SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D.C. 20549
                                  --------------

                                    FORM 10-Q


(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934 
For the quarterly period ended June 30, 1998 
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities 
    Exchange Act of 1934 
For the transition period from _____________________to______________________


                        COMMISSION FILE NUMBER: 000-23329
                                    C3, Inc.
- --------------------------------------------------------------------------------
              (Exact name of Registrant as specified in its charter)

               North Carolina                             56-1928817
- ----------------------------------------------   ------------------------------
       (State or other jurisdiction of                 (I.R.S. Employer
       incorporation or organization)                 Identification No.)

             3800 Gateway Boulevard, 310, Morrisville, N.C. 27560
- -------------------------------------------------------------------------------
                   (Address of principal executive offices)

                                  919-468-0399
                         -------------------------------------
                         Registrant's telephone number,
                         including area code


Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                    Yes X No _



As of August 7, 1998 there were 6,942,166 shares of the Registrant's Common
Stock, no par value per share, outstanding.





                                       1

<PAGE>


                                     C3, Inc.
                                      INDEX


PART I.   FINANCIAL INFORMATION

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


Item 1.   Financial Statements

         Condensed Balance Sheets - June 30, 1998 And December 31, 1997

         Condensed Statements Of Operations - Three Months And Six Months Ended
         June 30, 1998 And 1997 And Cumulative For The Period June 28, 1995 To
         June 30, 1998

         Condensed Statements Of Cash Flows - Six Months Ended June 30, 1998 And
         1997 And Cumulative For The Period June 28, 1995 To June 30, 1998


         Notes To Condensed Financial Statements


I
tem 2.  Management's  Discussion  And Analysis Of Financial  Condition And 
         Results Of Operations



PART II.  OTHER INFORMATION

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


Item 2.   Changes In Securities And Use Of Proceeds


Item 4.   Submission Of Matters To A Vote Of Security Holders


Item 5.   Other Information


Item 6.   Exhibits And Reports On Form 8-K


Signatures



                                       2

<PAGE>




PART I.   FINANCIAL INFORMATION


ITEM 1.   FINANCIAL STATEMENTS

                                    C3, Inc.
                       (A Company In The Development Stage)
                             Condensed Balance Sheets

                                                                 
                                                     June 30,     December 31,
                                                       1998           1997
                                                   ------------  --------------
ASSETS                                              (Unaudited)
Current Assets:
     Cash and equivalents                          $ 39,070,181    $ 43,980,385

     Accounts receivable, net                           126,649           4,298

     Interest receivable                                144,936         177,654

     Inventories                                      1,298,470         278,602

     Prepaid expenses and other assets                  329,076          73,274
                                                   ------------    ------------

              Total current assets                   40,969,312      44,514,213


Equipment, net                                        2,296,034         214,990

Patent and license rights, net                          201,489         143,886
                                                   ------------    ------------
              Total assets                         $ 43,466,835    $ 44,873,089
                                                   ============    ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
     Accounts payable:

              Cree Research, Inc.                  $  2,444,832    $    567,110

              Other                                     474,478         237,186
     Accrued expenses                                   192,090

     Deferred revenue                                    33,224          22,512
                                                   ------------    ------------

              Total current liabilities               3,144,624         826,808

Commitments and Contingencies

Shareholders' Equity:

     Common stock                                    47,785,931      47,743,431

     Additional paid-in capital - stock options       1,737,082       1,632,804
     Deficit accumulated during the development
          stage                                      (9,200,802)     (5,329,954)
                                                   ------------    ------------

              Total shareholders' equity             40,322,211      44,046,281
                                                   ------------    ------------
              Total liabilities and shareholders'
                    equity                         $ 43,466,835    $ 44,873,089
                                                   ============    ============

See notes to Condensed Financial Statements



                                       3

<PAGE>


                                    C3, Inc.
                       (A Company In The Development Stage)
                        Condensed Statements Of Operations
                                   (Unaudited)




<TABLE>
<CAPTION>


                                                                            
                                                                            
                                                                            
                                                                                          Cumulative
                                                                                            For the  
                              Three Months Ended           Six Months Ended                 Period  
                                    June 30,                   June 30,                     June 28, 
                          ----------------------------    -------------------------         1995 to  
                                                                                            June 30, 
                              1998            1997            1998             1997           1998   
                          ------------    ------------    ------------    ------------    ------------
<S>                       <C>             <C>             <C>             <C>             <C>         
Net sales                 $    202,010    $       --      $    452,565    $       --      $    452,565
Cost of goods                  135,476            --           290,552            --           290,552
                          ------------    ------------    ------------    ------------    ------------
Gross profit                    66,534            --           162,013            --           162,013

Operating expenses:

    Marketing and
       sales                   512,863          24,904       1,273,999          46,611       1,866,660
    General and
       administrative          686,456         135,371       1,298,287         316,154       4,158,152
    Research and
       development           1,088,331         251,307       2,410,843         452,571       4,764,004
    Depreciation and
         amortization           28,418           4,095          43,917           6,649          74,487
                          ------------    ------------    ------------    ------------    ------------

Operating loss              (2,249,534)       (415,677)     (4,865,033)       (821,985)    (10,701,290)

Interest income, net           473,690          79,957         994,185         113,376       1,500,488
                          ------------    ------------    ------------    ------------    ------------


Net loss                  $ (1,775,844)   $   (335,720)   $ (3,870,848)   $   (708,609)   $ (9,200,802)
                          ============    ============    ============    ============    ============

Basic and diluted
     net loss
     per share            $      (0.26)   $      (0.15)   $      (0.56)   $      (0.31)   $      (3.00)
                          ============    ============    ============    ============    ============
Weighted-average common
     shares, basic
     and diluted             6,941,315       2,261,102       6,939,904       2,261,102       3,068,197
                          ============    ============    ============    ============    ============

</TABLE>


See notes to Condensed Financial Statements.




                                       4

<PAGE>

                                     C3, Inc.
                       (A Company In The Development Stage)
                        Condensed Statements Of Cash Flows
                                   (Unaudited)
                                                                

<TABLE>
<CAPTION>
<S> <C>
                                                                  Cumulative For
                                      Six Months Ended June 30,     The Period  
                                      ------------------------- June 28, 1995 to
                                        1998           1997       June 30, 1998 
                                      -----------   ------------  -------------
OPERATING ACTIVITIES:
Net loss                            $(3,870,848)    $(708,609)    $ (9,200,802)
Adjustments:
     Depreciation and amortization       43,917         6,648           74,487
     Compensation   expense  related
     to stock options                   146,778        66,000        1,845,582
     Change in operating  assets and
     liabilities:
          Net change in assets       (1,365,303)        7,000       (1,899,131)
          Net change in liabilities     485,078        97,019        1,311,886
                                      -----------   ----------    -------------
     Net  cash  used  by   operating
     activities                      (4,560,378)     (531,942)      (7,867,978)
                                      -----------   ----------    -------------

INVESTING ACTIVITIES:
Purchase of equipment                  (286,492)      (44,842)        (524,102)
Patent costs                            (63,334)      (33,951)        (215,170)
                                      -----------   ----------    -------------
     Net  cash  used  by   investing
activities                             (349,826)      (78,793)        (739,272)
                                      -----------   ----------    -------------

FINANCING ACTIVITIES:
Proceeds from common stock
offerings, net of costs                    ----          ----       42,102,785
Proceeds from preferred stock
offerings, net of costs                    ----     4,981,376        5,574,646
                                      -----------   ----------    -------------
    Net cash provided by financing
    activities                             ----     4,981,376       47,677,431
                                      -----------   ----------    -------------

Net change in cash and equivalents    (4,910,204)   4,370,641       39,070,181

Cash and  equivalents,  beginning of
period                                43,980,385    1,167,458             ----
                                      -----------   ----------    -------------
Cash and equivalents, end of period   $39,070,181   $5,538,099     $39,070,181
                                      ===========   ==========    =============
</TABLE>


See notes to Condensed Financial Statements.

                                       5

<PAGE>

                                    C3, Inc.
                     (A Company In The Development Stage)

                   Notes To Condensed Financial Statements
                                 (Unaudited)

1.  BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in conformity
with generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed, or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the financial statements include all
normal recurring adjustments which are necessary for the fair presentation of
the results of the interim periods presented. Interim results are not
necessarily indicative of results for the fiscal year. Certain reclassifications
have been made to prior year's financial statements to conform to the
classifications used in fiscal 1998. These financial statements should be read
in conjunction with the Company's audited financial statements for the year
ended December 31, 1997, as set forth in the Company's Form 10-K, filed with the
Securities and Exchange Commission on March 31, 1998.

Prior to July 1, 1998 C3, Inc. was a development stage company which devoted
substantially all of its efforts to research and product development and
development of its initial markets and did not, through June 30, 1998, generate
significant revenues from its planned principal operations.

In preparing financial statements that conform with generally accepted
accounting principles, management must make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and amounts of
revenues and expenses reflected during the reporting period.
Actual results could differ from those estimates.


2.  INVENTORIES

Inventories are stated at the lower of cost or market. Inventories consisted of
the following:

                                               
                                  June 30,      December 31,
                                    1998           1997
                                  ----------    -----------
                                  
       Raw materials              $  84,641          -----
       Work in process              281,739      $ 278,602
       Finished goods               932,090           ----
                                  ----------    -----------
       Total inventory            $1,298,470     $ 278,602
                                  ==========    ===========

                                       6


<PAGE>


 3.    NON-CASH OPERATING EXPENSES

During the quarter ended June 30, 1998, in accordance with Accounting Principals
Board Opinion No. 25, the Company recorded compensation expense of approximately
$96,000 relating to stock options. Cumulatively for the period from June 28,
1995 (date of inception) to June 30, 1998, such compensation expense aggregated
approximately $1,846,000. This compensation expense is recorded in general and
administrative expense in the statements of operations.


 4.    NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS

 In June 1997, Statement of Financial Accounting Standards No. 130 ("FAS 130"),
Comprehensive Income, was issued. This Statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. FAS 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods is required.
However, this Statement does not currently affect the Company's financial
statements since it has no items of other comprehensive income in any period
presented.


5.  SUBSEQUENT EVENT

In July 1998, the Company entered into an Amended and Restated Development
Agreement (the "Agreement") with its exclusive supplier, Cree Research, Inc.
(Cree), which is focused on increasing the yield of usable material in each
silicon carbide crystal manufactured by Cree for use by C3 in the production of
lab-created moissanite gemstones. The companies have agreed on the definition of
a "repeatable process" in the KLMN comparable diamond color range. In June 1998
Cree demonstrated its ability to meet that definition for 2-inch diameter
crystals and has now begun to produce 2-inch crystals using that process. The
Agreement establishes performance milestones for 1999 and contemplates that the
Company and Cree will revise the performance milestones annually to provide both
parties with more flexibility to pursue further color and yield improvements on
both 2-inch and 3-inch diameter crystals. The 4-year Agreement replaces the June
1997 Development Agreement and the 1998 Supplemental Development Agreement
between the parties and requires the Company to fund the program at $2.88
million annually. Either party may terminate the Agreement if Cree does not meet
the annual performance milestones or if the Company and Cree do not mutually
agree on the performance milestones for the ensuing year.

                                       7


<PAGE>



I
TEM 2:  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND
         RESULTS OF OPERATIONS

This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 that relate to the Company's future plans, objectives, estimates and
goals. These statements are subject to numerous risks and uncertainties,
including macro and micro economic factors that affect businesses operating in
the international economy, the Company's reliance on Cree Research, Inc. as a
developer and supplier of silicon carbide crystals, the level of growth in
domestic and international gemstone jewelry markets, the level of market
acceptance of and demand for the Company's products, and the actions of existing
and potential competitors. These and other risks and uncertainties are described
under the heading "Business Risks" in the Company's Form 10-K for the year ended
December 31, 1997, which was filed with the Securities and Exchange Commission
on March 31, 1998. These risks and uncertainties could cause actual results and
developments to be materially different from those expressed or implied by any
of the forward-looking statements included herein.


OVERVIEW

Since its organization in June 1995, the Company has devoted its resources to
funding research and development of colorless lab-created moissanite gemstones,
market research, qualifying potential domestic retail jewelers and potential
international distributors, developing consumer marketing campaigns and
assembling a management team. The company has achieved significant objectives in
each of these areas and has begun the market introduction of its lab-created
moissanite gemstones. See "Item 5: Additional Information" for more detailed
information on the Company's present distribution arrangements. The Company's
lab-created moissanite gemstones are being marketed as an exclusive, new
gemstone with properties, including brilliance, fire and hardness that rival
diamonds, sapphires, emeralds and other fine gemstones. Nonetheless, the Company
remains subject to the risks inherent in establishing a new business, including
the risk that full-scale operations will not occur.

Based on progress in gemstone development and distribution arrangements, the
Company has determined that as of July 1, 1998 it is no longer a development
stage company for financial reporting purposes. As a result, future gemstone
sales will be reported as sales in the operating statement rather than being
netted against research and development expenses, as was the case for the first
two quarters of 1998.

Building on the initial shipment of lab-created moissanite gemstones to
retailers in Miami/Ft. Lauderdale and Atlanta during the second quarter of 1998,
and the July 1998 launch of consumer-focused advertising and promotion
activities in those areas, the Company will focus on the market introduction of
its lab-created moissanite gemstones throughout the Southeastern states of North
Carolina, South Carolina, Georgia and Florida for the remainder of 1998. The
Company anticipates increased advertising campaigns and additional distribution
arrangements in this region. The Company will continue limited distribution and
promotional activities in domestic locations outside this region and will
continue its international distribution efforts.

The Company expects its sales volumes to increase gradually as it increases
production capacity and as the market introduction expands geographically.
During this period the Company will incur increasing spending levels as it makes
investments in receivables, inventory and manufacturing equipment, and as it
increases advertising, marketing and manufacturing personnel expenditures. The
Company expects to continue operating at a loss through at least the balance of
1998. Moreover, there can be no assurance


                                       8

<PAGE>


that the Company will ever achieve profitability or that if profitability is
achieved, that such profitability can be sustained.


RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997.

Net sales for the quarter ended June 30, 1998, were $202,010, which resulted
entirely from sales of the Company's proprietary test instrument. In addition,
the Company generated net sales of approximately $243,000 for gemstones, which
have been netted against research and development expenses on the operating
statement, because many of the gemstones were associated with the Company's
research and development program. There were no sales for the second quarter of
1997.

Gross profit was $66,534 or 33% of net sales for the quarter ended June 30,
1998. Gross profit related entirely to sales of the Company's proprietary test
instrument. These margins decreased slightly from the first quarter of 1998 due
to the Company entering into volume distribution agreements for its testers.
Gross margins will likely decrease through the remainder of 1998 as the Company
enters into additional volume distribution agreements for testers, as it
potentially experiences pricing pressures on its testers from the introduction
of competitive test instruments, and as it increases sales of its moissanite
gemstones which will have a lower initial gross margin as the Company and Cree
work to improve yields from the crystal growth process.

Research and development expenses increased from $251,307 for the three months
ended June 30, 1997 to $1,088,331 for the three months ended June 30, 1998. The
increase was primarily attributable to development expenses incurred under the
Company's June 1997 Development Agreement and January 1998 Supplemental
Development Agreement with Cree Research, Inc. under which Cree has pursued
development of a fully repeatable process for producing larger diameter SiC
crystals in specified comparable diamond color grades. The increase was also due
to increased expenditures for the Company's internal development of prototype
gemstone pre-forming and faceting operations and compensation expense for
Company research and development staff.

Marketing and sales expenses increased from $24,904 for the three months ended
June 30, 1997 to $512,863 for the three months ended June 30, 1998. The increase
was primarily due to compensation expense associated with the expansion of the
Company's sales staff, increased market research expenditures, and the
development of consumer advertising campaigns and marketing materials.

General and administrative expenses rose from $135,371 for the three months
ended June 30, 1997 to $686,456 for the three months ended June 30, 1998. The
increase primarily reflected compensation and other expenses related to
additional staff, occupancy expenses, regulatory expenses, and investor
relations.

Net interest income increased from $79,957 for the three months ended June 30,
1997 to $473,690 for the three months ended June 30, 1998. This increase
resulted from higher interest income earned on higher cash balances due
primarily to the investment of proceeds from the Company's initial public
offering in November 1997.


                                       9

<PAGE>

SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997.

Net sales for the six months ended June 30, 1998, were $452,565, which resulted
entirely from sales of the Company's proprietary test instrument. In addition,
the Company generated net sales of approximately $324,000 for gemstones, which
have been netted against research and development expenses on the operating
statement, because many of the gemstones were associated with the Company's
research and development program. There were no sales for the six months ended
June 30, 1997.

Gross profit was $162,013 or 36% of net sales for the six months ended June 30,
1998. Gross profit related entirely to sales of the Company's proprietary test
instrument. Gross margins will likely decrease through the remainder of 1998 as
the Company enters into additional volume distribution agreements for its
testers, as it potentially experiences pricing pressures on its testers from the
introduction of competitive test instruments, and as it introduces its gemstones
which will have a lower initial gross margin as the Company and Cree Research,
Inc. work to improve yields from the crystal growth process.

Research and development expenses increased from $452,571 for the six months
ended June 30, 1997 to $2,410,843 for the six months ended June 30, 1998. The
increase was primarily attributable to development expenses incurred under the
Company's June 1997 Development Agreement and January 1998 Supplemental
Development Agreement with Cree Research, Inc. under which Cree has pursued
development of a fully repeatable process for producing larger diameter SiC
crystals in specified comparable diamond color grades. The increase was also due
to increased expenditures for the Company's internal development of prototype
gemstone pre-forming and faceting operations and compensation expense for
Company research and development staff.

Marketing and sales expenses increased from $46,611 for the six months ended
June 30, 1997 to $1,273,999 for the six months ended June 30, 1998. The increase
was primarily due to compensation and travel expense, increased market research
expenditures, development of consumer advertising campaigns, and jewelry
industry focused advertising activities.

General and administrative expenses rose from $316,154 for the six months ended
June 30, 1997 to $1,298,287 for the six months ended June 30, 1998. The increase
primarily reflected compensation expense of additional staff, occupancy
expenses, regulatory and investor relations, and franchise tax. In the first
half of 1997, the Company had few paid employees.

Net interest income increased from $113,376 for the six months ended June 30,
1997 to $994,185 for the six months ended June 30, 1998. This increase resulted
from higher interest income earned on higher cash balances due primarily to the
investment of proceeds from the Company's initial public offering in November
1997.


                                       10

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations primarily from the net proceeds of its
initial public offering of common stock in November 1997 and, prior to such
offering, from the net proceeds of private equity sales. The net proceeds from
the initial public offering were $41,072,982. During the second quarter of 1998,
the Company used $2,439,596 to fund operations and $213,166 to fund capital
expenditures and patent expenses. At June 30, 1998, the Company had
approximately $39 million of cash and equivalents and approximately $37.8
million of working capital. The Company anticipates that its existing capital
resources will be adequate to satisfy its capital requirements for at least the
next 12 months.

Due to developments in the Company's business, several balance sheet items
changed during the quarter. Accounts receivable and inventories have increased
significantly over December 1997 levels due to the introduction of moissanite
gemstones and the moissanite/diamond test instrument. In addition, accrued
expenses increased over fiscal year-end levels primarily as a result of payroll
and benefit expenses.

In May 1998, the Company agreed to acquire approximately $3.4 million of crystal
growth systems from Cree to provide additional production capacity for silicon
carbide crystals. The Company will pay the purchase price of the systems on a
monthly basis as the systems are manufactured. Once completed, the systems will
remain at Cree where Cree will use them to produce SiC crystals for the Company.
When the systems are fully depreciated, the Company is obligated to transfer
title to Cree. The first of these systems will come on-line during August 1998
with the balance coming on line through the remainder of 1998. The Company
intends to fund the purchase of these systems from its existing cash and
equivalents.

In July 1998, the Company entered into an Amended and Restated Development
Agreement (the "Agreement") with Cree whereby Cree is focusing its development
efforts on increasing the yield of usable material in each silicon carbide
crystal manufactured for use in producing moissanite gemstones. See Note 5 of
the Condensed Financial Statements and Item 5 of Part II of this Quarterly
Report. Under the Agreement, the Company is required to fund the development
program at $2.88 million annually as long as Cree meets certain performance
milestones. The Company has also entered into a number of agreements with
specialty retail jewelry stores in the United States and with international
distributors. See Item 5 of Part II of this Quarterly Report. To support this
expansion of its distribution network, the Company has begun to build an
inventory of moissanite gemstones and intends to significantly increase its
advertising and marketing expenditures. The Company intends to fund these
development activities, inventories and advertising and marketing expenditures
from its existing cash and equivalents.



                                       11

<PAGE>


P
ART II - OTHER INFORMATION


ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

On November 14, 1997, the Securities and Exchange Commission declared the
Company's Registration Statement on Form S-1 (File No. 333-36809) to be
effective. The net proceeds of this offering were $41,072,982. As of June 30,
1998, the Company had approximately $34,165,800 of the remaining net proceeds of
the offering invested in money market accounts, debt instruments having an
original maturity of three months or less and other highly liquid investments.
Approximately $3,200,800 of the proceeds have been used in research and
development, of which $91,200 was paid to officers, directors or shareholders
owning more than ten percent of the Common Stock outstanding. The Company has
also used approximately $2,279,900 to fund sales, marketing and administrative
expenses, of which $116,000 was paid to officers, directors or shareholders
owning more than ten percent of the Common Stock outstanding. The Company also
expended approximately $1,090,100 to build inventory of its products. In
addition, the Company spent $336,400 to acquire and install certain computerized
wafering and preform development equipment and other equipment.


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

The Annual  Meeting of  Shareholders  of C3, Inc.  was held on June 23,  1998.
At the meeting,  the  shareholders  voted on the election of directors and the
selection of independent  auditors.  The following eight nominees were elected
to the Board of  Directors:  Jeff N.  Hunter,  Kurt  Leutzinger,  Kurt Nassau,
Howard Rubin,  Frederick A. Russ,  Ollin B. Sykes,  Richard G. Hartigan,  Jr.,
and Joel N. Levy.  Additionally,  the  appointment of Deloitte & Touche LLP as
independent  auditors for the Company for the fiscal year ending  December 31,
1998 was ratified.  The number of votes cast for, against or withheld, as well
as the number of abstentions, for each proposal are as follows:

A.  Election of Directors
                                           Votes                       Votes
Director Nominee                            For                       Withheld
- ------------------------------------------------------------------------------
Jeff N. Hunter                           4,021,545                     14,000
Kurt Leutzinger                          3,892,168                    143,377
Kurt Nassau                              4,018,545                     17,000
Howard Rubin                             4,021,545                     14,000
Frederick A. Russ                        4,021,545                     14,000
Ollin B. Sykes                           4,014,545                     21,000
Richard G. Hartigan, Jr.                 4,014,545                     21,000
Joel N. Levy                             4,021,545                     14,000


B. Ratification of Deloitte & Touche LLP as auditors for fiscal year ending
   December 31, 1998

                         Votes For         Votes Against        Abstentions
- --------------------------------------------------------------------------------
Ratification of
Deloitte & Touche LLP    4,021,718             2,200              11,627


                                       12

<PAGE>


ITEM 5:  OTHER INFORMATION

In June 1998,  the Company  announced  two key  management  additions.  Robert
Thomas was  appointed  President  and Chief  Operating  Officer  and Dr.  Mark
Kellam was  appointed  Director  of  Technology.  Mr.  Thomas has more than 20
years of company  operating  experience,  most recently with Morven  Partners,
one of the nations  largest  processors and  distributors of raw and processed
edible  nuts.   Dr.   Kellam  has  more  than  15  years  of   experience   in
semi-conductor  manufacturing technology and specializes in optical properties
of materials like silicon carbide.

The Company has entered into a number of agreements with specialty retail
jewelry stores in its initial launch cities of Miami/Fort Lauderdale, Florida
and Atlanta, Georgia as well as certain other locations in the United States.
The initial consumer launch activities in Miami/Fort Lauderdale and Atlanta
began in mid-July 1998. Additionally, the Company has entered into 6
international agreements for distribution of moissanite gemstones in 10
countries and various areas in the Caribbean. The international agreements
require the purchase of an aggregate of approximately $9 million of moissanite
gemstones through the year 2000, with approximately $850,000 of those purchases
in 1998.

Additionally, in July 1998, the Company entered into an Amended and Restated
Development Agreement (the "Agreement") with its exclusive supplier, Cree
Research, Inc. (Cree), which is focused on increasing the yield of usable
material in each silicon carbide crystal manufactured by Cree for use by C3 in
the production of lab-created moissanite gemstones. The companies have agreed on
the definition of a "repeatable process" in the KLMN comparable diamond color
range. In June 1998 Cree demonstrated its ability to meet that definition for
2-inch diameter crystals and has now begun to produce 2-inch crystals using that
process. The Agreement establishes performance milestones for 1999 and
contemplates that the Company and Cree will revise the performance milestones
annually to provide both parties with more flexibility to pursue further color
and yield improvements on both 2-inch and 3-inch diameter crystals. The 4-year
Agreement replaces the June 1997 Development Agreement and the 1998 Supplemental
Development Agreement between the parties and requires the Company to fund the
program at $2.88 million annually. Either party may terminate the Agreement if
Cree does not meet the annual performance milestones or if the Company and Cree
do not mutually agree on the performance milestones for the ensuing year.

Under certain conditions, shareholders may request the Company to include a
proposal for action at a forthcoming meeting of the shareholders of the Company
in the proxy materials of the Company for such meeting. All shareholder
proposals intended to be presented at the 1999 Annual Meeting of the
Shareholders of the Company must be received by the Company no later than
January 22, 1999 for inclusion in the Proxy Statement and proxy card relating to
such meeting. In addition, if a shareholder desires to make a proposal from the
floor during the meeting and written notice of such proposal is not received by
the Company at least sixty days prior to the meeting, the shareholder proposal
will be considered untimely and the proxies appointed pursuant to the proxy
cards will have discretionary authority to vote for or against that proposal at
the meeting even though the proposal is not discussed in the Proxy Statement.


                                       13

<PAGE>


ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K

    (a)  Exhibits

    Exhibit 10.25 Amended and Restated  Development  Agreement,  dated July 1,
                  1998 between Cree Research, Inc. and C3, Inc.*

    Exhibit 10.26 Letter  Agreement  dated,   July  14,  1998,   between  Cree
                  Research, Inc. and C3, Inc.*

    Exhibit 27.1  Financial Data Schedule

    *The Company has requested that certain portions of this exhibit be given
    confidential treatment. An unredacted version of this Exhibit has been filed
    with the Commission.

    (b) Report on Form 8-K

The Company did not file any reports on 8-K during the three months ended June
30, 1998.


                                       14

<PAGE>


                                  SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

C3, Inc.

Dated:  August 7, 1998          /s/ Jeff  N. Hunter
                                -------------------
                               Jeff N. Hunter
                               Chief Executive Officer and Chairman of the Board
                               and Director
                               (Principal Executive Officer)





Dated:  August 7, 1998          /s/ Mark W. Hahn
                                ----------------
                                Mark W. Hahn
                                Chief Financial Officer
                                (Principal Financial and
                                Accounting Officer)



                                       15






                                                                   EXHIBIT 10.25
THE REGISTRANT HAS REQUESTED THAT CERTAIN PORTIONS OF THIS EXHIBIT
BE GIVEN CONFIDENTIAL TREATMENT.  AN UNREDACTED VERSION OF THIS
EXHIBIT HAS BEEN FILED WITH THE COMMISSION.

                   AMENDED AND RESTATED DEVELOPMENT AGREEMENT
                               DATED JULY 1, 1998
                    BETWEEN C3, INC. AND CREE RESEARCH, INC.

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                   AMENDED AND RESTATED DEVELOPMENT AGREEMENT

         This AMENDED AND RESTATED DEVELOPMENT AGREEMENT (the "Agreement") is
entered into effective as of the 1st day of July 1998 by and between Cree
Research, Inc. ("Cree") and C3, Inc. ("C3").

                                    Recitals

         WHEREAS, Cree and C3 are parties to an Amended and Restated Exclusive
Supply Agreement dated June 6, 1997 (the "Supply Agreement") wherein Cree and C3
agree, inter alia, for Cree to supply C3 certain silicon carbide ("SiC")
material and C3 agrees to purchase certain SiC material as provided therein; and

         WHEREAS, Cree and C3 are parties to a Development Agreement dated June
6, 1997 (the "Development Agreement"), and a Supplemental Development Agreement
dated January 8, 1998 (the "Supplemental Development Agreement"), wherein Cree
and C3 agree that Cree will perform certain research and development activities

directed to improving the colorless material available for purchase under the
Supply Agreement; and

         WHEREAS, Cree and C3 desire to combine the Development Agreement and
the Supplemental Development Agreement in a single agreement and to amend and
restate the Development Agreement and the Supplemental Developmental Agreement,
as set out herein; and

         WHEREAS, the parties acknowledge that Cree has successfully developed a
Repeatable Process (as defined in Section 1.2 of this Agreement) for producing
2" diameter SiC crystals with a ***** mm height of which *****% is in the
comparable diamond color grade range of KLMN, or better, according to the
standards generally accepted by the diamond industry for color using pregraded
master color stones; and

         WHEREAS, Cree and C3, in entering into this Agreement desire to improve
and expand upon their relationship and intend to work together cooperatively
with the objective of developing, as promptly as practicable, both the market
for and commercially viable means of manufacturing improved colorless silicon
carbide material suitable for gemstones, and with the specific development
objectives of further increasing the usable volume of material per crystal and
improving the repeatability of Cree's processes for producing such material;

         NOW, THEREFORE, the parties hereto, in consideration of the foregoing
premises and the covenants and undertakings herein contained, mutually agree as
follows:
                                       -2-

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         1.       Duties of Cree

                  1.1 Cree agrees to use its best commercially reasonable
efforts to develop a repeatable process, as defined in Section 1.2 (the
"Repeatable Process"), for producing SiC boules which meet the specifications
provided in Section 1.3 (the "Specifications") according to the proposal
attached hereto as Exhibit A.

                  1.2 The process for producing SiC boules shall be considered a
"Repeatable Process" when ***** crystal growers together can produce, in a
period of ***** days, at least ***** percent (*****%) of the total produced that
meet the Specifications.

                  1.3 As used in this Agreement, the term "Specifications" shall
mean the applicable specifications referred to in the Specifications and
Timetable Chart below for SiC boules. The specifications require only that each
boule contain a certain volume of SiC material of which a specified percentage
(the "Percentage") is in the comparable diamond color grade range of KLMN, or
better, according to the standards generally accepted by the diamond industry
for color using pregraded master color stones. While the specifications do not
require the absence of inclusions, blemishes or other defects affecting clarity,
Cree shall use its best commercially reasonable efforts to minimize such defects
since such defects can have an impact on the final product. The parties
acknowledge that initially C3 shall promptly provide feedback to Cree concerning
the Percentage, but the parties shall cooperate to develop a mutually acceptable
testing procedure for Cree to determine the Percentage prior to delivery of the
SiC boules to C3. The volume specifications are expressed in terms of the
diameter and height of each boule, but any equivalent volume is acceptable. The
specifications change over time, as the Date column indicates.

              Specifications and Timetable Chart

                  Minimum          Minimum  
Date              Diameter         Height                 %KLMN-Grade
- ---------         --------         -------                -----------
6/30/1999         *****"           *****mm                 *****%
6/30/2000            *                *                       *
6/30/2001            *                *                       *
6/30/2002            *                *                       *

*Each twelve-month period beginning July 1, 1998 through the period
beginning July 1, 2001 is referred to in this Agreement as a "Subject
Year". For each Subject Year beginning July 1, 1999 through July 1,
2001, the specifications applicable to June 30 of such year will

                                       -3-

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         be mutually agreed upon by the parties prior to July 1 of that Subject
         Year, subject to Section 3.2(ii) below.

For each of the specifications above, Cree will provide prompt notice to C3 when
Cree has developed a Repeatable Process for producing boules meeting such
specifications.

                  1.4 In seeking to achieve the Specifications targeted for June
30, 1999, Cree will use its best commercially reasonable efforts to develop: (i)
by August 31, 1998, a process that yields at a minimum a volume of material,
corresponding to a *****" diameter boule with a ***** mm height, of which *****%
is in the comparable diamond color grade range of KLMN, or better, according to
the standards generally accepted by the diamond industry for color using
pregraded master color stones, and (ii) by February 28, 1999 a process that
yields at a minimum a volume of material, corresponding to a *****" diameter
boule with a ***** mm height, of which *****% is in the comparable diamond color
grade range of KLMN, or better, according to the standards generally accepted by
the diamond industry for color using pregraded master color stones.

                  1.5 C3 and Cree will cooperate in determining the goals and
the scope of the activities to be performed by Cree to the extent the same are
not specified in this Agreement. Cree will direct the development work and
determine the specific tasks to be undertaken towards the goals stated in
Section 1.1 or otherwise agreed upon by the parties. If C3 reasonably requests
major changes in such goals or that Cree undertake specific development
activities in order to meet development needs related to SiC crystal growth
required by C3's business, the parties will in good faith negotiate and seek to
agree in writing on appropriate modifications to the Specifications set forth in
Section 1.3, and the target date for achieving the affected Specifications will
in any event be extended not less than ***** months from the originally
scheduled date.

                  1.6 Cree agrees to report to C3 the progress of the
development services provided pursuant to this Agreement at monthly progress
meetings. Any "Confidential Information" provided by Cree to C3 at such meetings
or otherwise under this Agreement shall be subject to the terms of Section 5 of
the Supply Agreement.

                  1.7 In April of each year, Cree and C3 shall consult on
appropriate development goals for the following year. Before May 1 of each year,
Cree shall submit to C3 a development plan for the next twelve months beginning
July 1 which shall include a budget and a description of the scope of the
activities to be undertaken. Plans submitted under this paragraph shall set
forth Cree's then current expectations for carrying on development activities
under this Agreement for the period covered by the plan, in the manner
determined by Cree to maximize the development progress toward the year's goals.
Cree may substitute resources and personnel from those set out in the
development plans provided that Cree reasonably determines such substitutions
are in the best
                                       -4-

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interest of maintaining or enhancing progress toward the then current
development goals. If Cree succeeds in reaching goals more quickly than
anticipated, Cree will consult with C3 to determine other development goals
important to high yields of gemstone quality SiC material.

                  1.8 All SiC boules produced pursuant to this Agreement,
including SiC boules that do not meet the Specifications but excluding *****,
shall be the property of C3; provided that the seeds from all SiC boules
produced shall remain the property of Cree and shall be removed and retained by
Cree. Cree shall identify each boule produced by the crystal growth system in
which it was grown, the date it was produced and its disposition and provide
such information to C3. Crystal growth systems used in the development
activities shall not be considered as "in use for production" for purposes of
the Supply Agreement. All SiC boules delivered hereunder will be supplied "AS
IS." EXCEPT AS PROVIDED ABOVE IN THIS PARAGRAPH WITIH RESPECT TO IDENTIFICATION
OF BOULES, CREE MAKES NO WARRANTY OF ANY KIND WITH RESPECT TO ANY MATERIAL
SUPPLIED HEREUNDER AND DISCLAIMS ANY IMPLIED WARRANTIES, INCLUDING ANY
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
NONINFRINGEMENT OF PATENT OR SIMILAR RIGHTS.

                  1.9 Cree will use all commercially reasonable efforts to
maximize the value obtained from costs incurred in performing development
services under this Agreement. It is understood, however, that Cree is expected
to incur costs such that C3 will provide the maximum funding permitted under
this Agreement.

                  1.10 Cree is not obligated to contribute resources to the
development services performed under this Agreement beyond those funded by C3,
as provided in Section 2.1.

                  1.11 Cree provides no assurances that the development services
performed under this Agreement will be successful.

         2.       Duties of C3

                  2.1 Subject to Sections 2.2 and 2.3, C3 shall pay to Cree each
month a development fee equal to the sum of:

                           (i) The costs of materials and equipment used in the
         development activities undertaken pursuant to this Agreement (including
         the costs of operating such equipment; with such costs calculated in
         the same manner as "loaded manufacturing costs," but, without reduction
         for boules that do not meet the "minimum specifications," as provided
         in the Supply Agreement);
                                       -5-

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                           (ii) An amount equal to a *****% gross margin of the
         costs described in Section 2.1(i); and

                           (iii) All research and development labor costs and
         outside services costs directly incurred by Cree in providing
         development services pursuant to this Agreement; provided, that these
         costs shall be charged to C3 on the same basis as Cree charges similar
         costs in providing research services pursuant to contracts between Cree
         and the U.S. government, using allocations, conditions and calculations
         no less favorable to C3 than those available under any such contract of
         Cree (it being understood that reductions in costs from cost-sharing
         shall not be applicable and that such costs include certain overhead
         allocations).

                  2.2 Subject to Section 2.3 and notwithstanding Section 2.1, C3
shall pay to Cree each month this Agreement continues in effect a development
fee equal to the lesser of:

                           (i) The fee calculated pursuant to Section 2.1; or

                           (ii) The total monthly development budget as set
         forth in the proposal attached hereto as Exhibit A.

                  2.3 If the fee calculated pursuant to Section 2.1 is less than
the total monthly development budget as set forth in the proposal in Exhibit A,
the difference will be carried forward and applied to the development budget for
subsequent months.

                  2.4 Cree shall invoice amounts due from C3 under this
Agreement, and such invoices shall be due and payable within thirty days.

                  2.5 C3 shall have the right, at its expense, to have an
independent public accounting firm reasonably acceptable to Cree audit Cree's
costs described in Sections 2.1(i) and 2.1(iii) (the "Audited Costs"). The audit
shall be conducted during normal business hours and upon reasonable prior
notice. The accounting firm conducting the audit shall be required to enter into
a mutually acceptable nondisclosure agreement with Cree under which such firm
will be obligated not to disclose any information obtained during the course of
the audit, except that it may disclose to C3 its analysis of the correctness of
the Audited Costs as calculated by Cree. The audit right under this paragraph
may be exercised not more than once during any fiscal year of Cree and only with
respect to costs applicable to the year preceding the request for an audit. Cree
shall provide reasonable assistance to the public accounting firm including, but
not limited to, providing a schedule of the Audited Costs (which shall provide
reasonable detail as to the calculation of the Audited Costs, including but not
limited to hours charged by person at billing rates applicable to each, total
material costs, equipment charges and overhead charges, however such schedule
shall not divulge any
                                       -6-

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proprietary or confidential information of Cree), supporting analyses and any
supporting source documentation reasonably required by the public accounting
firm. Such accounting firm will audit and report to C3 on the schedule of
Audited Costs, but will not divulge to C3 any proprietary or confidential
information (including but not limited to supporting schedules and source
documents) disclosed during the audit process.

         3.       Term and Termination

                  3.1 Unless earlier terminated pursuant to Section 3.2 or
Section 5.6, or unless extended by the mutual consent of the parties hereto,
this Agreement shall terminate on June 30, 2002.

                  3.2 C3 shall have the option to terminate this Agreement prior
to June 30, 2002 under the following conditions:

                           (i) If Cree does not develop by June 30 of each
         Subject Year a Repeatable Process for producing SiC boules that meet
         the mutually agreed Specifications for such Subject Year, C3 shall have
         the option of terminating this Agreement by giving notice to Cree;
         provided, that such termination option, if not sooner exercised by C3,
         shall expire at 11:59 p.m. eastern daylight savings time on the tenth
         day following the termination of the applicable deadline for
         establishing the Repeatable Process.

                           (ii) If the parties are unable to mutually agree in
         writing on the Specifications for a Subject Year by July 1 of such year
         as provided in Section 1.3, C3 shall have the option of terminating
         this Agreement, effective December 31 of that Subject Year, by giving
         notice to Cree; provided, that such termination option, if not sooner
         exercised by C3, shall expire at 11:59 p.m. eastern daylight savings
         time on August 1st of such Subject Year. If C3 exercises this
         termination option, Cree will continue its development work under this
         Agreement through the effective date of the termination.

If C3 exercises its option to terminate this Agreement pursuant to Section
3.2(i), Cree shall not be entitled to payment for any work done or any expenses
incurred during the period from the time C3's option to terminate became
exercisable to the time such option is exercised.

         4.       Intellectual Property

                  4.1 All inventions developed by Cree personnel in performing
work under this Agreement shall be the sole property of Cree.

                                       -7-

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                  4.2 Except for inventions related to the bulk growth of
silicon carbide or gallium nitride, C3 shall have a perpetual, irrevocable,
royalty-free, exclusive (including exclusive of Cree) license to use,
manufacture, sell and otherwise practice (including the right to sublicense) all
inventions developed by Cree pursuant to this Agreement for all gemstone
applications and applications for gemological instrumentation; provided that
Cree shall have the right to use and practice the invention to manufacture or
process material for C3 for the licensed applications. References in this
Agreement to "gemstones" are understood to mean "gems" (and vice versa).

         5.       General

                  5.1 This Agreement shall not be amended, modified or altered
except pursuant to a document signed by both parties.

                  5.2 This Agreement is made in and shall be construed in
accordance with and governed by the laws of the State of North Carolina.

                  5.3 This Agreement shall inure to the benefit of and be
binding upon the parties and their respective successors and permitted assigns.

                  5.4 The invalidity or uneforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.

                  5.5 This Agreement may not be assigned by either party without
the other party's prior written consent, which consent shall not be unreasonably
withheld except that either party may, in its sole discretion, withhold consent
to assignment of this Agreement to anyone other than a permitted assignee of all
rights under the Supply Agreement. Any attempted assignment in violation of this
Section 5.5 is void and shall constitute a breach of this Agreement.

                  5.6 In the event of a material breach by either party of any
obligation under this Agreement to the other party, the other party may
terminate this Agreement upon written notice if the breach is not cured within
thirty (30) days after giving written notice to the party in breach, setting out
the nature of the breach in reasonable detail; provided, however, that no cure
period shall apply to a termination pursuant to the terms of this Agreement by
C3 pursuant to Section 3.2 (it being understood that the grounds for termination
specified in Section 3.2 do not constitute a breach) or in the event of a
material breach by a party that has breached this Agreement and been given
notice of similar material breaches on two prior occasions. In addition, this
Agreement shall automatically terminate upon any termination of the Supply
Agreement under Section 3.3 thereof.
                                       -8-

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                  5.7 Neither party shall issue any press release nor otherwise
make any public announcement concerning this Agreement without the prior consent
of the other party, except as may be required by law. The parties further agree
that the terms of this Agreement shall be treated as Confidential Information of
each other subject to Section 5 of the Supply Agreement; 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 or other applicable law.
Neither party shall use the name of the other party in any advertising,
marketing or similar material without the other party's prior written consent.

                  5.8 The parties acknowledge and agree that in the event of a
breach of the Agreement, in addition to any other rights and remedies available
to it at law or otherwise, the parties shall be entitled to seek equitable
relief in the form of a temporary restraining order ("TRO") from any court of
competent jurisdiction; provided, however, that in the event a TRO is obtained,
the parties shall request that any hearing on the merits of the dispute shall be
stayed pending arbitration of the dispute as provided in this Section 5.8. In
the event a party seeks a TRO or in the event of any other controversy or claim
(including, without limitation, any claim based on negligence,
misrepresentation, strict liability or other basis) arising out of or relating
to this Agreement or its performance or breach, a party shall give the other
party notice of the dispute, setting out the circumstance in reasonable detail,
and requesting a meeting of the representatives of the parties to attempt to
resolve the dispute or to reduce the scope of the issues subject to dispute. The
chief operating officers of the parties, and such other representatives as each
may desire to have attend, shall meet at a mutually agreeable time within five
business days from the date the meeting request was received and shall hold such
meeting at the offices of the party not requesting the same, or at some mutually
agreeable alternative location. In the event the parties do not resolve the
dispute at such meeting, or any mutually agreed upon adjournment thereof, the
dispute shall be settled exclusively by arbitration in the City of Raleigh,
North Carolina pursuant to the expedited procedures of the Commercial
Arbitration Rules of the American Arbitration Association (other than notice
requirements which shall be as provided in Section 5.9 below and the expedited
procedures for selection of arbitrators which shall be as provided in Sections
14 and 15 of such Rules). There shall be three arbitrators, one selected by each
of C3 and Cree and a third selected by the arbitrators selected by the parties.
The arbitrators shall in no event make any damage award that contravenes Section
5.10 of this Agreement, but shall order the losing party to pay all of the
charges of the American Arbitration Association for such arbitration and all of
the prevailing party's costs of the arbitration, including reasonable attorneys'
fees. The decision in such arbitration shall be final and binding and judgment
on any award rendered therein may be entered in any court having jurisdiction.

                  5.9 All notices under this Agreement shall be in writing and
addressed to the other party at the address shown below or to such other
addresses as the party may hereafter designate by

                                       -9-

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notice under this Agreement. All notices so addressed shall be deemed given five
(5) days after mailing if sent by certified mail, return receipt requested,
postage prepaid, or when sent via facsimile if receipt is acknowledged in
writing or otherwise when actually received.

                  5.10 In no event shall either party be liable to the other for
incidental, consequential or special loss or damages of any kind, however
caused, or any punitive damages.

                  5.11 This Agreement constitutes the complete and exclusive
statement of the understanding and agreement of the parties with respect to the
subject matter hereof and supersedes all prior written or oral agreements
between the parties concerning such subject matter, including without limitation
the Development Agreement dated June 7, 1997, the Supplemental Development
Agreement dated January 8, 1998 and the letter agreement between the parties
dated January 8, 1998, but excluding the letter agreements between the parties
dated July 14, 1997, January 31, 1996, February 12, 1996, May 1, 1998 and July
14, 1998, the Assignment Agreement dated June 28, 1995 (as amended September 15,
1995), and the Amended and Restated Exclusive Supply Agreement dated June 6,
1997.

                  5.12 This Agreement shall be deemed the "Development
Agreement" as such term is used in the Amended and Restated Exclusive Supply
Agreement between the parties dated June 6, 1997, except that any notice given
by Cree that it has developed a Repeatable Process for achieving the
Specifications as defined in this Agreement shall not constitute the notice
required by the last paragraph of Section 1.1 or by Section 2.4 of the Exclusive
Supply Agreement. The parties acknowledge and agree that the Repeatable Process
developed by Cree, as described in the recitals to this Agreement, does not
constitute a process contemplated by Section 1.1 or Section 2.4 of the Exclusive
Supply Agreement and that the provisions of Section 2.4(b) and (c) of such
agreement are not presently applicable.

         IN WITNESS WHEREOF, the parties have executed this Agreement by and
through their duly authorized representatives.

                                      -10-

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CREE RESEARCH, INC.                                  C3, INC.

By:      /s/ Charles M. Swoboda          By:      /s/ Robert S. Thomas
   ---------------------------------        --------------------------
         Charles M. Swoboda,                      Robert S. Thomas
         Vice President and                       President and Chief
         Chief Operating Officer                  Operating Officer

Address for Notices:                              Address for Notices:

Cree Research, Inc.                      C3, Inc.
4600 Silicon Drive                       P.O. Box 13533
Durham, NC  27703                        Research Triangle Park, NC  27709-3533
Attention:  Chief Operating Officer      Attention:  President
Fax No. (919) 361-4630                   Fax No. (919) 468-0486

                                      -11-

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                                    EXHIBIT A

                            A Proposal Submitted to:

                                    C3, Inc.
                                 P.O. Box 13533
                      Research Triangle Park, NC 27009-3533

                                    entitled:

         Development of Large Volume Colorless Silicon Carbide Crystals
             and Repeatable Process for Manufacturing such Crystals

                                       by:

                               Cree Research, Inc.
                              2810 Meridian Parkway
                                Durham, NC 27713
                               Tel: (919) 361-5709

                            12 Month Cost: $2,880,000


         Company Proprietary "The information contained in this document is
confidential and proprietary to Cree Research, Inc. and shall not be duplicated,
used or disclosed--in whole or in part without the prior written consent of the
Company."
                                      -12-

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A.       Personnel

         Dr. *****, ***** at Cree Research, has over 20 years of experience in
materials research and development of elemental and compound semiconductors,
ranging from silicon through gallium arsenide to silicon carbide. Dr. *****'s
work in silicon carbide has focused primarily on the development of large
diameter *****- and *****- SiC crystals and substrates for microwave and power
device applications, with special emphasis on polytype uniformity, uniformity of
electrical properties (conducting through semi-insulating), and low crystalline
defect density. In addition to SiC, Dr. *****'s work covers materials problems
related to the growth of silicon, III-V materials (GaAs, InP) for microlectronic
device applications including microwave power MMICs, high voltage power
switching infrared imaging, and VLSI. His experience in semiconductor crystal
growth covers growth of silicon carbide by modified sublimation/physical vapor
transport method; growth of silicon by Czochralski and floating zone techniques;
and growth of GaAs and InP by high pressure liquid encapsulated Czochralski. D.
***** has authored or co-authored over 60 papers and presentations. Dr. *****
will be the Principal Investigator on this program and will devote *****% of his
time to the effort.

         Dr. *****, ***** at Cree Research, has over 17 years of experience in
research related to silicon carbide, and is also *****. He has been co-Principal
Investigator or Program Manager on all of Cree's funded research contracts
(totaling >$25M). Dr. ***** has extensive experience in SiC crystal growth, thin
film deposition, doping, and material characterization and developed the first
commercially viable SiC boule growth process. Since joining Cree, he has
increased the diameter of SiC bulk crystals from ***** mm to ***** mm, increased
crystal thickness by *****% and improved the crystal quality by orders of
magnitude. Much of the progress has been made possible by the combination of a
$2M NIST Advanced Technology Program project which was completed in 1994 and an
ongoing $6.8 M DARPA funded program on which he is PI. He was also co-PI on a
$2.4 M ARPA contract which demonstrated the first SiC/AIGaN single crystal
alloy, increased the brightness of SiC blue LEDs from 17uW to 35uW. He is
Program Manager on another ARPA funded program which will soon lead to the
release of a much brighter blue LED based on GaN grown on SiC substrates. In
addition to the ONR funded programs at NCSU, Dr. ***** was co-PI on a National
Science Foundation sponsored grant on diffusion on SiC as well as other grants
related to SiC for structural applications. He was also co-PI and program
manager on an SDIO funded program on the growth and characterization of GaN and
AIN on SiC substrates. Dr. ***** is co- inventor of 7 issued U.S. patents, 2
pending U.S. patent applications, and 1 issued foreign patent and has 70
publications on SiC and other electronic materials.

         Dr. *****, ***** at Cree Research is responsible for the development of
silicon carbide bulk crystal growth processes. He has over 25 years of
experience in research related to growth technology and characterization of wide
bandgap semiconductor crystals and epitaxial layers

                                      -13-

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COMMISSION AND IS NOTED HEREIN BY *****

including SiC, AIN, SiC-AIN, and GaN. Before joining Cree Research in April
1993, he was a professor at *****, *****. He investigated thermodynamics and
kinetics of crystal growth processes for SiC and SiC-AIN crystals, both pure and
doped. Based on this research, he developed a new method for bulk SiC and
SiC-AIN crystal growth with controlled polytype structures in 1976. This seeded
sublimation method is the basis for all known SiC boule growth programs. He also
was a consultant of the R&D team at ***** for GaN technology (GaN powder
preparation and epitaxial growth by a sublimation method). In 1991-1993, he was
Consultant-Professor of Siemens AG and *****, *****. Since joining Cree
Research, he has increased the diameter of SiC bulk crystals and has determined
the primary reasons for formation of micropipe defects in SiC boules. He has 21
patents and his results are published in more than 100 articles and 5
books/monographs.

         Dr. *****, ***** at Cree, has over 9 years of experience in the SiC
field. His initial work began with UHV ion-assisted e-beam deposition processes
and surface analytical studies on the interfacial chemistry of various materials
grown on SiC. Traveling abroad as a visiting scientist in Sweden, he conducted
materials studies on SiC for power device work sponsored by ABB. His research
there focused on high resolution X-ray analysis of SiC bulk material and growth
of CVD films. Upon returning to the U.S. he worked as a SiC crystal growth
research scientist at Westinghouse Electric Corporation's Science and Technology
Center. In October of 1995 he joined Cree Research as a crystal growth scientist
and manager of their crystal growth department, where he has worked between
development and production to successfully guide the Crystal Growth and Wafering
Departments through a 300% expansion and an order of magnitude improvement in
production material quality. Dr. ***** has authored or co-authored over 20
articles and presentations.

         Dr. *****, ***** at Cree Research, has spent the past 6 years
investigating optical and electrical processes in silicon carbide and other
related wide bandgap materials using techniques such as: Fourier transform
infrared spectroscopy, optical absorption, deep level transient spectroscopy,
Hall effect, and thermally stimulated current. His initial work at Carnegie
Mellon University, performed under an Air Force Fellowship, focused on the
impact that impurities have on the optical and electronic properties of SiC.
Immediately before his arrival at Cree Research, he spent 18 months working
under a National Research Council post-doctoral fellowship at the Air Force
Wright Labs, where, in addition to his interests in SiC, he examined the surface
kinetics of III- N growth. Dr. ***** has authored or co-authored 16 papers and
presentations. Dr. ***** will devote *****% of his time to this effort.

B. Budget
NOTE: CREE RESERVES THE RIGHT TO ADJUST THE SPENDING AS IT DEEMS APPROPRIATE IN
ORDER TO MEET THE OBJECTIVES OF THE DEVELOPMENT PROGRAM AND WITHIN THE TOTAL
AMOUNT OF THE BUDGET.
                                      -14-

<PAGE>
REDACTED - - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS NOTED HEREIN BY *****

                                    Monthly
Equipment Costs
  Crystal Growers (*****)           $*****
  Powder System (*****)             $*****

People Costs
  C3 Focused Team          $*****
  Cree Resources            *****

Other Processing
  Analytical               $*****
  Wafering                 $*****
  Polishing                $*****

Total                      $240,000

Equipment - The equipment is outlined above and the cost reflects a *****%
margin.

C3 Focused Team - This team will be led by Dr. *****, who reports to Dr. *****,
who will supervise these efforts. The team will include a *****, *****, *****,
and *****.

Cree Resources - These resources will support the C3 development effort on a
part time basis. This team will work under the direction of Dr. ***** and
include Dr. *****, Dr. *****, Dr.***** and other Cree resources as required.

                                      -15-



                                                                   EXHIBIT 10.26

THE REGISTRANT HAS REQUESTED THAT CERTAIN PORTIONS OF THIS EXHIBIT
BE GIVEN CONFIDENTIAL TREATMENT.  AN UNREDACTED VERSION OF THIS
EXHIBIT HAS BEEN FILED WITH THE COMMISSION.

                                LETTER AGREEMENT
                               DATED JULY 14, 1998
                    BETWEEN C3, INC. AND CREE RESEARCH, INC.

<PAGE>
REDACTED - - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS NOTED HEREIN BY *****

July 14, 1998

Robert S. Thomas
President
C3 Inc.
P.O. Box 13533
Research Triangle Park, NC  27709-3533


This letter, if accepted by C3, will serve as an agreement between Cree and C3
to the following terms, effective as of July 1, 1998.

1.       Cree agrees to supply production crystals and C3 agrees to purchase
         production crystals according to the terms outlined in this letter
         agreement for a period of one year.

2.       C3 will purchase the output of crystal growers according to the
         following schedule:
- ------------------------------------------------------------------
DATE                                   # OF CRYSTAL GROWTH SYSTEMS
- ------------------------------------------------------------------
July 1, 1998 - July 31, 1998                     ***** 
- ------------------------------------------------------------------
August 1, 1998 - September 15, 1998              *****
- ------------------------------------------------------------------
September 15, 1998 - October 31, 1998            ***** 
- ------------------------------------------------------------------
November 1, 1998 - June 30, 1999                 *****
- ------------------------------------------------------------------
                                        
3.       C3 must give Cree at least ***** days notice to delay the schedule
         outline in Section 2. Any delay in the schedule outlined in section 2
         greater than ***** weeks by either party will give the other party the
         right to require the parties
 to re-negotiate in good faith the pricing
         schedule outlined in Exhibit A.

4.       Cree will supply crystals from the systems outlined in Section 2
         according to the pricing schedule outlined in Exhibit A.

5.       C3 may switch growers from 2" to 3" diameter crystals provided it gives
         Cree at least ***** days notice and such additional time as reasonably
         required to address any conversion and ramp-up issues. Pricing for 3"
         production crystals will be mutually agreed upon by Cree and C3 prior
         to conversion.

<PAGE>
REDACTED - - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS NOTED HEREIN BY *****

6.       The ***** crystal growth systems outlined in section 2 in excess of
         ***** systems are being paid for by C3 under the payment terms outlined
         in the letter agreement dated May 1, 1998. The systems are being built
         as new for use by Cree on behalf of C3.

7.       As used in Exhibit A, 'usable material' means KLMN grade material *****
         as previously defined by both parties. Any discrepancies in usable
         material will be mutually resolved by Cree and C3. All grading will be
         concluded in a timely manner consistent with past practice.

8.       Except as provided above, purchases will be subject to the terms and
         conditions of the June 6, 1997 Amended and Restated Exclusive Supply
         Agreement (the "Supply Agreement').

9.       The parties will negotiate in good faith a mutually acceptable
         definition of "Repeatable Process," as applied to the production of 2"
         and 3" crystals, to be used for purposes of Sections 1.1 and 2.4 of the
         Supply Agreement from and after July 1, 1999. No agreement regarding
         the definition will be effective until reduced to writing and signed on
         behalf of both parties. The existing provisions of the Supply Agreement
         will remain in effect until the parties mutually agree otherwise in
         writing. Neither party will have any liability as a result of failure
         to reach agreement.

10.      If the parties do not agree in writing, prior to July 1, 1999, on a
         mutually acceptable definition of "Repeatable Process" for purposes of
         Sections 1.1 and 2.4 of the Supply Agreement, the pricing specified in
         this letter agreement for the second calendar quarter of 1999, will
         remain in effect for an additional six months, through December 31,
         1999 (the "Extension Period"), provided that: (a) C3 purchases the
         output of at least ***** crystal growers during Extension Period; and
         (b) the Amended and Restated Development Agreement between the parties
         dated as of July 1, 1998 remains in effect during the Extension Period
         and C3's funding obligation under the agreement has not been reduced.

11.      If the parties do not agree in writing, prior to January 1, 2000, on a
         mutually acceptable definition of "Repeatable Process" for purposes of
         Sections 1.1 and 2.4 of the Supply Agreement, then unless otherwise
         agreed in writing by the parties C3 will purchase from Cree, and Cree
         will sell to C3, material in accordance with the pricing and other
         terms and conditions set forth in the Supply Agreement and no minimum
         specifications shall be applicable to such material.

12.      The contents of this letter shall be considered 'Confidential
         Information' of each party subject to the provisions of Section 5 of
         the Supply Agreement.

If acceptable, please sign below and date to indicate C3's binding agreement to
these terms.

<PAGE>
REDACTED - - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS NOTED HEREIN BY *****

CREE RESEARCH, INC.                                  C3, INC.

By:      /s/Charles M. Swoboda                       By:    /s/Robert S. Thomas
         Charles M.  Swoboda                                Robert S.  Thomas
         Vice President & COO                               President and COO

<PAGE>
REDACTED - - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS NOTED HEREIN BY *****
                                    Exhibit A

                           2" Crystal Pricing Schedule

C3 Crystal Price
July 98 through October 98

   Usable Material Range                Price
 >=                      <
- --------------------------            --------
*****                                 $  *****
*****                *****            $  *****
*****                *****            $  *****
*****                *****            $  *****
*****                *****            $  *****
*****                *****            $  *****
*****                *****            $  *****
*****                *****            $  *****
                     *****            $  *****
                           
C3 Crystal Price
November 98 through February 99

   Usable Material Range                Price  
 >=                      <                     
- --------------------------            --------
*****                                 $  ***** 
*****                *****            $  ***** 
*****                *****            $  ***** 
*****                *****            $  ***** 
*****                *****            $  ***** 
*****                *****            $  ***** 
*****                *****            $  ***** 
*****                *****            $  ***** 
                     *****            $  ***** 

<PAGE>
REDACTED - - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS NOTED HEREIN BY *****

C3 Crystal Price
March 99 through June 99

   Usable Material Range                Price  
 >=                      <                     
- --------------------------            -------- 
*****                                 $  ***** 
*****                *****            $  ***** 
*****                *****            $  ***** 
*****                *****            $  ***** 
*****                *****            $  ***** 
*****                *****            $  ***** 
*****                *****            $  ***** 
*****                *****            $  ***** 
                     *****            $  ***** 

NOTE: THE UNITS FOR USABLE MATERIAL IS MM.




<TABLE> <S> <C>

<ARTICLE>                     5
<LEGEND>
This Schedule Contains Summary Financial Information Extracted From The
Condensed Balance Sheet As Of June 30, 1998 And The Condensed Statement Of
Operations For The Six Months Ended June 30, 1998 And Is Qualified In Its
Entirety By Reference To Such Financial Statements.
</LEGEND>
<MULTIPLIER> 1
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-START>                             JAN-01-1998
<PERIOD-END>                               JUN-30-1998
<CASH>                                      39,070,181
<SECURITIES>                                         0
<RECEIVABLES>                                  126,649
<ALLOWANCES>                                         0
<INVENTORY>                                  1,298,470
<CURRENT-ASSETS>                            40,969,312
<PP&E>                                       2,355,940
<DEPRECIATION>                                  59,906
<TOTAL-ASSETS>                              43,466,835
<CURRENT-LIABILITIES>                        3,144,624
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                    47,785,931
<OTHER-SE>                                  (7,463,720)
<TOTAL-LIABILITY-AND-EQUITY>                43,466,835
<SALES>                                        452,565
<TOTAL-REVENUES>                               452,565
<CGS>                                          290,552
<TOTAL-COSTS>                                  290,552
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                             (3,870,848)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                         (3,870,848)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                (3,870,848)
<EPS-PRIMARY>                                     (.56)
<EPS-DILUTED>                                     (.56)
        

</TABLE>