4. Discontinued Operations

		Three Months Ended
		September 24, 2006
Revenue		$	122,734
Income from continuing operations		$	21,512
Net income		$	13,875
Earnings per share, basic		$	0.16
Earnings per share, diluted		$	0.16

During fiscal 2006, the Company discontinued the operations of its silicon-based radio frequency and microwave semiconductor business conducted by its Cree Microwave subsidiary (“CMI”). As of December 25, 2005, the Company completed production of all last time buy orders for CMI’s silicon products and terminated its remaining employees. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has reported the operating results of CMI for the three and nine months ended March 25, 2007 and March 26, 2006, and the assets and liabilities of CMI on the consolidated balance sheet at March 25, 2007 and June 25, 2006, as a discontinued operation.

The Company believes the significant write-downs related to the closure of CMI’s business have been completed; however, there may be future adjustments to the estimated accrual of future lease obligations. During the second quarter of fiscal 2007, the Company entered into a sublease agreement for its Sunnyvale facility. As a result of entering into this agreement, the Company adjusted its accrual for future lease obligations by $394,000 to reflect the actual payments agreed to under the terms of the sublease. The lease for the Sunnyvale facility expires in November 2011 and the Company does not intend to extend the term. The sublease also expires in November 2011.

The following table summarizes the changes attributable to costs incurred and charged to expense related to the exit activities for CMI, which are reflected in liabilities of discontinued operations in the consolidated balance sheets:

The following table summarizes the amounts of revenue and pre-tax losses reported in discontinued operations for the respective income statement periods presented:

5. Inventories

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

The following is a summary of the components of inventory:

6. Investments

The Company currently holds 864,385 sharesDuring the fourth quarter of fiscal 2007, Color Kinetics Incorporated (“Color Kinetics”) common stock. Duringannounced that it had been acquired. The transaction closed during the fiscal quarter ended September 23, 2007, and as a result the Company sold 931,275liquidated its remaining 500,000 shares of Color Kinetics common stock for $16.7stock. The Company no longer holds an equity investment in Color Kinetics. The Company received proceeds of $17.0 million and recognized an $11.4a pre-tax gain of $14.1 million gain. During fiscal 2006,from this transaction in the Company sold 63,782 sharesconsolidated statement of Color Kinetics common stock for $954,000 and recognized a $587,000 gain. As of March 25, 2007 and June 25, 2006,income during the Company had recorded cumulative unrealized holding gains on its investment in Color Kinetics of $11.5 million and $18.7 million, or $7.2 million and $11.8 million, net of tax, respectively. The closing share price of Color Kinetics common stock as of March 23, 2007 and June 23, 2006 was used to determine the fair market value of the Company’s investment of $16.5 million and $29.1 million, respectively.quarter.

7. Intangible Assets

The following table reflects the components of intangible assets:

Amortization expense recognized during the three months ended September 23, 2007 and September 24, 2006 was $4.8 million and $600,000, respectively.

Customer relationships are amortized over ten years. Developed technology is amortized over seven years. Patent and license rights are amortized over twenty years.

8. Earnings Per Share

The following computation reconciles the differences between the basic and diluted earnings per share presentations:

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be antidilutive. In accordance with SFAS No. 128, “Earnings per Share,” these shares were not included in calculating diluted earnings per share. For the three and nine months ended March 25,September 23, 2007, there were 9.5 million and 8.7 million shares, respectively, not included in calculating diluted earnings per share because their effect was antidilutive. For the three and nine months ended March 26,September 24, 2006 there were 5.13.8 million and 5.48.2 million shares, respectively, not included in calculating diluted earnings per share because their effect was antidilutive.

9. Shareholders’ Equity

The following presents a summary of activity in shareholders’ equity for the ninethree months ended March 25,September 23, 2007 (dollars and shares in thousands):

10. Stock-Based Compensation

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

The Company recorded stock-based compensation of $2.7$3.2 million and $9.2$3.7 million in the three and nine months ended March 25,September 23, 2007, respectively. The Company recorded stock-based compensation of $3.5 million and $9.8 million in the three and nine months ended March 26,September 24, 2006, respectively. Approximately $663,000$518,000 and $618,000$699,000 of stock-based compensation werehas been recorded in inventory in the Company’s consolidated balance sheets as of March 25,September 23, 2007 and June 25, 2006,24, 2007, respectively.

The fair value of each award is estimated on the date of grant using the Black-Scholes-Merton option-pricing model using the following assumptions:

The following table summarizes option activity as of March 25,September 23, 2007, and changes during the ninethree months then ended:

As of March 25, 2007, there was approximately $24.2 million of total unrecognized compensation costs related to stock-based compensation arrangements. The unrecognized compensation cost is expected to be recognized over a weighted-average period of two years. The total intrinsic value of options exercised during the nine months ended March 25, 2007 was $2.1 million.

		Number of Shares (in 000's)			Weighted- Average Exercise price
Outstanding at June 24, 2007		10,303			$	25.34
Granted		1,180			$	27.46
Exercised		(477	)		$	16.06
Forfeited or expired		(83	)		$	27.20
Outstanding at September 23, 2007		10,923			$	25.96

A summary of nonvested shares of restricted stock awards outstanding under the Company’s 2004 Long-Term Incentive Compensation Plan as of March 25,September 23, 2007, and changes during the ninethree months then ended, follows:

As of March 25, 2007, there was approximately $3.7 million of total unrecognized compensation costs related to nonvested restricted stock share-based compensation arrangements. The unrecognized compensation cost is expected to be recognized over a weighted-average period of four years.

11. Income Taxes

The variation between income taxes and income tax expense at the statutory rate of 35% is primarily due to the retroactive reenactmentconsolidation of our foreign operations, which are subject to income taxes at lower statutory rates.

Effective with the beginning of the researchfirst quarter of 2008, the Company adopted the provisions of FIN 48. FIN 48 contains a two-step approach to recognizing and developmentmeasuring uncertain tax credit,positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the releasetax position for recognition by determining if the weight of $5.2available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is cumulatively more than 50% likely to be realized upon ultimate settlement.

As a result of the implementation of FIN 48, the Company recognized an increase in total unrecognized tax benefits of $2.7 million, and accounted for the increase as a cumulative effect of contingency reservesa change in accounting principle that resulted in a decrease to retained earnings of $37,000 and an increase to the goodwill associated with the completionacquisition of COTCO of $2.7 million. The total amount of gross unrecognized tax benefits as of the Company’s research and developmentdate of adoption was $8.4 million. The Company has historically classified all unrecognized tax credit study, the release of $9.3 million due to the expected resolution of Internal Revenue Service auditsbenefits as long-term deferred tax liabilities. As a result of the adoption of FIN 48, unrecognized tax benefits have been reclassified to long-term contingent tax reserves. Of the $8.4 million total unrecognized tax benefits, $5.2 million represents tax positions that, if recognized, would impact the effective tax rate. The Company does not believe that the unrecognized tax benefits will materially change in the next twelve months.

The Company’s fiscal 2003, 2004policy is to include interest and 2005 federal income tax returns, the release of $1.5 million of valuation allowances on deferred tax assetspenalties related to federal capital loss carry forwards, andunrecognized tax provision adjustments of $4.4 million associated with the filing of our fiscal 2006 federal tax returns and the amendment of our fiscal 2004 and 2005 federal tax returns.

In future periods, the Company will continue to adjust its deferred tax asset valuation allowance in connection with any increase or decrease in the value of its investment in Color Kinetics, which could increase or decreasebenefits within the income tax expense line item in the consolidated statements of income. This classification has not changed as a result of implementing the provisions of FIN 48. As of the date of adoption, the Company has accrued $96,000 for such period.

12. Recent Accounting Pronouncementsthe payment of interest related to unrecognized tax benefits.

The Company continuesfiles U.S. federal, U.S. state, and foreign tax returns. For federal and foreign purposes, the Company is generally no longer subject to assesstax examinations for fiscal years prior to 2004. For state tax returns the Company is generally no longer subject to tax examinations for fiscal years prior to 1997.

Subsequent to the end of the first quarter of fiscal 2008, the Internal Revenue Service issued Coordinated Issue Paper (“CIP”) LMSB-04-090762 dated September 27, 2007. The Company is currently in the process of evaluating the impact that Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretationthe issuance of FASB Statement No. 109” (“FIN 48”),this CIP will have on its consolidated financial statements. Issued by FASB in June 2006, FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. FIN 48 is effective for fiscal years beginning after December 15, 2006 and is required to be adopted by the Company in the first quarter of fiscal 2008.

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

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure certain financial assets and liabilities at fair value at specified election dates. The statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The statement is effective for the Company beginning in fiscal 2009. The Company has not yet determined the impact, if any, of the adoption of SFAS 159.

13. Subsequent Event

On March 30, 2007, the Company acquired all of the outstanding share capital of COTCO Luminant Device Ltd. (“COTCO”) in exchange for consideration consisting of 7,604,785 shares of the Company’s common stock and $70 million in cash. The cash portion of the purchase price is subject to a working capital adjustment after the closing of the transaction. Additional consideration of up to $125 million may be payable to the seller or its designees in the event COTCO achieves specific financial targets over the next two fiscal years. The Company may elect to pay the additional consideration, if any, in cash, shares of its common stock, or a combination of cash and stock, as long as the total number of shares of the Company’s common stock issued to the seller relating to the transaction is less than 9.99% of the Company’s then outstanding common stock. The acquisition will be accounted for under the purchase method of accounting as prescribed by SFAS No. 141, “Business Combinations,” and all related goodwill and other intangible assets will be accounted for in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.”

14. Commitments and Contingencies

Please refer to Part I, Item 3 of the Company’s Annual Report on Form 10-K for the fiscal year ended June 25, 200624, 2007 for a description of material legal proceedings, including descriptions of the proceedings discussed below underbelow.

BridgeLux Patent Litigation

In the captions “In re Cree,lawsuit that the Company and Boston University commenced against BridgeLux, Inc. Securities Litigation” and “Neumark v. Cree, Inc.” Please also refer to Part II, Item 1 of the Quarterly Report on Form 10-Q for the quarter ended December 24, 2006 for a description of the proceedings discussed below under the caption “BridgeLux Patent Litigation.”

In re Cree, Inc. Securities Litigation

As described in Part I, Item 3 of the Annual Report on Form 10-K for the fiscal year ended June 25, 2006, the U.S. District Court for the Middle District of North Carolina in August 2005, dismissed the plaintiffs’ amended complaint in these consolidated cases and the plaintiff appealed the dismissal to the U.S. Court of Appeal for the Fourth Circuit. In a published opinion issued in February 2007, the appellate court affirmed the dismissal of the amended complaint. The plaintiffs petitioned for rehearing by the entire appellate court. The petition was denied in April 2007.

Neumark v. Cree, Inc.

As described in Part I, Item 3 of the Annual Report on Form 10-K for the fiscal year ended June 25, 2006, this patent infringement case is pending before the U.S. District Court for the Southern District of New York. In March 2007, the court conducted a hearing, in accordance with the procedure laid out in the U.S. Supreme Court’s 1996 decision in Markman et al. v. Westview Instruments, Inc., for the purpose of determining the interpretation of disputed terms used in the claims of the patents at issue in the lawsuit.

BridgeLux Patent Litigation

As described in Part II, Item 1 of the Quarterly Report on Form 10-Q for the quarter ended December 24, 2006, the Company initiated this litigation by filing a patent infringement action against BridgeLux, Inc., in federal court in North Carolina, and BridgeLux subsequently filed related actions in federal court in California and in Texas. In the California case, the Company’s motion to dismiss BridgeLux’s declaratory judgment claims remains pending. In the Texas case, BridgeLux alleged infringement of U.S. Patent No. 6,869,812. The Company denied any infringement in its answer and has moved for summary judgment of invalidity on certain claims of the ‘812 patent on the ground that the claims were anticipated by prior art. The Company also asserted counterclaims against BridgeLux in the Texas case for infringement of U.S. Patent Nos. 6,657,236 and 5,686,738.5,686,738, the court on August 21, 2007 adopted the recommendation of the magistrate judge and dismissed the complaint for lack of personal jurisdiction. The Company had first alleged thatCompany’s claims against BridgeLux infringedfor infringement of these patents remain part of the ‘236 and ‘738 patents in its complaint filedlawsuit pending in the North Carolina case,U.S. District Court for the Northern District of California, in which BridgeLux has moved to dismiss. In February 2007, the court in Texas ordered that the claims on the ‘236 and ‘738 patents be severed and dismissed without prejudice on the ground that claims under these patents are the subject of prior pending litigation. BridgeLux had also moved to sever and to dismiss or stay proceedings on additional counterclaims the Company hadand Boston University have also asserted a claim against BridgeLux for infringement of U.S. Patent Nos. 6,614,056No. 7,235,819. In the California case, the court on August 17, 2007 entered a case management and 6,885,036.pretrial order that sets a trial date in May 2009 and addresses other case management matters. The court deniedcase is in the motion by BridgeLuxdiscovery phase.

Other Matters

The Company is currently a party to severother legal proceedings incidental to its business. Although the claims underresolution of these matters cannot be predicted with certainty, management’s present judgment is that the ‘056final outcome will not likely have a material adverse effect on the Company’s consolidated financial condition or results of operations. If an unfavorable resolution occurs, the Company’s business, results of operations and ‘036 patents, with the result that these claims remain pending in Texas.financial condition could be materially adversely affected.

Item  2.

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

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

Information set forth in this Quarterly Report on Form 10-Q contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All information contained in this report relative to future markets for our products and trends in and anticipated levels of revenue, gross margins and expenses, as well as other statements containing words such as “may,” “will,” “anticipate,” “target,” “plan,” “estimate,” “expect,” and “intend,” and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business, economic, and other risks and uncertainties, both known and unknown, and actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements we make are as of the date made and we do not intend to update them if our views later change. These forward- looking statements should not be relied upon as representing our views as of any date subsequent to the date of this quarterly report. To review risk factors that could cause actual results to differ, see “Risk Factors” in Part II, Item 1A, of this report and in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended June 25, 2006.report.

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements, including the notes thereto.

Overview

We develop and manufacture semiconductor materials and electronic devices primarily made from silicon carbide, or SiC, gallium nitride, or GaN, and related compounds. The majority of our products wereare manufactured at our main production facilities in Durham and Research Triangle Park, North Carolina.Carolina and in our facility in Huizhou, China. We also use subcontractorscontract manufacturers in Asia to perform some of our manufacturing steps for certain light emitting diode, or LED, and power products. We generate revenues from the following product lines:

Industry Dynamics

Our business is primarily focused on selling high-brightness LED products, which is affected by a number of industryproducts. Industry factors includingaffecting our business include overall demand in products using high-brightness LEDs, an intense and constantly evolving competitive environment, and intellectual property issues. Average LED sales prices generally decline each year as market players implement pricing strategies to gain or protect market share. To remain competitive, LED producers generally must increase product performance and reduce costs to support lower average sales prices. The LED high-brightness segment has become more competitive over the last several quarters which has caused companies to lower prices at a faster rate than was previously estimated.

Highlights of the ThirdFirst Quarter of Fiscal 20072008

The following is a summary of our financial results for the three months ended March 25,September 23, 2007:

Outlook for Fiscal 20072008

We targetproject that the LED chip market will remain highly competitive during the remainder of fiscal 2007.2008. We plan to continue to expand our global sales, marketing, and distribution capabilities to support increased sales of our new LED components, including those from our acquisition of COTCO and high-power products.COTCO.

For the remainder of fiscal 2007,2008, we plan to work on increasing the brightness of our LED chips and packaged LED products. We plan to continue our work on the integration of COTCO by expanding our product offerings and customer base. We plan to continue cost reduction initiatives for both our LED and SiC-based high-power products by converting some production to four-inch wafer and transferring more of our production to our subcontractorscontract manufacturers in Asia.Asia and our production facility in Huizhou, China. In addition, we target to invest a total of $80$25 million to $90$35 million in capital expenditures during the remainder of fiscal 2007.2008. This will support unit volume growth and is a critical part of our overall product cost reduction initiatives.

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

Critical Accounting Policies

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

Our significant accounting policies are discussed in Note 2, “Summary of Significant Accounting Policies and Other Matters,” of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended June 25, 2006.24, 2007. Management believes the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and related disclosures with the Audit Committee of our Board of Directors.

Description of Policy		Judgments and Uncertainties		Judgments and Uncertainties		Effect If Actual Results Differ From Assumptions and Adjustments Recorded
Revenue Recognition:
We provide our customers with limited rights of return for non-conforming shipments and product warranty claims. In addition, certain of our sales arrangements provide for limited product exchanges and the reimbursement of certain sales costs incurred by our customers. As a result, we record an allowance at the time of sale, which is recorded as a reduction of product revenue and accounts receivable.   In connection with the allowance for sales returns, we also record an asset for the value of product returns that we believe will be returned to inventory.		We apply judgment in estimating the amount of product that will be returned in the future. Our estimate of product returns and the amount of those returns that will be placed back in inventory is based primarily on historical transactional experience and judgment regarding market factors and trends.		As of March 25,September 23, 2007 and June 25, 2006, the amount of our sales return allowance was $4.3 million and $5.4 million, respectively.million.   As of March 25,September 23, 2007 and June 25, 2006, we estimated the value of future product returns that would be returned to inventory to be $1.2 million and $1.7 million, respectively.was $1.8 million.   A 10% increase or decrease in our sales return estimates and deferred product costs asset at March 25,September 23, 2007 would have affected net income by approximately $216,000$269,000 for the ninethree months ended March 25,September 23, 2007.
Accounting for Stock-Based Compensation:
We account for stock-based compensation arrangements in accordance with the provisions of SFASStatement of Financial Accounting Standards No. 123(R)123 (revised 2004), “Shared-Based Payment.Payment,” or SFAS 123R. Under SFAS 123(R),123R, compensation cost is calculated on the date of the grant using the Black-Scholes-Merton model. The compensation expense is then amortized over the vesting period.		We use the Black-Scholes-Merton model in determining fair value of our options at the grant date and apply judgment in estimating the key assumptions that are critical to the model such as the expected term, volatility and forfeiture rate of an option. Our estimate of these key assumptions is based on historical information and judgment regarding market factors and trends.		If actual results are not consistent with our assumptions and judgments used in estimating key assumptions, we may be required to adjust compensation expense, which could be material to our results of operations.

Description of Policy		Judgments and Uncertainties		Effect If Actual Results Differ From Assumptions and Adjustments Recorded
Valuation of Long-Lived Assets:
We review long-lived assets such as property, equipment, goodwill, definite lived intangible assets and patents for impairment on a routine basis and when events and circumstances indicate that the carrying value of the assets recorded in our financial statements may not be recoverable. For example, a portion of our equipment may be scrapped; certain of our patents or patent applications may be abandoned. In these cases, we would directly write off these long-lived assets.   In addition, we evaluate all of our long-livedproperty, equipment and definite lived intangibles assets for potential impairment by comparing the carrying value of our assets to the		Our impairment loss calculations require management to apply judgment in estimating future cash flows and asset fair values, including estimating useful lives of the assets. To make these judgments, we may use internal discounted cash flow estimates, quoted market prices when available, and independent appraisals as appropriate to determine fair value. We derive the required cash flow estimates from our internal business plans.		If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be required to record additional impairment losses that could be material to our results of operations. Using this impairment review methodology, we recorded no long-lived asset impairment charges during the three and nine months ended March 25, 2007 and $581,000 during the nine months ended March 26, 2006 for building improvements no longer being used at our Durham, North Carolina facility.

Description of Policy		Judgments and Uncertainties		Effect If Actual Results Differ From Assumptions and Adjustments Recorded
estimated future cash flows of the assets (undiscounted and without interest charges). If the estimated undiscounted future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on estimated discounted future cash flows. We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset will be its new cost basis. For a depreciable (amortized) long-lived asset, the new cost basis will be depreciated (amortized) over the remaining useful life of that asset.		Our impairment loss calculations require management to apply judgment in estimating future cash flows and asset fair values, including estimating useful lives of the assets. To make these judgments, we may use internal discounted cash flow estimates, quoted market prices when available, and independent appraisals as appropriate to determine fair value. We derive the required cash flow estimates from our internal business plans.		If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be required to record additional impairment losses that could be material to our results of operations.   Using this impairment review methodology, we recorded $759,000 of impairments of long-lived assets during the three months ended September 23, 2007, and $1,000 during the three months ended September 24, 2006.

Description of Policy		Judgments and Uncertainties		Effect If Actual Results Differ From Assumptions and Adjustments Recorded
For goodwill, on at least an annual basis, we evaluate impairment in a two-step process. The first step compares the fair value of the reporting unit with its carrying value. If the fair value of the reporting unit exceeds its carrying value, no impairment is recorded. If the carrying amount of the reporting unit exceeds its fair value, the second step of the impairment analysis is performed. The second step is used to measure the amount of the impairment loss and compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount exceeds the implied fair value of the goodwill, an impairment loss is recognized for the excess. However, it should be noted that the loss recognized shall not be in excess of the carrying amount. Once a goodwill impairment loss is recognized, the adjusted carrying value shall be its new accounting basis.   We do not restore a previously recognized impairment loss if the asset’s carrying value decreases below its estimated fair value.

Description of Policy		Judgments and Uncertainties		Judgments and Uncertainties		Effect If Actual Results Differ From Assumptions and Adjustments Recorded
Tax Contingencies:
We are subject to periodic audits of our income tax returns by federal, state and local agencies. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposures associated with our various tax filing positions, including state and local taxes, we record reserves for what we identify as probable exposures.more likely than not. A number of years may elapse before a particular matter for which we have established a reserve is audited and fully resolved.   We have also established a valuation allowance for capital loss carryforwards and unrealized losses on certain securities where we believe that it is more likely than not that the tax benefits of the items will not be realized.		The estimate of our tax contingencies reserve contains uncertainty because management must use judgment to estimate the exposures associated with various tax filing positions. To make these judgments, we make determinations about the likelihood that the specific taxing authority may challenge the tax deductions that we have taken on our tax return. Based on information about other tax settlements, we estimate amounts that we may settle with taxing authorities in order to conclude audits.		To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement might require use of our cash and result in an increase in our effective rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution. When we establish or reduce the valuation allowance against our deferred tax assets, our income tax expense will increase or decrease, respectively in the period such determination is made.   For example, in the third quarter of fiscal 2007 we recorded a tax benefit of $17.9 million for the release of contingency reserves associated with the completion of our research and development tax credit study and the expected resolution of Internal Revenue Service audits of our fiscal 2003, 2004 and 2005 federal income tax returns. As of March 25,September 23, 2007, we had established tax reserves of $3.3$5.8 million and a valuation allowance of $6.5 million.$2.8 million

Description of Policy		Judgments and Uncertainties		Effect If Actual Results Differ From Assumptions and Adjustments Recorded
Inventories:
We value our inventory at the lower of cost of the inventory or fair market value by establishing a write-down or an inventory loss reserve.   We base our lower of cost or market write-down on the excess carrying value of the inventory, which is typically its cost, over the amount that we expect to realize from the ultimate sale of the inventory based upon our assumptions regarding the average sales price to be received for the product.		Our inventory reserve is based on our analysis of sales levels by product and projections of future customer demand derived from historical order patterns and input received from our customers and our sales team. To mitigate uncertainties, we reserve for all inventory greater than twelve months old, unless there is an identified need for the inventory. In addition, we reserve for items that are considered obsolete based on changes in customer demand, manufacturing process changes or new product introductions that may eliminate demand for a product. When inventory is physically destroyed, we remove the inventory and the associated reserve from our financial records.		If our estimates regarding customer demand and physical inventory losses are inaccurate or changes in technology affect demand for certain products in an unforeseen manner, we may be exposed to losses or gains in excess of our established reserves that could be material. As of September 23, 2007 the amount of our inventory reserve was $3.2 million. A 10% increase or decrease in our actual inventory reserve at March 25,September 23, 2007 would have affected net income by approximately $96,000$240,000 for the ninethree months ended March 25,September 23, 2007.

Description of Policy		Judgments and Uncertainties		Effect If Actual Results Differ From Assumptions and Adjustments Recorded
		eliminate demand for a product. When inventory is physically destroyed, we remove the inventory and the associated reserve from our financial records.
Accruals for Self-Insured and Other Liabilities:
We make estimates for the amount of costs that have been incurred but not yet billed for our self-funded medical insurance, general services, including legal fees, accounting fees and other expenses.		Our liabilities contain uncertainties because we must make assumptions and apply judgment to estimate the ultimate cost to settle claims and claims incurred but not reported as of the balance sheet date. When estimating our liabilities, we consider a number of factors, including interviewing our service providers for bills that have not yet been received. For self-insured liabilities, we estimate our liabilities based on historical claims experience.		If actual costs billed to us are not consistent with our assumptions and judgments, our expenses could be understated or overstated and these adjustments could materially affect our net income.

Results of Operations

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