or greater than ***** and less than *****           -*****
       Equal to or greater than ***** and less than *****           -*****
       Greater than ***** and less than *****                    no adjustment
       Equal to or less than ***** and greater than *****           +*****
       Equal to or less than ***** and greater than *****           +*****
       Equal to or less than *****                                  +*****
       -------------------------------------------------------------------------

C.     Payment Terms.

       Products will be invoiced upon  shipment at the prices  determined  under
       Paragraph  (A) of this  Schedule 2, prior to any  adjustment  pursuant to
       Paragraph (B).  Invoices shall be due and payable within twenty (20) days
       from the invoice  date.  Within  fifteen  (15) days after the end of each
       fiscal quarter of Seller,  Seller will issue  Purchaser a credit or debit
       memorandum,  as the case may be,  reflecting all adjustments  required by
       Paragraph  (B)  with  respect  to  shipments  made  during  the  quarter.
       Purchaser  may apply  the  amount of any such  credit  memoranda  against
       unpaid  invoices  due to Seller  and shall pay  Seller the amount of such
       debit memoranda in the same manner as invoices.

--------------------------------------------------------------------------------
July 27, 2000 Purchase Agreement                                         Page 18

<PAGE>

                                   SCHEDULE 3

                             Product Specifications

A.     GaN LEDs. The GaN LEDs subject to this Agreement are Seller's part number
       *****, and the applicable  product  specifications are those set forth in
       Seller's ISO 9000-controlled specifications for such Product as in effect
       on the  Effective  Date of this  Agreement,  copies  of which  have  been
       provided to Purchaser prior to execution of this Agreement.

B.     InGaN LEDs.

       1.     The  standard  size and small  size  InGaN  LEDs  subject  to this
              Agreement are identified by Seller's part numbers shown below. The
              applicable product  specifications are those set forth in Seller's
              ISO 9000-controlled  specifications for such Products as in effect
              on the Effective Date of this Agreement, copies of which have been
              provided to Purchaser prior to execution of this Agreement, except
              as otherwise noted below.

                           ****** **
                           ****** **
                           ******
                           ****** **
                           ******
                           ****** *

              *The  specifications  for the ***** part shall be mutually  agreed
              upon in writing by the parties.

              **The minimum  radiant flux of *****,  ***** and ***** parts shall
              be as shown below for the period in which the unit is shipped:

              ------------------------------------------------------------------
                                             Minimum Radiant Flux
                               -------------------------------------------------
                                      Quarterly (13-Week) Period Ending
                               -------------------------------------------------
              Part No.         12/24/00     3/25/01      6/24/01      9/23/01
              ==================================================================
              *****              *****       *****        *****        *****
              *****              *****       *****        *****        *****
              *****              *****       *****        *****        *****
              ------------------------------------------------------------------

       2.     Product  Specifications for the Aton technology InGaN LED shall be
              mutually  agreed upon in writing by the parties,  with a target of
              *****  increase  in radiant  flux and a *****  increase in forward
              voltage  (Vf)  from  Seller's  standard   specifications  for  the
              corresponding  non-Aton  technology  Products,  as  set  forth  in
              Seller's ISO  9000-controlled  specifications  as in effect on the
              Effective Date of this Agreement.

C.     SiC Wafers.  The SiC Wafers  subject to this  Agreement are Seller's part
       number  ***** and the  applicable  product  specifications  are those set
       forth in Seller's ISO 9000-controlled  specifications for such Product as
       in effect on the Effective Date of this  Agreement,  copies of which have
       been provided to Purchaser prior to execution of this Agreement.

--------------------------------------------------------------------------------
July 27, 2000 Purchase Agreement                                         Page 19

<PAGE>

       The parties will cooperate in evaluating the  substitution of Purchaser's
       internal  specifications as the Product  Specifications  applicable under
       this  Agreement  and will  negotiate in good faith a mutually  acceptable
       written   agreement   effecting  such   substitution  and  any  necessary
       adjustments  to  Purchaser's  specifications.  Failure of the  parties to
       agree on such substitute specifications for any Products, or on any other
       Product  Specifications  required to be mutually  agreed upon pursuant to
       this  Agreement,  shall not give either party the right to terminate this
       Agreement.

D.     Seller  acknowledges  Purchaser's  desire that Seller  reduce the forward
       voltages  (Vf max.) for all colors from ***** to *****.  Seller shall use
       its best commercially  reasonable  efforts to develop such improved parts
       prior to *****.

--------------------------------------------------------------------------------
July 27, 2000 Purchase Agreement                                         Page 20<PAGE>

                         EXECUTIVE EMPLOYMENT AGREEMENT

     EXECUTIVE EMPLOYMENT AGREEMENT, effective December 1, 1999, by and between
SPORT-HALEY, INC., a Colorado corporation (the "Company") and KEVIN TOMLINSON
(the "Executive").

     WHEREAS, the Company desires to employ the Executive on a full-time basis,
and the Executive desires to be so employed by the Company, in accordance with
the terms of this Agreement.

     NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties agree as follows:

                                    ARTICLE I
                         EMPLOYMENT DUTIES AND BENEFITS

     SECTION 1.1 EMPLOYMENT. The Company hereby employs the Executive in the
position described on Schedule 1 hereto as an executive officer of the Company.
The Executive accepts such employment and agrees to perform the duties and
responsibilities assigned to him pursuant to this Agreement.

     SECTION 1.2 DUTIES AND RESPONSIBILITIES. The Executive shall hold the
position with the Company which is specified on Schedule 1, which is attached
hereto and incorporated herein by reference. The Executive is employed pursuant
to the terms of this Agreement and agrees to devote full-time to the business of
the Company. The Executive shall perform the duties set forth on Schedule 1
while employed as an executive officer, and such further duties as may be
determined and assigned to him from time-to-time by the Chief Executive Officer
or the Board of Directors of the Company.

     SECTION 1.3 WORKING FACILITIES. The Executive shall be furnished with
facilities and services suitable to the position and adequate for the
performance of the Executive's duties under this Agreement. The Executive's
duties shall be rendered at the Company's offices, or at such other place or
places as the Executive may designate with the Company's approval, which shall
not be unreasonably withheld.

     SECTION 1.4 VACATIONS. The Executive shall be entitled each year to a
reasonable vacation of not less than four weeks in accordance with the
established practices of the Company now or hereafter in effect for executive
personnel, during which time the Executive's compensation shall be paid in full.
Should the Company from time-to-time require the Executive to perform job duties
during vacation periods, the Executive shall be entitled to compensatory
vacation time at a mutually agreeable time.

<PAGE>

     SECTION 1.5 EXPENSES. The Executive is authorized to incur reasonable
expenses for promoting the domestic and international business of the Company in
all respects, including expenses for entertainment, travel and similar items.
The Company will reimburse the Executive for all such expenses upon the
presentation by the Executive, from time-to-time, of an itemized account of such
expenditures. To facilitate entertainment in an environment in which the
Company's products are displayed, the Company will maintain a membership at a
golf or country club chosen by the Employee and will pay monthly dues and
expenses of entertainment at such club.

                                   ARTICLE II
                                  COMPENSATION

     SECTION 2.1 BASE SALARY. The Company shall pay to the Executive a base
salary of not less than the amount specified on Schedule 1, subject to annual
review and raises in such base salary. The base salary may be raised by action
of the Board of Directors, and such raises shall thereafter be included in the
Executive's base salary as defined for purposes of this Agreement and the
Company's bonus plan.

     SECTION 2.2 BONUS AND BONUS PLAN PARTICIPATION. The Executive shall be
entitled to receive a bonus at such time or times as may be determined by the
Board of Directors of the Company. The Executive shall also be entitled to
receive bonuses of up to 50% of the Executive's base salary in accordance with
the provisions of the Company-wide bonus plan as in effect from time to time.

     SECTION 2.3 AUTOMOBILE. The Company shall furnish, at the Company's
expense, the Executive an automobile for the Executive's use during the term of
this Agreement.

                                   ARTICLE III
                       TERM OF EMPLOYMENT AND TERMINATION

     SECTION 3.1 TERM. This Agreement shall be for a term which is specified on
Schedule 1, commencing on its effective date, subject, however, to termination
during such period as provided in this Article. Provided that the Executive is
in compliance with all of his obligations hereunder, the term of the Executive's
employment shall be extended automatically for one additional year at the end of
each year of the term or extended term of this Agreement on the same terms and
conditions as contained in this Agreement, unless either the Company or the
Executive shall, at least 90 days prior to the expiration of the initial term or
of any renewal term, give written notice of the intention not to renew this
Agreement. If the Company gives such written notice of non-renewal, the
provisions of

                                      -2-
<PAGE>

Section 3.2 shall apply; if the Executive gives such written notice of
non-renewal, the provisions of Section 3.4 shall apply. Automatic renewals shall
be effective in subsequent years on the same day of the same month as the
original effective day and month of this Agreement.

     SECTION 3.2 TERMINATION BY THE EXECUTIVE WITHOUT CAUSE. The Executive,
without cause, may terminate this Agreement upon 90 days' written notice to the
Company. In such event, the Executive shall not be required to thereafter render
the services required under this Agreement. Compensation for vacation time not
taken by Executive shall be paid to the Executive at the date of termination.

     SECTION 3.3 TERMINATION BY THE COMPANY WITH CAUSE. The Company may
terminate the Executive, at any time, upon ten days' written notice and
opportunity for Executive to remedy any non-compliance with the terms of this
Agreement (if such non-compliance is capable of being remedied; if not, the
Company's notice of termination shall be effective immediately), by reason of
fraud or gross negligence of the Executive. In such event, the Board of
Directors shall provide in writing to the Executive an opinion of the Board of
Directors, signed by each member voting in favor of termination of the
Executive, which shall specify with particularity the basis for such termination
by reason of fraud or gross negligence. Upon the date of such termination, the
Company's obligation to pay compensation shall terminate.

     SECTION 3.4 TERMINATION BY THE EXECUTIVE WITH CAUSE. The Executive may
terminate his employment with the Company at any time, upon five days' written
notice and opportunity for the Company to remedy any non-compliance, by reason
of (i) the Company's material failure to perform its duties pursuant to this
Agreement, or (ii) any material diminishment in the duties and responsibilities,
working facilities, or benefits as described in Article I of this Agreement. The
Executive shall be entitled to the severance compensation and other benefits
described in Section 3.6 below in the event of termination of this Agreement
pursuant to this Section 3.4.

     SECTION 3.5 TERMINATION UPON DEATH OF EXECUTIVE. In addition to any other
provision relating to termination, this Agreement shall terminate upon the
Executive's death. In such event, the severance compensation as set forth in
Section 3.6 of this Agreement (paid as if there was a non-negotiated change in
control of the Company) and compensation for vacation time not taken by
Executive shall be paid to the Executive's estate.

     SECTION 3.6 SEVERANCE COMPENSATION AND CONTINUATION OF BENEFITS. In the
event (i) the Executive shall terminate this Agreement pursuant to Section 3.4
of this Agreement, (ii) the Company shall terminate this Agreement for reasons
other than those specified in Section 3.3 of this Agreement, or (iii) of a
change in control of the Company, then, in any of such events, the Executive
shall be entitled to receive the following:

                                      -3-
<PAGE>

     (a)  The Executive shall receive severance compensation for a term of 12
months from the date of termination equal to his salary and incentive or bonus
payments, if any, as shall have been paid to the Executive during the most
recent 12-month period concluded prior to the date of termination. Such
severance compensation shall be paid monthly during such 12 month period. In the
event that the severance payments provided for in this Section 3.6 shall be made
in connection with a change of control of the Company, the Executive shall
receive a sum equal to three times the Executive's base compensation (which
shall be defined as the average annual taxable compensation of the Executive for
the three years preceding the year in which the change of control occurs) in 12
equal monthly payments commencing 30 days after the change of control.
Notwithstanding any provisions to the contrary herein, in the event of a
non-negotiated change in control of the Company, the severance compensation to
be paid to the Executive shall be paid by the Company in a lump sum within 30
days of the non-negotiated change in control.

     (b)  Notwithstanding anything contained in this Agreement to the contrary,
in the event that any payment, within the meaning of Section 280G(b)(2) of the
Internal Revenue Code of 1986, as amended (the "Code"), or distribution to or
for the benefit of the Executive, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise in connection
with, or arising out of, his employment with the Company (a "Payment" or
"Payments"), would be subject to the excise tax imposed by Section 4999 of the
Code or any interest or penalties are incurred by the Executive with respect to
such excise tax (such excise tax, interest and penalties collectively referred
to as the "Excise Tax"), then the Executive shall be entitled to receive an
additional payment (a "Gross-Up Payment") in an amount such that after payment
by the Executive of all such taxes (including any interest or penalties imposed
with respect to such taxes, including any Excise Tax imposed upon the Gross-Up
Payment) that is equal to the Excise Tax imposed upon the Payments; provided,
that the Executive shall not be entitled to receive any additional payment
relating to any interest or penalties attributable to any action or commission
by the Executive in bad faith.

     (c)  An initial determination shall be made by an accounting firm mutually
agreeable to the Company and the Executive and, if not agreed to within ten days
after the date of termination, an independent accounting firm selected by the
Executive (the "Accounting Firm") as to whether a Gross-Up Payment is required
pursuant to this Section 3.6 and the amount of such Gross-Up Payment. To permit
the Accounting Firm to make the initial determination, the Company shall furnish
the Accounting Firm with all information reasonably required for such firm to
complete such determination as soon as practicable after the date of
termination, but in any event not more than twenty-five (25) days thereafter.
All fees, costs and expenses (including, but not limited to, the cost of
retaining experts) of

                                      -4-
<PAGE>

the Accounting Firm shall be borne by the Company and the Company shall pay such
fees, costs and expenses as they become due. The Accounting Firm shall provide
detailed supporting calculations, reasonably acceptable both to the Company and
the Executive within thirty (30) days of the date of termination, if applicable,
or such other time as requested by the Company or by the Executive (provided the
Executive reasonably believes that any of the Payments may be subject to the
Excise Tax). The Gross-Up Payment, if any, as determined pursuant to this
Section 3.6 shall be paid by the Company to the Executive within five (5)
business days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by the Executive with
respect to a Payment or Payments, it shall furnish the Executive with an opinion
reasonably satisfactory to the Executive that no Excise Tax will be imposed with
respect to any such Payment or Payments. Any such initial determination by the
Accounting Firm of the Gross-Up Payment shall be binding upon the Company and
the Executive subject to the application of Section 3.6(d).

     (d)  As a result of the uncertainty in the application of Sections 4999 and
280G of the Code, it is possible that a Gross-Up Payment (or a portion thereof)
will be paid which should not have been paid (an "Overpayment") or a Gross-Up
Payment or a portion thereof which should have been paid will not have been paid
(an "Underpayment"). An Underpayment shall be deemed to have occurred upon a
"Final Determination" (as hereinafter defined) that the tax liability of the
Executive (whether in respect of the then current taxable year of the Executive
or in respect of any prior taxable year of the Executive) will be increased by
reason of the imposition of the Excise Tax on a Payment or Payments with respect
to which the Company has failed to make a sufficient Gross-Up Payment. An
Overpayment shall be deemed to have occurred upon a "Final Determination" (as
hereinafter defined) that the Excise Tax shall not be imposed (or shall be
reduced) upon a Payment or Payments with respect to which the Executive had
previously received a Gross-Up Payment. A Final Determination shall be deemed to
have occurred when (i) in the case of an Overpayment, the Executive has received
from the applicable government tax liability authority a refund of taxed or
other reduction in his tax liability imposed as a result of a Payment or, in the
case of an Underpayment, the Executive receives notice from a competent
governmental taxing authority that his tax liability imposed as a result of a
Payment will be increased, and (ii) in the case of an Overpayment or an
Underpayment, upon either (x) the date a determination is made by, or an
agreement is entered into with, the applicable governmental taxing authority
which finally and conclusively binds the Executive and such taxing authority, or
in the event that a claim is brought before a court of competent jurisdiction,
the date upon which a final determination has been made by such court and either
all appeals have been taken and finally resolved or the time for all appeals
have been taken and finally resolved or the time for all

                                      -5-
<PAGE>

appeals has expired, or (y) the statute of limitations with respect to the
Executive's applicable tax return has expired. If an Underpayment occurs, the
Executive shall promptly notify the Company and the Company shall promptly pay
to the Executive an additional Gross-Up Payment equal to the amount of the
Underpayment plus an interest and penalties imposed on the Underpayment (other
than interest and penalties attributable to any action or omission by the
Executive in bad faith). If an Overpayment occurs, the amount of the Overpayment
shall be treated as a loan by the Company to the Executive and Executive shall,
within ten (10) business days of the occurrence of such Overpayment, pay the
Company the amount of the Overpayment, with interest computed in the same manner
as for an Underpayment.

     (e)  Notwithstanding anything contained in this Agreement to the contrary,
in the event it is determined that an Excise Tax will be imposed on any Payment
or Payments, the Company shall pay to the applicable governmental taxing
authorities as Excise Tax withholding, the amount of the Excise Tax that the
Company has actually withheld from the Payment or Payments.

     (f)  In the event the Executive is required to hire counsel to negotiate on
his behalf in connection with his termination or a change in control of the
Company, or in order to enforce the rights and obligations as provided herein,
the Company shall reimburse to the Executive all reasonable attorney's fees
which may be expended by the Executive in seeking to enforce the terms hereof.
Such reimbursement shall be paid by the Company every 30 days after the
Executive provides to the Company copies of invoices from the Executive's
counsel, which may be redacted as necessary to preserve applicable
attorney-client confidentiality.

     (g)  So long as the Executive is receiving severance compensation pursuant
to this Section 3.6 of this Agreement, the Executive shall be entitled to
continue to participate, at the Company's cost, in all existing benefit plans
provided to the Company's executive Executives at the time of the Executive's
termination or resignation. Such plans shall include, but are not limited to,
then-existing medical, health, dental, vision, disability, life insurance and
death benefit plans. If the terms of such plans expressly prohibit the Executive
from continuing as a participant in such plans following the date of resignation
or termination, the Company will provide the Executive with benefits equivalent
to, or exceeding, those offered by the then-existing benefit plans offered to
the Company's executive Executives, all at the Company's cost, for the duration
of the Executive's right to severance compensation hereunder.

     (h)  Any compensation to be paid to the Executive under the foregoing
provisions of this Section 3.6 shall be subject to the Executive complying with
the non-compete provisions of Section 4.1(c)

                                      -6-
<PAGE>

below. In the event the Executive does not so comply, the Company shall be
released from any obligations to the Executive under this Section 3.6.

     SECTION 3.7 OPTIONS. Any options granted to the Executive to purchase stock
of the Company shall become fully vested on the date of termination of this
Agreement except if termination is for the reasons specified in Section 3.3 of
this Agreement. This provision shall serve as a contractual modification of any
option grants or agreements between the Executive and the Company, whether such
grants or agreements shall pre-date or postdate this Agreement, and is hereby
incorporated by reference into each such option grant or agreement.

                                   ARTICLE IV
                         CONFIDENTIALITY AND COMPETITION

     SECTION 4.1 FURTHER OBLIGATIONS OF THE EXECUTIVE DURING AND AFTER
EMPLOYMENT.

     (a)  The Executive agrees that during the term of his employment under this
Agreement, he will engage in no other business activities which are or may be
competitive with, or which might place his in a competing position to that of,
the Company or any subsidiary of the Company.

     (b)  The Executive realizes that during the course of his employment, the
Executive will have produced and/or have access to confidential business plans,
information, business opportunity records, notebooks, data, formula,
specifications, trade secrets, customer lists, account lists and inventions of
the Company and its affiliates. Therefore, during or subsequent to his
employment by the Company, or by an affiliate, the Executive agrees to hold in
confidence and not to directly or indirectly disclose or use or copy or make
lists of any such information, except to the extent authorized by the Company in
writing. All records, files, business plans, documents, equipment and the like,
or copies thereof, relating to Company's business, or the business of an
affiliated company, which the Executive shall prepare, or use, or come into
contact with, shall remain the sole property of the Company, or of an affiliated
company, and shall not be removed from the Company's or the affiliated company's
premises without its written consent, and shall be promptly returned to the
Company upon termination or resignation of employment with the Company or its
affiliated companies.

     (c)  Because of his employment by the Company, Executive will have access
to trade secrets and confidential information about the Company, its business
plans, its business accounts, its business opportunities, its expansion plans
into other geographic areas and its methods of doing business. Executive agrees
that for a period of one (1) year after termination or resignation of his
employment, he will not, directly or indirectly, compete with the Company or its
affiliates in the business of

                                      -7-
<PAGE>

designing, marketing or contracting for the manufacture of men's and women's
golf apparel and outerwear within the United States. This non-compete agreement
shall be void and of no further force or effect in the event the Company fails
to pay the Executive amounts required under Section 3.6 hereof.

     (d)  In the event a court of competent jurisdiction finds any provision of
this Section 4.1 to be so overbroad as to be unenforceable, then such provision
shall be reduced in scope by the court, but only to the extent deemed necessary
by the court to render the provision reasonable and enforceable, it being the
Executive's intention to provide the Company with the broadest protection
possible against harmful competition.

                                    ARTICLE V
                             DISABILITY AND ILLNESS

     SECTION 5.1 DISABILITY AND SALARY CONTINUATION. If the Executive becomes
totally disabled during the term of this Agreement, his full salary shall be
continued for 360 days from the date of the disabling injury or onset of the
disability illness. For purposes of this Agreement, the terms "totally disabled"
and "total disability" shall mean disability as defined in any total disability
insurance policy or policies, if any, in effect with respect to the Executive.
If no insurance policy is in effect, "total disability" shall mean a medically
determinable physical or mental condition which in the opinion of two
independent physicians renders the Executive unable to perform substantially all
of the duties required pursuant to this Agreement. Total disability shall be
deemed to have occurred on the date of the disabling injury or onset of the
disabling illness, as determined by the two independent physicians.

     SECTION 5.2 ILLNESS. If the Executive is unable to perform the services
required under this Agreement by reason of illness or physical injury not
amounting to total disability, as defined in this Article, the compensation
otherwise payable to the Executive under this Agreement shall be continued in
full for the remaining term or renewed term of this Agreement.

                                   ARTICLE VI
                                 GENERAL MATTERS

     SECTION 6.1 GOVERNING LAW. This Agreement shall be governed by the laws of
the State of Colorado and shall be construed in accordance therewith.

                                      -8-
<PAGE>

     SECTION 6.2 NO WAIVER. No provision of this Agreement may be waived except
by an agreement in writing signed by the waiving party. A waiver of any term or
provision shall not be construed as a waiver of any other term or provision.

     SECTION 6.3 AMENDMENT. This Agreement may be amended, altered or revoked at
any time, in whole or in part, by filing with this Agreement a written
instrument setting forth such changes, signed by each of the parties.

     SECTION 6.4 BENEFIT. This Agreement shall be binding upon the Executive and
the Company, and shall not be assignable by the Company without the Executive's
written consent.

     SECTION 6.5 CONSTRUCTION. Throughout this Agreement the singular shall
include the plural, and the plural shall income the singular, and the masculine
and neuter shall include the feminine, wherever the context so requires.

     SECTION 6.6 TEXT TO CONTROL. The headings of articles and sections are
included solely for convenience of reference. If any conflict between any
heading and the text of this Agreement exists, the text shall control.

     SECTION 6.7 SEVERABILITY. If any provision of this Agreement is declared by
any court of competent jurisdiction to be invalid for any reason, such
invalidity shall not affect the remaining provisions. On the contrary, such
remaining provisions shall be fully severable, and this Agreement shall be
construed and enforced as if such invalid provisions had not been included in
the Agreement.

     SECTION 6.8 AUTHORITY. The officer executing this Agreement on behalf of
the Company has been empowered and directed to do so by the Board of Directors
of the Company.

     SECTION 6.9 EFFECTIVE DATE. The effective date of this Agreement shall be
December 1, 1999.

                                    SPORT-HALEY, INC.

                                    By: /s/ R. G. Tomlinson
                                       ----------------------------------------
                                       R. G. Tomlinson, Chief Executive Officer

                                    EXECUTIVE:

                                    /s/ Kevin Tomlinson
                                    -------------------------------------------
                                    Kevin Tomlinson

                                      -9-
<PAGE>

                                SPORT-HALEY, INC.

                         EXECUTIVE EMPLOYMENT AGREEMENT

                                   Schedule 1

                             Duties and Compensation

Executive:          Kevin Tomlinson

Position:           Chief Operating Officer and Executive Vice
                    President-Operations

Base Salary:        $140,000 per year, payable bi-weekly

Bonus:              As determined by the Board of Directors and in accordance
                    with Company-wide bonus plan

Term:               December 1, 2002, subject to automatic one (1) year
                    extensions described in Section 3.1 of the Executive
                    Employment Agreement

Duties and
 Responsibilities:  Supervision and coordination of manufacturing and other
                    operations of the Company

APPROVED:

THE COMPANY:                                          EXECUTIVE:

By: /s/ R. G. Tomlinson                               /s/ Kevin Tomlinson
   ----------------------------------------           --------------------------
   R. G. Tomlinson, Chief Executive Officer           Kevin Tomlinson

Date: November 12, 1999                               Date: November 12, 1999

                                      -10-

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