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/s/ John C. East

John C. East

Chief Executive Officer

Actel Corporation

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2006
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-21970

ACTEL CORPORATION

(Exact name of Registrant as specified in its charter)


California		77-0097724
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
2061 Stierlin Court Mountain View, California (Address of principal executive offices)		94043-4655 (Zip Code)

(650) 318-4200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value

Preferred Stock Purchase Rights

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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 o No þ

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed fourth fiscal quarter: $337,300,407

Note. — If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 26,496,497 shares of Common Stock outstanding as of January 16, 2008.

In this Annual Report on Form 10-K, Actel Corporation and its consolidated subsidiaries are referred to as “we,” “us,” “our,” or “Actel.” You should read the information in this Annual Report with the Risk Factors in Item 1A. Unless otherwise indicated, the information in this Annual Report is given as of January 21, 2008, and we undertake no obligation to update any of the information, including forward-looking statements. All forward-looking statements are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements containing words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “seeks,” and variations of such words and similar expressions are intended to identify the forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements due to the risks identified in the Risk Factors or for other reasons.

TABLE OF CONTENTS


PART I
	ITEM 1. BUSINESS
	ITEM 1B. UNRESOLVED STAFF COMMENTS
	ITEM 2. PROPERTIES
	ITEM 3. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
	ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
	ITEM 6. SELECTED FINANCIAL DATA
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	ITEM 9A. CONTROLS AND PROCEDURES
	ITEM 9B. OTHER INFORMATION
PART III
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE
	ITEM 11. EXECUTIVE COMPENSATION
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
	ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
EXHIBIT 10.12
EXHIBIT 21.1
EXHIBIT 23
EXHIBIT 24
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

Explanatory Note Regarding Restatements

This Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (“2006 Form 10-K”), includes restatements of the following previously-filed financial statements and data (and related disclosures): (i) our consolidated balance sheet as of January 1, 2006, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the fiscal years ended January 1, 2006 and January 2, 2005; (ii) our selected financial data as of and for the fiscal years ended January 1, 2006, January 2, 2005, January 4, 2004, and January 5, 2003, (iii) our management’s discussion and analysis of financial condition and results of operations as of and for the fiscal years ended January 1, 2006 and January 2, 2005, and (iv) our unaudited quarterly financial information for the first two quarters in the fiscal year ended December 31, 2006, and for all four quarters in the fiscal year ended January 1, 2006. We also recorded adjustments affecting previously-reported financial statements for fiscal years 1994 through 2003, the effects of which are summarized in cumulative adjustments to additional paid-in capital, deferred stock-based compensation, and retained earnings as of January 4, 2004. All restatements are a result of an independent stock option investigation conducted by a Special Committee of our Board of Directors and additional reviews conducted by our management. See below and Note 2, “Restatements of Consolidated Financial Statements,” to the Consolidated Financial Statements, and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a detailed discussion of the effect of the restatement.

Financial information included in our reports on Form 10-K, Form 10-Q, and Form 8-K filed with the Securities and Exchange Commission (“SEC”) before January 18, 2007, and the related opinions of our independent registered public accounting firm, and all of our earnings press releases and similar communications issued before January 18, 2007, should not be relied upon and are superseded in their entirety by this 2006 Form 10-K and our other reports on Form 10-Q and Form 8-K filed with the SEC on or after January 18, 2007.

Stock Option Reviews, Investigation, and Findings

In September 2006, our Board of Directors appointed a Special Committee of independent directors (“Special Committee”) to formally investigate our historical stock option grant practices and related accounting. The Special Committee retained an independent law firm and forensic team of professionals to assist the Committee in conducting a thorough investigation. The Special Committee investigated stock options granted during the eleven-year period from January 1, 1996, through December 31, 2006. On January 18, 2007, our management concluded (based on a preview of the Special Committee’s preliminary findings) that shareholders and other investors should no longer rely on the Company’s financial statements and the related reports or interim reviews of Actel’s independent registered public accounting firm and all earnings press releases and similar communications issued by the Company for fiscal periods commencing on or after January 1, 1996.

The Special Committee presented its preliminary findings to the Board of Directors on January 30, 2007, and its final report on March 9, 2007. The Special Committee concluded that there was inadequate documentation supporting the recorded measurement dates for each of our company-wide annual grants during the period 1996-2001; that there were a number of other grants during the 1996-2001 period for which there was inadequate documentation supporting the recorded measurement dates, including some executive grants and grants to new employees in connection with corporate acquisitions; and that, beginning in 2002, documentation relating to annual and other grants improved substantially, although some minor errors occurred thereafter in the form of corrections or adjustments to grant allocations after the recorded measurement dates.

measurement date was other than the stated grant date, we made accounting adjustments as required, resulting in stock-based compensation expense and related tax effects. We have determined that we had unrecorded non-cash equity-based compensation charges associated with our equity incentive plans for the period 1995 through 2006. Since these charges were material to our financial statements for the years 1995 through 2005, we are restating our historical financial statements to record additional non-cash charges for stock-based compensation expense. At the direction of management, option exercises before December 31, 2000 (when employees could exercise shares directly with the Company, as opposed to through an independent, third-party broker), were also reviewed and tested, and no instance of exercise backdating was identified.

Restatement

As a result of the Special Committee’s investigation and findings, as well as our internal reviews, we have recorded additional stock-based compensation expense for stock option grants made from June 1995 through March 2004 for which the actual measurement date was different than the stated grant date. We determined that the stated grant dates for 28 granting actions (or 15% of the 190 granting actions between our initial public offering and the end of 2006) cannot be supported as the proper measurement dates. As a result, we corrected the measurement dates for options covering a total of 10.1 million shares (or 41% of the 24.7 million shares of Common Stock covered by options granted during the relevant period), resulting in a gross deferred stock-based compensation charge of $23.4 million. After accounting for forfeitures, cancellations, and other related adjustments, we recorded additional pre-tax stock-based compensation expense of $17.4 million as a result of the revised measurement dates for historical stock option grants.

In addition to the stock-based compensation expenses resulting from revised measurement dates for historical stock option grants, and the related payroll and withholding taxes and penalties, our internal review also identified certain other errors in accounting determinations and judgments relating to stock-based compensation that have been corrected in the restated consolidated financial statements. These errors include incorrect accounting for (i) modifications to equity awards in connection with, and subsequent to, certain employees’ terminations and (ii) equity awards granted to consultants. As a result of these errors, we recorded additional pre-tax stock-based compensation expense of $1.4 million.

Also included in this restatement are accounting adjustments for one item that is not related to stock options. These adjustments relate to errors associated with the recognition of deferred income at our European distributors. While we were aware of these errors outside of the course of the stock options investigation and reviews described above, these adjustments had not previously been recorded in the appropriate periods due to their immateriality. The restatement impact of recording these adjustments is a $1.0 million cumulative increase to pre-tax income from 2000 through 2005.

For explanatory purposes and to assist in analysis of our consolidated financial statements, the impact of the stock option and other adjustments that were affected by the restatement are summarized below (in thousands):


	Adjustment to											Other
	Stock-Based											Deferred
	Compensation								Subtotal			Revenue			Other
	Expense		Other			Adjustment to			Stock-Based			Adjustments			Adjustments-			Adjustment to
	Associated		Adjustments			Payroll			Compensation			Associated			-Other			Income			Total
	with		to Stock-Based			Tax			Expense and			with			Income and			Tax			Restatement
	Remeasured		Compensation			Expense			Payroll			European			Expense			Expense			Expense
Fiscal Year	Grants		Expense			(Benefit)			Taxes			Distributor			Charges(1)			(Benefit)			(Benefit)

1994	$	—	$	60		$	—		$	60		$	—		$	—		$	(24	)	$	36
1995		205		27			—			232			—			—			(73	)		159
1996		539		42			6			587			—			—			(175	)		412
1997		823		32			23			878			—			—			(262	)		616
1998		937		35			18			990			—			—			(307	)		683
1999		814		12			105			931			—			—			(242	)		689
2000		2,574		92			347			3,013			(1,528	)		—			(436	)		1,049
2001		5,455		485			88			6,028			(100	)		(17	)		(2,111	)		3,800
2002		2,810		(73	)		93			2,830			203			(31	)		(953	)		2,049
2003		2,155		1,687			181			4,023			—			20			(1,370	)		2,673

Cumulative through January 4, 2004		16,312		2,399			861			19,572			(1,425	)		(28	)		(5,953	)		12,166
2004		950		(604	)		(312	)		34			100			(463	)		(51	)		(380	)
2005		186		(431	)		(91	)		(336	)		338			12			(14	)		—

Total	$	17,448	$	1,364		$	458		$	19,270		$	(987	)	$	(479	)	$	(6,018	)	$	11,786


(1)		Reflects mark to market adjustments relating to $1.0 million of awards originally charged to stock-based compensation which were subsequently classified as liability awards following the termination of employment.

PART I


ITEM 1.	*BUSINESS*

The leading supplier of nonvolatile field-programmable gate arrays (FPGAs), Actel Corporation designs, develops, and markets Flash- and antifuse-based FPGAs for a wide range of applications in the aerospace, automotive, avionics, communications, consumer, industrial, medical, and military markets. In support of our FPGAs, we also offer design and development software and tools, intellectual property (IP) cores, programming hardware, starter kits, and a variety of services. We sell our products globally through a worldwide, multi-tiered sales and distribution network.

The company was founded and incorporated in California in 1985. Actel’s common stock trades on the NASDAQ Global Market under the symbol ACTL. Our corporate headquarters are located at 2061 Stierlin Court, Mountain View, Calif., 94043, and our Website address is www.actel.com.

We provide access free of charge through a link on our Web site to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as amendments to those reports, as soon as reasonably practicable after the reports are electronically filed with or furnished to the Securities and Exchange Commission (SEC). The Actel, Actel Fusion, Axcelerator, EPGA, FlashLock, FuseLock, Libero, ProASIC, ProASIC PLUS, and VariCore names and logos are registered trademarks of Actel. This Annual Report also includes unregistered trademarks of Actel as well as registered and unregistered trademarks of other companies.

Industry Overview

Three principal types of integrated circuits (ICs) are used in nearly every electronic system: processors, which are used for control and computing tasks; memory devices, which are used to store program instructions and data; and logic devices, which are used to adapt these processing and storage capabilities to a specific application.

The logic market is highly fragmented and includes application-specific integrated circuits (ASICs). Programmable logic devices (PLDs) are one type of ASIC, and FPGAs are one type of PLD. While all of these devices are competitive, price, performance, reliability, power consumption, security, density, features, ease of use, and time to market determine the degree to which the devices compete for specific applications.

ASICs other than PLDs are customized for use in a specific application at the time they are manufactured. Because they are “hard wired,” they cannot be modified after they are manufactured, thereby subjecting them to the risk of inventory obsolescence if the system manufacturer changes the logic design. These devices generally have longer development times and greater development costs than their programmable alternatives. The advantages of hard-wired ASICs are high capacity, high density, high speed, and low cost in production volumes.

FPGAs and other PLDs, on the other hand, are manufactured as standard components and customized “in the field,” allowing the same device type to be used for many different applications. Using software tools, users can program their design directly into an FPGA, resulting in lower development costs and inventory risks, shorter design cycles, and faster time-to-market.

Technology

To a large extent, the characteristics of an FPGA are dictated by the technology used to make the device programmable. Devices based on nonvolatile Flash or antifuse programming elements, which are offered only by Actel, offer consistent single-chip, low-power, live-at-power-up, security, and neutron-immunity advantages over volatile devices based on static-random access memory (SRAM) technology.

• Single Chip

Unlike volatile SRAM-based FPGAs, Actel’s nonvolatile FPGAs do not require additional system components, such as configuration serial nonvolatile memory (EEPROM) or a Flash-based microcontroller, to configure the device at every system power-up. By eliminating the support devices required by volatile SRAM-based FPGAs, Actel’s nonvolatile single-chip FPGAs reduce the direct costs of the bill of materials (BOM). In addition, the

nonvolatile Flash- and antifuse-based FPGAs lower associated total system costs by reducing design complexity, increasing reliability, and simplifying materials management.

• Low Power

Among the primary FPGA technologies, only Flash and antifuse have power characteristics similar to hard-wired ASICs, making them an appropriate choice for battery-operated and other power-sensitive applications. All of our devices have low static and dynamic power consumption and our Flash devices also support sleep and standby modes of operation to maximize power savings. Unlike alternative FPGA technologies, our devices do not exhibit power-on current surges or no high-current transitions

• Live At Power-Up

Our nonvolatile devices are live at power-up (LAPU). As soon as system power is applied to the board and normal operating specifications are achieved, our devices are working. The LAPU feature greatly simplifies total system design and often allows for the removal of expensive power-sequencing, voltage-monitor, and brownout-detection devices from the board. Simplifying the system design reduces total system cost and design risk while increasing system reliability and improving system initialization time.

• Security

Secure systems and ultimately the underlying silicon technologies are becoming increasingly vital in preventing corruption, intrusion, and ultimately the theft of valuable IP. Once programmed, our nonvolatile single-chip FPGAs retain configuration indefinitely without requiring an external configuration device. With no bitstream susceptible to interception, our nonvolatile solutions eliminate the potential for in-system errors or data erasures that might occur during download. For our Flash-based devices, we offer the Actel FlashLock^® feature, which provides a unique combination of reprogrammability and design security without external overhead. Our Flash-based devices with AES-based security allow for secure, remote field updates of both system design and Flash memory content. For our antifuse-based FPGAs, we offer the Actel FuseLock feature, which ensures that unauthorized users will not be able to read back the contents of our FPGA.

• Firm Error Immunity

Independent radiation testing has confirmed that our Flash- and antifuse-based FPGAs are not subject to configuration upsets caused by high-energy neutrons naturally generated in the earth’s atmosphere. The testing also determined that SRAM-based FPGAs are vulnerable to neutron-induced configuration loss not only under high-altitude conditions, as traditionally believed, but also in ground-based applications. The energy of the collision can change the state of the SRAM FPGA’s configuration cell and thereby cause an unpredictable change in FPGA functionality. Impossible to prevent in SRAM FPGAs, these errors can result in failure-in-time (FIT) rates in the thousands and complete system failures.

Strategy

Our strategy is to offer innovative solutions to markets in which our nonvolatile technologies have an inherent competitive advantage.

• Value-Based Market

We expect that the value-based, sub-$10 market will be the fastest growing segment of the FPGA market. With low prices, high densities and performance, and an ASIC-like design flow, the Actel ProASIC3 and IGLOO families offer solutions for a broad range of cost-sensitive applications, including those traditionally served by hard-wired ASICs. These reprogrammable solutions combine the low-cost, low-power, nonvolatile single-chip advantages of hard-wired ASICs with the fast time-to-market and low development-cost advantages typically associated with FPGAs.

• Programmable System Chip (PSC) Market

Electronic system manufacturers are continuing to demand greater flexibility, reliability, and performance as well as lower power, board space, and total system cost. This has put increasing pressure on chip makers to integrate analog, processor, programmable logic, and nonvolatile memory circuits in a single programmable system chip (PSC). As a result, analog, processor, and hard-wired ASIC suppliers are moving to add configurability to their product lines, and PLD suppliers are moving to integrate analog, processor, and Flash memory into their products. In this race to develop PSC solutions, PLD suppliers have an advantage because programmable logic historically has been the most difficult of these technologies to master and the integration of analog and Flash memory has already been proven in processor and hard-wired ASIC technologies. We address this market with our Actel Fusion PSCs, which bring the benefits of true mixed-mode programmable logic to PSCs. By combining an advanced Flash FPGA core with Flash memory blocks and analog peripherals and using a fully functional on-chip soft Flash processor, the Actel Fusion devices allow designers to integrate a wide range of functionality into a single device, simplify system design, reduce total system cost, and upgrade during the production cycle or in the field. The Actel Fusion PSCs are the most comprehensive single-chip mixed-signal programmable logic solutions available today.

• System-Critical Market

Our antifuse and Flash FPGAs are reliable, secure, nonvolatile, and immune to configuration corruption caused by radiation. A well-known supplier to the aerospace and military markets, Actel brings the same benefits to designers of automotive systems and system-critical avionics, industrial, and medical applications. In addition to high reliability and design security, nonvolatility, and firm-error immunity, these benefits include low power consumption and a small, single-chip footprint.

Products

The key to our future success is the introduction of new products that address customer requirements and compete effectively with respect to price, features, and performance. Also critical are the intellectual property (IP) cores, development tools, technical support, and design services that enable our customers to implement their designs into our products.

We offer customers a range of single-chip, Flash-based solutions to address design challenges in the aerospace, automotive, avionics, communications, consumer, ,industrial, and medical markets. With densities ranging from 75,000 to 3,000,000 system gates, our reprogrammable product families highlight the inherent benefits of our nonvolatile Flash technology — low power, LAPU, security, and neutron immunity. Our Flash-based solutions include the Actel Fusion PSCs, M7 Fusion PSCs, M1 Fusion PSCs, IGLOO, ProASIC 3/E, M7 ProASIC 3/E, M1 ProASIC 3/E, ProASIC Plus, and ProASIC families.

We also offer a broad portfolio of nonvolatile antifuse-based FPGAs designed to meet the performance, power, security, and reliability requirements of the aerospace, automotive, avionics, communications, consumer, industrial, and military markets. Ranging in density from 3,000 to 4,000,000 system gates, our single-chip solutions include FPGAs qualified to commercial, industrial, military, and automotive specifications as well as radiation-tolerant and radiation-hardened devices. Spanning six process geometries, our antifuse-based solutions include the Axcelerator, eX, SX, SX-A, MX, and the legacy DX, XL, ACT 3, ACT 2, and ACT 1 families.

To meet the diverse requirements of our customers, we offer almost all our products in a variety of speed grades, package types, and/or ambient (environmental) temperature tolerances. We also offer “green,” lead-free, and RoHS-compliant packages, which provide the necessary mechanical and environmental protection while ensuring consistent reliability and performance.

A brief overview of our newer products follows. The families discussed below are currently being designed by customers into their next-generation applications. Although our more mature product families have been excluded from the discussion below, they continue to generate most of our revenues.

• Actel Fusion PSC

• World’s first mixed-signal PSC, incorporating analog functions, embedded Flash, and FPGA fabric in a single chip

• Density: 90,000 to 1,500,000 system gates

• M7-enabled devices support Actel’s CoreMP7, the only soft 32-bit ARM7 microprocessor core for FPGAs

The Actel Fusion PSC has attracted interest from a broad spectrum of customers and applications. The Fusion PSC solutions have also won several prestigious product awards, including the 2005 EDN Innovation, the 2006 IEC DesignVision, the 2005 EDN “Hot 100 Products,”, the 2006 EDN China Leading Product, and the 2006 Electron D’Or Awards. Our Fusion design team was also a finalist in the 2005 ACE Awards Design Team of the Year category.

The Actel Fusion PSC’s system-management functionality, which includes power and thermal management, data logging, and system diagnostics, gives us the opportunity to win numerous designs in high-volume applications. The Actel Fusion PSC can integrate system-management functions and provide programmable flexibility in a single chip, resulting in potential cost and space savings of 50% or more relative to current implementations. To provide templates for the customization of system management functions and to speed development time, we also offer the System Management Development Kit, a complete prototyping and development kit. In addition, we have introduced several free Fusion-based reference designs addressing the Micro Telecom Computing Architecture (MicroTCA) standard, which is related to system management.

Sample Actel Fusion PSC applications:


Automotive		Engine control units GPS navigation systems In-cab entertainment Safety systems
Communications		Handheld radios Telecom and networking line-card management Wireless base stations
Consumer		Digital cameras Home networking Multimedia entertainment systems Plasma displays Set-top boxes Smart handsets
Industrial		Instrumentation and test equipment Medical instrumentation systems Point of sale RFID infrastructure Surveillance and automation systems

• Actel IGLOO FPGAs

• The low-power, high-density reprogrammable ASIC alternative for portable applications

• Density: 30,000 to 3,000,000 system gates

Designers of portable and handheld applications are taking notice of the 5W Actel IGLOO family due to its unprecedented low power, large number of system gates, feature set, and ASIC-like design flow and methodology. The Actel IGLOO family consumes between 10 and 1,000 times less static power than the products of our competitors, setting a new standard for low power consumption. The only truly low-power FPGA solution to support 1.2V core operation, the Actel IGLOO family has several low-power modes to optimize power consumption — the Flash*Freeze^tm mode, a low-power active mode, and a sleep mode. The innovative IGLOO FPGA family was included on the 2006 EDN “Hot 100 Products” list.

Sample IGLOO applications:


Automotive		Personal occupancy detection systems (PODS) Rear- and side-view cameras Space- and power-constrained safety systems Telematics
Communications		Handheld radios PC card-based wideband solutions (UMTS, 3G, EDO) Wireless access points
Consumer		Digital cameras GPS devices Multimedia entertainment systems PDAs Portable gaming Smart phones
Industrial		Portable medical instruments Portable test equipment

• ProASIC 3/E FPGAs

• Third generation of single-chip, nonvolatile, reprogrammable, Flash-based FPGAs

• Density: 30,000 to 3,000,000 system gates

• M7-enabled devices support Actel’s CoreMP7, the only soft 32-bit ARM7 microprocessor core for FPGAs

Our successful ProASIC 3 devices are commercially qualified and shipping into high-volume applications to customers worldwide in the automotive, communications, consumer, industrial, and medical markets. ProASIC 3 offers designers a reprogrammable solution that combines the low-cost, low-power, nonvolatile single-chip advantages of a hard-wired ASIC with the fast time-to-market and low development-cost advantages typically associated with FPGAs.

Sample ProASIC 3/E applications:


Automotive		Engine control units GPS navigation systems In-cab entertainment Safety systems
Communications		Handheld radios Telecom and networking line-card management Wireless base stations
Consumer		Digital cameras Gaming Home networking Multimedia entertainment systems Plasma displays Set-top boxes Smart handsets
Industrial		Instrumentation and test equipment Medical instrumentation systems Point of sale RFID infrastructure Surveillance and automation systems

• RTAX-S FPGAs

• Space-grade radiation-tolerant devices with densities high enough to compete with hard-wired ASICs for space-flight sockets

• Qualified to MIL-STD 883B and QML Class Q standards and DSCC certified

• Density: 250,000 to 4,000,000 system gates

Designers utilizing our RTAX-S FPGAs value their radiation tolerance, high reliability, firm-error immunity, and high densities. The 4,000,000 system gate RTAX4000S FPGA significantly expanded the number of space applications that can be supported by our RTAX-S family,

Sample RTAX-S applications:


Aerospace and Military		Attitude and orbit control Camera electronics Command and data handling Instrumentation Management of spacecraft power and environmental controls Propulsion system electronics Radio communication Sensor control Sensor data processing Telemetry
Medical		Imaging equipment with high exposure to radiation

Supporting Products and Services

In support of our PSC and FPGA products, we offer design and development software and tools, IP cores, programming hardware, starter kits, and a variety of services that enable our customers to implement their designs into our products.

• Design and Development Software and Tools

The Actel Libero integrated design environment (IDE) seamless integrates best-in-class design tools from Mentor Graphics, SynaptiCAD, and Synplicity with Actel-developed custom tools, such as the Actel Designer physical design solution, into a single FPGA development package. For customers who want to use their own design and verification tools, the Designer software is available as a standalone interactive design tool suite compatible with popular design entry and verification packages, including those from Cadence Design Systems, Inc., Mentor Graphics, Synopsys, Inc., and Synplicity. We also offer the CoreConsole IP Deployment Platform, which enables designers to quickly stitch IP blocks together into synthesizable register-transfer language (RTL), and Silicon Explorer, a design verification and debugging tool.

• IP Cores

Designed, optimized, and verified to work with Actel’s FPGAs, we offer more than 130 proven IP cores for aerospace, automotive, , consumer, communications, industrial, military, and networking applications. DirectCore products, which are developed and supported by Actel, and CompanionCore IP cores from third-party participants, offer designers the ability to streamline design and offer the benefits of faster time to market and reduced design costs and risks. To support embedded systems designers using our FPGAs, we offer an extensive portfolio of optimized processor solutions, including a variety of industry-standard ARM^®, 8051, and LEON cores, as well as a development environment, boards,and reference designs that enable customers to get system-level products to market quickly and reduce cost and risk.

• Programming Hardware

We offer several programming options, including Silicon Sculptor 3 and the FlashPro series, for designers utilizing our nonvolatile FPGAs. Actel also has programming solutions for production design and offers volume programming services through distribution partners. Our Silicon Sculptor 3 is a high-speed, single-device programmer for all Actel devices. The compact Silicon Sculptor 3 programmer connects to a PC via USB 2.0. Up to 12 programmers can be connected to a single PC using nested USB hubs.

FlashPro 3 and FlashPro Lite are compact and cost-effective programmers for our Flash-based devices. With their in-system programming (ISP) capability, these programmers limit incompatibility problems and expensive redesign costs and offer faster time to market. FlashPro 3 supports Fusion, IGLOO, ProASIC 3, and ProASIC 3E devices and is powered from the USB port. FlashPro Lite supports ProASIC Plus devices and is powered from the target board. In addition to programmers, we offer programming adapter modules, surface-mount sockets, prototyping adapter boards, and prototyping mechanical packages, and accessories.

• Starter Kits

We offer low-cost Fusion, ProASIC3/E, ProASIC Plus and Axcelerator starter kits. Starter kits are a quick and cost-effective way for potential customers to assess an FPGA technology without the expense and time needed to design a specialized evaluation board. Our kits contain a board with an FPGA, design software, and a programmer. Immediate prototyping for IGLOO devices is possible by using the ProASIC3/E Starter Kit.

• Services and Support

To shorten design times for customers utilizing Actel’s nonvolatile FPGAs, we offer a variety of services and support, including design services, technical support, and training. Located in Mt. Arlington, New Jersey, our Protocol Design Services Group applies system-level design expertise to the government, military, and proprietary designs of our customers. The organization provides varying levels of design services, including FPGA, ASIC, and system design; software development and implementation; and development of prototypes, first articles, and production units. The Protocol Design Services team has participated in the development of a wide range of applications, including optical networks, routers, cellular phones, digital cameras, embedded DSP systems, automotive electronics, navigation systems, compilers, custom processors, and avionics systems. We also offer prototyping and high-volume programming services.

Markets and Applications

Today, FPGAs can be used in a broad range of applications across nearly all electronic system market segments. Our products serve a wide range of customers within the military and aerospace, industrial, communications, consumer and computer, and automotive markets.

• Military and Aerospace

With a focus on stringent quality and reliability requirements, military and aerospace designers have recognized the inherent advantages that nonvolatile FPGA technologies offer for applications that require high reliability, firm-error immunity, low power consumption, small footprint (single chip), and design security. Thousands of our radiation-tolerant and radiation-hardened FPGAs have performed mission- or flight-critical functions aboard manned space vehicles, earth observation satellites, and deep space probes. For example, our FPGAs continue to perform critical functions throughout several ongoing Mars missions, including the Mars Reconnaissance Orbiter (MRO), the Mars Express probe and the Mars Exploration Rovers — Spirit and Opportunity. Our FPGAs are also used to enable cameras and radio communications to transmit astounding images of the planet’s surface, including previously unexamined regions of the Mars surface, such as the Gusev Crater. We believe that we are the leading supplier of military and aerospace PLDs.

During 2006, we announced that Defense Supplier Center Columbus (DSCC) had released Standard Microcircuit Drawing (SMD) numbers for our radiation-tolerant RTAX2000S, RTAX1000S, and RTAX250S devices. Signaling compliance with the Department of Defense’s (DoD) MIL-PRF-38535 performance standard, designers can utilize SMD numbers to specify our RTAX-S FPGAs for their space-flight applications across all DoD programs In 2006, we also expanded our IP portfolio for military and aerospace applications with the Gaisler Research IP Library (GRLIB), a LEON 3 processor-based application solution optimized for our RTAX-S FPGAs; the Actel Core1553BRT-EBR, a complete, dual-redundant EBR remote terminal core that offers the reliability and data rates required for high-bandwidth applications, such as radar and laser targeting; and the free Actel CoreCORDIC RTL core, which enables designers to build highly configurable digital processing systems, such as digital receivers and cable modems.

• Industrial

Recent advances in electronic component performance and integration at a lower price point have spurred the proliferation of electronic control units. Crossing many technologies and applications — from automated industrial manufacturing lines to instrumentation systems — the focus is on increasing design and power efficiency while reducing design, development, and total system costs. With technology improvements in semiconductor processes and integration, FPGAs have emerged as an important platform alternative for many industrial applications. Compared with ASICs, nonvolatile FPGAs are a cost-effective choice, eliminating ASIC-related development costs and speeding time to market. Using FPGAs also gives designers an efficient and reliable way to upgrade and customize features, whether during development or in the field.

For industrial motion-control applications, the Actel Fusion PSC can offer unprecedented integration in a single-chip implementation, replacing a host of discrete components at less than 50 percent of the cost and board space while maintaining system reliability. With the emergence of mixed-signal Actel Fusion PSC with integrated Flash memory, designers can also integrate a soft processor core, run directly from on-chip memory, and tightly couple control logic and processing needs.

Our ProASIC 3 and IGLOO FPGA families are also attractive to customers in the industrial market. These solutions offer designers a reprogrammable device that combines the low-cost, low-power, nonvolatile single-chip advantages of hard-wired ASICs with the fast time-to-market and low development-cost advatnages typically associated with FPGAs. For example, we announced in 2006 that our single-chip, Flash-based ProASIC3 FPGAs had been selected for use within the USBscope50, part of Elan Digital Systems’ portfolio of miniature USB-based test and measurement equipment. Our secure, low-power A3P250 solution will perform vital signal processing functions at the heart of current and future products that can turn a desktop or laptop PC into a professional-grade digital sampling oscilloscope.

• Communications

Today’s system management implementations often require a large number of discrete components (sometimes numbering in the hundreds) that occupy large amounts of board space and are inflexible to change. In the communications market, increased costs and risks are driving the rapid adoption of standards for remotely managed systems, such as the Micro Telecom Computing Architecture (MicroTCA). Built on the AdvancedTCA (ATCA) specification, MicroTCA is an emerging global standard driven by the PCI Industrial Computer Manufacturers Group (PICMG) that offers adopters a powerful combination of lower cost, a smaller form factor, improved reliability and flexibility, and reduced time to market for remotely managed systems. As a smaller, lower cost option for the marketplace, many believe that MicroTCA has great potential to replace successful standards like CompactPCI and VME as the platform of choice. In the communications space, VoIP gateways, WiMax, wireless base stations and media servers are expected to be widespread adopters.

To meet this growing trend, we introduced a power module and an advanced mezzanine card (AMC) MicroTCA reference design in October 2006. Leveraging our single-chip mixed-signal Fusion PSC, these new reference designs include hardware, software, and IP for a complete solution to meet the cost, footprint, flexibility, security, and reliability requirements facing today’s system designers. We believe these free, tested reference designs will help drive MicroTCA adoption and provide templates for the customization of system management functions. As an early semiconductor entrant, we believe we are well-positioned to capture a significant share of this promising market. To support system management applications like MicroTCA, we also offers a portfolio of IP cores for processing, analog, and memory interface and communications.

• Consumer and Computer

The growth in battery-operated applications, such as digital cameras, wireless handhelds, smart phones, and multi-media players, has created a global demand for low-power semiconductors. For these applications, the ultimate goal is to achieve the lowest power possible and to accommodate long system idle times by allowing to the system to enter and exit low-power modes quickly. Other considerations include design security, path to prototyping, footprint, design reuse, and field upgradability. Traditionally, ASICs and CPLDs have addressed the needs of the consumer or portable marketplace. However, CPLDs are becoming less attractive in some low-

power applications, mainly due to the increasing demand for high-end features. With longer time-to-market and a lack of flexibility to address changing standards and late-stage design modifications, hard-wired ASICs are riskier and often impractical for portable applications with short product-life cycles. As a result, PLDs are becoming the preferred solution as competition intensifies and time to market has an increasingly greater impact on product success. Of course, these PLDs must meet the other design requirements, including cost, features, performance, size, security, and (most importantly) power.

Today, reprogrammable, fully featured FPGAs, such as the Flash-based Actel IGLOO family, address the short product-life cycles and extreme competition in the portable application marketplace. These devices meet the design requirements of portable application, such as design security, small footprint, and LAPU, at ASIC-like unit costs, making them attractive alternatives to ASICs and CPLDs. With less than 5W static power, our reprogrammable, nonvolatile single-chip IGLOO FPGAs have set a new standard for low-power consumption, delivering much lower static power and much longer battery life in portable applications than other PLDs.

• Automotive

Electronic content in automotive applications is increasing in all areas, the most obvious being in-dash or in-cab infotainment and telematics, applications, such as GPS navigation and DVD players. However, improved technology, legislated emissions and safety regulations, and increased driver demand for safety and convenience have resulted in the steady increase in the proportion of electronics in the “core automotive systems” — engine control modules, powertrain, transmission, and diagnostic and monitoring systems; body electronics, such as power seats, windows, and locks; and safety systems, such as anti-lock brakes, adaptive cruise control and collision avoidance, emergency response consoles, smart airbags, back-up and side detect radar, tire pressure monitoring, and lane departure systems. For all automotive products, quality, reliability, and cost are of the greatest importance, particularly for the semiconductors used in the safety and system-critical subsystems. Automotive designers are also under great pressure to adapt the ever-changing technology standards, protocols, and legislation to the longevity and model development timescales of the automotive industry, all while meeting the stringent demands of low-cost, high-volume production. These factors, along with expanding component counts, greater time-to-market pressures, and increased performance demands, are causing many automotive designers to use nonvolatile FPGA technologies instead of the hard-wired ASICs they have traditionally relied on for these core automotive system application areas.

Compared with hard-wiredASICs, FPGAs offer designers a flexible platform that can more readily adapt to new protocols, standards, and (most importantly) market needs. With an FPGA, the design team can make late stage changes. Indeed, products can even be upgraded when they are already in service with minimal qualification and cost consequences. Product obsolescence is also an issue for automotive designers. FPGA lifecycles are typically longer than lower-volume hard-wired ASIC devices, with some FPGA suppliers only now issuing end-of-life notices for products introduced in the 1980s. Of perhaps greatest importance is the impact of FPGAs on the expensive and time-consuming automotive qualification and validation process. Unlike hard-wired ASICs, once the exhaustive automotive qualification process is complete, FPGAs can also be used in multiple programs/projects, thereby helping designers to minimize the time,resources, and risks associated with automotive qualification activities.

With its long-time focus on reliability, cost, and security, the automotive market has clearly begun to recognize the inherent advantages offered by nonvolatile FPGA technologies. Our broad offering of nonvolatile FPGAs are appropriate solutions for automotive applications that require high reliability, firm-error immunity, low power consumption, high junction temperature, small footprint, and design security.

Sales and Distribution

We maintain a worldwide, multi-tiered selling organization that includes a direct sales force, independent sales representatives, electronics distributors, and value-added resellers. Our North American sales force consists of sales and administrative personnel and field application engineers (FAEs) operating from offices located in major metropolitan areas. Direct sales personnel call on target accounts and support direct original equipment manufacturers (OEMs). In addition to overseeing the activities of direct sales personnel, our sales managers also oversee

the activities of sales representative firms operating from various office locations. The sales representatives concentrate on selling to major industrial companies in North America. To service smaller, geographically dispersed accounts in North America, we have a distribution agreement with Avnet, which has offices in North America and became our sole North American distributor during 2005. We generate a significant portion of our revenues from international sales. Sales to European customers accounted for 27% of net revenues in 2006, while sales to Pan Asian and Rest of the World (ROW) customers accounted for 22%. Our European and Pan Asian/ROW sales organization consists of employees operating from various sales offices and distributors and sales representatives.

Sales made through distributors accounted for 77% of our net revenues in 2006. As is common in the semiconductor industry, we generally grant price protection to distributors. Under this policy, distributors are granted a credit upon a price reduction for the difference between their original purchase price for products in inventory and the reduced price. From time to time, distributors are also granted credit on an individual basis for approved price reductions on specific transactions to meet competition. We also generally grant distributors limited rights to return products. Because of our price protection and return policies, we generally do not recognize revenue on products sold to distributors until the products are resold.

Our sales cycle for the initial sale of a design system is generally lengthy and often requires the ongoing participation of sales, engineering, and managerial personnel. After a sales representative or distributor evaluates a customer’s logic design requirements and determines if there is an application suitable for our FPGAs, the next step typically is a visit to the qualified customer by a regional sales manager or an FAE from Actel or one of our distributors or sales representatives. The sales manager or FAE may then determine if additional analysis is required by engineers based at our headquarters.

Backlog

Our backlog was $57.2 million at December 31, 2006, compared with $42.6 million at January 1, 2006. We include in our backlog all OEM orders scheduled for delivery over the next nine months and all distributor orders scheduled for delivery over the next six months. We sell standard products that may be shipped from inventory within a short time after receipt of an order. Our business, and to a great extent that of the entire semiconductor industry, is characterized by short-term order and shipment schedules rather than volume purchase contracts. In accordance with industry practice, our backlog generally may be cancelled or rescheduled by the customer on short notice without significant penalty. As a result, our backlog may not be indicative of actual sales and therefore should not be used as a measure of future revenues.

Customer Service and Support

We believe that premier customer service and technical support are essential for success in the FPGA market. Our customer service organization emphasizes dependable, prompt, accurate responses to questions about product delivery and order status. Many of our customers regularly measure the most significant areas of customer service and technical support. Our FAEs are strategically located around the world to provide technical support to our worldwide customer base. This network of experts is augmented by FAEs working for our sales representatives and distributors throughout the world. Customers in any stage of design may also obtain assistance from our technical support hotline or online interactive automated technical support system. In addition, we offer technical seminars on our products, comprehensive training classes on our software, and functional failure analysis services.

We generally warrant that our FPGAs will be free from defects in material and workmanship for one year, and that our software will conform to published specifications for 90 days. To date, we have not experienced significant warranty returns.

Manufacturing and Assembly

Our strategy is to utilize third-party manufacturers for our wafer requirements, which permits us to allocate our resources to product design, development, and marketing. Our FPGAs in production are manufactured by:


	•	Chartered in Singapore using 0.45- and 0.35-micron design rules;


	•	Infineon in Germany using 0.25- and 0.13-micron design rules;

	•	Matsushita in Japan using 1.0-, 0.9and 0.8 micron design rules;

	•	UMC in Taiwan using 0.25/ 0.22- and 0.15-micron design rules; and

	•	Winbond in Taiwan using 0.8- and 0.45-micron design rules.

Wafers purchased from our suppliers are assembled, tested, marked, and inspected by Actel and/or our subcontractors before shipment to customers. We assemble most of our plastic commercial products in China, Hong Kong, South Korea, the Philippines and Singapore. Hermetic package assembly, which is often required for military applications, is performed at one or more subcontractor manufacturing facilities, some of which are in the United States.

We invest resources in the continual improvement of our products, processes, and systems. We strive to ensure that our quality and reliability systems conform to standards that have worldwide recognition for improving an organization’s capabilities. We recently were fully recertified for ISO 9001:2000 after a comprehensive audit by NSF International, a leader in quality management systems registrations. We are also STACK, QML, and PURE certified. STACK International consists of major electronic equipment manufacturers serving the worldwide high-reliability and communications markets. Our QML certification confirms that quality management procedures, processes, and controls comply with MIL-PRF-38535, the performance specification used by the U.S. Department of Defense for monolithic ICs. QML certification demonstrates our capability to produce quality products for all types of high reliability, military, and space applications. PURE, an abbreviation for “PEDs (plastic encapsulated devices) Used in Rugged Environments,” is an association of European equipment makers dedicated to quality and reliability. The PURE certification is for plastic quad flat pack packages. The ISO, STACK, QML, and PURE certifications demonstrate that our quality systems conform with internationally-valued standards and confirm our commitment to supply top-quality FPGAs to a diverse customer base.

Strategic Relationships

We enjoy ongoing strategic relationships with customers, distributors, sales representatives, foundries, assembly houses, and other suppliers of goods and services. Some highlights from 2006 include the following:

• Aldec

In November 2006, Actel and Aldec announced to two highly integrated solutions designed specifically for our FPGAs in high-reliability avionics and aerospace applications. With the industry’s first hardware/software verification package to ease DO-254 certification, the two companies alleviate the verification bottleneck in the design assurance process. In addition, the companies unveiled a Flash-based prototyping solutions for our space-optimized RTAX-S FPGAs, allowing aerospace customers to tap the flexibility and reprogrammability of Flash-based prototypes for multiple aerospace applications.

• ARM

In October 2006, Actel and ARM announced that Actel had licensed the ARM Cortex-M3 processor. The agreement further strengthened the partnership established in March 2005, which resulted in Actel’s CoreMP7, a soft ARM7 family processor core optimized for implementation in Actel’s FPGAs. As part of our ongoing relationship with ARM, we continue to explore current and next-generation technologies that will benefit our mutual customers, thereby increasing the choices available to designers.

• Gaisler Research

In 2006, Actel and Gaisler expanded their long-standing relationship with the addition of Gaisler to our CompanionCore Partner Program. At the same time, we announced the availability of the Gaisler GRLIB, an RTAX-S-optimized LEON3 processor-based application solution.

• MicroBlade^tm, Inc.

Because we offer our Fusion-based MicroTCA reference design boards for purchase as evaluation tools only, we formed a relationship with MicroBlade to deliver production-volume modules for MicroTCA applications. Customers who wish to purchase turn-key boards in production volumes can work with MicroBlade.

• Signal Stream Technologies

To provide a more complete Fusion-based MicroTCA solution for our customers, we also partnered with Signal Stream, a leader in MicroTCA design services, to offer design services, support, and customization for the hardware and software.

• Synplicity

In May 2006, Actel and Synplicity announced that the companies had expanded their OEM agreement. Under terms of the multi-year agreement, we obtained the right to distribute the Synplify Pro^®, Identify^®, Synplify^® DSP software solutions to our customers a part of its Libero IDE. The expanded agreement also provides our customers with future access to Synplicity’s innovative physical synthesis technology.

• UMC

In October 2006, Actel and UMC announced that the two companies had partnered to produce the award-winning Actel IGLOO low-power FPGA family. UMC’s 0.13-micron low-power and e-Flash processes combined with Actel’s IGLOO power-mode options and Flash*Freeze technology enable power consumption as low as 5W, a new standard for the industry.

Research and Development

Our research and development expenditures are divided among circuit design, software development, and process technology activities, all of which are involved in the development of new products based on existing or emerging technologies. In the areas of circuit design and process technology, our research and development activities also involve continuing efforts to reduce the cost and improve the performance of current products, including “shrinks” of the design rules under which such products are manufactured. Our software research and development activities include enhancing the functionality, usability, and availability of high-level design and development tools and IP cores in a complete and automated desktop design environment.

In 2006, 2005, and 2004, our research and development expenses were $56.9 million, $48.2 million and $45.7 million, respectively. We believe technical leadership and innovation are essential to our future success and we are committed to continuing a significant level of research and development effort. However, there can be no assurance that any of these efforts will be successful, timely, or cost effective.

Competition

We believe that the increasing costs associated with the use of advanced chip manufacturing technology is driving the development and use of standard programmable digital integrated circuits. As with microprocessors and memory, programmable logic devices, such as FPGAs, provide the flexibility for the user to change and define circuits without incurring the cost, risk, and delays of the fabrication of hard-wired ASICs.

Competition in the PLD/FPGA market is intense and we expect that to increase as the market grows. We believe our products and technologies are superior than competitive products for many applications requiring low cost, nonvolatility, low power, high reliability and/or greater security. While a few hybrid or alternative approaches have been introduced, no other FPGA vendor has developed a true single-chip, Flash-based FPGA that delivers optimal architecture, technical features, low power, design security and ease of FPGA-to-ASIC migration. However, our primary competitors, Xilinx and Altera, are substantially larger than Actel, offering products to a more extensive customer base, and have substantially greater financial, technical, sales, and other resources. We also expect continued competition from the hard-wired ASIC suppliers and from new companies that may enter PLD or PSC markets.

We believe that the important competitive factors in our market are price; performance; capacity (total number of usable gates); density (concentration of usable gates); ease of use and functionality of development tools; installed base of development tools; reprogrammability; strength of sales organization and channels; power consumption; reliability; security; adaptability of products to specific applications and IP; ease, speed, cost, and consistency of programming; length of research and development cycle (including migration to finer process geometries); number of I/Os; reliability; wafer fabrication and assembly capacity; availability of packages, adapters, sockets, programmers, and IP; technical service and support; and utilization of intellectual property laws. While we believe we compete favorably with respect to these factors, our failure to compete successfully in any of these areas could have a materially adverse effect on our business, financial condition, or results of operations.

Patents and Licenses

We currently hold 346 United States patents and applications pending for an additional 114 United States patents. We also have 93 foreign patents and applications pending for 82 patents outside the United States. Our patents cover circuit architectures, antifuse and Flash structures, and programming methods among other things, and expire between 2007 and 2024. We expect to continue filing patent applications as appropriate to protect our proprietary technologies. We believe that patents, along with such factors as innovation, technological expertise, and experienced personnel, will become increasingly important.

In connection with the settlement of patent litigation in 1993, we entered into a Patent Cross License Agreement with Xilinx, under which Xilinx was granted a license under certain of our patents that permits Xilinx to make and sell antifuse-based PLDs, and we were granted a license under certain Xilinx patents to make and sell SRAM-based PLDs. Xilinx introduced antifuse-based FPGAs in 1995 and abandoned its antifuse FPGA business in 1996. We announced our intention to develop SRAM-based FPGA products in 1996 and abandoned the development in 1999.

In 1995, we entered into a License Agreement with BTR, Inc. (BTR) that was amended and restated in 2000, pursuant to which BTR licensed its proprietary technology to Actel for development and use in FPGAs and certain multichip modules. At the end of 2004, we elected under the License Agreement to convert to a non-exclusive license, as a consequence of which we ceased to pay BTR advance royalties after March 2006. In September 2005, Actel initiated an arbitration proceeding against BTR under the License Agreement to determine Actel’s rights under the License Agreement. This arbitration demand resulted from BTR’s assertion that Actel products were covered by BTR patents and therefore royalties were due under the License Agreement. BTR later added trade secret claims to the arbitration. In December 2006, the parties agreed in principle to settle the case through Actel’s acquisition of the patents and trade secrets at issue, as well as certain other intellectual property assets controlled by BTR and agreed on a purchase price for the acquisition. The parties executed the legal agreements closing the transaction, under which Actel purchased the intellectual property assets for $7.5 million, in March 2007.

In connection with the settlement of patent litigation in 1998, we entered into a Patent Cross License Agreement with QuickLogic that covers the products of both companies that were first offered for sale on or before September 4, 2000, or future generations of such products.

In December 2006, Zilog, Inc. filed suit against Actel, alleging that Actel products infringed a single patent owned by Zilog. In its answer to the complaint, Actel denied all allegations of infringement. The parties negotiated a settlement prior to any substantive litigation, under which Actel paid Zilog a settlement amount of $0.4 million in exchange for a complete release. The parties executed the settlement agreement in June 2007.

As is typical in the semiconductor industry, we have been and expect to be notified from time to time of claims that we may be infringing patents owned by others. When probable and reasonably estimable, we make provision for the estimated settlement costs of claims for alleged infringement. As we sometimes have in the past, we may obtain licenses under patents that we are alleged to infringe. While we believe that reasonable resolution will occur, there can be no assurance that these claims will be resolved or that the resolution of these claims will not have a materially adverse effect on our business, financial condition, or results of operations. Our failure to resolve a claim could result in litigation or arbitration, which can result in significant expense and divert the efforts of our technical and management personnel, whether or not determined in our favor. In addition, our evaluation of the impact of

these pending disputes could change based upon new information. Subject to the foregoing, we do not believe that the resolution of any pending patent dispute is likely to have a materially adverse effect on our financial position at December 31, 2006, or results of operations or cash flows for the fiscal quarter or year then ended.

Employees

At the end of 2006, we had 574 full-time employees, including 145 in marketing, sales, and customer support; 231 in engineering and research and development; 160 in operations; and 38 in administration and finance. This compares with 565 full-time employees at the end of 2005, an increase of 2%. Net revenues were approximately $334,000 per employee in 2006 compared with approximately $317,000 per employee in 2005, representing an increase of 5%. We have no employees represented by a labor union, have not experienced any work stoppages, and believe that our employee relations are satisfactory.


ITEM 1A.	*RISK FACTORS*

Before deciding to purchase, hold, or sell our Common Stock, you should carefully consider the risks described below in addition to the other cautionary statements and risks described elsewhere, and the other information contained, in this Annual Report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition, and results of operations could be seriously harmed. In that event, the market price for our Common Stock will likely decline and you may lose all or part of your investment.

Risks Related to the Investigation of Past Stock Option Practices and the Related Restatement of our Prior Financial Results

Since September 2006, we have been working to resolve issues associated with our stock option practices and accounting. A Special Committee of our Board of Directors (“Special Committee”), with the assistance of independent legal counsel, conducted an extensive review of our stock option practices covering the time from January 1996 through December 2006. The Special Committee concluded that there was inadequate documentation supporting the recorded measurement dates for each of our company-wide annual grants during the period 1996-2001; that there were a number of other grants during the 1996-2001 period for which there was inadequate documentation supporting the recorded measurement dates, including some executive grants and grants to new employees in connection with corporate acquisitions; and that, beginning in 2002, documentation relating to annual and other grants improved substantially, although some minor errors occurred thereafter in the form of corrections or adjustments to grant allocations after the recorded measurement dates. In addition to these awards, we subsequently concluded that there was inadequate documentation supporting the recorded measurement date for four of our company-wide grants during the period 2002-2004, and for one stock option grant in the period from our initial public offering in August 1993 through December 1995. As a result, we determined that we had unrecorded non-cash equity-based compensation charges associated with our equity incentive plans for the period 1994 through 2006. Since these charges were material to our financial statements for the years 1994 through 2005, we are restating our historical financial statements to record additional non-cash charges for stock-based compensation expense.

Our historical stock option granting practices and the restatement of our financial statements have exposed us to civil litigation claims and regulatory proceedings, and may expose us to future civil litigation claims, regulatory proceedings, government inquiries, and enforcement actions, that could burden Actel and have a materially adverse effect on our financial condition, business, results of operations, and/or cash flows.

Our past stock option granting practices and the restatement of our prior financial statements have exposed and may continue to expose us to greater risks associated with litigation. As described in Part I, Item 3, “Legal Proceedings,” a complaint and two amended complaints have been filed in the United States District Court for the Northern District of California derivatively on our behalf against certain of our current and former officers and

Directors related to certain stock option grants that were allegedly backdated. We may become subject to additional private lawsuits related to our past stock option granting practices or the restatement of our prior financial statements. The expenses associated with the lawsuit(s) may be significant, the amount of time to resolve and the resolution of the lawsuit(s) is unpredictable, and defending the lawsuit(s) may divert management’s attention from the day-to-day operations of our business, any of which could have a materially adverse effect on our financial condition, business, results of operations, and/or cash flows.

In addition, our past stock option granting practices and the restatement of our prior financial statements have exposed and may continue to expose us to greater risks associated with regulatory proceedings and government inquiries and enforcement actions. As described in Part I, Item 3, “Legal Proceedings,” the SEC initiated an informal inquiry into our historical stock option granting practices and closed its file without recommending any enforcement action by the SEC. Any future government inquiries, investigations, or actions could require us to expend significant management time and incur significant legal and other expenses, and could result in civil and criminal actions seeking, among other things, injunctions against us and the payment of significant fines and penalties by us, any of which could have a materially adverse effect on our financial condition, business, results of operations, and/or cash flows.

We have not been in compliance with The Nasdaq Stock Market’s continued listing requirements and remain subject to the risk of our stock being delisted from The Nasdaq Global Select Market, which would have a materially adverse effect on us and our shareholders.

Due to the Special Committee investigation and resulting restatements, we failed to file a Quarterly Report on Form 10-Q for the third fiscal quarter of 2006, which ended on October 1; an Annual Report on Form 10-K for the 2006 fiscal year, which ended on December 31; a Quarterly Report on Form 10-Q for the first fiscal quarter of 2007, which ended on April 1; a Quarterly Report on Form 10-Q for the second fiscal quarter of 2007, which ended on July 1; and a Quarterly Report on Form 10-Q for the third fiscal quarter of 2007, which ended on September 30, 2007. As a result, and as described in Part I, Item 3, “Legal Proceedings,” we were not in compliance with the filing requirements for continued listing on The Nasdaq Global Select Market as set forth in Marketplace Rule 4310(c)(14) and were subject to delisting from The Nasdaq Global Select Market. With the filing of this Annual Report and our Quarterly Report on Form 10-Q for the third fiscal quarter of 2006, and following the filing of our Quarterly Report on Form 10-Q for the first, second, and third fiscal quarters of 2007, we believe we will have remedied our non-compliance with Marketplace Rule 4310(c)(14), subject to Nasdaq’s affirmative completion of its compliance protocols and its notification to us accordingly. If, however, we do not file our Quarterly Report on Form 10-Q for the first, second, and third fiscal quarters of 2007 or Nasdaq does not concur that we are in compliance with the applicable listing requirements, our Common Stock may be delisted from The Nasdaq Global Select Market and it would be uncertain when, if ever, our Common Stock would be relisted. If a delisting were to occur, the price of our Common Stock and the ability of our shareholders to trade in our Common Stock could be adversely affected and, depending on the duration of the delisting, some institutions whose charters disallow holding securities in unlisted companies might sell our shares, which could have a further adverse effect on the price of our Common Stock.

The process of restating our financial statements, making the associated disclosures, and complying with SEC requirements are subject to uncertainty and evolving requirements.

We believe our filings comply with all applicable requirements. Nevertheless, the issues surrounding our historical stock option grant practices are complex and the regulatory guidelines or requirements continue to evolve. There can be no assurance that further SEC or other requirements will not evolve or that we will not be required to further amend this or other filings. In addition to the cost and time to amend financial reports, such amendments may have a materially adverse effect on investors and the price of our Common Stock and could result in a delisting of our Common Stock from The Nasdaq Global Select Market.

A number of our current and former executive officers and Directors have been named as parties to a derivative action lawsuit related to our historical stock option grant practices, and there is a possibility of additional civil litigation claims, regulatory proceedings, government inquiries, and enforcement actions, any of which could result in significant legal expenses.

Certain of our current and former officers and Board members are subject to a lawsuit purportedly filed on our behalf, they may become subject to additional private lawsuits. Although we are not aware of any current or former officer or Board member that is currently the subject of any government inquiry, investigation, or action, they could be the subject of future government inquiries, investigations, or other actions related to our historical stock option grant practices. Subject to certain limitations, we are obligated to indemnify our current and former Directors, officers, and employees in connection with the investigation of our historical stock option practices and the pending lawsuit, as well as any future civil litigation claims and government inquiries, investigations or actions. The expenses associated with such matters could have a materially adverse effect on our financial condition, business, results of operations and cash flows.

Risks Related to Our Failure to Meet Expectations

Our quarterly revenues and operating results are subject to fluctuations resulting from general economic conditions and a variety of risks specific to Actel or characteristic of the semiconductor industry, including booking and shipment uncertainties, supply problems, and price erosion. These and other factors make it difficult for us to accurately project quarterly revenues and operating results, which may fail to meet our expectations. When we fall short of our quarterly revenue expectations, our operating results will probably also be adversely affected because the majority of our expenses are fixed and therefore do not vary with revenues. Any failure to meet expectations could cause our stock price to decline significantly.

We derive a large percentage of our quarterly revenues from bookings received during the quarter, making quarterly revenues difficult to predict.

Our backlog (which generally may be cancelled or deferred by customers on short notice without significant penalty) at the beginning of a quarter typically accounts for about half of our revenues during the quarter. This means that we generate about half of our quarterly revenues from orders received during the quarter and “turned” for shipment within the quarter, and that any shortfall in “turns” orders will have an immediate and adverse impact on quarterly revenues. There are many factors that can cause a shortfall in turns orders, including declines in general economic conditions or the businesses of our customers, excess inventory in the channel, and conversion of our products to hard-wired ASICs or other competing products for price or other reasons. In addition, we sometimes book a disproportionately large percentage of turns orders during the final weeks of the quarter. Any failure or delay in receiving expected turns orders would have an immediate and adverse impact on quarterly revenues.

We derive a significant percentage of our quarterly revenues from shipments made in the final weeks of the quarter, making quarterly revenues difficult to predict.

We sometimes ship a disproportionately large percentage of our quarterly revenues during the final weeks of the quarter, which makes it difficult to accurately project quarterly revenues. Any failure to effect scheduled shipments by the end of a quarter would have an immediate and adverse impact on quarterly revenues.

Our military and aerospace shipments tend to be large and are subject to complex scheduling uncertainties, making quarterly revenues difficult to predict.

Orders from military and aerospace customers tend to be large monetarily and irregular, which contributes to fluctuations in our net revenues and gross margins. These sales are also subject to more extensive governmental regulations, including greater export restrictions. Historically, it has been difficult to predict if and when export licenses will be granted, if required. In addition, products for military and aerospace applications require processing and testing that is more lengthy and stringent than for commercial applications, which increases the complexity of scheduling and forecasting as well as the risk of failure. It is often impossible to determine before the end of processing and testing whether products intended for military or aerospace applications will fail and, if they do fail,

it is generally not possible for replacements to be processed and tested in time for shipment during the same quarter. Any failure to effect scheduled shipments by the end of a quarter would have an immediate and adverse impact on quarterly revenues.

We derive a majority of our quarterly revenues from products resold by our distributors, making quarterly revenues difficult to predict.

We generate the majority of our quarterly revenues from sales made through distributors. Since we generally do not recognize revenue on the sale of a product to a distributor until the distributor resells the product, our quarterly revenues are dependent on, and subject to fluctuations in, shipments by our distributors. We are therefore highly dependent on the accuracy of shipment forecasts from our distributors in setting our expectations. We are also highly dependent on the timeliness and accuracy of resale reports from our distributors. Late or inaccurate resale reports, particularly in the last month of a quarter, contribute to our difficulty in predicting and reporting our quarterly revenues and/or operating results.

An unanticipated shortage of products available for sale may cause our quarterly revenues and/or operating results to fall short of expectations.

In a typical semiconductor manufacturing process, silicon wafers produced by a foundry are sorted and cut into individual die, which are then assembled into individual packages and tested. The manufacture, assembly, and testing of semiconductor products is highly complex and subject to a wide variety of risks, including defects in photomasks, impurities in the materials used, contaminants in the environment, and performance failures by personnel and equipment. In addition, we may not discover defects or other errors in new products until after we have commenced volume production. Semiconductor products intended for military and aerospace applications and new products, such as our Flash-based Actel Fusion PSCs and ProASIC 3/E FPGAs and antifuse-based Axcelerator FPGAs, are often more complex and more difficult to produce, increasing the risk of manufacturing- and design-related defects. Our failure to effect scheduled shipments by the end of a quarter due to unexpected supply constraints or production difficulties would have an immediate and adverse impact on quarterly revenues.

Unanticipated increases, or the failure to achieve anticipated reductions, in the cost of our products may cause our quarterly operating results to fall short of expectations.

As is also common in the semiconductor industry, our independent wafer suppliers from time to time experience lower than anticipated yields of usable die. Wafer yields can decline without warning and may take substantial time to analyze and correct, particularly for a company like Actel that utilizes independent facilities, almost all of which are offshore. Yield problems are most common at new foundries, particularly when new technologies are involved, or on new processes or new products, particularly new products on new processes. Our FPGAs are also manufactured using customized processing steps, which may increase the incidence of production yield problems as well as the amount of time needed to achieve satisfactory, sustainable wafer yields on new processes and new products. In addition, if we discover defects or other errors in a new product that require us to “re-spin” some or all of the product’s mask set, we must expense the photomasks that are replaced. This type of expense is becoming more significant as the cost and complexity of photomask sets continue to increase. Lower than expected yields of usable die or other unanticipated increases in the cost of our products could reduce our gross margin, which would adversely affect our quarterly operating results. In addition, in order to win designs, we generally must price new products on the assumption that manufacturing cost reductions will be achieved, which often do not occur as soon as expected. The failure to achieve expected manufacturing or other cost reductions during a quarter could reduce our gross margin, which would adversely affect our quarterly operating results.

Unanticipated reductions in the average selling prices of our products may cause our quarterly revenues and operating results to fall short of expectations.

The semiconductor industry is characterized by intense price competition. The average selling price of a product typically declines significantly between introduction and maturity. We sometimes are required by competitive pressures to reduce the prices of our new products more quickly than cost reductions can be achieved. We also sometimes approve price reductions on specific direct sales for strategic or other reasons, and provide price

concessions to our distributors for a portion of their original purchase price in order for them to address individual negotiations involving high-volume or competitive situations. Typically, a customer purchasing a small quantity of product for prototyping or development from a distributor will pay list price. However, a customer using our products in volume production will often negotiate a substantial price discount from the distributor. Under such circumstances, the distributor will in turn often negotiate and receive a price concession from Actel. This is a standard practice in the semiconductor industry and we provide some level of price concession to every distributor. Unanticipated declines in the average selling prices of our products could cause our quarterly revenues and/or gross margin to fall short of expectations, which would adversely affect our quarterly financial results.

In preparing our financial statements, we make good faith estimates and judgments that may change or turn out to be erroneous.

In preparing our financial statements in conformity with accounting principles generally accepted in the United States, we must make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. The most difficult estimates and subjective judgments that we make concern income taxes, inventories, legal matters and loss contingencies, revenues, and stock-based compensation expense. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. If these estimates or their related assumptions change, our operating results for the periods in which we revise our estimates or assumptions could be adversely and perhaps materially affected.

Our gross margin may decline as we increasingly compete with hard-wired ASICs and serve the value-based market.

The price we can charge for our products is constrained principally by our competition. While it has always been intense, we believe that price competition for new designs is increasing. This may be due in part to the transition toward high-level design methodologies. Designers can now wait until later in the design process before selecting a PLD or hard-wired ASIC and it is easier to convert between competing PLDs or between a PLD and a hard-wired ASIC. The increased price competition may also be due in part to the increasing penetration of PLDs into price-sensitive markets previously dominated by hard-wired ASICs. We have strategically targeted many of our products at the value-based market, which is defined primarily by low prices. If our strategy is successful, we will generate an increasingly greater percentage of our net revenues from low-price products, which may make it more difficult to maintain our gross margin at our historic levels. Any long-term decline in our gross margin may have an adverse effect on our operating results.

We may not win sufficient designs, or the designs we win may not generate sufficient revenues, for us to maintain or expand our business.

In order for us to sell an FPGA, our customer must incorporate our FPGA into the customer’s product in the design phase. We devote substantial resources, which we may not recover through product sales, to persuade potential customers to incorporate our FPGAs into new or updated products and to support their design efforts (including, among other things, providing design and development software). These efforts usually precede by many months (and often a year or more) the generation of FPGA sales, if any. In addition, the value of any design win depends in large part upon the ultimate success of our customer’s product in its market. Our failure to win sufficient designs, or the failure of the designs we win to generate sufficient revenues, could have a materially adverse effect on our business, financial condition, and/or operating results.

Risks Related to Defective Product

Our products are complex and may contain errors, manufacturing defects, design defects, or otherwise fail to comply with our specifications, particularly when first introduced or as new versions are released. Our new products are being designed on ever more advanced processes, adding cost, complexity, and elements of experimentation to the development, particularly in the areas of mixed-voltage and mixed-signal design. We rely primarily on our in-

house personnel to design test operations and procedures to detect any errors prior to delivery of our products to customers.

During 2003, several U.S. government contractors reported a small percentage of functional failures in our RTSX-S and SX-A antifuse devices manufactured on a 0.25 micron antifuse process at the original manufacturer of those FPGAs. During 2004, The Aerospace Corporation (Aerospace) proposed a series of experiments to test various hypotheses on the root cause of the failures and to generate reliability data that could be used by space industry participants in deciding whether or not to launch spacecraft with RTSX-S FPGAs that were already integrated. Also during 2004, we announced the availability of RTSX-SU devices from UMC; Aerospace and Actel each recommended that customers switch to UMC-manufactured RTSX-SU devices if their schedules permitted; and we offered to accept RTSX-S parts from the original manufacturer in exchange for RTSX-SU parts. By the fourth quarter of 2004, most customers had decided to switch to RTSX-SU devices. Utilizing all of the available data, Aerospace calculated a failure in time (FIT) rate for our RTSX-SU devices manufactured at UMC of 13 to 34 (depending on the definition of failure) for an average design, mission life, and amount of screening time. A FIT is one failure per billion device-hours, so if a group of devices has a FIT rate of 13 to 34, the customer should expect between 13 and 34 failures per billion device-hours. A billion hours is more than 114 centuries. On February 15, 2006, Aerospace brought to a close the regular meeting of space industry participants on this matter, although testing has continued.

Any error or defect in our products could have a material adverse effect on our business, financial condition, and operating results.

If problems occur in the operation or performance of our products, we may experience delays in meeting key introduction dates or scheduled delivery dates to our customers, in part because our products are manufactured by third parties. These problems also could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from our product development efforts, and cause significant customer relations and business reputation problems. Any error or defect might require product replacement or recall or obligate us to accept product returns. Any of the foregoing could have a material adverse effect on our financial results and business in the short and/or long term.

Any product liability claim could pose a significant risk to our business, financial condition, and operating results.

Product liability claims may be asserted with respect to our products. Our products are typically sold at prices that are significantly lower than the cost of the end-products into which they are incorporated. A defect or failure in our product could cause failure in our customer’s end-product, so we could face claims for damages that are much higher than the revenues and profits we receive from the products involved. In addition, product liability risks are particularly significant with respect to aerospace, automotive, and medical applications because of the risk of serious harm to users of these products. Any product liability claim, whether or not determined in our favor, can result in significant expense, divert the efforts of our technical and management personnel, and harm our business. In the event of an adverse settlement of any product liability claim or an adverse ruling in any product liability litigation, we could incur significant monetary liabilities, which may not be covered by any insurance that we carry and might have a materially adverse effect on our financial condition and/or operating results.

Risks Related to New Products

The market for our products is characterized by rapid technological change, product obsolescence, and price erosion, making the timely introduction of new or improved products critical to our success. Our failure to design, develop, market, and sell new or improved products that satisfy customer needs, compete effectively, and generate acceptable margins may adversely affect our business, financial condition, and/or operating results. While most of our product development programs have achieved a level of success, some have not. For example:


	•	We announced our intention to develop SRAM-based FPGA products in 1996 and abandoned the development in 1999 principally because the product would no longer have been competitive.


	•	We introduced our VariCore embeddable reprogrammable gate array (EPGA) logic core based on SRAM technology in 2001. Revenues from VariCore EPGAs did not materialize and the development of a more advanced VariCore EPGA was cancelled. In this case, a market that we believed would develop did not emerge.

	•	In 2001, we also launched our BridgeFPGA initiative to address the I/O problems created within the high-speed communications market by the proliferation of interface standards. We introduced the antifuse-based Axcelerator FPGA, which has dedicated I/O circuits that can support multiple interface standards, in 2002. However, the development of subsequent BridgeFPGA products was postponed in 2002 due principally to the prolonged downturn in the high-speed communications market. The development was cancelled in 2003 primarily because the subsequent BridgeFPGA products would no longer have been competitive.

Our experience generally suggests that the risk is greater when we attempt to develop products based in whole or in part on technologies with which we have limited experience. During 2005, we introduced our new Actel Fusion technology, which integrates analog capabilities, Flash memory, and FPGA fabric into a single PSC that may be used with soft processor cores, including the ARM7 processor core that we offer. We have limited experience with analog circuitry and soft processor cores and no prior experience with PSCs.

Our introduction of the Actel Fusion PSC presents numerous significant challenges.

When entering a new market, the first-mover typically faces the greatest market and technological challenges. To be successful in the PSC market and realize the advantages of being the initial entrant, we need to understand the market, the competition, and the value proposition that we are bringing to potential customers; identify the early adopters and understand their buying process, decision criteria, and support requirements; and select the right sales channels and provide the right customer service, logistical, and technical support, including training. Any or all of these may be different for the PSC market than for the value-based or system-critical FPGA markets. Meeting these challenges is a top priority for Actel generally and for our sales and marketing organizations in particular. Our failure to meeting these challenges could have a materially adverse effect on our business, financial condition, and/or operating results.

Numerous factors can cause the development or introduction of new products to fail or be delayed.

To develop and introduce a product, we must successfully accomplish all of the following:


	•	anticipate future customer demand and the technology that will be available to meet the demand;

	•	define the product and its architecture, including the technology, silicon, programmer, IP, software, and packaging specifications;

	•	obtain access to advanced manufacturing process technologies;

	•	design and verify the silicon;

	•	develop and release evaluation software;

	•	layout the FPGA and other functional blocks along with the circuitry required for programming;

	•	integrate the FPGA block with the other functional blocks;

	•	simulate (i.e., test) the design of the product;

	•	tapeout the product (i.e., compile a database containing the design information about the product for use in the preparation of photomasks);

	•	generate photomasks for use in manufacturing the product and evaluate the software;

	•	manufacture the product at the foundry;

	•	verify the product; and

	•	qualify the process, characterize the product, and release production software.

Each of these steps is difficult and subject to failure or delay, and the failure or delay of any step can cause the failure or delay of the entire development and introduction. In addition to failing to meet our development and introduction schedules for new products or the supporting software or hardware, our new products may not gain market acceptance, and we may not respond effectively to new technological changes or new product announcements by others. Any failure to successfully define, develop, market, manufacture, assemble, test, or program competitive new products could have a materially adverse effect on our business, financial condition, and/or operating results.

New products are subject to greater design and operational risks.

Our future success is highly dependent upon the timely development and introduction of competitive new products at acceptable margins. However, there are greater design and operational risks associated with new products. The inability of our wafer suppliers to produce advanced products; delays in commencing or maintaining volume shipments of new products; the discovery of product, process, software, or programming defects or failures; and any related product returns could each have a materially adverse effect on our business, financial condition, and/or results of operation.

New products are subject to greater technology risks.

As is common in the semiconductor industry, we have experienced from time to time in the past, and expect to experience in the future, difficulties and delays in achieving satisfactory, sustainable yields on new products. The fabrication of antifuse and Flash wafers is a complex process that requires a high degree of technical skill, state-of-the-art equipment, and effective cooperation between Actel and the foundry to produce acceptable yields. Minute impurities, errors in any step of the fabrication process, defects in the photomasks used to print circuits on a wafer, and other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be non-functional. Yield problems increase the cost of our new products as well as time it takes us to bring them to market, which can create inventory shortages and dissatisfied customers. Any prolonged inability to obtain adequate yields or deliveries of new products could have a materially adverse effect on our business, financial condition, and/or operating results.

New products generally have lower gross margins.

Our gross margin is the difference between the amount it costs Actel to make our products and the revenues we receive from the sale of those products. One of the most important variables affecting the cost of our products is manufacturing yields. With our customized antifuse and Flash manufacturing process requirements, we almost invariably experience difficulties and delays in achieving satisfactory, sustainable yields on new products. Until satisfactory yields are achieved, gross margins on new products are generally lower than on mature products. The lower gross margins typically associated with new products could have a materially adverse effect on our operating results.

Risks Related to Competitive Disadvantages

The semiconductor industry is intensely competitive. Our competitors include suppliers of hard-wired ASICs, CPLDs, and FPGAs. Our biggest direct competitors are Xilinx, Altera, and Lattice, all of which are suppliers of CPLDs and SRAM-based FPGAs; and QuickLogic, a supplier of antifuse-based FPGAs. Altera and Lattice have announced the development of FPGAs manufactured on embedded Flash processes. In addition, we face competition from suppliers of logic products based on new or emerging technologies. While we seek to monitor developments in existing and emerging technologies, our technologies may not remain competitive. We also face competition from companies that specialize in converting our products into hard-wired ASICs.

Many of our current and potential competitors are larger and have more resources.

We are much smaller than Xilinx and Altera, which have broader product lines, more extensive customer bases, and substantially greater financial and other resources. Additional competition is also possible from major domestic and international semiconductor suppliers, all of which are larger and have broader product lines, more

extensive customer bases, and substantially greater financial and other resources than Actel, including the capability to manufacture their own wafers. We may not be able to overcome these competitive disadvantages.

Our antifuse technology is not reprogrammable, which is a competitive disadvantage in most cases.

All existing FPGAs not based on antifuse technology and certain CPLDs are reprogrammable. The one-time programmability of our antifuse FPGAs is necessary or desirable in some applications, but logic designers generally prefer to prototype with a reprogrammable logic device. This is because the designer can reuse the device if an error is made. The visibility associated with discarding a one-time programmable device often causes designers to select a reprogrammable device even when an alternative one-time programmable device offers significant advantages. This bias in favor of designing with reprogrammable logic devices appears to increase as the size of the design increases. Although we now offer reprogrammable Flash devices, we may not be able to overcome this competitive disadvantage.

Our Flash and antifuse technologies are not manufactured on standard processes, which is a competitive disadvantage.

Our antifuse-based FPGAs and (to a lesser extent) Flash-based PSCs and FPGAs are manufactured using customized steps that are added to otherwise standard manufacturing processes of independent wafer suppliers. There is considerably less operating history for the customized process steps than for the foundries’ standard manufacturing processes. Our dependence on customized processing steps means that, in contrast with competitors using standard manufacturing processes, we generally have more difficulty establishing relationships with independent wafer manufacturers; take longer to qualify a new wafer manufacturer; take longer to achieve satisfactory, sustainable wafer yields on new processes; may experience a higher incidence of production yield problems; must pay more for wafers; and may not obtain early access to the most advanced processes. For example, we expect that our next generation Flash product families will be manufactured on a 90-nanometer process and have found it challenging to identify and procure fabrication process arrangements for our technology development activities. Any of these factors could be a material disadvantage against competitors using standard manufacturing processes. As a result of these factors, our products typically have been fabricated using processes at least one generation behind the processes used by competing products. As a consequence, we generally have not fully realized the benefits of our technologies. Although we are attempting to obtain earlier access to advanced processes, we may not be able to overcome these competitive disadvantages.

Risks Related to Events Beyond Our Control

Our performance is subject to events or conditions beyond our control, and the performance of each of our foundries, suppliers, subcontractors, distributors, agents, and customers is subject to events or conditions beyond their control. These events or conditions include labor disputes, acts of public enemies or terrorists, war or other military conflicts, blockades, insurrections, riots, epidemics, quarantine restrictions, landslides, lightning, earthquakes, fires, storms, floods, washouts, arrests, civil disturbances, restraints by or actions of governmental bodies acting in a sovereign capacity (including export or security restrictions on information, material, personnel, equipment, or otherwise), breakdowns of plant or machinery, and inability to obtain transport or supplies. These events or conditions could impair our operations, which may have a materially adverse effect on our business, financial condition, and/or operating results.

Our operations and those of our partners are located in areas subject to volatile natural, economic, social, and political conditions.

Our corporate offices are located in California, which was subject to power outages and shortages during 2001 and 2002. More extensive power shortages in the state could disrupt our operations and interrupt our research and development activities. Our foundry partners in Japan and Taiwan as well as our operations in California are located in areas that have been seismically active in the recent past. In addition, many of the countries outside of the United States in which our foundry partners and assembly and other subcontractors are located have unpredictable and potentially volatile economic, social, or political conditions, including the risks of conflict between Taiwan and China or between North Korea and South Korea. These countries may also be more susceptible to epidemics. For

example, an outbreak of Severe Acute Respiratory Syndrome (SARS) occurred in Hong Kong, Singapore, and China in 2003. The occurrence of these or similar events or circumstances could disrupt our operations and may have a materially adverse effect on our business, financial condition, and/or operating results.

We have only limited insurance coverage.

Our insurance policies provide coverage for only certain types of losses and may not be adequate to fully offset even covered losses. If we were to incur substantial liabilities not adequately covered by insurance, our business, financial condition, and/or operating results could be adversely and perhaps materially affected.

Risks Related to Dependence on Third Parties

We rely heavily on, but generally have little control over, our independent foundries, suppliers, subcontractors, and distributors, whose interests may diverge from our interests

Our independent wafer manufacturers may be unable or unwilling to satisfy our needs in a timely manner, which could harm our business.

We do not manufacture any of the semiconductor wafers used in the production of our FPGAs. Our wafers are currently manufactured by Chartered in Singapore, Infineon in Germany, Matsushita in Japan, UMC in Taiwan, and Winbond in Taiwan. Our reliance on independent wafer manufacturers to fabricate our wafers involves significant risks, including lack of control over capacity allocation, delivery schedules, the resolution of technical difficulties limiting production or reducing yields, and the development of new processes. Although we have supply agreements with some of our wafer manufacturers, a shortage of raw materials or production capacity could lead any of our wafer suppliers to allocate available capacity to other customers, or to internal uses in the case of Infineon, which could impair our ability to meet our product delivery obligations and may have a materially adverse effect on our business, financial condition, and/or operating results.

Our limited volume and customized process requirements generally make us less attractive to independent wafer manufacturers.

The semiconductor industry has from time to time experienced shortages of manufacturing capacity. When production capacity is tight, the relatively small number of wafers that we purchase from any foundry and the customized process steps that are necessary for our technologies put us at a disadvantage to foundry customers who purchase more wafers manufactured on standard processes. To secure an adequate supply of wafers, we may consider various transactions, including the use of substantial nonrefundable deposits, contractual purchase commitments, equity investments, or the formation of joint ventures. Any of these transactions could have a materially adverse effect on our business, financial condition, and/or operating results.

Identifying and qualifying new independent wafer manufacturers is difficult and might be unsuccessful.

If our current independent wafer manufacturers were unable or unwilling to manufacture our products as required, we would have to identify and qualify additional foundries. No additional wafer foundries may be able or available to satisfy our requirements on a timely basis. Even if we are able to identify a new third party manufacturer, the costs associated with manufacturing our products may increase. In any event, the qualification process typically takes one year or longer, which could cause product shipment delays, and qualification may not be successful. Any of these developments could have a materially adverse effect on our business, financial condition, and/or operating results.

Our independent assembly subcontractors may be unable or unwilling to meet our requirements, which could delay product shipments and result in the loss of customers or revenues.

We rely primarily on foreign subcontractors for the assembly and packaging of our products and, to a lesser extent, for the testing of our finished products. Our reliance on independent subcontractors involves certain risks, including lack of control over capacity allocation and delivery schedules. We generally rely on one or two subcontractors to provide particular services for each product and from time to time have experienced difficulties

with the timeliness and quality of product deliveries. We have no long-term contracts with our subcontractors and certain of those subcontractors sometimes operate at or near full capacity. Any significant disruption in supplies from, or degradation in the quality of components or services supplied by, our subcontractors could have a materially adverse effect on our business, financial condition, and/or operating results.

Our independent software and hardware developers and suppliers may be unable or unwilling to satisfy our needs in a timely manner, which could impair the introduction of new products or the support of existing products.

We are dependent on independent software and hardware developers for the design, development, supply, maintenance, and support of some of our analog capabilities, IP cores, design and development software, programming hardware, design diagnostics and debugging tool kits, and demonstration boards (or certain elements of those products). Our reliance on independent developers involves certain risks, including lack of control over delivery schedules and customer support. Any failure of or significant delay by our independent developers to complete software and/or hardware under development in a timely manner could disrupt the release of our software and/or the introduction of our new products, which might be detrimental to the capability of our new products to win designs. Any failure of or significant delay by our independent suppliers to provide updates or customer support could disrupt our ability to ship products or provide customer support services, which might result in the loss of revenues or customers. Any of these disruptions could have a materially adverse effect on our business, financial condition, and/or operating results.

Our future performance will depend in part on the effectiveness of our independent distributors in marketing, selling, and supporting our products.

In 2006, sales made through distributors accounted for 77% of our net revenues, compared with 64% for 2005. Our distributors offer products of several different companies, so they may reduce their efforts to win new designs or sell our products or give higher priority to other products. This is particularly a concern with respect to any distributor that also sells products of our direct competitors. A reduction in design win or sales effort, termination of relationship, failure to pay for products, or discontinuance of operations because of financial difficulties or for other reasons by one or more of our current distributors could have a materially adverse effect on our business, financial condition, and/or operating results.

Distributor contracts generally can be terminated on short notice.

Although we have contracts with our distributors, the agreements are terminable by either party on short notice. We consolidated our distribution channel in 2001 by terminating our agreement with Arrow Electronics, Inc., which accounted for 13% of our net revenues in 2001. On March 1, 2003, we again consolidated our distribution channel by terminating our agreement with Pioneer-Standard Electronics, Inc., which accounted for 26% of our net revenues in 2002, after which Unique Technologies, Inc. (Unique), a sales division of Memec, was our sole distributor in North America. Unique accounted for 33% of our net revenues in 2004. During 2005, Avnet acquired Memec, after which Avnet became our sole distributor in North America. Avnet accounted for 40% of our net revenues in 2006. Even though Xilinx is Avnet’s biggest line, our transition from Unique to Avnet was generally satisfactory. The loss of Avnet as a distributor, or a significant reduction in the level of design wins or sales generated by Avnet, could have a materially adverse effect on our business, financial condition, and/or operating results.

Fluctuations in inventory levels at our distributors can affect our operating results.

Our distributors occasionally build inventories in anticipation of significant growth in sales and, when such growth does not occur as rapidly as anticipated, substantially reduce the amount of product ordered from us in subsequent quarters. Such a slowdown in orders generally reduces our gross margin because we are unable to take advantage of any manufacturing cost reductions while the distributor depletes its inventory.

Risk Related to the Conduct of International Business

Unlike our older RTSX-S and RTSX-SU space-grade FPGAs, our new RTAX-S space-grade FPGAs are subject to the International Traffic in Arms Regulations (ITAR), which is administered by the U.S. Department of State. ITAR controls not only the export of RTAX-S FPGAs, but also the export of related technical data and defense services as well as foreign production. While we believe that we have obtained and will continue to obtain all required licenses for RTAX-S FPGA exports, we have undertaken corrective actions with respect to the other ITAR controls and are implementing improvements in our internal compliance program. If the corrective actions and improvements were to fail or be ineffective for a prolonged period of time, it could have a materially adverse effect on our business, financial condition, and/or operating results. In addition, the fact that our new RTAX-S space-grade FPGAs are ITAR-controlled may make them less attractive to foreign customers, which could also have a materially adverse effect on our business, financial condition, and/or operating results.

We depend on international operations for almost all of our products.

We purchase almost all of our wafers from foreign foundries and have almost all of our commercial products assembled, packaged, and tested by subcontractors located outside the United States. These activities are subject to the uncertainties associated with international business operations, including trade barriers and other restrictions, changes in trade policies, governmental regulations, currency exchange fluctuations, reduced protection for intellectual property, war and other military activities, terrorism, changes in social, political, or economic conditions, and other disruptions or delays in production or shipments, any of which could have a materially adverse effect on our business, financial condition, and/or operating results.

We depend on international sales for a substantial portion of our revenues.

Sales to customers outside North America accounted for 49% of net revenues in 2006 (compared with 44% in 2005), and we expect that international sales will continue to represent a significant portion of our total revenues. International sales are subject to the risks described above as well as generally longer payment cycles, greater difficulty collecting accounts receivable, and currency restrictions. We also maintain foreign sales offices to support our international customers, distributors, and sales representatives, which are subject to local regulation. In addition, international sales are subject to the export laws and regulations of the United States and other countries. Changes in United States export laws that require us to obtain additional export licenses sometimes cause significant shipment delays. Any future restrictions or charges imposed by the United States or any other country on our international sales or sales offices could have a materially adverse effect on our business, financial condition, and/or operating results.

Risk Related to Economic and Market Fluctuations

We have experienced substantial period-to-period fluctuations in revenues and operating results due to conditions in the overall economy, in the general semiconductor industry, in our major markets, and at our major customers. We may again experience these fluctuations, which could be adverse and may be severe.

Our revenues and operating results may be adversely affected by future downturns in the semiconductor industry.

The semiconductor industry historically has been cyclical and periodically subject to significant economic downturns, which are characterized by diminished product demand, accelerated price erosion, and overcapacity. Beginning in the fourth quarter of 2000, we experienced (and the semiconductor industry in general experienced) reduced bookings and backlog cancellations due to excess inventories at communications, computer, and consumer equipment manufacturers and a general softening in the overall economy. During this downturn, which was severe and prolonged, we experienced lower revenues, which had a substantial negative effect on our operating results. Any future downturns in the semiconductor industry may have a similar adverse effect on our business, financial condition, and/or operating results.

Our revenues and operating results may be adversely affected by future downturns in the military and aerospace market.

We estimate that sales of our products to customers in the military and aerospace industries, which carry higher overall gross margins than sales of products to other customers, accounted for 34% of our net revenues for 2006 compared with 41% for 2005, 36% for 2004 and 2003, and 26% for 2001. In general, we believe that the military and aerospace industries have accounted for a significantly greater percentage of our net revenues since the introduction of our Rad Hard FPGAs in 1996 and our Rad Tolerant FPGAs in 1998. Any further downturn in the military and aerospace market could have a materially adverse effect on our revenues and/or operating results.

Our revenues and operating results may be adversely affected by changes in the military and aerospace market.

In 1994, Secretary of Defense William Perry directed the Department of Defense to avoid government-unique requirements when making purchases and rely more on the commercial marketplace. We believe that this trend toward the use of “off-the-shelf” products generally has helped our business. However, if this trend continued to the point where defense contractors customarily purchased commercial-grade parts rather than military-grade parts, the revenues and gross margins that we derive from sales to customers in the military and aerospace industries would erode, which could have a materially adverse effect on our business, financial condition, and/or operating results. On the other hand, there are signs that this trend toward the use of off-the-shelf products may be reversing. If defense contractors were to use more customized hard-wired ASICs and fewer off-the-shelf products, the revenues and gross margins that we derive from sales to customers in the military and aerospace industries may erode, which could also have a materially adverse effect on our business, financial condition, and/or operating results.

Our revenues and/or operating results may be adversely affected by future downturns at any of our major customers.

A relatively small number of customers are responsible for a significant portion our net revenues. We have experienced periods in which sales to one or more of our major customers declined significantly as a percentage of our net revenues. For example, Lockheed Martin accounted for 4% of our net revenues during 2004 compared with 11% during 2003. We believe that sales to a limited number of customers will continue to account for a substantial portion of net revenues in future periods. The loss of a major customer, or decreases or delays in shipments to major customers, could have a materially adverse effect on our business, financial condition, and/or operating results.

Any acquisition we make may harm our business, financial condition, and/or operating results.

We have a mixed history of success in our acquisitions. For example:


	•	In 1999, we acquired AGL for consideration valued at $7.2 million. We acquired AGL for technology used in the unsuccessful development of an SRAM-based FPGA.

	•	In 2000, we acquired Prosys Technology, Inc. (Prosys) for consideration valued at $26.2 million. We acquired Prosys for technology used in our VariCore FPGA logic core, which was introduced in 2001 but for which no market emerged.

	•	Also in 2000, we completed our acquisition of GateField for consideration valued at $45.7 million. We acquired GateField for its Flash technology and ProASIC FPGA family. We introduced the second-generation ProASIC PLUS product family in 2002 and the third-generation ProASIC3/E families in 2005. We also introduced the Flash-based Actel Fusion PSC in 2005. Actel is currently the only company offering FPGAs with a nonvolatile, reprogrammable architecture.

In pursuing our business strategy, we may acquire other products, technologies, or businesses from third parties. Identifying and negotiating these acquisitions may divert substantial management time away from our operations. An acquisition could absorb substantial cash resources, require us to incur or assume debt obligations, and/or involve the issuance of additional Actel equity securities. The issuance of additional equity securities may dilute, and could represent an interest senior to, the rights of the holders of our Common Stock. An acquisition could involve significant write-offs (possibly resulting in a loss for the fiscal year(s) in which taken) and would require the

amortization of any identifiable intangibles over a number of years, which would adversely affect earnings in those years. Any acquisition would require attention from our management to integrate the acquired entity into our operations, may require us to develop expertise outside our existing business, and could result in departures of management from either Actel or the acquired entity. An acquired entity could have unknown liabilities, and our business may not achieve the results anticipated at the time of the acquisition. The occurrence of any of these circumstances could disrupt our operations and may have a materially adverse effect on our business, financial condition, and/or operating results.

Risks Related to Changing Rules and Practices

Pending or new accounting pronouncements, corporate governance or public disclosure requirements, or tax regulatory rulings could have an impact, possibly material and adverse, on our business, financial condition, and/or operating results. Any change in accounting pronouncements, corporate governance or public disclosure requirements, or taxation rules or practices, as well as any change in the interpretation of existing pronouncements, requirements, or rules or practices, may call into question our SEC or tax filings and could affect our reporting of transactions completed before the change.

Changes in accounting for equity compensation adversely affected our operating results and may adversely affect our ability to attract and retain employees.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment: An Amendment of FASB Statements No. 123 and 95.” SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and instead requires companies to recognize compensation expense using a fair-value based method for costs related to share-based payments, including stock options and employee stock purchase plans. We implemented the standard in the fiscal year that began January 2, 2006, and the adoption of SFAS No. 123(R) had a material effect on our consolidated operating results and earnings per share.

In addition, we historically have used stock options as a key component of employee compensation in order to align employees’ interests with the interests of our shareholders, encourage employee retention, and provide competitive compensation packages. To the extent that SFAS No. 123(R) or other new regulations make it more difficult or expensive to grant options to employees, we may incur increased out-of-pocket compensation costs, change our equity compensation strategy, or find it difficult to attract, retain, and motivate employees. Any of these results could materially and adversely affect our business and/or operating results.

Compliance with the Sarbanes-Oxley Act of 2002 and related corporate governance and public disclosure requirements have resulted in significant additional expense.

Changing laws, regulations, and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulations and Nasdaq National Market rules, have resulted in significant additional expense. We are committed to maintaining high standards of corporate governance and public disclosure, and therefore have invested the resources necessary to comply with the evolving laws, regulations, and standards. This investment has resulted in increased general and administrative expenses as well as a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations, and standards differ from the activities intended by regulatory or governing bodies, we might be subject to lawsuits or sanctions or investigation by regulatory authorities, such as the SEC or The Nasdaq National Market, and our reputation may be harmed.

We evaluated our internal controls systems in order to allow management to report on, and our independent public accountants to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. In performing the system and process evaluation and testing required to comply with the management certification and auditor attestation requirements of Section 404, we incurred significant additional expenses, which adversely affected our operating results and financial condition and diverted a significant amount of management’s time. While we believe that our internal control procedures are adequate, we may not be able to continue complying with the requirements relating to internal controls or other aspects of Section 404 in a timely fashion. If we were not able

to comply with the requirements of Section 404 in a timely manner in the future, we may be subject to lawsuits or sanctions or investigation by regulatory authorities. Any such action could adversely affect our financial results and the market price of our Common Stock. In any event, we expect that we will continue to incur significant expenses and diversion of management’s time to comply with the management certification and auditor attestation requirements of Section 404.

We may face significant business and financial risk from claims of intellectual property infringement asserted against us, and we may be unable to adequately enforce our intellectual property rights.

As is typical in the semiconductor industry, we are notified from time to time of claims that we may be infringing patents owned by others. As we sometimes have in the past, we may obtain licenses under patents that we are alleged to infringe. Although patent holders commonly offer licenses to alleged infringers, we may not be offered a license for patents that we are alleged to infringe or we may not find the terms of any offered licenses acceptable. We may not be able to resolve any claim of infringement, and the resolution of any claim may have a materially adverse effect on our business, financial condition, and/or operating results.

Our failure to resolve any claim of infringement could result in litigation or arbitration. During 2006, we were involved with BTR in an arbitration, which settled on March 16, 2007, with Zilog in litigation, which settled on June 11, 2007 (see “BUSINESS — Patents and Licenses”). In addition, we have agreed to defend our customers from and indemnify them against claims that our products infringe the patent or other intellectual rights of third parties. All litigation and arbitration proceedings, whether or not determined in our favor, can result in significant expense and divert the efforts of our technical and management personnel. In the event of an adverse ruling in any litigation or arbitration involving intellectual property, we could suffer significant (and possibly treble) monetary damages, which could have a materially adverse effect on our business, financial condition, and/or operating results. We may also be required to discontinue the use of infringing processes; cease the manufacture, use, and sale or licensing of infringing products; expend significant resources to develop non-infringing technology; or obtain licenses under patents that we are infringing. In the event of a successful claim against us, our failure to develop or license a substitute technology on commercially reasonable terms could also have a materially adverse effect on our business, financial condition, and/or operating results.

We have devoted significant resources to research and development and believe that the intellectual property derived from such research and development is a valuable asset important to the success of our business. We rely primarily on patent, trademark, and copyright laws combined with nondisclosure agreements and other contractual provisions to protect our proprietary rights. The steps we have taken may not be adequate to protect our proprietary rights. In addition, the laws of certain territories in which our products are developed, manufactured, or sold, including Asia and Europe, may not protect our products and intellectual property rights to the same extent as the laws of the United States. Our failure to enforce our patents, trademarks, or copyrights or to protect our trade secrets could have a materially adverse effect on our business, financial condition, and/or operating results.

We may be unable to attract or retain the personnel necessary to successfully develop our technologies, design our products, or operate, manage, or grow our business.

Our success is dependent in large part on our ability to attract and retain key managerial, engineering, marketing, sales, and support employees. Particularly important are highly skilled design, process, software, and test engineers involved in the manufacture of existing products and the development of new products and processes. The failure to recruit employees with the necessary technical or other skills or the loss of key employees could have a materially adverse effect on our business, financial condition, and/or operating results. From time to time we have experienced growth in the number of our employees and the scope of our operations, resulting in increased responsibilities for management personnel. To manage future growth effectively, we will need to attract, hire, train, motivate, manage, and retain a growing number of employees. During strong business cycles, we expect to experience difficulty in filling our needs for qualified engineers and other personnel. Any failure to attract and retain qualified employees, or to manage our growth effectively, could delay product development and introductions or otherwise have a materially adverse effect on our business, financial condition, and/or operating results.

We have some arrangements that may not be neutral toward a potential change of control and our Board of Directors could adopt others.

We have adopted an Employee Retention Plan that provides for payment of a benefit to our employees who hold unvested stock options or restricted stock units (RSUs) in the event of a change of control. Payment is contingent upon the employee remaining employed for six months after the change of control (unless the employee is terminated without cause during the six months). Each of our executive officers has also entered into a Management Continuity Agreement, which provides for the acceleration of stock options and RSUs unvested at the time of a change of control in the event the executive officer’s employment is actually or constructively terminated other than for cause following the change of control. While these arrangements are intended to make executive officers and other employees neutral towards a potential change of control, they could have the effect of biasing some or all executive officers or employees in favor of a change of control.

Our Articles of Incorporation authorize the issuance of up to 5,000,000 shares of “blank check” Preferred Stock with designations, rights, and preferences determined by our Board of Directors. Accordingly, our Board is empowered, without approval by holders of our Common Stock, to issue Preferred Stock with dividend, liquidation, redemption, conversion, voting, or other rights that could adversely affect the voting power or other rights of the holders of our Common Stock. Issuance of Preferred Stock could be used to discourage, delay, or prevent a change in control. In addition, issuance of Preferred Stock could adversely affect the market price of our Common Stock.

On October 17, 2003, our Board of Directors adopted a Shareholder Rights Plan. Under the Plan, we issued a dividend of one right for each share of Common Stock held by shareholders of record as of the close of business on November 10, 2003. The provisions of the Plan can be triggered only in certain limited circumstances following the tenth day after a person or group announces acquisitions of, or tender offers for, 15% or more of our Common Stock. The Shareholder Rights Plan is designed to guard against partial tender offers and other coercive tactics to gain control of Actel without offering a fair and adequate price and terms to all shareholders. Nevertheless, the Plan could make it more difficult for a third party to acquire Actel, even if our shareholders support the acquisition.

Our stock price may decline significantly, possibly for reasons unrelated to our operating performance.

The stock markets broadly, technology companies generally, and our Common Stock in particular have experienced extreme price and volume volatility in recent years. Our Common Stock may continue to fluctuate substantially on the basis of many factors, including:


	•	quarterly fluctuations in our financial results or the financial results of our competitors or other semiconductor companies;

	•	changes in the expectations of analysts regarding our financial results or the financial results of our competitors or other semiconductor companies;

	•	announcements of new products or technical innovations by Actel or by our competitors; or

	•	general conditions in the semiconductor industry, financial markets, or economy.

If our stock price declines sufficiently, we would write down our goodwill, which may have a materially adverse affect on our operating results.

We account for goodwill and other intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets.” Under this standard, goodwill is tested for impairment annually or more frequently if certain events or changes in circumstances indicate that the carrying amount of goodwill exceeds its implied fair value. The two-step impairment test identifies potential goodwill impairment and measures the amount of a goodwill impairment loss to be recognized (if any). The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. We are a single reporting unit under SFAS No. 142, so we use the enterprise approach to compare fair value with book value. Since the best evidence of fair value is quoted market prices in active markets, we use our market capitalization as the basis for the measurement. As long as our market capitalization is greater than our book value and we remain a single reporting unit, our goodwill will be considered not impaired, and the second step of the impairment test will be unnecessary. If

our market capitalization were to fall below our book value, we would proceed to the second step of the goodwill impairment test, which measures the amount of impairment loss by comparing the implied fair value of our goodwill with the carrying amount of our goodwill. As long as we remain a single reporting entity, we believe that the difference between the implied fair value of our goodwill and the carrying amount of our goodwill would equal the difference between our market capitalization and our book value. Accordingly, if our market capitalization fell below our book value and we remained a single reporting unit, we expect that we would write down our goodwill, and recognize a goodwill impairment loss, equal to the difference between our market capitalization and our book value.


ITEM 1B.	*UNRESOLVED STAFF COMMENTS*

None.


ITEM 2.	*PROPERTIES*

Our principal facilities and executive offices are located in Mountain View, California, in two buildings that comprise approximately 158,000 square feet. These buildings are leased through June 2013. We have a renewal option for an additional ten-year term. In addition to our facility in Mountain View, we also lease sales offices in various countries around the world to support our worldwide customer base. We believe our facilities will be adequate for the foreseeable future.


ITEM 3.	*LEGAL PROCEEDINGS*

Legal Proceedings Related to Stock Options

In re Actel Derivative Litigation, 5:06-cv-05352-JW

On August 30, 2006, a shareholder derivative action was filed in the United States District Court for the Northern District of California, entitled Frank Brozovich v. John C. East, et al., 06-cv-05352-JW, against certain of our former and current officers and directors alleging that the individual defendants violated Section 10(b)/Rule 10b-5 of the Securities Exchange Act of 1934 (the “Exchange Act”), breached their fiduciary duties, and were unjustly enriched in connection with the timing of stock option grants from 1996 to 2001. In addition, on November 2, 2006, a second nearly identical shareholder derivative complaint, entitled Samir Younan v. John C. East, et al., 5:06-cv-06832-JW, was filed in the same court. Younan alleged further causes of action in connection with the timing of stock option grants from 1994 to 2000, including violations of Sections 14(a) and 20(a) of the Exchange Act, and violation of California Corporation Code Section 25402. On January 10, 2007, these cases were consolidated as In re Actel Derivative Litigation, 5:06-cv-05352-JW and plaintiffs Younan and Brozovich were appointed lead plaintiffs. Plaintiffs filed a consolidated complaint on February 9, 2007. The consolidated complaint alleges causes of action in connection with the timing of stock option grants from 1996 to 2002, including violations of Sections 10(b), 14(a), and 20(a) of the Exchange Act, breach of fiduciary duty, accounting, unjust enrichment, and violation of California Corporation Code Section 25402. Actel is named solely as a nominal defendant against whom no recovery is sought. The Company and the individual defendants intend to defend these cases vigorously.

SEC Informal Inquiry

By a letter dated November 2, 2006, we were informed by the SEC’s Office of Enforcement that it was conducting an informal inquiry to determine whether there had been violations of the federal securities laws. The letter asked us to produce (i) spreadsheets identifying all stock options granted to any of our employees or members of the Board of Directors since January 1, 1997; (ii) documents constituting our policies, practices, and procedures for granting stock options during such period; and (iii) public disclosures of our policies, practices, and procedures and how we accounted for stock option grants during such period. We voluntarily produced the requested documents and the Special Committee and its independent counsel periodically apprised the SEC’s Office of Enforcement staff on the status of the independent investigation. By a letter dated May 23, 2007, we were informed by the SEC’s Office of Enforcement staff that it had closed its file and would not recommend any enforcement action by the SEC.

The Nasdaq Stock Market Proceedings, Docket NQ 5272N-06

On November 13, 2006, we received notice from The Nasdaq Stock Market (“Nasdaq”) of a staff determination that we were not in compliance with the requirement for continued listing set forth in Nasdaq Marketplace Rule 4310(c)(14). Under that Rule, listed companies must file with the SEC all required reports. Our noncompliance was a result of the ongoing stock option review and our related failure to file with the SEC a Quarterly Report on Form 10-Q for the fiscal quarter ended October 1, 2006. On January 3, 2007, we received an additional staff determination notice that we were not in compliance with the requirement for continued listing set forth in Nasdaq Marketplace Rules 4350(e) and 4350(g). Under those Rules, listed companies must hold an annual meeting of shareholders, solicit proxies, and provide proxy statements to Nasdaq. Our noncompliance was a result of the ongoing review and related failure to hold an annual shareholder meeting in 2006.

We appealed the Nasdaq staff’s determinations at a hearing held on January 11, 2007. On February 16, 2007, a Nasdaq Listing Qualifications Panel (the “Panel”) determined to continue our listing and grant our request for an extension until May 17, 2007, to file our delinquent filings and any required financial restatements and to hold our annual meeting, subject to us providing the Panel with either a copy of the Special Committee’s final investigatory report or a written submission regarding the Special Committee’s final investigatory results. On March 16, 2007, we provided the Panel with the required written submission. On March 20, 2007, we received an additional staff determination notice relating to our failure to file with the SEC an Annual Report on Form 10-K for the fiscal year ended December 31, 2006. On May 18, 2007, the Panel determined to delist our securities, but stayed the suspension pending further action by the Nasdaq Listing and Hearing Review Council (“Listing Council”).

On April 2, 2007, the Listing Council called the Panel’s decision for review and determined to stay the Panel’s decision pending further action by the Listing Council. The Nasdaq Listing Qualifications Department provided the Listing Council with an updated qualifications summary sheet on June 26, 2007, and we submitted additional information to the Listing Council on June 29, 2007. On May 15, 2007, we received an additional staff determination notice relating to our failure to file with the SEC a Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2007. On August 13, 2007, we received an additional staff determination notice relating to our failure to timely file with the SEC a Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 2007. On August 23, 2007, the Listing Counsel granted us an extension until October 22, 2007, to demonstrate compliance with all continued listing requirements.

As we requested on October 9, 2007, the Nasdaq Board of Directors (the “Nasdaq Board”) on October 17, 2007, called for review the August 23, 2007, decision of the Listing Council, and stayed the suspension of our securities from trading, pending further consideration by the Nasdaq Board. On November 9, 2007, the Nasdaq Board granted us an extension until January 9, 2008, to file all delinquent periodic reports necessary to regain compliance with the filing requirement contained in Rule 4310(c)(14). On November 13, 2007, we received an additional staff determination notice relating to our failure to timely file with the SEC a Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2007. As we requested on January 4, 2008, the Nasdaq Board on January 8, 2008, granted us an extension until February 20, 2008, to file all delinquent periodic reports necessary to regain compliance with the filing requirement contained in Rule 4310(c)(14). We have filed this Annual Report on Form 10-K for the fiscal year ended December 31, 2006, with the SEC as part of our initial effort to resume our timely reporting and meet Nasdaq’s continued listing requirements.


ITEM 4.	*SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS*

None.

PART II


ITEM 5.	*MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES*

Our Common Stock has been traded on the Nasdaq National Market under the symbol “ACTL” since our initial public offering on August 2, 1993. On January 11, 2008, there were 122 shareholders of record. The following table

sets forth, for the fiscal quarters indicated, the high and low sale prices per share of our Common Stock as reported on the Nasdaq National Market.


	2006				2005
	High		Low		High		Low

First Quarter	$	15.95	$	12.64	$	18.64	$	14.78
Second Quarter		17.53		13.20		15.54		13.65
Third Quarter		16.40		12.40		15.98		13.35
Fourth Quarter		19.36		15.00		15.25		12.52

On January 16, 2008, the reported last sale of our Common Stock on the Nasdaq National Market was $12.07.

We have never declared or paid a cash dividend on our Common Stock and do not anticipate paying any cash dividends in the foreseeable future. Any future declaration of dividends is within the discretion of our Board of Directors and will be dependent on our earnings, financial condition, and capital requirements as well as any other factors deemed relevant by our Board of Directors.


ITEM 6.	*SELECTED FINANCIAL DATA*

The consolidated balance sheet as of January 1, 2006 and the consolidated statements of operations for the fiscal years ended January 1, 2006 and January 2, 2005 have been restated as set forth in this Form 10-K. The data for the consolidated balance sheets as of January 2, 2005, January 4, 2004, and January 5, 2003 and the consolidated statements of operations for the fiscal years ended January 4, 2004 and January 5, 2003, derived from our books and records, have been restated to include stock-based compensation and other adjustments. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below. The information presented in the following tables has been adjusted to reflect the restatement of our financial results, which is more fully described in the “Explanatory Note” immediately preceding Part I, Item 1 and in Note 2, “Restatement of Consolidated Financial Statements,” in the Notes to Consolidated Financial Statements of this Form 10-K, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Actel has not amended its previously-filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by this restatement. The financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this Annual Report on Form 10-K, and the

financial statements and related financial information contained in such previously-filed reports should no longer be relied upon.

ACTEL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA


	Years Ended
	Dec. 31, 2006			Jan. 1, 2006		Jan. 2, 2005			Jan. 4, 2004			Jan. 5, 2003
				Restated(1)		Restated(1)			Restated(1)			Restated(1)
	(In thousands, except per share data)

Consolidated Statements of Operations Data:
Net revenues	$	191,499		$	178,947	$	165,402		$	149,910		$	134,096
Costs and expenses:
Total cost of revenues(2)(4)		75,618			73,282		70,404			59,867			53,011
Research and development(4)		56,926			48,242		45,701			41,720			40,798
Selling, general, and administrative(4)(5)(6)		67,959			49,649		47,975			46,422			44,269
Amortization of acquisition-related intangibles(3)		15			1,908		2,651			2,670			2,724

Total costs and expenses		200,518			173,081		166,731			150,679			140,802

Income (loss) from operations		(9,019	)		5,866		(1,329	)		(769	)		(6,706	)
Interest income and other, net of expense		7,128			3,912		3,398			3,190			5,561
Gain (loss) on sales and write-downs of equity investments		—			—		—			91			(3,707	)

Income (loss) before tax provision (benefit)		(1,891	)		9,778		2,069			2,512			(4,852	)
Tax provision (benefit)		264			2,742		(705	)		(1,043	)		(2,878	)

Net income (loss)	$	(2,155	)	$	7,036	$	2,774		$	3,555		$	(1,974	)

Net income (loss) per share:
Basic	$	(0.08	)	$	0.28	$	0.11		$	0.14		$	(0.08	)

Diluted	$	(0.08	)	$	0.28	$	0.11		$	0.14		$	(0.08	)

Shares used in computing net income (loss) per share:
Basic		26,106			25,277		25,584			24,808			24,302

Diluted		26,106			25,545		26,381			26,190			24,302


	As of
	Dec. 31, 2006		Jan. 1, 2006		Jan. 2, 2005		Jan. 4, 2004		Jan. 5, 2003
			Restated(1)		Restated(1)		Restated(1)		Restated(1)
	(In thousands)

Consolidated Balance Sheet Data:
Working capital	$	191,278	$	177,491	$	194,613	$	190,545	$	170,632
Total assets		368,922		343,196		318,171		319,637		295,101
Total shareholders’ equity		290,616		276,057		267,816		266,780		244,787


(1)		See the “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatement of Consolidated Financial Statements,” in the Notes to Consolidated Financial Statements of this Form 10-K, and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We recorded after-tax, stock-based compensation expense of ($0.2) million, ($0.5) million, $2.7 million, and $1.9 million in 2005, 2004, 2003 and 2002, respectively, as a result of improper measurement dates, equity awards to consultants,


		equity award modifications and related payroll and income tax impact. As part of the restatement, for the years ended January 1, 2006, January 2, 2005 and January 4, 2004 we recorded additional non-cash adjustments that were previously identified and considered not to be material to our consolidated financial statements, relating primarily to errors associated with the recognition of deferred income at our European distributors. These deferred income adjustments decreased net income by $0.2 million, $0.1 million and $0.1 million, respectively, in fiscal 2005, 2004 and 2002.

(2)		During the fourth quarter of 2004 we incurred incremental charges included in cost of revenues of $3.2 million for expenses associated with the testing of the RTSX-S space qualified FPGAs and the write down of RTSX-S inventory from the original manufacturer. During the fourth quarter of fiscal 2006 we recorded charges of $2.2 million in connection with the write-down of certain excess inventory.

(3)		Beginning in 2002, we ceased to amortize goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Instead, goodwill is subject to annual impairment tests and written down only when identified as impaired. Non-goodwill intangible assets with definite lives continue to be amortized under SFAS No. 141 and 142. See Notes 1 and 3 of Notes to Consolidated Financial Statements for further information.

(4)		On January 2, 2006, we adopted SFAS No. 123R, “Share-Based Payment,” which requires us to measure all employee stock-based compensation awards using a fair value method and record such expense in our consolidated financial statements. As a result, we recorded pre-tax, stock based compensation expense of $11.0 million for fiscal 2006 under SFAS No. 123R.

(5)		During fiscal 2006 we recorded charges of $10.0 million and $0.4 million in connection with the settlement of certain patent and license infringement claims. See Note 14 to Consolidated Financial Statements for further information.

(6)		During fiscal 2006 we incurred $2.0 million of legal and accounting costs in connection with the Company’s stock options investigation that was initiated during the fourth quarter of fiscal 2006.

The impact of the restatement and a comparison to the amounts originally reported are detailed in the tables below:

Consolidated Statements of Operations Data (in thousands, except per share data):


	Year Ended January 1, 2006							Year Ended January 2, 2005
	As Previously							As Previously
	Reported		Adjustments			As Restated		Reported			Adjustments			As Restated

Net revenues	$	179,397	$	(450	)	$	178,947	$	165,536		$	(134	)	$	165,402
Costs and expenses:
Cost of revenues		73,392		(110	)		73,282		70,451			(47	)		70,404
Research and development		48,173		69			48,242		45,360			341			45,701
Selling, general, and administrative		50,056		(407	)		49,649		48,269			(294	)		47,975
Amortization of acquisition-related intangibles		1,908		—			1,908		2,651			—			2,651

Total costs and expenses		173,529		(448	)		173,081		166,731			—			166,731

Income (loss) from operations		5,868		(2	)		5,866		(1,195	)		(134	)		(1,329	)
Interest income and other, net of expense		3,924		(12	)		3,912		2,935			463			3,398

Income before tax provision (benefit)		9,792		(14	)		9,778		1,740			329			2,069
Tax provision (benefit)		2,756		(14	)		2,742		(654	)		(51	)		(705	)

Net income	$	7,036	$	—		$	7,036	$	2,394		$	380		$	2,774

Net income per share:
Basic	$	0.28	$	0.00		$	0.28	$	0.09		$	0.01		$	0.11

Diluted	$	0.28	$	0.00		$	0.28	$	0.09		$	0.01		$	0.11

Shares used in computing net income per share:
Basic		25,277		—			25,277		25,584			—			25,584

Diluted		25,556		(11	)		25,545		26,421			(40	)		26,381


	Year Ended January 4, 2004								Year Ended January 5, 2003
	As Previously								As Previously
	Reported		Adjustments			As Restated			Reported			Adjustments			As Restated

Net revenues	$	149,910	$	—		$	149,910		$	134,368		$	(272	)	$	134,096
Costs and expenses:
Cost of revenues		59,734		133			59,867			52,935			76			53,011
Research and development		39,602		2,118			41,720			39,349			1,449			40,798
Selling, general, and administrative		44,650		1,772			46,422			43,033			1,236			44,269
Amortization of acquisition-related intangibles		2,670		—			2,670			2,724			—			2,724

Total costs and expenses		146,656		4,023			150,679			138,041			2,761			140,802

Income (loss) from operations		3,254		(4,023	)		(769	)		(3,673	)		(3,033	)		(6,706	)
Interest income and other, net of expense		3,210		(20	)		3,190			5,530			31			5,561
Gain (loss) on sales and write-downs of equity investments		91		—			91			(3,707	)		—			(3,707	)

Income (loss) before tax provision (benefit)		6,555		(4,043	)		2,512			(1,850	)		(3,002	)		(4,852	)
Tax provision (benefit)		327		(1,370	)		(1,043	)		(1,925	)		(953	)		(2,878	)

Net income (loss)	$	6,228	$	(2,673	)	$	3,555		$	75		$	(2,049	)	$	(1,974	)

Net income (loss) per share:
Basic	$	0.25	$	(0.11	)	$	0.14		$	0.00		$	(0.08	)	$	(0.08	)

Diluted	$	0.24	$	(0.10	)	$	0.14		$	0.00		$	(0.08	)	$	(0.08	)

Shares used in computing net income (loss) per share:
Basic		24,808		—			24,808			24,302			—			24,302

Diluted		26,300		(110	)		26,190			25,252			(950	)		24,302

Consolidated Balance Sheet Data (in thousands):


	Year Ended January 1, 2006						Year Ended January 2, 2005
	As Previously						As Previously
	Reported		Adjustments		As Restated		Reported		Adjustments		As Restated

Working capital(1)	$	176,961	$	530	$	177,491	$	194,472	$	141	$	194,613
Total assets		340,389		2,807		343,196		315,290		2,881		318,171
Total shareholders’ equity		272,721		3,336		276,057		264,793		3,023		267,816


(1)		Working capital balance As Previously Reported for the year ended January 1, 2006 includes a reclassification of $1.6 million of previously reported long-term investments to short-term to conform to current presentation.


	Year Ended January 4, 2004							Year Ended January 5, 2003
	As Previously							As Previously
	Reported		Adjustments			As Restated		Reported		Adjustments		As Restated

Working capital	$	191,078	$	(533	)	$	190,545	$	169,939	$	693	$	170,632
Total assets		316,757		2,880			319,637		293,321		1,780		295,101
Total shareholders’ equity		264,433		2,347			266,780		242,314		2,473		244,787


ITEM 7.	*MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*

You should read the following discussion of our financial condition and results of operations in conjunction with our Consolidated Financial Statements and the related “Notes to Consolidated Financial Statements”, and “Financial Statement Schedules” and “Supplementary Financial Data” included in this Annual Report on Form 10-K. This Annual Report on Form 10-K, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains forward-looking statements regarding future events and the future results of our Company that are based on current expectations, estimates, forecasts, and projections about the industry in which we operate and the beliefs and assumptions of our management. Words such as ‘expects,’ ‘anticipates,’ ‘targets,’ ‘goals,’ ‘projects,’ ‘intends,’ ‘plans,’ ‘believes,’ ‘seeks,’ ‘estimates,’ variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report under the section entitled “Risk Factors” in Item 1A of Part I and elsewhere, and in other reports we file with the Securities and Exchange Commission (“SEC”), specifically the most recent reports on Form 10-Q. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Restatement of Previously-Issued Financial Statements

Stock Option Reviews, Investigation, and Informal Inquiry

On August 30, 2006, a complaint was filed in the United States District Court for the Northern District of California derivatively on behalf of Actel against certain of our current and former officers and Directors. The derivative action relates to certain stock option grants that were allegedly backdated. On September 8, 2006, our Board of Directors directed management to conduct an informal review of our historical stock option grants. On September 21, 2006, our management found evidence indicating that the recipients of a stock option grant in 2000 were not determined with finality by the recorded measurement date. On September 22, 2006, our Board of Directors appointed a Special Committee of independent directors to formally investigate our historical stock option grant practices and related accounting. The Special Committee retained an independent law firm and forensic team of professionals (collectively, the “Investigation Team”), to assist the Committee in conducting a thorough investigation.

We voluntarily notified the SEC about the independent investigation prior to announcing it publicly on October 2, 2006. By a letter dated November 2, 2006, we were informed by the SEC’s Office of Enforcement that it was conducting an informal inquiry to determine whether there had been violations of the federal securities laws. We voluntarily disclosed the requested information and otherwise cooperated with the Office of Enforcement, which notified us by a letter dated May 23, 2007, that it had closed its file and would not recommend any enforcement action by the SEC.

The Special Committee investigated stock options granted during the eleven-year period from January 1, 1996, through December 31, 2006 (the “Investigation Period”). Consistent with published guidance from the staff of the SEC, the Investigation Team organized option grants into categories based on the types of options granted and granting processes. During the Investigation Period, the Company had three processes by which stock options could be approved other than at a meeting of the Compensation Committee:


	•	A regular process of making “monthly grants” of new-hire, promotion, merit-adjustment, and patent-award options (and, in 2005 and 2006, annual replenishment awards to continuing employees known as “Evergreen” options) on the first Friday of each month. We have made a monthly grant of options on the first Friday of almost every month since September 1994. Primarily because our monthly grant process uses stock option grant dates that are fixed in advance, the Special Committee concluded that it is a reliable process with respect to the risk of stock option backdating (even though there is still a risk that the grants may not have been determined with finality on the stated grant date, requiring a measurement date for accounting purposes that is different than the stated grant date). Other factors that support our conclusion that the monthly grant process is reliable include the following:


	•	The parameters of the new-hire, promotion, merit-adjustment, and patent-award options included in monthly grants are pre-approved by the Compensation Committee as part of the annual stock option budget.

	•	The events giving rise to the new-hire, promotion, merit-adjustment, and patent-award options included in monthly grants are subject to separate formal approval processes that include the Vice President of Human Resources (who signs the grant list included in the monthly grants) and result in signed and dated Personnel Action Notices (or “PANs”) evidencing management approval of the stock option awards on or before the stated grant date. For this reason, the terms and recipients of each monthly grant are “known” on the stated grant date, making the compilation of the grant list for each monthly grant from the PANs merely an administrative task.

	•	As with the new-hire, promotion, merit-adjustment, and patent-award options included in other monthly grants, the budget for the Evergreen options granted in 2005 and 2006 was approved by the Compensation Committee at a meeting near the beginning of each fiscal year, and the grants to officers were pre-cleared by the Compensation Committee. By explicitly pre-clearing the grant of Evergreen options to officers in 2005 and 2006, the Compensation Committee implicitly authorized the grant of Evergreen options to all employees.

	•	The Company operated as if the terms of the awards included in the monthly grants were final prior to completion of the formal Compensation Committee approval procedure, indicating that formal approval of the monthly grants represented only an administrative delay rather than a period during which any of the terms of the awards remained under consideration or subject to change. For example, we frequently communicated the option terms to recipients and entered the option terms and recipients into Equity Edge, our stock administration database, prior to completion of the formal Compensation Committee approval procedure.


	•	The Special Committee recommended, and we agree, that the completion of the formal Compensation Committee approval procedure subsequent to the stated grant date does not in and of itself require a correction in the measurement date for a monthly grant.

	•	A process of making “non-monthly grants” on irregular dates primarily for (i) eleven annual replenishment options to continuing employees and one additional Evergreen grant in 2003, (ii) options to continuing employees in connection with two repricings (one in 1996 and one in 1998) and two exchanges (one in 2001


		and one in 2006), and (iii) options to new employees retained in connection with four business combinations or acquisitions (one in 1998, one in 1999, and two in 2000). Any new-hire, promotion, merit-adjustment, and/or patent-award options that were pending on the date of these non-monthly grants were usually also awarded, and new-hire, promotion, merit-adjustment, and/or patent-award options were sometimes awarded by themselves in non-monthly grants. Primarily because our non-monthly grant process (which was abandoned in 2004) did not use stock option grant dates that were fixed in advance, the Special Committee concluded that it was not a reliable process with respect to the risk of stock option backdating to the extent that hindsight could have been used (and in one instance was found to have been used) to select the stated grant dates. Accordingly, the Special Committee recommended, and we agree, that the completion of the formal Compensation Committee approval procedure subsequent to the stated grant date does require a correction in the measurement date for a monthly grant.


	•	A process of making “automatic grants” of Director options. The automatic grant process uses stock option grant dates that are fixed in advance for replenishment options, so the Special Committee concluded that it is a reliable process with respect to the risk of stock option backdating (even though there can be uncertainty about when a new Director joins the Board). Almost all stock options granted during the Investigation Period were awarded under the monthly and non-monthly grant processes, which were approved by means of a Unaminous Written Consent (“UWC”) of the three-member Compensation Committee. In light of the risk of stock option backdating presented by each granting process, the Special Committee directed the Investigation Team to examine all non-monthly grants and all grants to Directors and executive officers (who are responsible for all of the stock option granting processes), but determined that testing of the monthly grants on a sample basis was sufficient in combination with appropriate analytical procedures. Approximately 85% of the options granted during the Investigation Period were examined by the Investigation Team. The additional analytical review procedures applied to the monthly grant population consisted of new-hire, rehire, and Equity Edge record-add date (i.e., the date option terms and recipients were entered into our stock administration database) analyses. The Special Committee concluded, and the Investigation Team agreed, that no additional procedures were required since all non-monthly grants and all grants to Directors and executive officers were tested directly and all monthly grants were either tested directly or analyzed using the additional review procedures to provide reasonable assurance that the untested population does not contain any material errors of the types found in the tested population.

The Special Committee presented its preliminary findings to the Board of Directors on January 30, 2007. The preliminary findings were described in our Form 8-K filed with the SEC on February 1, 2007, and include the following:


	•	There was inadequate documentation supporting the measurement dates for each of the Company’s company-wide annual grants during the period 1996-2001.

	•	There were a number of other grants during the 1996-2001 period for which there was inadequate documentation supporting the recorded measurement dates, including some executive grants and grants to new employees in connection with corporate acquisitions.

	•	In at least one instance during the 1996-2001 period, at a time when he was the Company’s Chief Financial Officer, Mr. Henry L. Perret participated in the selection of a favorable stated grant date with the benefit of hindsight and did not properly consider the accounting implications of that action.

	•	Beginning in 2002, documentation relating to annual and other grants improved substantially, although some minor errors occurred thereafter in the form of corrections or adjustments to grant allocations after the recorded measurement dates.

	•	The Special Committee did not conclude that any current officers or employees of the Company engaged in any knowing or intentional misconduct with regard to the Company’s option granting practices.

	•	The Special Committee has confidence in the integrity of John C. East, the Company’s Chief Executive Officer, and Jon A. Anderson, its Chief Financial Officer.

Following the Special Committee’s presentation, the Board requested and accepted the resignation of Henry L. Perret as a member of the Board. The Special Committee presented its final report to the Board of Directors on March 9, 2007.

Per the recommendation of the Special Committee, our management reviewed the information made available to it by the Special Committee and performed its own detailed review of historical stock option grants (including the examination of approximately 73% of the options granted during the period between our initial public offering on August 2, 1993, and January 1, 1996 (the beginning of the Investigation Period)) as part of the effort to establish appropriate measurement dates. Management analyzed all available evidence related to each category of grants. Based on relevant facts and circumstances, management applied the applicable accounting standards to determine appropriate measurement dates for all grants. In addition to the grants found by the Special Committee to have lacked adequate documentation supporting the recorded measurement dates, our management concluded that there was inadequate documentation supporting the recorded measurement date for the four company-wide grants during the period 2002-2004, and for one company-wide grant in 1995. If the measurement date was other than the stated grant date, we made accounting adjustments as required, resulting in stock-based compensation expense and related tax effects. We have determined that we had unrecorded non-cash equity-based compensation charges associated with our equity incentive plans for the period 1994 through 2006. Since these charges were material to our financial statements for the years 1994 through 2005, we are restating our historical financial statements to record additional non-cash charges for stock-based compensation expense. At the direction of management, option exercises before December 31, 2000 (when employees could exercise shares directly with the Company, as opposed to through an independent, third-party broker), were also reviewed and tested, and no instance of exercise backdating was identified.

Stock-Based Compensation Adjustments Resulting From Corrected Measurement Dates

As a result of the Special Committee’s investigation and findings, as well as our internal reviews, we determined that the stated grant dates for 28 granting actions (or 15% of the 190 granting actions between our initial public offering and the end of 2006) cannot be supported as the proper measurement dates. As a result, we corrected the measurement dates for options covering a total of 10.1 million shares (or 41% of the 24.7 million shares of Common Stock covered by options granted during the relevant period) and we have recorded additional stock-based compensation expense for stock option grants made from June 1995 through March 2004 for which the actual measurement date was different than the stated grant date. The gross deferred stock-based compensation charge associated with these changes was $23.4 million. After accounting for forfeitures, cancellations and other related adjustments, we recorded additional pre-tax stock-based compensation expense of $17.4 million as a result of the revised measurement dates for historical stock option grants.

Judgment

In calculating the amount of incremental stock-based compensation expense that we are required to record under generally accepted accounting principles, we made certain interpretations and assumptions and drew certain conclusions from the independent investigation and internal review findings. In addition, we made a number of accounting interpretations and applied those interpretations to our facts and circumstances. We considered, among other things, the guidance provided by the Office of the Chief Accountant of the SEC in a letter dated September 19, 2006 (“Chief Accountant’s Letter”), which states that:

The accounting guidance applicable to the grants in question was, in most cases, Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (Opinion 25). The accounting under Opinion 25 relies heavily on the determination of the measurement date, which is defined as “the first date on which are known both (1) the number of shares that an individual employee is entitled to receive and (2) the option or purchase price, if any.” Under Opinion 25, the final amount of compensation cost of an option is measured as the difference between the exercise price and the market price of the underlying stock at the measurement date. As such, for the purpose of determining compensation cost pursuant to Opinion 25, it is important to determine whether a company’s stock option granting practices resulted in the award of stock options with an exercise price that was lower than the market price of the underlying stock at the date on which the terms and recipients of those stock options were determined with finality.

The Chief Accountant’s Letter also states that “a company must use all available relevant information to form a reasonable conclusion as to the most likely option granting actions that occurred and the dates on which such actions occurred in determining what to account for.” In light of the significant judgment used in the determination of measurement dates, alternate approaches to those used by us could have resulted in different compensation expense charges than those recorded in the restatements.

General Approach to Determining the Revised Measurement Dates

Management’s methodology was intended to determine appropriate measurement dates using clear and objective evidence, if possible, or to determine corrected measurement dates using objective evidence to the greatest extent possible and management’s judgment (applied in a consistent and rigorous manner) to the least extent possible. For many reasons, including the fact that the grant dates for monthly grants were fixed in advance, management concluded that the subsequent return of the UWC signature pages for the monthly grants represented only an administrative delay, as described in the Chief Accountant’s Letter, and therefore did not in and of itself necessitate corrections in the measurement dates for the monthly grants. For non-monthly grants, and for monthly grants that required measurement date corrections for other reasons, management selected the date of the last fax-dated UWC signature page as the appropriate measurement date for all awards requiring corrected measurement dates when there were three dated UWC signature pages because, in accordance with the Chief Accountant’s Letter, that was the date at which all required granting actions were complete. Greater management judgment was required when there were not three fax-dated UWC signature pages. After evaluating all available relevant information, management ranked the evidence used in determining corrected measurement dates, with fax transmittals of signed UWC signature pages being the most reliable evidence and Equity Edge (“EE”) data being the least reliable. The Equity Edge record-add date was used as the measurement date only if no other reliable objective evidence could be located supporting a specific date. We considered various alternative approaches, but believe that the approaches we used were the most appropriate.

Sensitivity Analysis

In applying its judgment, management considered the impact on compensation expense of selecting measurement dates based on different criteria. The sensitivity analysis included a review of the fair market value of Actel’s Common Stock (“FMV”) and potential compensation expense for each of the alternative dates considered in the selection of measurement dates that involved the application of significant management judgment. Set forth below is a sensitivity analysis table for awards with corrected measurement dates by type of grant:


	Low Point of Range				Actel Actual				High Point of Range
	Gross		Expense		Gross		Expense		Gross		Expense
	Deferred		(Net of		Deferred		(Net of		Deferred		(Net of
Grant Classification	Compensation		Forfeitures)		Compensation		Forfeitures)		Compensation		Forfeitures)

Evergreen Grants	$	4,659,783	$	2,684,744	$	10,132,794	$	6,175,052	$	19,001,910	$	12,671,714
Acquisition Grants		—		—		50,916		50,916		50,916		50,916
Non-Monthly Grants		91,361		30,697		979,298		743,462		1,367,501		1,057,093
Director Options		26,213		26,213		97,508		97,508		97,508		97,508
Monthly Grants		462,215		385,936		505,015		421,673		624,842		521,726
Non-Sensitivity		11,607,096		9,959,521		11,607,095		9,959,521		11,607,095		9,959,521

Total	$	16,846,668	$	13,087,111	$	23,372,626	$	17,448,132	$	32,749,772	$	24,358,478

In order to make these sensitivity calculations, management determined the earliest plausible measurement date and the latest plausible measurement date for each award requiring a corrected measurement date, and the highest FMV and lowest FMV between and including those dates because it is possible that the terms of the options were known with finality on any date within this range. For awards with corrected measurement dates that do not have three dated UWC signature pages, management believes the earliest and latest plausible measurement date is generally the earlier of (i) the date the last UWC signature page was received and (ii) the initial Equity Edge record-add date. The date the last UWC signature page was received and the initial Equity Edge record-add date are both considered by management to be evidence of when the terms and recipients of an award were finalized, although

UWC signature pages are at the top of the evidence hierarchy and the Equity Edge record-add date is at the bottom of the hierarchy.

Sensitivity analysis was performed on all awards with corrected measurement dates that have one or more UWC signature pages missing or undated. Thus, it is possible that the last UWC signature page was actually received after the latest plausible measurement date used in the sensitivity analysis. However, based on an evaluation of awards with corrected measurement dates that have three dated UWC signature pages, we do not believe that any such occurrence would have a material effect on the range of potential compensation cost that we could have recorded. No sensitivity analysis was performed on awards with corrected measurement dates that have three dated UWC signature pages. To avoid skewing the sensitivity analysis table, these awards are included in the “Non-Sensitivity” line of the table, with the “High” and “Low” range numbers being equal to the “Actual” gross deferred compensation charge and net expense recorded by Actel.

Overall, the sensitivity table indicates that the total gross deferred compensation charge could range from a high of $32.7 million to a low of $16.8 million, while the Company recorded an actual gross deferred compensation charge of $23.4 million. Total net compensation expense could range from a high of $24.4 million to a low of $13.1 million, while the Company recorded actual net compensation expense of $17.4 million. The award that has the greatest impact on the sensitivity analysis is the Evergreen Options grant dated March 14, 2002, for which the measurement date was revised to April 5, 2002, when emails indicate that changes in the allocation of options were no longer under consideration. There was little volatility in our stock price between the earliest plausible measurement date of March 28, 2002 (the date the last UWC signature page was received), and the revised measurement date of April 5, 2002. However, for the latest plausible measurement date of May 14, 2002 (the initial EE record-add date), we experienced significant volatility in our stock price: it increased from the $20 share range in April to the $27 per share range in May and then declined back to the $20 per share range in June 2002. Due to the short-lived increase in the stock price during the month of May, coupled with the strength of the evidence used to establish the revised measurement date of April 5, 2002, we believe the March 14, 2002, grant sensitivity range potentially distorts the impact of management’s judgment. Eliminating the impact of this grant from the sensitivity analysis (by including it in the “Non-Sensitivity” line) would reduce the range of total net compensation expense from a high of $19.1 million and a low of $13.1 million, compared with the Company’s actual net compensation expense of $17.4 million. Thus, the grant dated March 14, 2002, accounts for $5.3 million, or almost half, of the $11.3 million range in total net compensation expense.

For fiscal years 2003 through 2005, the net compensation expense could range from a high of $7.8 million to a low of $3.0 million, compared with the Company’s actual net compensation expense of $3.3 million. For fiscal year 2006, the net compensation expense could be affected by no more than $0.2 million. We have concluded that the range of total net compensation expense is acceptable given the uncertainty of the corrected measurement dates and the resulting inability to precisely measure the resulting stock compensation expense. Accordingly, we believe the related compensation charges comply with U.S. Generally Accepted Accounting Principles in all material respects.

Other Stock-Based Compensation Adjustments

In addition to the stock-based compensation expenses resulting from revised measurement dates for historical stock option grants, and the related payroll and withholding taxes and penalties (which are described in more detail below), our internal review also identified certain other errors in accounting determinations and judgments relating to stock-based compensation that have been corrected in the restated consolidated financial statements. These errors include incorrect accounting for (i) modifications to equity awards in connection with and subsequent to, certain employees’ terminations, and (ii) equity awards granted to consultants. These errors in accounting for stock-based compensation expense are also described in more detail below.

Payroll and Withholding Taxes and Penalties

Internal Revenue Code Section 421 prohibits the granting of Incentive Stock Options (“ISOs”) with an exercise price below the fair market value of the underlying shares on the date of grant. The Company issued both ISOs and Non Qualified Stock Options (“NQs”) during the period investigated. As described above, 28 of our stock option granting actions were subject to revised measurement dates (the last of which was in March 2004). For all but five of

the granting actions, the fair market value of our Common Stock on the revised measurement date was higher than the fair market value of our Common Stock on the stated grant date.

Therefore, many of the stock options that were granted as ISOs should have been treated as NQs for purposes of payroll taxes and federal and state income tax withholding. ISOs receive special tax treatment by not being taxed or subject to FICA withholding at the time of exercise. The shares acquired upon the exercise of ISOs are taxable at the time of disposition and, if held for the required length of time, may receive the benefit of capital gains tax treatment. If not held for the required length of time, shares acquired upon the exercise of ISOs are taxed as ordinary income. The restated financial statements include expenses (arising from exercises of ISOs with corrected measurement dates) relating to the estimated payroll taxes, federal and state income taxes and penalties (including negligence penalties) arising from ISOs that should have been treated as NQ stock options (due to their below-market grant pricing). We calculated payroll taxes and the marginal income tax rate for each affected individual for each fiscal period on the stock option gains in the fiscal period the stock options were exercised, subject to the individual applicable employment tax ceilings for Social Security and Medicare for each fiscal period. Penalties were also factored into the restatement. The Company has calculated penalties in accordance with the applicable Internal Revenue Codes (10% of employer FICA) under IRC Sec. 6656 and a negligence (20%) penalty under IRC Sec. 6662. To the extent appropriate, the expense accrual for taxes and penalties was reversed in fiscal years in which the applicable statue of limitations was exceeded. The net accrual for payroll and withholding-related expense in the restatement is $0.5 million for 1996 through 2005.

Stock Option Grant Modifications in Connection with Employee Terminations and Grants to Consultants

The stock option reviews identified individuals who were terminated and rehired by us but whose options were not cancelled (and continued to vest between the termination and rehire dates). In accordance with Opinion 25 and its interpretations, modifications that renew or extend the life of fixed awards result in a new measurement date. Accordingly in the restated financial statements we have recorded the stock-based compensation expense (net of forfeitures) for these modified grants of less than $0.1 million.

The stock option reviews identified six consultants who received option awards, two of whom first received grants in 1994 and the other four of whom first received grants in 1995. We determined that three of these individuals did not have an “employee-like” relationship with us, and we measured their awards at the grant-date fair value and amortized the amount to compensation expense on a straight-line basis over their respective vesting periods. We determined that the other three of these individuals (who subsequently became employees) had an “employee-like” relationship with us from the beginning of the original grant period, so we measured the awards at the grant-date intrinsic value, which resulted in no compensation expense. However, the four individuals who first received grants in 1995 retained the right to exercise their vested options for a ten-year period from the date of grant, even after their relationship with the Company terminated. The relationship between the Company and one of these individuals was terminated in 2000, and the relationship between the Company and the other three of these individuals was terminated in 2003. Applying the accounting literature that was applicable at those points in time, we recorded a stock compensation charge equal to the fair value of those awards as of their termination date. These awards were then accounted for as liability awards from the date of termination (the options did not qualify as equity instruments because we could settle the options only by delivering registered shares, which is outside the control of the Company), and we subsequently marked the awards to market through the date the options were exercised or expired, with the related income or expense being recognized as “Other Income and Expense.” Net of forfeitures, the stock-based compensation expense for stock options grants to consultants reflected in the restated financial statements is $1.3 million on a pre-tax basis, which is offset in part by a related pre-tax financial statement benefit of $0.5 million in Other Income and Expense.

Other Matters

restatement impact of recording these adjustments is a $1.0 million increase to pre-tax income from 2000 through 2005.

We have incurred substantial expenses for legal, accounting, tax, and other professional services in connection with the Special Committee’s investigation, our internal reviews, the preparation of the restated consolidated financial statements, the SEC informal inquiry, and the derivative litigation. These expenses, which are included in selling, general, and administrative expenses, were approximately $2.0 million for the year ended December 31, 2006, and are expected to be approximately $5.5 million for the 2007 fiscal year.

Because almost all holders of options issued by us were not involved in or aware of the incorrect pricing, we have taken and intend to take actions to deal with certain adverse tax consequences that may be incurred by the holders of certain incorrectly priced options. Adverse tax consequences may arise as a result of the change in the status of employee awards from ISO to NQ stock options, and incorrectly priced stock options vesting after December 31, 2004, may subject the option holder to a penalty tax under IRC Section 409A (and, as applicable, similar penalty taxes under California and other state tax laws). The Company may incur future charges to resolve the adverse tax consequences of incorrectly priced options; however, based on current estimates the Company believes that such costs will be immaterial.

IRC Section 162(m) limits the deductibility of compensation in excess of $1.0 million that is not performance-based and that is paid to the Chief Executive Officer and the four other named executive officers in our annual proxy statement. In the year in which any such officers exercise options that have been revised as a result of our investigation, we have made appropriate adjustments to reduce our deferred income taxes for the compensation expense for which we are not able to take a corresponding tax deduction. Furthermore, since the Chief Executive Officer’s compensation has, on occasion, exceeded the 162 (m) limit, the company has recorded tax benefits associated with his options only when the options are exercised and the benefit is known. Accordingly, no deferred tax assets have been established for stock compensation associated with the Chief Executive Officer.


	Adjustment to											Other
	Stock-Based											Deferred
	Compensation											Revenue			Other
	Expense		Other			Adjustment			Subtotal			Adjustments			Adjustments-
	Associated		Adjustments to			to Payroll			Stock-Based			Associated			-Other			Adjustment			Total
	with		Stock-Based			Tax			Compensation			with			Income and			to Income			Restatement
	Remeasured		Compensation			Expense			Expense and			European			Expense			Tax Expense			Expense
Fiscal Year	Grants		Expense			(Benefit)			Payroll Taxes			Distributor			Charges(1)			(Benefit)			(Benefit)

1994	$	—	$	60		$	—		$	60		$	—		$	—		$	(24	)	$	36
1995		205		27			—			232			—			—			(73	)		159
1996		539		42			6			587			—			—			(175	)		412
1997		823		32			23			878			—			—			(262	)		616
1998		937		35			18			990			—			—			(307	)		683
1999		814		12			105			931			—			—			(242	)		689
2000		2,574		92			347			3,013			(1,528	)		—			(436	)		1,049
2001		5,455		485			88			6,028			(100	)		(17	)		(2,111	)		3,800
2002		2,810		(73	)		93			2,830			203			(31	)		(953	)		2,049
2003		2,155		1,687			181			4,023			—			20			(1,370	)		2,673

Cumulative through January 4, 2004		16,312		2,399			861			19,572			(1,425	)		(28	)		(5,953	)		12,166
2004		950		(604	)		(312	)		34			100			(463	)		(51	)		(380	)
2005		186		(431	)		(91	)		(336	)		338			12			(14	)		—

Total	$	17,448	$	1,364		$	458		$	19,270		$	(987	)	$	(479	)	$	(6,018	)	$	11,786


(1)		Reflects mark to market adjustments relating to $1.0 million of awards originally charged to stock-based compensation which were subsequently classified as liability awards following the termination of employment.

Results of Operations

The following table sets forth certain financial data from the Consolidated Statements of Operations expressed as a percentage of net revenues:


	Years Ended
	Dec. 31, 2006			Jan. 1, 2006			Jan. 2, 2005
				Restated			Restated

Net revenues		100.0	%		100.0	%		100.0	%
Cost of revenues		39.5			41.0			42.6

Gross margin		60.5			59.0			57.4
Research and development		29.7			27.0			27.6
Selling, general, and administrative		35.5			27.7			29.0
Amortization of acquisition-related intangibles		0.0			1.1			1.6

Income (loss) from operations		(4.7	)		3.2			(0.8	)
Interest income and other, net of expense		3.7			2.2			2.1

Income (loss) before tax provision (benefit)		(1.0	)		5.4			1.3
Tax provision (benefit)		0.1			1.5			(0.4	)

Net income (loss)		(1.1	)%		3.9	%		1.7	%

• Net Revenues

We derive our revenues primarily from the sale of FPGAs, which accounted for over 95% of net revenues in 2006, 2005 and 2004. Non-FPGA revenues are derived from our Protocol Design Services organization, royalties, and the licensing of software and sale of hardware used to design and program our FPGAs. We believe that we derived at least 53% of our revenues in 2006, 2005 and 2004 from sales of FPGAs to customers serving the military and aerospace and the communications markets. We have experienced, and may again in the future experience, substantial period-to-period fluctuations in operating results due to conditions in each of these markets as well as in the general economy.

Net revenues in 2006 were $191.5 million, an increase of 7% over 2005. This increase was due primarily to a 7% increase in the overall average selling price (ASP) and a slight increase in the total number of units shipped in the year. The overall ASP increased primarily due to increases in ASPs from most of the new and mature product families. Net revenues in 2006 increased $1.2 million as a result of a refinement in the Company’s estimate of distributor revenue as noted in Critical Accounting Policies and Estimates.

Net revenues in 2005 were $178.9 million, an 8% increase over 2004. This increase was due primarily to an 8% increase in the overall average selling price (ASP) and a 1% increase in the total number of units shipped in the year. The overall ASP increased principally because we derived a higher percentage of our revenues from our radiation hardened and radiation tolerant products which have higher ASPs than other product families.

We shipped approximately 77% of our net revenues through the distribution sales channel in 2006 compared with 64% in 2005 and 67% in 2004. Since 2003, Memec, Unique has been our sole distributor in North America. On April 26, 2005, Avnet, Inc. (Avnet) and Memec Group Holdings Ltd. (Memec) announced they had reached a definitive agreement for Avnet to acquire Memec in a stock and cash transaction. On July 5, 2005, Avnet announced the completion of its acquisition of Memec, Unique. We generally do not recognize revenue on product shipped to a distributor until the distributor resells the product to its customer.

Sales to customers outside the United States accounted for 49% of net revenues in 2006, 44% in 2005 and 45% in 2004 with European customers representing 27% of net revenues in each of these years.

• Gross Margin

Gross margin was 60.5% of revenues in 2006 compared with 59.0% in 2005 and 57.4% in 2004. Gross margin in 2006 benefited from lower inventory write-downs as compared to fiscal 2005 coupled with a reduction in license costs as a result of consolidation of a number of our license agreements with third parties. Gross margin in 2006 was unfavorably impacted by a fourth quarter write-down of $2.2 million associated with excess radiation products. Gross margin in 2005 benefited from a product mix that contained a higher percentage of radiation products as a percentage of total, which typically generate higher gross margins. Gross margin in 2004 was unfavorably impacted by a $3.2 million write down we recorded in the fourth quarter. This charge included a write down of $2.1 million of RTSX-S inventory from the original manufacturer for which we determined there was no demand. In addition, $1.1 million of the charge was a write-off of certain boards and sockets, purchased solely to test the RTSX-S units, that have no future use to us in the production process. See the Risk Factors set forth at the end of Item I of this Annual Report on Form 10-K for more information about the investigations regarding the reliability of our RTSX-S space-qualified FPGAs. We also experienced some pressure on gross margin in 2004 due to a higher concentration of our newer products, as a percentage of total revenue, which tend to have lower gross margins than our more mature products.

Gross margin is affected by changes in excess and slow moving inventory write downs. Gross margin was positively impacted by the sell through of previously written down inventory of $0.9 million, or 1.0% in 2005 and $3.2 million, or 2.4% in 2004. The 2006 impact of such sales was not material.

We seek to reduce costs and improve gross margins by improving wafer yields, negotiating price reductions with suppliers, increasing the level and efficiency of our testing and packaging operations, achieving economies of scale by means of higher production levels, and increasing the number of die produced per wafer, principally by shrinking the die size of our products. No assurance can be given that these efforts will be successful. Our capability to shrink the die size of our FPGAs is dependent on the availability of more advanced manufacturing processes. Due to the custom steps involved in manufacturing antifuse and (to a lesser extent) Flash FPGAs, we typically obtain access to new manufacturing processes later than our competitors using standard manufacturing processes.

• Research and Development (R&D)

R&D expenditures were $56.9 million, or 30% of net revenues, in 2006 compared with $48.2 million, or 27% of net revenues, in 2005 and $45.7 million, or 28% of net revenues, in 2004. R&D spending in 2006 increased due to recognition of stock-based compensation expense under SFAS 123(R) of $5.6 million, along with higher costs associated with expanded R&D efforts and increased headcount. R&D expenditures increased $2.5 million in 2005 as compared to 2004 due to our expanded efforts and increased headcount needed to concurrently research and develop future commercial and radiation tolerant generations of both Flash and antifuse-based product families.

Our R&D consists of circuit design, software development, and process technology activities. We believe that continued substantial investment in R&D is critical to maintaining a strong technological position in the industry. Since our antifuse and (to a lesser extent) Flash FPGAs are manufactured using customized processes that require a substantial time to develop, our R&D expenditures will probably always be higher as a percentage of net revenues than that of our major competitors using standard manufacturing processes.

• Selling, General, and Administrative (SG&A)

SG&A expenses in 2006 were $68.0 million, or 36% of net revenues, compared with $49.6 million, or 28% of net revenues, in 2005 and $48.0 million, or 29% of net revenues, in 2004. During fiscal 2006, we incurred costs of $10.0 million and $0.4 million in connection with the settlement of two patent infringement claims brought against us. See Note 14 of Notes to Consolidated Financial Statements for further information regarding these claims. SG&A expenses also increased $4.8 million in 2006 due to recognition of stock-based compensation expense under SFAS 123(R). SG&A expenses in 2006 included legal and accounting costs of approximately $2.0 million associated with the Company’s stock option investigation. SG&A spending in 2006 increased as a percentage of sales over 2005 levels primarily as a result of the items noted above.

SG&A expenses in 2005 increased by $1.7 million from 2004 primarily as a result of higher selling expense associated with increased net revenues, higher legal costs associated with general business issues and employment matters and increased marketing expense related to new product offerings. SG&A spending in 2005 decreased slightly as a percentage of sales over 2004 levels. This was the result of 8% higher revenue levels in 2005, even though absolute spending in 2005 increased.

• Amortization of Other Acquisition-Related Intangibles

Amortization of other acquisition-related intangibles was $15,000 in 2006, $1.9 million in 2005 and $2.7 million in 2004. The decrease in 2006 was attributable to intangible assets, related to an acquisition completed in the year 2000, being fully amortized during the second quarter of 2006.

• Interest Income and Other, Net of Expense

Interest income and other, net of expense, was $7.1 million, $3.9 million and $3.4 million in 2006, 2005 and 2004, respectively. For 2006, our average investment portfolio return on investment was 4.2% compared with 2.8% in 2005 and 1.9% in 2004, resulting in higher interest income during fiscal 2006 as compared to prior years. Our average investment portfolio balance was $157.0 million in 2006 compared with $144.9 million in 2005 and $154.0 million in 2004. We invest excess liquidity in investment portfolios consisting primarily of corporate bonds, floating rate notes, and federal and municipal obligations. In periods where market interest rates are falling, and for some time after rates stabilize, we typically experience declines in interest income and other as our older debt investments at higher interest rates mature and are replaced by new investments at the lower rates available in the market.

• Tax Provision (Benefit)

Significant components affecting the effective tax rate include pre-tax net income or loss, federal R&D tax credits, income from tax-exempt securities, the state composite tax rate, adjustments to income taxes as a result of tax audits and reviews and recognition of certain deferred tax assets subject to valuation allowances. Our tax provision for 2006 was $0.3 million despite a pre-tax loss of $1.9 million. This tax charge is primarily due to non-deductible stock-based compensation.

Our tax provision for 2005 was $2.7 million based upon a 28% annual effective tax rate. This rate was calculated based on a statutory tax rate benefited by R&D tax credits and state tax benefits. We recorded a tax benefit of $0.7 million in 2004 resulting from the combined effect of a small pre-tax income offset by R&D tax credits and state tax benefits.

Financial Condition, Liquidity, and Capital Resources

Our total assets were $368.9 million at the end of 2006 compared with $343.2 million at the end of 2005. The increase in total assets was attributable principally to increases in cash, cash equivalents, inventory and other assets. The following table sets forth certain financial data from the consolidated balance sheets expressed as the percentage change from January 1, 2006 to December 31, 2006.


	As of		As of
	Dec. 31, 2006		Jan. 1, 2006		$ Change			% Change
			Restated
	In thousands

Cash and cash equivalents, short and long term investments	$	191,955	$	168,316	$	23,639			14	%
Accounts receivable, net	$	22,017	$	25,287	$	(3,270	)		(13	)%
Inventories	$	39,203	$	37,372	$	1,831			5	%


	Year Ended
	Dec. 31, 2006			Jan. 1, 2006
				Restated
	In thousands

Net cash provided by operating activities	$	24,529		$	22,585
Net cash used in investing activities	$	(22,066	)	$	(6,149	)
Net cash provided by financing activities	$	7,203		$	1,192

• Cash, Cash Equivalents, and Investments

Our cash, cash equivalents, and short-term investments were $192.0 million at the end of 2006 compared with $168.3 million at the end of 2005. This increase of $23.6 million from the end of 2005 was due primarily to $24.5 million of net cash provided by operating activities, $7.2 million of cash provided by financing activities ($9.4 million provided from the issuance of Common Stock under employee stock plans partially offset by $2.2 million used to repurchase Actel Common Stock) partially offset by $13.5 million used to purchase available-for-sale securities and $8.7 million of cash used to purchase property and equipment.

The significant non-cash expenses used in the determination of cash flows from operating activities that provided cash for 2006 included non-cash charges of $9.8 million for depreciation and amortization, $11.0 million for non-cash stock compensation, decreases in accounts receivable of $3.3 million, and increases in accounts payable and other liabilities of $10.2 million. The significant components within operating activities that resulted in a reduction of cash from operations in 2006 included a net loss of $2.2 million, increases in inventories of $1.6 million, and increases in license agreements and other assets of $5.6 million.

Spending on property and equipment amounted to $8.7 million in 2006 compared with $10.2 million in 2005.

Cash from the issuance of Common Stock under employee stock plans amounted to $9.4 million in 2006, $11.0 million in 2005, and $8.2 million in 2004.

We meet all of our funding needs for ongoing operations with internally generated cash flows from operations and with existing cash and short-term investment balances. We believe that existing cash, cash equivalents, and short-term investments, together with cash generated from operations, will be sufficient to meet our cash requirements for the following twelve months. A portion of available cash may be used for investment in or acquisition of complementary businesses, products, or technologies. Wafer manufacturers have at times demanded financial support from customers in the form of equity investments and advance purchase price deposits, which in some cases have been substantial. Should we require additional capacity, we may be required to incur significant expenditures to secure such capacity.

The following represents contractual commitments not accrued on the balance sheet associated with operating leases as of December 31, 2006:


	Payments Due by Period
													2012
	Total		2007		2008		2009		2010		2011		and Later
	(In thousands)

Operating leases	$	21,628	$	3,367	$	3,080	$	3,094	$	2,933	$	2,880	$	6,274

Purchase orders or contracts for the purchase of raw materials and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations as purchase orders may represent authorizations to purchase rather than binding agreements. For the purposes of this table, contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current manufacturing needs and fulfilled by our vendors within short time horizons. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements for three months. We also enter

into contracts for outsourced services; however, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty.

We believe that the availability of adequate financial resources is a substantial competitive factor. To take advantage of opportunities as they arise, or to withstand adverse business conditions when they occur, it may become prudent or necessary for us to raise additional capital. No assurance can be given that additional capital would become available on acceptable terms if needed.

• Accounts Receivable

Our net accounts receivable was $22.0 million at the end of 2006 compared with $25.3 million at the end of 2005. This decrease was due primarily to the timing of shipments in the fourth quarter of each of these fiscal years. Approximately 46% of fourth quarter sales were shipped in the last month of fiscal 2005 compared to approximately 39% of fourth quarter sales shipped in the last month of fiscal 2006. This allowed us to collect a higher percentage of our quarterly sales prior to the end of fiscal 2006 as compared to fiscal 2005. Net accounts receivable represented 42 days of sales outstanding at the end of fiscal 2006 compared to 53 days at the end of fiscal 2005.

• Inventories

Our net inventories were $39.2 million at the end of 2006 compared with $37.4 million at the end of 2005. We continue to hold material from “last time buy” inventory purchases made in 2003 and 2005 from two wafer manufacturers for some of our mature product families. Last time buys occur when a wafer supplier is about to shut down the manufacturing line used to make a product and we believe that our then-current inventories are insufficient to meet foreseeable future demand. Inventory purchased in last time buy transactions is evaluated on an ongoing basis for indications of excess or obsolescence based on rates of actual sell through, expected future demand for those products, and any other qualitative factors that may indicate the existence of excess or obsolete inventory. Inventory at December 31, 2006 and January 1, 2006, included $1.9 million and $4.3 million, respectively, of inventory purchased in last time buys. Inventory days of supply decreased from 191 days at the end of 2005 to 174 days at the end of 2006.

Our FPGAs are manufactured using customized steps that are added to the standard manufacturing processes of our independent wafer suppliers, so our manufacturing cycle is generally longer and more difficult to adjust in response to changing demands or delivery schedules than our competitors using standard processes. Accordingly, our inventory levels will probably always be higher than that of our major competitors using standard processes.

• Property and Equipment

Our net property and equipment was $22.8 million at the end of 2006 compared with $23.9 million at the end of 2005. We invested $8.7 million in property and equipment in 2006 compared with $10.2 million in 2005. Capital expenditures during the past two years have been primarily for engineering, manufacturing, and office equipment. Depreciation of property and equipment was $9.8 million in 2006 compared with $9.1 million in 2005.

• Goodwill

Our net goodwill was $30.2 million at the end of 2006 compared to $32.1 million at the end of 2005. The decrease in goodwill is the result of the realization of certain net operating loss carryforwards associated with the Company’s fiscal 2000 acquisition of Gatefield. We had originally established a valuation allowance for a portion of the net operating loss carryforwards acquired in connection with the acquisition of Gatefield. To the extent such valuation allowance is subsequently reversed as a result of the realization of the deferred tax asset, FAS 109 requires that the offsetting credit is recognized first as a reduction of goodwill.

Goodwill is recorded when consideration paid in an acquisition exceeds the fair value of the net tangible and intangible assets acquired. At the beginning of 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which addresses the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition. Under SFAS No. 142, we do not amortize goodwill, but instead test for impairment annually or more frequently if certain events or changes in circumstances indicate that the carrying value may not be

recoverable. We completed our annual goodwill impairments tests during the fourth quarter of 2006, and noted no indicators of impairment.

• Other Assets

Our other assets, net were $19.8 million at the end of 2006 compared with $13.4 million at the end of 2005. The increase was due primarily to a $5.1 million increase in the capitalization of various technology license agreements and a $1.0 million increase in deferred compensation plan assets.

• Current Liabilities

Our total current liabilities were $67.5 million at the end of 2006 compared with $58.4 million at the end of 2005. The increase was due primarily to the capitalization of certain long-term license agreements of $3.4 million and a $2.9 million increase in other accrued liabilities.

• Shareholders’ Equity

Shareholders’ equity was $290.6 million at the end of 2006 compared with $276.1 million at the end of 2005. The increase in 2006 included proceeds of $9.4 million from the sale of Common Stock under employee stock plans and $11.3 million of stock-based compensation partially offset by a net loss of $2.2 million, and stock repurchases of $2.2 million.

Impact of Recently Issued Accounting Standards

In February 2006, the FASB issued FASB Statement No. 155 (SFAS 155), “Accounting for Certain Hybrid Financial Instruments” an amendment of FASB Statements No. 133 and 140. SFAS 155 simplifies the accounting for certain hybrid financial instruments by permitting fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. This Statement will be adopted by Actel in the first quarter of fiscal 2007. The adoption of SFAS 155 will not have a material impact on our consolidated results of operations and financial condition.

In June 2006, the FASB issued FASB Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109”. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. This Interpretation prescribes 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. This Interpretation is effective for fiscal years beginning after December 15, 2006 and will be adopted by Actel in the first quarter of fiscal 2007. The Company is evaluating the impact of this Interpretation, however, we currently do not expect that the adoption of FIN 48 will have a material effect on our results of operations and financial condition.

In June, 2006, the FASB ratified the consensus reached in EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences”. This consensus provides that sabbatical leave or other similar benefits provided to an employee should be considered to accumulate over the service period as described in FASB Statement No. 43. This EITF is effective for fiscal years beginning after December 15, 2006 and will be adopted by Actel in the first quarter of fiscal 2007. Actel will record a $2.5 million cumulative adjustment, net of tax, to decrease the January 1, 2007 balance of retained earnings. We expect the annual impact to earnings to be immaterial.

beginning after November 15, 2007, and interim periods within those fiscal years. This Statement will be adopted by Actel in the first quarter of fiscal 2008. Actel is currently evaluating the effect that the adoption of FASB No. 157 will have on its consolidated results of operations and financial condition.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 provides interpretive guidance on how the effects of prior year errors should be considered in quantifying a current year misstatement. SAB 108 is effective for Actel for the fiscal year ended December 31, 2006. In connection with the adoption of SAB 108, the Company restated its financial statements for certain errors associated with the recognition of deferred income associated with its European distributors. See Note 2, “Restatements to Consolidated Financial Statements”.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157. The Company expects to adopt SFAS No. 159 in the first quarter of fiscal 2008. The Company is currently evaluating the impact that this pronouncement may have on its consolidated financial statements.

Critical Accounting Policies and Estimates

Our 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 (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. The U.S. Securities and Exchange Commission has defined critical accounting policies as those that are most important to the portrayal of our financial condition and results and also require us to make the most difficult, complex and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Based upon this definition, our most critical policies include revenue recognition, inventories, legal matters and income taxes. During the first quarter of fiscal 2006, we implemented a new critical accounting policy, stock-based compensation expense, in conjunction with our adoption of SFAS 123(R). These policies, as well as the estimates and judgments involved, are discussed below. We also have other key accounting policies that either do not generally require us to make estimates and judgments that are as difficult or as subjective or they are less likely to have a material impact on our reported results of operations for a given period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. In addition, if these estimates or their related assumptions change in the future, it could result in material expenses being recognized on the income statement.

• Revenues

Distributors resell our products to end customers at various negotiated price points which vary by end customer, product, quantity, geography and competitive pricing environments. When a distributors’ resale is priced at a discount from list price, we credit back to the distributor a portion of their original purchase price after the resale transaction is complete. Thus, a portion of the deferred income on shipments to distributors balance will be credited back to the distributor in the future. Based upon historical trends and inventory levels on hand at each of our distributors as of December 31, 2006, we estimate that approximately $10.9 million of the deferred income on shipments to distributors on the Company’s balance sheet as of December 31, 2006, will be credited back to the distributors in the future. These amounts will not be recognized as revenue and gross margin in our Statement of Operations. Since we expect our distributors to “turn” their inventory balances five to six times a year, we expect that a majority of the inventory held by our distributors at the end of any quarter will be resold to end customers over the next two quarters.

Revenue recognition depends on notification from the distributor that product has been resold. This reported information includes product resale price, quantity, and end customer information as well as inventory balances on hand. Our revenue reporting is dependent on us receiving timely and accurate data from our distributors. In determining the appropriate amount of revenue to recognize, we use this data from our distributors and apply judgment in reconciling differences between their reported inventory and sell through activities. Because of the time involved in collecting, assimilating and analyzing the data provided by our distributors, we report actual sell through revenue one month in arrears. This practice requires us to make an estimate of one month’s distributor sell through activity at the end of each fiscal quarter. This estimate is adjusted the following month to reflect actual sell through activity reported by our distributors.

There is a level of uncertainty in the distributor revenue estimation process and, accordingly, Actel maintains a reserve for revenue estimates exceeding actual sell through activity. As a result of ongoing improvements in distributor reporting and reconciliation processes and an evaluation of recent trends in variances between estimated amounts and actual sell through activity, in the third quarter of 2006 Actel adjusted its estimate of the distributor revenue reserve. The net effect of this change in estimate was to increase 2006 revenue by $1.2 million, increase costs of sales by $0.5 million, and increase gross margin by $0.7 million.

• Inventories

We believe that a certain level of inventory must be carried to maintain an adequate supply of product for customers. This inventory level may vary based upon orders received from customers or internal forecasts of demand for these products. Other considerations in determining inventory levels include the stage of products in the product life cycle, design win activity, manufacturing lead times, customer demands, strategic relationships with foundries, and competitive situations in the marketplace. Should any of these factors develop other than anticipated, inventory levels may be materially and adversely affected.

We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future demand and market conditions. To address this difficult, subjective, and complex area of judgment, we apply a methodology that includes assumptions and estimates to arrive at the net realizable value. First, we identify any inventory that has been previously written down in prior periods. This inventory remains written down until sold, destroyed, or otherwise dispositioned. Second, we examine inventory line items that may have some form of non-conformance with electrical and mechanical standards. Third, we assess the inventory not otherwise identified to be written down against product history and forecasted demand (typically for the next six months). Finally, we analyze the result of this methodology in light of the product life cycle, design win activity, and competitive situation in the marketplace to derive an outlook for consumption of the inventory and the appropriateness of the resulting inventory levels. If actual future demand or market conditions are less favorable than those we have projected, additional inventory write-downs may be required.

Our inventory valuation policies also take into consideration “last time buy” inventory purchases. Last time buys occur when a wafer supplier is about to shut down the manufacturing line used to make a product and we believe that our then current inventories are insufficient to meet foreseeable future demand. We made last time buys of certain products from our wafer suppliers in 2003 and 2005. Since this inventory was not acquired to meet current

demand, we apply a discrete write down policy for inventory purchased in last time buy transactions and the related inventory are excluded from the standard excess and obsolescence write down policy. Inventory purchased in last time buy transactions will be evaluated on an ongoing basis for indications of excess or obsolescence based on rates of actual sell through; expected future demand for those products over a longer time horizon; and any other qualitative factors that may indicate the existence of excess or obsolete inventory. Evaluations of last time buy inventory in 2006 and 2005 resulted in write-downs of $0.2 million and $0.3 million of material, respectively. These write-downs were taken because actual sell through results did not meet expectations or estimations of expected future demand.

• Legal Matters and Loss Contingencies

From time to time we are notified of claims, including claims that we may be infringing patents owned by others, or otherwise become aware of conditions, situations, or circumstances involving uncertainty as to the existence of a liability or the amount of a loss. When probable and reasonably estimable, we make provisions for estimated liabilities. As we sometimes have in the past, we may settle disputes and/or obtain licenses under patents that we are alleged to infringe. We can offer no assurance that any pending or threatened claim or other loss contingency will be resolved or that the resolution of any such claim or contingency will not have a materially adverse effect on our business, financial condition, and/or results of operations. Our failure to resolve a claim could result in litigation or arbitration, which can result in significant expense and divert the efforts of our technical and management personnel, whether or not determined in our favor. Actel is a nominal defendant in a consolidated shareholder derivative action filed in the United States District Court for the Northern District of California against certain current and former officers and Directors. The Company and the individual defendants intend to defend these cases vigorously. In addition, our evaluation of the impact of these claims and contingencies could change based upon new information. Subject to the foregoing, we do not believe that the resolution of any pending or threatened legal claim or loss contingency is likely to have a materially adverse effect on our financial position as of December 31, 2006, or results of operations or cash flows for the fiscal year then ended.

• Income Taxes

We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. We evaluate annually the realizability of our deferred tax assets by assessing our valuation allowance and, if necessary, we adjust the amount of such allowance. The factors used to assess the likelihood of realization include our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. We assessed our deferred tax assets at the end of 2006 and determined that it was more likely than not that we would be able to realize approximately $33.4 million of net deferred tax assets based upon our forecast of future taxable income and other relevant factors.

• Stock-Based Compensation Expense

Beginning January 2, 2006, we adopted the fair value recognition provisions of SFAS 123(R), using the modified prospective transition method, and therefore have not restated prior period’s results. Under the fair value recognition provisions of SFAS 123(R), we estimate the fair value of our employee stock awards at the date of grant using the Black-Scholes-Merton option pricing model, which requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of expected volatility of the market price of our stock and the expected term of the stock award. We have determined that historical volatility is the best predictor of expected volatility and the expected term of our awards was determined taking into consideration the vesting period of the award, the contractual term and our historical experience of employee stock option exercise behavior. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, we could change our assumptions used to value employee stock-based awards granted in future periods. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those awards expected to vest. If our actual forfeiture rate were materially different from our estimate, the stock-based compensation expense would

be different from what we have recorded in the current period. The fair value of restricted stock units was calculated based upon the fair value of our Common Stock at the date of grant. Further, SFAS 123(R) requires that employee stock-based compensation costs be recognized over the vesting period of the award and we have elected the straight-line method as the basis for recording our expense.

The Company recorded $11.0 million of stock-based compensation expense for the year ended December 31, 2006. As required by SFAS 123(R), management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest. As of December 31, 2006, the total compensation cost related to options and nonvested stock granted to employees under the Company’s stock option plans but not yet recognized was approximately $11.5 million, net of estimated forfeitures of approximately $1 million. This cost will be amortized over a weighted-average period of 2.15 years and will be adjusted for subsequent changes in estimated forfeitures. As of December 31, 2006, the total compensation cost related to options to purchase shares of the Company’s common stock under the ESPP but not yet recognized was approximately $1.2 million. This cost will be amortized over a weighted-average period of 1.14 years.


ITEM 7A.	*QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK*

As of December 31, 2006, our investment portfolio consisted primarily of asset backed obligations, corporate bonds, floating rate notes, and federal and municipal obligations. The principal objectives of our investment activities are to preserve principal, meet liquidity needs, and maximize yields. To meet these objectives, we invest excess liquidity only in high credit quality debt securities with average maturities of less than two years. We also limit the percentage of total investments that may be invested in any one issuer. Corporate investments as a group are also limited to a maximum percentage of our investment portfolio.

Our investments in debt securities, which totaled $158.6 million at December 31, 2006, are subject to interest rate risk. An increase in interest rates could subject us to a decline in the market value of our investments. These risks are mitigated by our ability to hold these investments for a period of time sufficient to recover the carrying value of the investment which may not be until maturity. A hypothetical 100 basis point increase in interest rates compared with interest rates at December 31, 2006, and January 1, 2006, would result in a reduction of approximately $2.4 million and $1.5 million in the fair value of our available-for-sale debt securities held at December 31, 2006, and January 1, 2006, respectively.

The potential changes noted above are based upon sensitivity analyses performed on our financial position and expected operating levels at December 31, 2006. Actual results may differ materially.


ITEM 8.	*FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA*

ACTEL CORPORATION

CONSOLIDATED BALANCE SHEETS


	Dec. 31, 2006			Jan. 1, 2006
				Restated(1)
	(In thousands, except
	share and per share amounts)

ASSETS
Current assets:
Cash and cash equivalents	$	33,699		$	24,033
Short-term investments		124,022			119,158
Accounts receivable, net		22,017			25,287
Inventories		39,203			37,372
Deferred income taxes		30,389			21,489
Prepaid expenses and other current assets		9,492			8,554

Total current assets		258,822			235,893
Long-term investments		34,234			25,125
Property and equipment, net		22,770			23,859
Goodwill		30,209			32,142
Deferred tax asset		3,055			12,786
Other assets, net		19,832			13,391

	$	368,922		$	343,196


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,799		$	14,503
Accrued salaries and employee benefits		5,984			5,452
Accrued license		9,098			5,714
Other accrued liabilities		7,366			4,482
Deferred income on shipments to distributors		29,297			28,251

Total current liabilities		67,544			58,402
Deferred compensation plan liability		4,428			3,667
Deferred rent liability		1,367			1,242
Long term accrued licenses, net		4,967			3,828

Total liabilities		78,306			67,139
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $.001 par value per share; 4,500,000 shares authorized; 1,000,000 issued and converted to common stock; and none outstanding		—			—
Series A Preferred stock, $.001 par value per share; 500,000 shares authorized; none issued or outstanding		—			—
Common Stock, $.001 par value; 55,000,000 shares authorized; 26,516,850 and 25,733,490 shares issued and outstanding at December 31, 2006 and January 1, 2006, respectively		26			26
Additional paid-in capital		226,443			210,101
Deferred stock compensation		—			(63	)
Retained earnings		64,578			66,733
Accumulated other comprehensive loss		(431	)		(740	)

Total shareholders’ equity		290,616			276,057

	$	368,922		$	343,196


(1)		See “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatements of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements of this Form 10-K.

See Notes to Consolidated Financial Statements

ACTEL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND ACCUMULATED OTHER
COMPREHENSIVE INCOME/(LOSS)


													Accumulated
													Other			Total
	Common			Additional			Deferred Stock			Retained			Comprehensive			Shareholders’
	Stock			Paid-in Capital			Compensation			Earnings			Income (Loss)			Equity
	(In thousands, except share amounts)

Balance at January 1, 2004, as previously reported	$	25		$	184,674		$	(44	)	$	79,518		$	260		$	264,433
Cumulative effect of restatements		—			15,780			(1,267	)		(12,165	)		—			2,348

Balance at January 1, 2004 — Restated(1)		25			200,454			(1,311	)		67,353			260			266,781

Net income		—			—			—			2,774			—			2,774
Other comprehensive income (loss):
Change in unrealized loss on investments		—			—			—			—			(700	)		(700	)

Total comprehensive income		—			—			—			2,774			(700	)		2,074
Adjustment for stock-based compensation expense associated with remeasured grants		—			950			—			—			—			950
Other adjustments for stock-based compensation expense		—			(604	)		—			—			—			(604	)
Adjustment to income tax benefit		—			(51	)		—			—			—			(51	)
Reversal of unearned stock-based compensation expense due to employee terminations, net		—			(1,012	)		1,012			—			—			—
Issuance of stock option to consultant		—			74			—			—			—			74
Issuance of 682,106 shares of Common Stock under employee stock plans		1			8,174			—			—			—			8,175
Repurchase of 661,697 shares of Common Stock		(1	)		(4,888	)		—			(4,738	)		—			(9,627	)
Cashless exercise of options to purchase 54,563 shares of Common Stock using 30,563 mature shares of Common Stock		—			598			—			(598	)		—			—
Amortization of unearned compensation cost		—			—			44			—			—			44

Balance at January 2, 2005 — Restated(1)	$	25		$	203,695		$	(255	)	$	64,791		$	(440	)	$	267,816


(1)		See “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatements of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements of this Form 10-K.

See Notes to Consolidated Financial Statements

ACTEL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND ACCUMULATED OTHER
COMPREHENSIVE INCOME/(LOSS)


												Accumulated
												Other			Total
	Common		Additional			Deferred Stock			Retained			Comprehensive			Shareholders’
	Stock		Paid-in Capital			Compensation			Earnings			Income (Loss)			Equity
	(In thousands, except share amounts)

Balance at January 2, 2005 — Restated(1)	$	25	$	203,695		$	(255	)	$	64,791		$	(440	)	$	267,816

Net income		—		—						7,036			—			7,036
Other comprehensive income (loss):
Change in unrealized loss on investments		—		—			—			—			(300	)		(300	)

Total comprehensive income		—		—						7,036			(300	)		6,736
Adjustment for stock-based compensation expense associated with remeasured grants		—		186			—			—			—			186
Other adjustments for stock-based compensation expense		—		(431	)		—			—			—			(431	)
Reversal of unearned compensation expense due to expiration of options		—		646			—			—			—			646
Tax impact of stock-based compensation		—		(88	)		—			—			—			(88	)
Reversal of unearned stock-based compensation expense due to employee terminations, net		—		(192	)		192			—			—			—
Issuance of 951,835 shares of Common Stock under employee stock plans		1		10,987			—			—			—			10,988
Repurchase of 627,500 shares of Common Stock		—		(4,702	)		—			(5,094	)		—			(9,796	)

Balance at January 1, 2006 — Restated(1)		26		210,101			(63	)		66,733			(740	)		276,057

Net loss		—		—			—			(2,155	)		—			(2,155	)
Other comprehensive income (loss):
Change in unrealized loss on investments		—		—			—			—			309			309

Total comprehensive loss		—		—			—			(2,155	)		309			(1,846	)
Stock based compensation		—		11,256			—			—			—			11,256
Reversal of deferred tax assets upon cancellation of options		—		(2,054	)		—			—			—			(2,054	)
Issuance of 906,380 shares of Common Stock under employee stock plans		—		9,437			—			—			—			9,437
Repurchase of 123,020 shares of Common Stock		—		(2,234	)		—			—			—			(2,234	)
Reversal of unearned stock-based compensation upon adoption of SFAS No. 123R		—		(63	)		63			—			—			—

Balance at December 31, 2006	$	26	$	226,443		$	—		$	64,578		$	(431	)	$	290,616


(1)		See “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatements of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements of this Form 10-K.

See Notes to Consolidated Financial Statements

ACTEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended,
	Dec. 31, 2006			Jan. 1, 2006			Jan. 2, 2005
				Restated(1)			Restated(1)
	(In thousands)

Operating activities:
Net income(loss)	$	(2,155	)	$	7,036		$	2,774
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		9,782			11,033			10,496
Stock compensation cost recognized		10,990			(233	)		1
Changes in operating assets and liabilities:
Accounts receivable		3,270			(8,854	)		2,946
Inventories		(1,564	)		3,846			(2,554	)
Deferred income taxes		(434	)		2,187			(568	)
Prepaid expenses and other current assets		(938	)		(2,446	)		(1,366	)
License agreements and other long-term assets		(5,627	)		(7,894	)		1
Accounts payable, accrued salaries and employee benefits, and other accrued liabilities		10,159			11,992			(3,048	)
Deferred income on shipments to distributors		1,046			5,918			1,213

Net cash provided by operating activities		24,529			22,585			9,895
Investing activities:
Purchases of property and equipment		(8,678	)		(10,180	)		(10,714	)
Purchases of available-for-sale securities		(145,200	)		(72,252	)		(166,356	)
Sales and maturities of available-for-sale securities		131,731			75,767			161,657
Changes in other long term assets		81			516			(273	)

Net cash used in investing activities		(22,066	)		(6,149	)		(15,686	)
Financing activities:
Issuance of Common Stock under employee stock plans		9,437			10,988			8,175
Repurchase of Common Stock		(2,234	)		(9,796	)		(9,627	)

Net cash provided by (used in) financing activities		7,203			1,192			(1,452	)
Net increase (decrease) in cash and cash equivalents		9,666			17,628			(7,243	)
Cash and cash equivalents, beginning of year		24,033			6,405			13,648

Cash and cash equivalents, end of year	$	33,699		$	24,033		$	6,405

Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes	$	510		$	435		$	431
Supplemental schedule of non-cash activities:
Accrual of long-term license agreements	$	9,557		$	10,678		$	—


(1)		See “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatements of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements of this Form 10-K.

See Notes to Consolidated Financial Statements

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	Organization and Summary of Significant Accounting Policies

The leading supplier of nonvolatile solutions, Actel Corporation, founded in California in 1985, designs, develops, and markets Flash- and antifuse-based field-programmable gate arrays (FPGAs) for a wide range of applications within the aerospace, automotive, avionics, communications, consumer, industrial, medical, and military markets. In support of its FPGA devices, the company also offers design and development software, intellectual property (IP) cores, programming hardware, debugging tool kits and demonstration boards, design services, field engineering and technical support. We sell our products globally through a worldwide, multi-tiered sales and distribution network.

Advertising and Promotion Costs

Our policy is to expense advertising and promotion costs as they are incurred. Our advertising and promotion expenses were approximately $3.4 million in 2006, $3.4 million in 2005 and $3.2 million in 2004 and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

Basis of Presentation

The consolidated financial statements include the accounts of Actel Corporation and our wholly owned subsidiaries. We use the U.S. Dollar as the functional currency in our foreign operations. Assets and liabilities that are not denominated in the functional currency are remeasured into U.S. dollars, and the resulting gains or losses are included in interest income and other, net of expense. All significant intercompany accounts and transactions have been eliminated in consolidation.

Our fiscal year ends on the first Sunday after December 30th. Fiscal 2006 ended on December 31, 2006, fiscal 2005 ended on January 1, 2006, and fiscal 2004 ended on January 2, 2005.

Cash Equivalents and Investments

For financial statement purposes, we consider all highly liquid debt instruments with insignificant interest rate risk and a maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist primarily of cash deposits in money market funds that are available for withdrawal without restriction. Investments consist principally of corporate, federal, state, and local municipal obligations. See Note 4 for further information regarding short-term investments.

We account for our investments in accordance with the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” We determine the appropriate classification of debt securities at the time of purchase and re-evaluate such designation as of each balance sheet date. We may also make long term equity investments for the promotion of business and strategic objectives.

We monitor all of our equity investments for impairment on a periodic basis. In the event that the carrying value of the equity investment exceeds its fair value and the decline in value is determined to be other than temporary, the carrying value is reduced to its current fair market value. See Note 4 for further information regarding investments.

Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported as a component of comprehensive income in shareholders’ equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest and other income, net of expense. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income and other.

In accordance with SFAS No. 115, if a decline in value below cost is determined to be other than temporary, the unrealized losses will be recorded as expense in the period when that determination is made. In the absence of other

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

overriding factors, we consider a decline in market value to be other than temporary when a publicly traded stock or a debt security has traded below book value for a consecutive six-month period. If an investment continues to trade below book value for more than six months, and mitigating factors such as general economic and industry specific trends including the creditworthiness of the issuer are not present this investment would be evaluated for impairment and written down to a balance equal to the estimated fair value at the time of impairment, with the amount of the write-down realized as expense on the income statement. If management concludes it has the intent and ability as necessary, to hold such securities for a period of time sufficient to allow for an anticipated recovery of fair value up to the cost of the investment, and the issuers of the securities are creditworthy, no other-than-temporary impairment is deemed to exist. No impairment charges were recorded for 2006, 2005 or 2004.

We maintain trading assets to generate returns that offset changes in liabilities related to our deferred compensation plan. The trading assets consist of insurance contracts, which are stated at fair value, and our Common Stock contributed to the plan by participants, which is stated at historical value. Recognized gains and losses are included in interest income and other, net of expense, and generally offset the change in the deferred compensation liability, which is also included in interest income and other, net of expense. Net losses on the trading asset portfolio were $0.2 million in 2006, and $0.1 million in 2005 and 2004. The deferred compensation assets were $4.1 million in 2006, $3.3 million in 2005 and $3.0 million in 2004 and the deferred compensation liabilities were $4.4 million, $3.7 million, and $3.3 million, respectively, in those years.

Concentration of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments, and trade receivables. We limit our exposure to credit risk by investing excess liquidity only in securities of A, A1, or P1 grade. We are exposed to credit risks in the event of default by the financial institutions or issuers of investments to the extent of amounts recorded on the balance sheet.

We sell our products to customers in diversified industries. We are exposed to credit risks in the event of non-payment by customers to the extent of amounts recorded on the balance sheet. We limit our exposure to credit risk by performing ongoing credit evaluations of our customers’ financial condition and generally require no collateral. We are exposed to credit risks in the event of insolvency by our customers and manage such exposure to accounting losses by limiting the amount of credit extended whenever deemed necessary. Our distributors accounted for approximately 77% of our revenues in 2006, 64% of our revenues in 2005 and 67% in 2004. During 2003, we consolidated our distribution channel by terminating our agreement with Pioneer, leaving Memec as our sole distributor in North America. On April 26, 2005, Avnet, Inc. (Avnet) and Memec Group Holdings Ltd. (Memec) announced they had reached a definitive agreement for Avnet to acquire Memec in a stock and cash transaction. On July 5, 2005, Avnet announced the completion of its acquisition of Memec. The loss of Avnet as a distributor could have a material adverse effect on our business, financial condition and results of operations. We had no single end customer accounting for greater than 10% of net revenues in 2006, 2005 or 2004.

As of December 31, 2006, we had accounts receivable totaling $22.0 million, net of an allowance for doubtful accounts of $0.6 million. If sales levels were to increase the level of receivables would likely also increase. In the event that customers were to delay their payments to us, the levels of accounts receivable would also increase. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based on past payment history with the customer, analysis of the customer’s current financial condition, outstanding invoices older than 90 days, and other known factors. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required and our operating results would be negatively impacted.

We depend on a limited number of independent wafer manufacturers, subcontractors for the assembly and packaging of our products and software and hardware developers for the design, development and maintenance of our products. Our reliance on these independent suppliers of products and services involves certain risks, including lack of control over capacity allocation, delivery schedules and customer support. We have no long-term contracts

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

with our subcontractors and certain of those subcontractors sometimes operate at or near full capacity. Any significant disruption in supplies or services from, or degradation in the quality of components or services supplied by, our subcontractors could have a materially adverse effect on our business, financial condition, and/or operating results.

Fair Value of Financial Instruments

We use the following methods and assumptions in estimating our fair value disclosures for financial instruments:

• Accounts Payable

The carrying amount reported in the balance sheets for accounts payable approximates fair value because of relatively short payment terms.

• Cash and Cash Equivalents

The carrying amounts reported in the balance sheets for cash and cash equivalents approximate fair value because of the relatively short time to maturity.

• Insurance Contracts

The fair value of our insurance contracts (entered into in connection with our deferred compensation plan) is based upon cash surrender value.

• Investment Securities

The fair values for marketable debt and equity securities are based on quoted market prices. Strategic equity investments in non-public companies with no readily available market value are carried on the balance sheet at cost as adjusted for impairment losses. If reductions in the market value of marketable equity securities to an amount that is below cost are deemed by us to be other than temporary, the reduction in market value will be realized, with the resulting loss in market value reflected on the income statement.

Goodwill and other Acquisition-Related Intangibles

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” which addresses the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition, we test goodwill for impairment annually or more frequently if certain events or changes in circumstances indicate that the carrying value may not be recoverable. We completed our annual goodwill impairment tests and noted no impairment. The initial test of goodwill impairment requires us to compare our fair value with our book value, including goodwill. Based on our total market capitalization, which we believe represents the best indicator of our fair value, we determined that our fair value was in excess of our book value. Since we found no indication of impairment, no further testing was necessary.

At January 1, 2006 and January 2, 2005 we had identified intangible assets arising from prior business acquisitions with a net book value of $15,000 and $1.9 million, respectively, which were being amortized on a straight line basis over their estimated lives. These non-goodwill intangible assets were fully amortized in 2006.

Impact of Recently Issued Accounting Standards

In February 2006, the FASB issued FASB Statement No. 155 (“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments” an amendment of FASB Statements No. 133 and 140. SFAS 155 simplifies the accounting for certain hybrid financial instruments by permitting fair value remeasurement for any hybrid financial instrument

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

that contains an embedded derivative that otherwise would require bifurcation. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. This Statement will be adopted by Actel in the first quarter of fiscal 2007. The adoption of SFAS 155 will not have a material impact on our consolidated results of operations and financial condition.

In June 2006, the FASB issued FASB Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109”. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes 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. This Interpretation is effective for fiscal years beginning after December 15, 2006 and will be adopted by Actel in the first quarter of fiscal 2007. The Company is evaluating the impact of this Interpretation, however, we currently do not expect that the adoption of FIN 48 will have a material effect on our results of operations and financial condition.

On June 28, 2006, the FASB ratified the consensus reached in EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences”. This consensus provides that sabbatical leave or other similar benefits provided to an employee should be considered to accumulate over the service period as described in FASB Statement No. 43. This EITF is effective for fiscal years beginning after December 15, 2006 and will be adopted by Actel in the first quarter of fiscal 2007. Actel will record a $2.5 million cumulative adjustment, net of tax, to decrease the January 1, 2007 balance of retained earnings. We expect the annual impact to earnings to be immaterial.

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements of assets and liabilities. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. This Statement will be adopted by Actel in the first quarter of fiscal 2008. Actel is currently evaluating the effect that the adoption of FASB No. 157 will have on its consolidated results of operations and financial condition.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Income Taxes

We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Under SFAS No. 109, the liability method is used in accounting for income taxes. Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. We evaluate annually the realizability of our deferred tax assets by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). We believe that a certain level of inventory must be carried to maintain an adequate supply of product for customers. This inventory level may vary based upon orders received from customers or internal forecasts of demand for these products. Other considerations in determining inventory levels include the stage of products in the product life cycle, design win activity, manufacturing lead times, customer demand, strategic relationships with foundries, and competitive situations in the marketplace. Should any of these factors develop other than anticipated, inventory levels may be materially and adversely affected.

We write down our inventory for estimated obsolescence or unmarketability equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future demand and market conditions. To address this difficult, subjective, and complex area of judgment, we apply a methodology that includes assumptions and estimates to arrive at the net realizable value. First, we identify any inventory that has been previously written down in prior periods. This inventory remains written down until sold, destroyed, or otherwise dispositioned. Second, we examine inventory line items that may have some form of non-conformance with electrical and mechanical standards. Third, we assess the inventory not otherwise identified to be written down against product history and forecasted demand (typically for the next six months). Finally, we analyze the result of this methodology in light of the product life cycle, design win activity, and competitive situation in the marketplace to derive an outlook for consumption of the inventory and the appropriateness of the resulting inventory levels. If actual future demand or market conditions are less favorable than those we have projected, additional inventory write-downs may be required.

During the second quarter of 2004, we recommended that customers switch to RTSX-S parts manufactured by UMC if their schedules permitted, and we offered to accept RTSX-S parts from our original manufacturer in exchange for the UMC parts. By the fourth quarter of 2004, most customers had decided to switch to UMC devices, and we determined that the demand for parts from our original manufacturer no longer supported our inventory levels. As a result, we took a charge of $2.1 million in the fourth quarter of 2004 related to the unmarketability of RTSX-S parts from our original manufacturer.

We made “last time buys” of certain products from our wafer suppliers during 2003 and 2005. Our inventory valuation policy has been designed to take into consideration last time buy inventory purchases. Last time buys occur when a wafer supplier is about to shut down the manufacturing line used to make a product and current inventories are insufficient to meet foreseeable future demand. Since this inventory was not acquired to meet current demand, we did not believe the application of our existing inventory write down policy was appropriate, so a discrete write down policy was established for inventory purchased in last time buy transactions. As a consequence, these transactions and the related inventory are excluded from our standard excess and obsolescence write down policy. Inventory purchased in last time buy transactions is evaluated on an ongoing basis for indications of excess

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

or obsolescence based on rates of actual sell through; expected future demand for those products over a longer time horizon; and any other qualitative factors that may indicate the existence of excess or obsolete inventory. In the event that actual sell through does not meet expectations and estimations of expected future demand decrease, last time buy inventory may be written down. Evaluations of last time buy inventory in 2005 resulted in a write down of $0.3 million of last time buy material. No write down of last time buy material had been recorded in 2006 or prior to 2005. Approximately $1.9 million and $4.3 million related to last time buy purchases was included in inventory on the balance sheet at year end 2006 and 2005 respectively.

Legal Matters and Loss Contingencies

Property and Equipment

Property and equipment is carried at cost less accumulated depreciation and amortization. Depreciation and amortization have been provided on a straight-line basis over the following estimated useful lives:


Equipment		2 to 5 years
Furniture and fixtures		3 to 5 years
Leasehold improvements		Shorter of useful life or remaining term of lease

See Note 3 for information on property and equipment amounts.

Revenue Recognition

We sell our products to OEMs and to distributors who resell our products to OEMs or their contract manufacturers. We recognize revenue on products sold to our OEMs upon shipment. Because sales to our distributors are generally made under agreements allowing for price adjustments, credits, and right of return under certain circumstances, we generally defer recognition of revenue on products sold to distributors until the products are resold by the distributor and price adjustments are determined at which time our final net sales price is fixed. Deferred revenue net of the corresponding deferred cost of sales are recorded in the caption deferred income on shipments to distributors in the liability section of the consolidated balance sheet. Deferred income effectively represents the gross margin on the sale to the distributor, however, the amount of gross margin we recognize in future periods will be less than the originally recorded deferred income as a result of negotiated price concessions. Distributors resell our products to end customers at various negotiated price points which vary by end customer, product, quantity, geography and competitive pricing environments. When a distributors’ resale is priced at a discount from list price, we credit back to the distributor a portion of their original purchase price after the resale transaction is complete. Thus, a portion of the deferred income on shipments to distributors balance will be credited

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

back to the distributor in the future. Based upon historical trends and inventory levels on hand at each of our distributors as of December 31, 2006, we currently estimate that approximately $10.9 million of the deferred income on shipments to distributors on the Company’s balance sheet as of December 31, 2006, will be credited back to the distributors in the future. These amounts will not be recognized as revenue and gross margin in our Statement of Operations. Since we expect our distributors to “turn” their inventory balances five to six times a year, we expect that a majority of the inventory held by our distributors at the end of any quarter will be resold to end customers over the next two quarters.

We record a provision for price adjustments on unsold merchandise shipped to distributors in the same period as the related revenues are recorded. If market conditions were to decline, we may need to take action with our distributors to ensure the sell-through of inventory already in the channel. These actions during a market downturn could result in incrementally greater reductions to net revenues than otherwise would be expected. We also record a provision for estimated sales returns on products shipped directly to end customers in the same period as the related revenues are recorded. The provision for sales returns is based on historical sales returns, analysis of credit memo data, and other factors. If our calculation of these estimates does not properly reflect future return patterns, future net revenues could be materially different.

Stock-Based Compensation

Adoption of SFAS 123(R)

Prior to January 2, 2006, we accounted for our stock options and equity awards in accordance with the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations and had elected to follow the “disclosure only” alternative prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation.” Under this approach we accounted for stock-based awards to employees using the intrinsic value method in accordance with APB Opinion No. 25 and FASB Interpretation (FIN) No. 44, “Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB Opinion No. 25.” Accordingly, no compensation cost was recognized for our fixed-cost stock option plans when stock-based awards were issued at fair market value on the date of grant for our stock option plans or 85% of fair market value at the date of grant for our employee stock purchase plan. Options and warrants granted to consultants and vendors were accounted for at fair value determined by using the Black-Scholes-Merton method in accordance with Emerging Issues Task Force (EITF) Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” and FIN No. 44.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Effective January 2, 2006, we adopted the fair value recognition provisions of SFAS No. 123 (Revised 2004), “Share-Based Payment,” “SFAS 123(R)”, using the modified-prospective transition method. Under this transition method, stock-based compensation cost recognized in 2006, includes: (a) compensation cost for all unvested stock-based awards as of January 2, 2006, that were granted prior to January 2, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all stock-based awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).

We receive a tax deduction for certain stock option exercises in the period options are exercised, generally for the excess of the fair market value of the options at the exercise date over the exercise prices of the options. Prior to the adoption of SFAS 123(R) we reported all tax benefits resulting from the exercise of stock options as operating cash flows in our consolidated statement of cash flows. Beginning in 2006, the excess tax benefits from the exercise of stock options are reported as financing cash flows in accordance with SFAS 123(R).

Determining Fair Value

Valuation and amortization method — The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing formula and multiple option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

Expected Term — The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

Expected Volatility — Effective January 2, 2006, pursuant to the SEC’s Staff Accounting Bulletin 107, the Company reevaluated the assumptions used to estimate stock price volatility and determined that it would place exclusive reliance on historical stock price volatility that corresponds to the period of expected term as the Company has no reason to believe that the future stock price volatility over the expected term is likely to differ from past stock price volatility.

Expected Dividend — The Black-Scholes-Merton valuation model calls for a single expected dividend yield as an input. The dividend yield is determined by dividing the expected per share dividend during the coming year by the grant date stock price. The expected dividend assumption is based on the Company’s current expectations about its stated dividend policy which is to not pay dividends to its shareholders.

Risk-Free Interest Rate— The Company bases the risk-free interest rate used in the Black-Scholes-Merton valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term. Where the expected term of the Company’s stock-based awards do not correspond with the terms for which interest rates are quoted, the Company performed a straight-line interpolation to determine the rate from the available term maturities.

Estimated Forfeitures— When estimating forfeitures, the Company set the estimated forfeiture rate to be equal to its 5 year average actual forfeiture rate.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fair Value — The fair value of the Company’s stock options granted to employees for the year ended December 31, 2006, was estimated using the following weighted- average assumptions:


Option Plan Shares
Expected term (in years)		4.65
Volatility		44.4%
Risk-free interest rate		4.5%
Estimated forfeitures		3%
Weighted-average fair value		$7.22
ESPP Shares
Expected term (in years)		1.27
Volatility		32.0%
Risk-free interest rate		4.6%
Estimated forfeitures		3%
Weighted-average fair value		$4.07

During the fourth fiscal quarter of 2005, the Company accelerated the vesting of unvested stock options previously granted under its stock option plans that had an exercise price greater than or equal to $19.73 per share that were held by employees located outside the United States. Unvested options to purchase approximately 91,400 shares became exercisable as a result of the vesting acceleration. The affected stock options have exercise prices ranging from $19.73 to $25.56 per share and a weighted average exercise price of $22.02 which is significantly above the current fair value of the stock. The affected options included no options held by the Company’s executive officers. The primary purpose of the accelerated vesting was to enable the Company to avoid recognizing in its income statement compensation expense associated with these options in future periods upon adoption of SFAS No. 123R in the first quarter of 2006.

Pro Forma Information for Periods Prior to Adoption of FAS 123(R)

Pro forma information regarding net income and net income per share is required by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure an Amendment of FASB Statement No. 123,” which also requires that the information be determined as if we had accounted for our stock-based awards to employees granted under the fair value method. Our stock based awards consist of options and employee stock purchase rights. The fair value for these stock-based awards to employees was estimated at the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions:


	Stock Options						Stock Purchase Plan Rights
Year Ended December 31,	2005			2004			2005			2004

Expected life of options (years)		3.90			4.18			1.29			1.24
Expected stock price volatility		51	%		57	%		48	%		56	%
Risk-free interest rate		3.7	%		3.0	%		3.7	%		2.3	%

The weighted-average fair value per share of options granted during 2005 was $6.57 and during 2004 was $10.43. The weighted-average fair value per share of ESPP rights granted during 2005 was $5.35 and during 2004 was $6.01.

The following pro forma net loss per share were determined as if we had accounted for employee stock-based compensation for our employee stock plans under the fair value method prescribed by FAS 123.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Years Ended
	January 1,									January 2,
	2006									2005
	As Reported			Adjustments			As Restated			As Reported			Adjustments			As Restated
	(In thousands, except per share amounts)

Net income as reported	$	7,036		$	—		$	7,036		$	2,394		$	380		$	2,774
Add back:
Stock-based compensation included in reported net income, net of tax(1)		—			(149	)		(149	)		118			211			329
Less:
Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax		(12,401	)		(113	)		(12,514	)		(12,411	)		(396	)		(12,807	)

Pro forma net loss	$	(5,365	)	$	(262	)	$	(5,627	)	$	(9,899	)	$	195		$	(9,704	)

Net income per share as reported:
Basic	$	0.28		$	0.00		$	0.28		$	0.09		$	0.01		$	0.11

Diluted	$	0.28		$	0.00		$	0.28		$	0.09		$	0.01		$	0.11

Pro forma net income (loss) per share:
Basic	$	(0.21	)	$	(0.01	)	$	(0.22	)	$	(0.39	)	$	0.01		$	(0.38	)

Diluted	$	(0.21	)	$	(0.01	)	$	(0.22	)	$	(0.39	)	$	0.01		$	(0.38	)


(1)		Adjustments reflect the sum of stock-based compensation expense associated with remeasured grants, net of tax, plus other stock-based compensation expense, net of tax

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. In addition, any change in these estimates or their related assumptions could have a materially adverse effect on our operating results.

Reclassifications

Certain amounts from prior years have been reclassified in the Consolidated Balance Sheet to conform to the current year presentation.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


2.	Restatement of Financial Statements

Restatement of Previously-Issued Financial Statements

In addition, we have restated the pro forma amortization of deferred stock compensation included in the pro forma net income (loss), net of tax, and total stock-based employee compensation expenses determined under the fair value based method, net of tax, under SFAS 123 and reported in Note 1 to the consolidated financial statements to reflect the impact of the stock-based compensation expense resulting from the correction of these past stock option grants.

Stock Option Reviews, Investigation, and Informal Inquiry


	•	A regular process of making “monthly grants” of new-hire, promotion, merit-adjustment, and patent-award options (and, in 2005 and 2006, annual replenishment awards to continuing employees known as “Evergreen” options) on the first Friday of each month. We have made a monthly grant of options on the first Friday of almost every month since September 1994. Primarily because our monthly grant process uses stock option grant dates that are fixed in advance, the Special Committee concluded that it is a reliable process with respect to the risk of stock option backdating (even though there is still a risk that the grants may not

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


		have been determined with finality or that all granting actions may not have been complete on the stated grant date, requiring a measurement date for accounting purposes that is different than the stated grant date). Other factors that support our conclusion that the monthly grant process is reliable include the following:


	•	The parameters of the new-hire, promotion, merit-adjustment, and patent-award options included in monthly grants are pre-approved by the Compensation Committee as part of the annual stock option budget.

	•	The events giving rise to the new-hire, promotion, merit-adjustment, and patent-award options included in monthly grants are subject to separate formal approval processes that include the Vice President of Human Resources (who signs the grant list included in the monthly grants) and result in signed and dated Personnel Action Notices (or “PANs”) evidencing management approval of the stock option awards on or before the stated grant date. For this reason, the terms and recipients of each monthly grant are “known” on the stated grant date, making the compilation of the grant list for each monthly grant from the PANs merely an administrative task.

	•	As with the new-hire, promotion, merit-adjustment, and patent-award options included in other monthly grants, the budget for the Evergreen options granted in 2005 and 2006 was approved by the Compensation Committee at a meeting near the beginning of each fiscal year, and the grants to officers were pre-cleared by the Compensation Committee. By explicitly pre-clearing the grant of Evergreen options to officers in 2005 and 2006, the Compensation Committee implicitly authorized the grant of Evergreen options to all employees.

	•	The Company operated as if the terms of the awards included in the monthly grants were final prior to completion of the formal Compensation Committee approval procedure, indicating that formal approval of the monthly grants represented only an administrative delay rather than a period during which any of the terms of the awards remained under consideration or subject to change. For example, we frequently communicated the option terms to recipients and entered the option terms and recipients into Equity Edge, our stock administration database, prior to completion of the formal Compensation Committee approval procedure.

The Special Committee recommended, and we agree, that the completion of the formal Compensation Committee approval procedure subsequent to the stated grant date does not in and of itself require a correction in the measurement date for a monthly grant.


	•	A process of making “non-monthly grants” on irregular dates primarily for (i) eleven annual Evergreen option grants to continuing employees and one additional Evergreen option grant in 2003, (ii) options to continuing employees in connection with two repricings (one in 1996 and one in 1998) and two exchanges (one in 2001 and one in 2006), and (iii) options to new employees retained in connection with four business combinations or acquisitions (one in 1998, one in 1999, and two in 2000). Any new-hire, promotion, merit-adjustment, and/or patent-award options that were pending on the date of these non-monthly grants were usually also awarded, and new-hire promotion, merit-adjustment, and/or patent-award options were sometimes awarded by themselves in non-monthly grants. Primarily because our non-monthly grant process (which was abandoned in 2004) did not use stock option grant dates that were fixed in advance, the Special Committee concluded that it was not a reliable process with respect to the risk of stock option backdating to the extent that hindsight could have been used (and in one instance was found to have been used) to select the stated grant dates. Accordingly, the Special Committee recommended, and we agree, that the completion of the formal Compensation Committee approval procedure subsequent to the stated grant date does require a correction in the measurement date for a monthly grant.

	•	A process of making “automatic grants” of Director options. The automatic grant process uses stock option grant dates that are fixed in advance for replenishment options so the Special Committee concluded that it is

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


		a reliable process with respect to the risk of stock option backdating (even though there can be uncertainty about when a new Director joins the Board).

Almost all stock options granted during the Investigation Period were awarded under the monthly and non-monthly grant processes, which were approved by means of a Unaminous Written Consent (“UWC”) of the three-member Compensation Committee. In light of the risk of stock option backdating presented by each granting process, the Special Committee directed the Investigation Team to examine all non-monthly grants and all grants to Directors and executive officers (who are responsible for all of the stock option granting processes), but determined that testing of the monthly grants on a sample basis was sufficient in combination with appropriate analytical procedures. Approximately 85% of the options granted during the Investigation Period were examined by the Investigation Team. The additional analytical review procedures applied to the monthly grant population consisted of new-hire, rehire, and Equity Edge record-add date (i.e., the date option terms and recipients were entered into our stock administration database) analyses. The Special Committee concluded, and the Investigation Team agreed, that no additional procedures were required since all non-monthly grants and all grants to Directors and executive officers were tested directly and all monthly grants were either tested directly or analyzed using the additional review procedures to provide reasonable assurance that the untested population does not contain any material errors of the types found in the tested population.

The Special Committee presented its preliminary findings to the Board of Directors on January 30, 2007. The preliminary findings were described in our Current Report on Form 8-K filed with the SEC on February 1, 2007, and include the following:


	•	There was inadequate documentation supporting the measurement dates for each of the Company’s company-wide annual grants during the period 1996-2001.

	•	There were a number of other grants during the 1996-2001 period for which there was inadequate documentation supporting the recorded measurement dates, including some executive grants and grants to new employees in connection with corporate acquisitions.

	•	In at least one instance during the 1996-2001 period, at a time when he was the Company’s Chief Financial Officer, Mr. Henry L. Perret participated in the selection of a favorable stated grant date with the benefit of hindsight and did not properly consider the accounting implications of that action.

	•	Beginning in 2002, documentation relating to annual and other grants improved substantially, although some minor errors occurred thereafter in the form of corrections or adjustments to grant allocations after the recorded measurement dates.

	•	The Special Committee did not conclude that any current officers or employees of the Company engaged in any knowing or intentional misconduct with regard to the Company’s option granting practices.

	•	The Special Committee has confidence in the integrity of John C. East, the Company’s Chief Executive Officer, and Jon A. Anderson, its Chief Financial Officer.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

lacked adequate documentation supporting the recorded measurement dates, our management concluded that there was inadequate documentation supporting the recorded measurement date for the four company-wide grants during the period 2002-2004, and for one company-wide grant in 1995. If the measurement date was other than the stated grant date, we made accounting adjustments as required, resulting in stock-based compensation expense and related tax effects. We have determined that we had unrecorded non-cash equity-based compensation charges associated with our equity incentive plans for the period 1994 through 2006. Since these charges were material to our financial statements for the years 1994 through 2005, we are restating our historical financial statements to record additional non-cash charges for stock-based compensation expense. At the direction of management, option exercises before December 31, 2000 (when employees could exercise shares directly with the Company, as opposed to through an independent, third-party broker), were also reviewed and tested, and no instance of exercise backdating was identified.

General Approach to Determining the Revised Measurement Dates

Management’s methodology was intended to determine appropriate measurement dates using clear and objective evidence, if possible, or to determine corrected measurement dates using objective evidence to the greatest extent possible and management’s judgment (applied in a consistent and rigorous manner) to the least extent possible. For many reasons, including the fact that the grant dates for monthly grants were fixed in advance, management concluded that the subsequent return of the UWC signature pages for the monthly grants represented only an administrative delay, and therefore did not in and of itself necessitate corrections in the measurement dates for the monthly grants. For non-monthly grants, and for monthly grants that required measurement date corrections for other reasons, management selected the date of the last fax-dated UWC signature page as the appropriate measurement date for all awards requiring corrected measurement dates when there were three dated UWC signature pages because that was the date at which all required granting actions were complete. Greater management judgment was required when there were not three fax-dated UWC signature pages. After evaluating all available relevant information, management ranked the evidence used in determining corrected measurement dates, with fax transmittals of signed UWC signature pages being the most reliable evidence and Equity Edge data being the least reliable. The Equity Edge record-add date was used as the measurement date only if no other reliable objective evidence could be located supporting a specific date. We considered various alternative approaches, but believe that the approaches we used were the most appropriate.

Summary of Stock-Based Compensation Adjustments

In addition to the stock-based compensation expenses resulting from revised measurement dates for historical stock option grants, and the related payroll and withholding taxes and penalties (which are described in more detail below), our internal review also identified certain other errors in accounting determinations and judgments relating to stock-based compensation that have been corrected in the restated consolidated financial statements. These errors include incorrect accounting for (i) modifications to equity awards in connection with and subsequent to, certain employees’ terminations, and (ii) equity awards granted to consultants. These errors in accounting for stock-based compensation expense are also described in more detail below.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Payroll and Withholding Taxes and Penalties

Internal Revenue Code Section 421 prohibits the granting of Incentive Stock Options (“ISOs”) with an exercise price below the fair market value of the underlying shares on the date of grant. The Company issued both ISOs and Non Qualified Stock Options (“NQSOs”) during the period investigated. As described above, 28 of our stock option granting actions were subject to revised measurement dates (the last of which was in March 2004). For all but five of the granting actions, the fair market value of our Common Stock on the revised measurement date was higher than the fair market value of our Common Stock on the stated grant date.

Therefore, many of the stock options that were granted as ISOs should have been treated as Non-Qualified (“NQ”) stock options for purposes of payroll taxes and federal and state income tax withholding. ISOs receive special tax treatment by not being taxed or subject to FICA withholding at the time of exercise. The shares acquired upon the exercise of ISOs are taxable at the time of disposition and, if held for the required length of time, may receive the benefit of capital gains tax treatment. If not held for the required length of time, shares acquired upon the exercise of ISOs are taxed as ordinary income.

The restated financial statements include expenses (arising from exercises of ISOs with corrected measurement dates) relating to the estimated payroll taxes, federal and state income taxes and penalties (including negligence penalties) arising from ISOs that should have been treated as NQ stock options (due to their below-market grant pricing). We calculated payroll taxes and the marginal income tax rate for each affected individual for each fiscal period on the stock option gains in the fiscal period the stock options were exercised, subject to the individual applicable employment tax ceilings for Social Security and Medicare for each fiscal period. Penalties were also factored into the restatement. The Company has calculated penalties in accordance with the applicable Internal Revenue Codes (10% of employer FICA) under IRC Sec. 6656 and a negligence (20%) penalty under IRC Sec. 6662. To the extent appropriate, the expense accrual for taxes and penalties was reversed in fiscal years in which the applicable statue of limitations was exceeded. The net accrual for payroll and withholding-related expense in the restatement is $0.5 million for 1996 through 2005.

Stock Option Grant Modifications in Connection with Employee Terminations and Grants to Consultants

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the stock-based compensation expense for stock options grants to consultants reflected in the restated financial statements is $1.3 million on a pre-tax basis, which is offset in part by a related pre-tax financial statement benefit of $0.5 million in Other Income and Expense.

Other Matters

Also included in this restatement are accounting adjustments for one item that is not related to stock options. These adjustments relate to errors associated with the recognition of deferred income based on inventory levels on hand at our European distributors. While we were aware of these errors outside of the course of the stock options investigation and reviews described above, these adjustments had not previously been recorded in the appropriate periods due to their immateriality. The restatement impact of recording these adjustments is a $1.0 million cumulative increase to pre-tax income from 2000 through 2005.

We have incurred substantial expenses for legal, accounting, tax, and other professional services in connection with the Special Committee’s investigation, our internal reviews, the preparation of the restated consolidated financial statements, the SEC informal inquiry, and the derivative litigation. These expenses, which are included in selling, general and administrative expenses, were approximately $2.0 million for the year ended December 31, 2006, and are expected to be approximately $5.5 million for the 2007 fiscal year.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Adjustment to											Other
	Stock-Based								Subtotal			Deferred			Other
	Compensation		Other			Adjustment to			Stock-Based			Revenue			Adjustments-			Adjustment
	Expense		Adjustments to			Payroll			Compensation			Adjustments			Other			to Income			Total
	Associated with		Stock-Based			Tax			Expense and			Associated with			Income and			Tax			Restatement
	Remeasured		Compensation			Expense			Payroll			European			Expense			Expense			Expense
Fiscal Year	Grants		Expense			(Benefit)			Taxes			Distributor			Charges(1)			(Benefit)			(Benefit)

1994	$	—	$	60		$	—		$	60		$	—		$	—		$	(24	)	$	36
1995		205		27			—			232			—			—			(73	)		159
1996		539		42			6			587			—			—			(175	)		412
1997		823		32			23			878			—			—			(262	)		616
1998		937		35			18			990			—			—			(307	)		683
1999		814		12			105			931			—			—			(242	)		689
2000		2,574		92			347			3,013			(1,528	)		—			(436	)		1,049
2001		5,455		485			88			6,028			(100	)		(17	)		(2,111	)		3,800
2002		2,810		(73	)		93			2,830			203			(31	)		(953	)		2,049
2003		2,155		1,687			181			4,023			—			20			(1,370	)		2,673

Cumulative through January 4, 2004		16,312		2,399			861			19,572			(1,425	)		(28	)		(5,953	)		12,166
2004		950		(604	)		(312	)		34			100			(463	)		(51	)		(380	)
2005		186		(431	)		(91	)		(336	)		338			12			(14	)		—

Total	$	17,448	$	1,364		$	458		$	19,270		$	(987	)	$	(479	)	$	(6,018	)	$	11,786


(1)		Reflects mark to market adjustments relating to $1.0 million of awards originally charged to stock-based compensation which were subsequently classified as liability awards following the termination of employment.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following tables reflect the impact of the restatement on our consolidated financial statements as of January 1, 2006, and for the years ended January 1, 2006 and January 2, 2005:

Consolidated Statement of Operations


			Restatement
	As Previously		Adjustments
Year Ended January 1, 2006	Reported		(1)(2)			As Restated
	(In thousands, except per share data)

Net revenues	$	179,397	$	(450	)	$	178,947
Costs and expenses
Cost of revenues		73,392		(110	)		73,282
Research and development		48,173		69			48,242
Selling, general and administrative		50,056		(407	)		49,649
Amortization of acquisition-related intangibles		1,908					1,908

Total costs and expenses		173,529		(448	)		173,081

Income (loss) from operations		5,868		(2	)		5,866
Interest income and other, net of expense		3,924		(12	)		3,912

Income (loss) before tax provision (benefit)		9,792		(14	)		9,778
Tax provision (benefit)		2,756		(14	)		2,742

Net income	$	7,036		—		$	7,036

Net income per share:
Basic:	$	0.28	$	0.00		$	0.28

Diluted:	$	0.28	$	0.00		$	0.28

Shares used in computing net income per share:
Basic:		25,277		—			25,277

Diluted:		25,556		(11	)		25,545


(1)		Adjustment of $450 to revenue and adjustment of ($112) to cost of revenue for European distributor deferred income.

(2)		Restatement adjustments of ($245) for stock-based compensation expenses, relating to improper measurement dates, other stock option modifications, adjustments to other income and expense of $12, and related payroll and income tax benefit impacts of ($91) and ($14), respectively.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidated Statement of Operations


	As			Restatement
	Previously			Adjustments
Year Ended January 2, 2005	Reported			(1)(2)			As Restated
	(In thousands, except per share data)

Net revenues	$	165,536		$	(134	)	$	165,402
Costs and expenses
Cost of revenues		70,451			(47	)		70,404
Research and development		45,360			341			45,701
Selling, general and administrative		48,269			(294	)		47,975
Amortization of acquisition-related intangibles		2,651			—			2,651

Total costs and expenses		166,731			—			166,731

Loss from operations		(1,195	)		(134	)		(1,329	)
Interest income and other, net of expense		2,935			463			3,398

Income before tax benefit		1,740			329			2,069
Tax benefit		(654	)		(51	)		(705	)

Net income	$	2,394		$	380		$	2,774

Net income per share:
Basic:	$	0.09		$	0.01		$	0.11

Diluted:	$	0.09		$	0.01		$	0.11

Shares used in computing net income per share:
Basic:		25,584			—			25,584

Diluted:		26,421			(40	)		26,381


(1)		Adjustment of $134 to revenue and adjustment of ($34) to cost of revenue for European distributor deferred income.

(2)		Restatement adjustments of $346 for stock-based compensation expenses, relating to improper measurement dates, other stock option modifications, adjustments to other income and expense of ($463) and related payroll and income tax benefit impacts of ($312) and ($51), respectively.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidated Balance Sheet


	As Previously
January 1, 2006	Reported			Adjustments(1)(2)			As Restated
	(In thousands, except share data)

ASSETS
Current assets:
Cash and cash equivalents	$	24,033		$	—		$	24,033
Short-term investments(3)		119,158			—			119,158
Accounts receivable, net(4)		25,287			—			25,287
Inventories		37,372			—			37,372
Deferred income taxes		21,489			—			21,489
Prepaid expenses and other current assets(4)		8,554			—			8,554

Total current assets		235,893			—			235,893
Long-term investments(3)		25,125			—			25,125
Property and equipment, net		23,859			—			23,859
Goodwill		32,142			—			32,142
Deferred tax asset		9,979			2,807			12,786
Other assets, net		13,391			—			13,391

	$	340,389		$	2,807		$	343,196


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	14,503		$	—		$	14,503
Accrued salaries and employee benefits		4,994			458			5,452
Accrued license		5,714			—			5,714
Other accrued liabilities		4,482			—			4,482
Deferred income on shipments to distributors		29,238			(987	)		28,251

Total current liabilities		58,931			(529	)		58,402
Deferred compensation plan liability		3,667			—			3,667
Deferred rent liability		1,242			—			1,242
Long term accrued licenses, net		3,828			—			3,828

Total liabilities		67,668			(529	)		67,139
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $.001 par value per share; 4,500,000 shares authorized; 1,000,000 issued and converted to common stock; and none outstanding		—			—			—
Series A Preferred stock, $.001 par value per share; 500,000 shares authorized; none issued or outstanding		—			—			—
Common Stock, $.001 par value; 55,000,000 shares authorized; 25,733,490 shares issued and outstanding at January 1, 2006		26			—			26
Additional paid-in capital		194,916			15,185			210,101
Deferred compensation		—			(63	)		(63	)
Retained earnings		78,519			(11,786	)		66,733
Accumulated other comprehensive loss		(740	)		—			(740	)

Total shareholders’ equity		272,721			3,336			276,057

	$	340,389		$	2,807		$	343,196


(1)		Cumulative adjustment of ($987) for European distributor deferred income.

(2)		Cumulative restatement adjustments for stock-based compensation expenses, relating to improper measurement dates, other stock option modifications and related payroll and income tax expense (benefit) impacts.

(3)		The Company has reclassified $1,581 of previously reported long-term investments to short-term to conform to the current presentation.

(4)		The Company has reclassified $1,549 previously reported as accounts receivable, net to prepaid expenses and other current assets to conform to the current presentation.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidated Statement of Cash Flows


	As			Restatement
	Previously			Adjustments
Year Ended January 1, 2006	Reported			(1)(2)			As Restated
	(In thousands)

Operating activities:
Net income	$	7,036		$	—		$	7,036
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,033			—			11,033
Stock compensation cost recognized		—			(233	)		(233	)
Changes in operating assets and liabilities:
Accounts receivable(3)		(8,854	)		—			(8,854	)
Inventories		3,846			—			3,846
Deferred income taxes		2,201			(14	)		2,187
Prepaid expenses and other current assets(3)(4)		(2,446	)		—			(2,446	)
License agreements and other long-term assets(4)		(7,894	)		—			(7,894	)
Accounts payable, accrued salaries and employee benefits, and other accrued liabilities(3)(4)		12,083			(91	)		11,992
Deferred income on shipments to distributors		5,580			338			5,918

Net cash provided by operating activities		22,585			—			22,585
Investing activities:
Purchases of property and equipment		(10,180	)		—			(10,180	)
Purchases of available-for-sale securities		(72,252	)		—			(72,252	)
Sales and maturities of available-for-sale securities		75,767			—			75,767
Changes in other long term assets		516			—			516

Net cash used in investing activities		(6,149	)		—			(6,149	)
Financing activities:
Issuance of Common Stock under employee stock plans		10,988			—			10,988
Repurchase of Common Stock		(9,796	)		—			(9,796	)

Net cash provided by financing activities		1,192			—			1,192
Net increase in cash and cash equivalents		17,628			—			17,628
Cash and cash equivalents, beginning of year		6,405			—			6,405

Cash and cash equivalents, end of year	$	24,033		$	—		$	24,033

Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes	$	435		$	—		$	435
Supplemental schedule of non-cash activities:
Accrual of long-term license agreements	$	10,678		$	—		$	10,678


(1)		Adjustment of $450 to European distributor deferred revenue and adjustment of ($112) to Cost of Revenue for European distributor.

(2)		Restatement adjustments for stock-based compensation expenses, relating to improper measurement dates, other stock option modifications and related payroll and income tax expense (benefit) impacts.

(3)		The Company has reclassified $296 of previously reported accounts receivable to prepaid expenses and other current assets and ($1,005) of previously reported accounts receivable to accounts payable, accrued salaries and employee benefits, and other accrued liabilities. Both reclassifications were made to conform to the current presentation.

(4)		The Company has reclassified $9,518 of previously reported accounts payable, accrued salaries and employee benefits, and other accrued liabilities to prepaid expenses and other current assets and license and other long-term assets to conform to the current presentation.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidated Statement of Cash Flows


	As Previously			Restatement
Year Ended January 2, 2005	Reported			Adjustments(1)(2)			As Restated
	(In thousands)

Operating activities:
Net income	$	2,394		$	380		$	2,774
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		10,496			—			10,496
Stock compensation cost recognized		118			(117	)		1
Changes in operating assets and liabilities:
Accounts receivable(3)		2,946			—			2,946
Inventories		(2,554	)		—			(2,554	)
Deferred income taxes		(517	)		(51	)		(568	)
Prepaid expenses and other current assets(3)(4)		(1,366	)		—			(1,366	)
License agreements and other long-term assets(4)		1			—			1
Accounts payable, accrued salaries and employee benefits, and other accrued liabilities		(2,736	)		(312	)		(3,048	)
Deferred income on shipments to distributors		1,113			100			1,213

Net cash provided by operating activities		9,895			—			9,895
Investing activities:
Purchases of property and equipment		(10,714	)		—			(10,714	)
Purchases of available-for-sale securities		(166,356	)		—			(166,356	)
Sales and maturities of available-for-sale securities		161,657			—			161,657
Changes in other long term assets		(273	)		—			(273	)

Net cash used in investing activities		(15,686	)		—			(15,686	)
Financing activities:
Issuance of Common Stock under employee stock plans		8,175			—			8,175
Repurchase of Common Stock		(9,627	)		—			(9,627	)

Net cash used in financing activities		(1,452	)		—			(1,452	)
Net decrease in cash and cash equivalents		(7,243	)		—			(7,243	)
Cash and cash equivalents, beginning of year		13,648			—			13,648

Cash and cash equivalents, end of year	$	6,405		$	—		$	6,405

Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes	$	431		$	—		$	431
Supplemental schedule of non-cash activities:
Accrual of long-term license agreements	$	—		$	—		$	—


(1)		Adjustment of $134 to European distributor deferred revenue and adjustment of ($34) to Cost of Revenue for European distributor.

(2)		Restatement adjustments for stock-based compensation expenses, relating to improper measurement dates, other stock option modifications and related payroll and income tax expense (benefit) impacts.

(3)		The Company has reclassified $95 of previously reported accounts receivable to prepaid expenses and other current assets to conform to the current presentation.

(4)		The Company has reclassified $1 of previously reported prepaid and other current assets to license and other long-term assets to conform to the current presentation.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


3.	Balance Sheet Detail


	Dec. 31, 2006			Jan. 1, 2006
	(In thousands)

Accounts receivable:
Trade accounts receivable	$	22,631		$	26,495
Allowance for doubtful accounts		(614	)		(1,208	)

	$	22,017		$	25,287

Inventories:
Purchased parts and raw materials	$	7,537		$	6,403
Work-in-process		21,336			25,599
Finished goods		10,330			5,370

	$	39,203		$	37,372

Property and equipment:
Equipment	$	81,294		$	77,547
Furniture and fixtures		2,729			2,656
Leasehold improvements		3,752			3,461

		87,775			83,664
Accumulated depreciation		(65,005	)		(59,805	)

	$	22,770		$	23,859

Depreciation expense was approximately $9.8 million in 2006, $9.1 million in 2005 and $7.8 million in 2004, and is included with amortization expense in the Consolidated Statements of Cash Flows.

Goodwill:


	Dec. 31, 2006			Jan. 1, 2006
	(In thousands)

Other Assets:
Prepaid long-term license fees	$	13,584		$	8,457
Deferred compensation plan assets		4,104			3,350
Identifiable intangible assets from acquisitions		12,728			12,728
Acquired patents		1,842			1,842
Other		2,144			1,569

Subtotal		34,402			27,946
Less accumulated amortization		(14,570	)		(14,555	)

	$	19,832		$	13,391

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Identified intangible assets as of December 31, 2006, consisted of the following:


			Accumulated
	Gross Assets		Amortization			Net
	(In thousands)

Acquisition-related developed technology	$	11,454	$	(11,454	)	$	—
Other acquisition-related intangibles		1,274		(1,274	)		—
Acquired patents		1,842		(1,842	)		—

Total identified intangible assets	$	14,570	$	(14,570	)	$	—

Identified intangible assets as of January 1, 2006, consisted of the following:


			Accumulated
	Gross Assets		Amortization			Net
	(In thousands)

Acquisition-related developed technology	$	11,454	$	(11,454	)	$	—
Other acquisition-related intangibles		1,274		(1,274	)		—
Acquired patents		1,842		(1,827	)		15

Total identified intangible assets	$	14,570	$	(14,555	)	$	15

Amortization expense related to identifiable intangible assets was $15,000 and $1.9 million for fiscal 2006 and 2005, respectively. All identifiable intangible assets have been fully amortized as of December 31, 2006.


4.	Financial Instruments

The following is a summary of available-for-sale securities at December 31, 2006 and January 1, 2006:


			Gross		Gross
			Unrealized		Unrealized			Estimated Fair
	Cost		Gains		Losses			Values
	(In thousands)

December 31, 2006
Money market mutual funds	$	337	$	—	$	—		$	337
Asset backed obligations		27,755		1		(42	)		27,714
Corporate bonds		64,788		19		(413	)		64,394
U.S. government securities		47,327		11		(234	)		47,104
Floating rate notes		10,589		10		(30	)		10,569
Municipal obligations		8,527		—		(52	)		8,475

Total available-for-sale securities	$	159,323	$	41	$	(771	)	$	158,593

Included in cash and cash equivalents								$	337
Included in short term investments									124,022
Included in long term investments									34,234

Total available-for-sale securities								$	158,593

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


			Gross		Gross
			Unrealized		Unrealized			Estimated Fair
	Cost		Gains		Losses			Values
	(In thousands)

January 1, 2006
Commercial paper	$	7,179	$	1	$	—		$	7,180
Money market mutual funds		300		—		—			300
Corporate bonds		62,788		5		(584	)		62,209
U.S. government securities		62,983		10		(541	)		62,452
Floating rate notes		7,132		3		(18	)		7,117
Municipal obligations		12,613		—		(109	)		12,504

Total available-for-sale securities	$	152,995	$	19	$	(1,252	)	$	151,762

Included in cash and cash equivalents								$	7,479
Included in short term investments(1)									119,158
Included in long term investments(1)									25,125

Total available-for-sale securities								$	151,762


(1)		The Company has reclassified $1,581 of previously reported long-term investments to short-term to conform to the current presentation.

The following is a summary of available-for-sale securities that were in an unrealized loss position as of December 31, 2006:


	Aggregate			Aggregate
	Value of			Fair Value
	Unrealized			of
	Loss			Investments

Unrealized loss position for less than twelve months	$	(198	)	$	69,269
Unrealized loss position for greater than twelve months	$	(573	)	$	63,964

Approximately $73.5 million of investment securities, representing 46.3% of our total investment portfolio, has been in an unrealized loss position for greater than six months. It is our intention and within our ability, as necessary, to hold these securities in an unrealized loss position for a period of time sufficient to allow for an anticipated recovery of fair value up to (or greater than) the cost of the investment. In addition, we have assessed the creditworthiness of the issuers of the securities and have concluded that based upon all these factors that other-than-temporary impairment of these securities does not exist at December 31, 2006. At December 31, 2006 and January 1, 2006, we classified $34.2 million and $25.1 million, respectively of the investments we intend to hold to recovery as long-term because these investment securities carry maturity dates greater than twelve months from the balance sheet date.

The adjustments to unrealized losses on investments, net of taxes, included as a separate component of shareholders’ equity totaled approximately $0.3 million for the year ended December 31, 2006, ($0.3) million for the year ended January 1, 2006, and ($0.7) million for the year ended January 2, 2005. See Note 8 for information regarding other comprehensive income/(loss). Net realized gains and losses in 2006, 2005 and 2004 were immaterial.

The expected maturities of our investments in debt securities at December 31, 2006, are shown below. Expected maturities can differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	(In thousands)

Available-for-sale debt securities:
Due in less than one year	$	35,776
Due in one to five years		111,800
Due in five to ten years		5,581
Due after ten years		5,099

	$	158,256

A portion of our securities represents investments in floating rate municipal bonds with contractual maturities greater than one year with some greater than ten years. However, the interest rates on these debt securities generally reset every ninety days, at which time we have the option to sell the security or roll over the investment at the new interest rate. Since it is generally not our intention to hold these floating rate municipal bonds until their contractual maturities, these amounts have been classified in the accompanying consolidated balance sheet as short-term investments that are available-for-sale.


5.	Commitments and Contingencies

• Commitments

We lease our facilities under non-cancelable lease agreements. The current primary facilities lease agreement expires in January 2014 and includes an annual increase in lease payments of three percent per year. Facilities lease expense is recorded on a straight-line basis over the term of the lease. Since cash payments in 2005 were less than rent expense recognized on a straight-line basis we recorded a deferred rent liability of $0.1 million in 2006. The equipment lease terms are month-to-month. Our facilities and equipment leases are accounted for as operating leases and require us to pay property taxes, insurance and maintenance, and repair costs.

As of December 31, 2006, the Company has approximately $14.0 million of non-cancelable obligations to providers of electronic design automation software expiring at various dates through 2008. The current portion of these obligations of $9.1 million is recorded in accrued license fees and the long-term portion of these obligations of $4.9 million is recorded at net present value in long-term accrued licenses on the accompanying balance sheet. Interest expense related to these long-term license agreements is being amortized to the income statement. We recorded $0.1 million of interest expense related to these obligations in 2006. The asset portion of these commitments of $13.6 million is recorded in the “Other Assets, net” line of the balance sheet and $2.8 million is recorded in “prepaid expenses and other current assets”.

The following represents contractual commitments associated with operating leases at December 31, 2006


	Payments Due by Period
													2012
	Total		2007		2008		2009		2010		2011		and Later
	(In thousands)

Operating leases	$	21,628	$	3,367	$	3,080	$	3,094	$	2,933	$	2,880	$	6,274

Purchase orders or contracts for the purchase of raw materials and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations as purchase orders may represent authorizations to purchase rather than binding agreements. For the purposes of this table, contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors within short time horizons. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements for three months. We also enter

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Rental expense under operating leases was approximately $3.9 million for 2006 and $3.8 million for 2005 and 2004. Amounts amortized under licensing agreements were approximately $4.2 million in 2006, $5.3 million in 2005, and $6.0 million in 2004.

• Contingencies

We have established an irrevocable standby letter of credit in favor of Britannia Hacienda in care of Britannia Management Services in the amount of $0.5 million pursuant to the terms and conditions of the lease for our principal facilities and executive offices located in Mountain View, California. In addition, we have established an irrevocable letter of credit in favor of Matsushita Electric Industrial. Co., Ltd., one of our foundry partners, in the amount of Japanese Yen 30 million. Our agreement with Wells Fargo Bank under which these letters of credit were issued requires us to maintain certain financial ratios and levels of net worth. At December 31, 2006, we were in compliance with these covenants for the letters of credit.


6.	Retirement Plan

Effective December 10, 1987, we adopted a tax deferred savings plan for the benefit of qualified employees. The plan is designed to provide employees with an accumulation of funds at retirement. Employees may elect at any time to have salary reduction contributions made to the plan.

We may make contributions to the plan at the discretion of the Board of Directors. We made no contribution to the plan in 2006 or 2005. We made a discretionary contribution to the plan in 2004 of approximately $0.5 million. The contributions vest annually, retroactively from an eligible employee’s date of hire, at the rate of 25% per year. In addition, contributions become fully vested upon retirement from Actel at age 65. There is no guarantee we will make any contributions to the plan in the future, regardless of our financial performance.


7.	Stock Based Compensation

• Stock-Based Compensation Expense

The Company recorded $11.0 million of pre-tax stock-based compensation expense for the year ended December 31, 2006. As required by SFAS 123(R), management estimates expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest. The following table summarizes the distribution of stock-based compensation expense related to stock options and the Employee Stock Purchase Plan (ESPP) for the year ended December 31, 2006 (in thousands):


Cost of revenues	$	506
Research and development		5,648
Selling, general, and administrative		4,836

Total stock-based compensation expense, before income taxes		10,990
Tax benefit		1,632

Total stock-based compensation expense, net of income taxes	$	9,358

Stock based compensation expense for 2006 includes $0.1 million associated with the extension of employee options that were scheduled to expire in the fourth quarter of fiscal 2006 during the stock option investigation blackout period. The Company agreed to extend the life of the expiring options for continuing employees until 30 days following the release of the blackout period. This extension represents a modification to these options which resulted in the additional charge during the fourth quarter of fiscal 2006. The Company expects to incur further option extension modification costs during fiscal 2007 of $0.7 million.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In addition, stock-based compensation costs of $0.3 million was included in inventory as of December 31, 2006.

As of December 31, 2006, the total compensation cost related to options and nonvested stock granted to employees under the Company’s stock option plans but not yet recognized was approximately $11.5 million, net of estimated forfeitures of approximately $1.0 million. This cost will be amortized over a weighted-average period of 2.15 years and will be adjusted for subsequent changes in estimated forfeitures.

As of December 31, 2006, the total compensation cost related to options to purchase shares of the Company’s common stock under the ESPP but not yet recognized was approximately $1.2 million. This cost will be amortized over a weighted-average period of 1.14 years.

The total fair value of shares vested during the year ended December 31, 2006 was $8.5 million.

Cash proceeds from the exercise of stock options were $6.7 million and cash proceeds from our employee stock purchase plan were $2.7 million for the year ended December 31, 2006.

Under SFAS No. 123R, the benefits of tax deductions in excess of recognized compensation cost is to be reported as a financing cash flow, rather than as an operating cash flow. The future realizability of tax benefits related to stock compensation is dependent upon the timing of employee exercises and future taxable income, among other factors. For the fiscal year ended December 31, 2006, we did not recognize any tax benefits on option exercises.

• Stock Option Plans

We have adopted stock option plans under which officers, employees, and consultants may be granted incentive stock options or nonqualified options to purchase shares of our Common Stock. In connection with our acquisitions of AGL in 1999 and Prosys and GateField in 2000, we assumed the stock option plans of AGL, Prosys, and GateField and the related options are incorporated in the amounts below. At December 31, 2006, 20,536,769 shares of Common Stock were reserved for issuance under these plans, of which 4,746,764 were available for grant. There were no options granted to consultants in 2006 or 2005. Options granted to consultants in 2004 were recorded at fair value of $0.07 million using the Black-Scholes model in accordance with EITF 96-18 and FIN No. 44.

We also adopted a new Directors’ Stock Option Plan in 2003, under which directors who are not employees of Actel may be granted nonqualified options to purchase shares of our Common Stock. The new Directors’ Stock Option Plan replaced a 1993 plan that expired in 2003. At December 31, 2006, 500,000 shares of Common Stock were reserved for issuance under such plan, of which 362,500 were available for grant.

We generally grant stock options under our plans at a price equal to the fair value of our Common Stock on the date of grant. Subject to continued service, options generally vest over a period of four years and expire ten years from the date of grant.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company issues shares of common stock upon the exercise of stock options. The following table summarizes our stock option activity and related information for the three years ended December 31, 2006:


						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
	Number			Exercise		Contractual		Intrinsic
Options	of Shares			Price		Term		Value
								(In thousands)

Outstanding at January 5, 2004		8,344,940		$	19.55
Granted		1,413,042			21.87
Exercised		(289,722	)		12.76
Cancelled		(488,851	)		23.16

Outstanding at January 2, 2005		8,979,409		$	19.94
Granted		1,219,365			15.45
Exercised		(250,166	)		11.02
Cancelled		(302,121	)		21.06

Outstanding at January 1, 2006		9,646,487		$	19.57
Granted		1,009,927			15.13
Exercised		(540,221	)		12.43
Exchanged		(4,182,027	)		23.39
Forfeitures and cancellations		(269,312	)		18.08

Outstanding at December 31, 2006		5,664,854			16.71		6.09	$	14,457

Vested and expected to vest at December 31, 2006		5,551,522			16.73		6.03	$	14,138

Exercisable at December 31, 2006		3,649,528			17.18		4.80	$	9,146

The aggregate intrinsic value is calculated as the difference between the cash exercise price of the underlying awards and the quoted price of the Company’s common stock for the 4.4 million options that were in-the-money at December 31, 2006. During the years ended December 31, 2006, January 1, 2006, and January 2, 2005, the aggregate intrinsic value of options exercised under the Company’s stock option plans were $1.2 million, $1.3 million and $2.3 million, respectively, determined as of the date of option exercise.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes information about stock options outstanding at December 31, 2006:


	December 31, 2006
	Options Outstanding						Options Exercisable
			Weighted
			Average
			Remaining		Weighted				Weighted
			Contract		Average				Average
	Number of		Life		Exercise		Number of		Exercise
Range of Exercise Prices	Shares		(In Years)		Price		Shares		Price

$0.07 — 13.06		772,536		2.27	$	12.22		760,398	$	12.20
13.61 — 14.75		573,413		7.36		14.22		312,144		14.32
14.77 — 14.81		591,675		8.79		14.77		37,062		14.80
14.88 — 15.13		187,715		6.55		15.01		103,232		15.03
15.15 — 15.15		666,673		5.77		15.15		546,526		15.15
15.25 — 15.42		9,735		9.60		15.41		187		15.25
15.70 — 15.70		814,632		7.75		15.70		361,222		15.70
15.83 — 17.45		566,661		6.51		16.55		316,642		16.86
17.56 — 20.13		572,399		6.57		18.95		398,431		19.25
20.38 — 54.45		909,415		4.78		24.47		813,684		24.45

		5,664,854		6.09	$	16.71		3,649,528	$	17.18

At January 1, 2006, 5,957,351 outstanding options were exercisable.

• Employee Stock Purchase Plan

We have adopted an Employee Stock Purchase Plan (ESPP), under which eligible employees may designate not more than 15% of their cash compensation to be deducted each pay period for the purchase of Common Stock (up to a maximum of $25,000 worth of Common Stock each year). At December 31, 2006, 4,519,680 shares of Common Stock were authorized for issuance under the ESPP. The ESPP is administered in consecutive, overlapping offering periods of up to 24 months each, with each offering period divided into four consecutive purchase periods. On the last business day of each purchase period, shares of Common Stock are purchased with employees’ payroll deductions accumulated during the purchase period at a price per share equal to 85% of the market price of the Common Stock on the first day of the applicable offering period or the last day of the purchase period, whichever is lower. There were 243,139 shares issued in 2006 under the ESPP, 701,669 shares issued in 2005, and 422,947 shares issued in 2004. Shares remaining available for issuance under the ESPP at December 31, 2006 total 494,804.

During the fourth quarter of fiscal 2006, as a result of the options investigation and related employee trading black-out period, the Company suspended further contributions to the ESPP and refunded all contributions remaining in the plan. Accordingly, there were no ESPP options outstanding at December 31, 2006. In connection with the ESPP suspension, the Company recorded a charge of approximately $0.2 million, which represents the remaining unamortized fair value of the current purchase period canceled in the fourth quarter of 2006. If the Company continues to be a delinquent filer, future withholding periods will lapse and those purchase periods will also be deemed to be cancelled with no replacement and no consideration paid by the Company for the cancellation. The fair value associated with these purchase periods will be recognized ratably as the cancellations occur.

During the years ended December 31, 2006, January 1, 2006, and January 2, 2005, the aggregate intrinsic value of options exercised under the Company’s ESPP were $0.6 million, $1.9 million, and $3.3 million, respectively.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

• Restricted Stock Units (RSU’s)

On December 1, 2005 Actel offered to certain employees the opportunity to participate in an employee Stock Option/Restricted Stock Unit Exchange Program (Exchange Program). Under the Exchange Program, employees were allowed to exchange “eligible stock options” for “restricted stock units.” “Eligible stock options” were all unexercised stock options (whether vested or unvested) with an exercise price per share of $19.73 or more. The number of restricted stock units that an employee would receive in exchange for the eligible stock options, as well as the vesting schedule of the restricted stock units, depended on the number and exercise price of the eligible stock options exchanged.

The Exchange Program expired on January 3, 2006. Pursuant to the Exchange Program, the Company accepted for cancellation options to purchase 4,182,027 shares of the Company’s common stock and granted restricted stock units to purchase 1,132,393 shares of the Company’s common stock resulting in an overall exchange ratio of 3.7 options to 1.0 restricted stock unit. Included in these figures were 1,474,500 options previously held by our executive officers who received a total of 422,544 restricted stock units in the Exchange Program. The Company entered into Restricted Stock Unit Agreements dated January 3, 2006 with each participating employee.

As the offer to replace the eligible stock options with restricted stock was made on December 1, 2005, all the option awards eligible to participate in the Exchange Program are subject to variable accounting from December 1, 2005 to January 1, 2006 (the last fiscal day of 2005), in accordance with EITF 00-23. The Company did not record a charge pursuant to EITF 00-23 in fiscal 2005 since the fair market value of Actel common stock declined during the offer period.

During the year ended December 31, 2006, we also granted additional RSUs and stock options to certain US employees as part of our long-term equity incentive program. The RSUs granted under this program vest over a period of four years. As of December 31, 2006, the total compensation cost not yet recognized related to RSUs granted subsequent to January 3, 2006 was approximately $1.4 million. The Company issues shares of common stock upon vesting of RSUs. The following is a summary of RSU activity for the year ended December 31,2006:


				Weighted-
				Average
	Number of			Grant DateFair
	Shares			Value

Nonvested at January 1, 2006		—			—
Granted		125,160		$	12.66
Granted under exchange program		1,130,965			13.17
Vested		(350,870	)		13.17
Forfeited		(94,569	)		13.23

Nonvested at December 31, 2006		810,686		$	13.09

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


8.	Comprehensive Income (Loss)

The components of comprehensive income (loss), net of tax, are as follows:


	Years Ended
	Dec. 31, 2006			Jan. 1, 2006			Jan. 2, 2005
				Restated			Restated
	(In thousands)

Net income(loss)	$	(2,155	)	$	7,036		$	2,774
Change in gain (loss) on available-for-sale securities, net of tax of $207 in 2006, ($210) in 2005, ($468) in 2004		329			(315	)		(702	)
Reclassification adjustment for gains or losses included in net income (loss), net of tax of ($13) in 2006, $11 in 2005, $1 in 2004		(20	)		15			2

Other comprehensive income (loss), net of tax of $194 in 2006, ($199) in 2005, ($467) in 2004		309			(300	)		(700	)

Total comprehensive income (loss)	$	(1,846	)	$	6,736		$	2,074

Accumulated other comprehensive loss for 2006 and 2005 is presented on the accompanying consolidated balance sheets and consists solely of the accumulated net unrealized gain on available-for-sale securities.


9.	Tax Provision

The components of income(loss) before income taxes were as follows:


	Years Ended
	Dec. 31,			Jan. 1,		Jan. 2,
	2006			2006		2005
	(In thousands)

U.S.	$	(2,598	)	$	9,130	$	1,205
Foreign		707			648		864

Income(loss) before income taxes	$	(1,891	)	$	9,778	$	2,069

The tax provision (benefit) consists of:


	Years Ended
	Dec. 31,			Jan. 1,			Jan. 2,
	2006			2006			2005
				Restated			Restated
	(In thousands)

Federal — current	$	(158	)	$	150		$	(512	)
Federal — deferred		2,149			2,706			912
State — current		105			50			10
State — deferred		(2,240	)		(519	)		(1,480	)
Foreign — current		408			355			365

	$	264		$	2,742		$	(705	)

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The tax provision (benefit) reconciles to the amount computed by multiplying income before tax by the U.S. statutory rate as follows:


	Dec. 31,			Jan. 1,			Jan. 2,
	2006			2006			2005
				Restated			Restated
	(In thousands)

Provision/(benefit) at federal statutory rate	$	(662	)	$	3,414		$	724
Tax exempt interest income		—			(31	)		(62	)
Federal research credits		(260	)		(452	)		(534	)
State taxes, net of federal benefit		(1,387	)		(305	)		(779	)
Non-deductible stock compensation		2,518			(8	)		(161	)
Non-deductible meals and entertainment expenses		91			112			88
Settlement of tax contingencies		(386	)		—			—
Foreign tax rate differential		297			—			—
Other		53			12			19

Tax provision (benefit)	$	264		$	2,742		$	(705	)

Significant components of our deferred tax assets and liabilities for federal and state income taxes are as follows:


	Dec. 31,			Jan. 1,
	2006			2006
				Restated
	(In thousands)

Deferred tax assets:
Depreciation	$	—		$	214
Deferred income on shipments to distributors		11,558			10,033
Intangible assets		3,186			2,468
Inventories		5,458			5,168
Net operating losses		6,398			17,239
Capitalized research and development expenses		1,938			2,983
Research and development tax credit		7,141			5,391
Stock options		2,200			2,896
Other, net		6,575			5,950

		44,454			52,342
Valuation allowance		(9,920	)		(18,069	)

Deferred tax assets	$	34,534		$	34,273

Deferred tax liabilities:
Depreciation	$	(1,090	)	$	—

Net deferred tax assets	$	33,444		$	34,273

The valuation allowance decreased by approximately $8.2 million in 2006, decreased approximately $10.5 million in 2005, and increased approximately $1.2 million in 2004. Approximately $7.4 million of the valuation allowance at December 31, 2006, will be allocated to reduce goodwill or other non-current intangible assets from the acquisition of GateField when realized.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company is tracking the portion of its deferred tax assets attributable to stock option benefits in accordance with SFAS No. 123R and therefore, these amounts are no longer included in the Company’s gross or net deferred tax assets. The tax benefit of stock options totals $8.7 million at December 31, 2006 and will only be recorded when they reduce cash taxes payable. Of this $8.7 million, $5.7 million relates to prior years and is reflected in the change in the valuation allowance and an additional $3.0 million relates to 2006 stock option benefits.

We have a federal operating loss carryforward of approximately $42.0 million which will expire at various times beginning in 2007. We also have federal research and development credits of approximately $2.1 million, which will expire at various times beginning in 2013. The Company has state operating loss carryforwards of approximately $11.5 million that will expire beginning in 2007. In addition, we have California research and development credits of approximately $7.5 million that have no expiration dates. In addition, the Company has foreign tax credit carryforwards of approximately $0.9 million that begin to expire in 2015.


10.	Shareholders’ Equity

• Stock Repurchase

Our Board of Directors authorized a stock repurchase program in September 1998 whereby shares of our Common Stock may be purchased from time to time in the open market at the discretion of management. Additional shares were authorized for repurchase in each of 1999, 2002, 2004 and 2005. In 2004, we repurchased 661,697 shares for $9.6 million. In 2005, we repurchased 627,500 shares for $9.8 million. In 2006, we repurchased 123,020 shares for $2.2 million. As of December 31, 2006, we have remaining authorization to repurchase up to 1,487,783 shares.

• Shareholder Rights Plan

Our Board of Directors adopted a Shareholder Rights Plan in October 2003. Under the Plan, we issued a dividend of one right for each share of our Common Stock held by shareholders of record as of the close of business on November 10, 2003. Each right entitles the shareholder to purchase a fractional share of our Preferred Stock for $220.00. However, the rights will become exercisable only if a person or group acquires, or announces a tender or exchange offer that would result in the acquisition of, 15% or more of our Common Stock while the Plan remains in place. Then, unless we redeem the rights for $0.001 per right, each right will become exercisable by all rights holders (except the acquiring person or group) for shares of Actel (or shares of the third party acquirer) having a value equal to twice the right’s then-current exercise price.


11.	Segment Disclosures

We operate in a single operating segment: designing, developing, and marketing FPGAs. FPGA sales accounted for 97% of net revenues for 2006, and 96% of net revenues for 2005 and 2004. We derive non-FPGA revenues from our Protocol Design Services organization, royalties, and the licensing of software and sale of hardware that is used to design and program our FPGAs. The Protocol Design Services organization, which we acquired from GateField in the third quarter of 1998, accounted for 1% of our net revenues for 2006, 2005 and 2004.

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We market our products in the United States and in foreign countries through our sales personnel, independent sales representatives, and distributors. Our geographic sales based on shipping locations were as follows:


	Years Ended
	December 31, 2006				January 1, 2006				January 2, 2005
	(In thousands, except percentages)

United States	$	97,716	51	%	$	99,159	56	%	$	89,975	55	%
Export:
Europe		51,401	27	%		49,042	27	%		45,198	27	%
Japan		12,427	6	%		10,296	6	%		9,787	6	%
Other international		29,955	16	%		20,450	11	%		20,442	12	%

	$	191,499	100	%	$	178,947	100	%	$	165,402	100	%

Our property and equipment is located primarily in the United States. Property, plant, and equipment information is based on the physical location of the assets at the end of each of the fiscal years. Net property, plant, and equipment by geographic region were as follows:


	Dec. 31,		Jan. 1,
	2006		2006
	(In thousands)

United States	$	21,849	$	21,629
Europe		873		662
Japan		13		93
Other international		35		1,475

	$	22,770	$	23,859


12.	Net Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) per share:


	Years Ended
	Dec. 31,			Jan. 1,		Jan. 2,
	2006			2006		2005
				Restated		Restated
	(In thousands, except per share amounts)

Basic:
Weighted-average common shares outstanding		26,106			25,277		25,584

Net income(loss)	$	(2,155	)	$	7,036	$	2,774

Net income(loss) per share	$	(0.08	)	$	0.28	$	0.11

Diluted:
Weighted-average common shares outstanding		26,106			25,277		25,584
Net effect of dilutive stock options based on the treasury stock method		—			268		797

Shares used in computing net income per share		26,106			25,545		26,381

Net income(loss)	$	(2,155	)	$	7,036	$	2,774

Net income(loss) per share	$	(0.08	)	$	0.28	$	0.11

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For 2006, options outstanding under our stock option plans to purchase approximately 4,363,000 shares of our Common Stock were excluded from the calculation to derive diluted loss per share because their inclusion would have had an anti-dilutive effect.

For 2005, options outstanding under our stock option plans to purchase approximately 7,899,000 shares of our Common Stock were excluded from the calculation to derive diluted income per share because their inclusion would have had an anti-dilutive effect.

For 2004, options outstanding under our stock option plans to purchase approximately 5,783,000 shares of our Common Stock were excluded from the calculation to derive diluted income per share because their inclusion would have had an anti-dilutive effect.


13.	Legal Proceedings

From time to time we are notified of claims, including claims that we may be infringing patents owned by others, or otherwise become aware of conditions, situations, or circumstances involving uncertainty as to the existence of a liability or the amount of a loss. When probable and reasonably estimable, we make provisions for estimated liabilities. As we sometimes have in the past, we may settle disputes and/or obtain licenses under patents that we are alleged to infringe. We can offer no assurance that any pending or threatened claim or other loss contingency will be resolved or that the resolution of any such claim or contingency will not have a materially adverse effect on our business, financial condition, and/or results of operations. Our failure to resolve a claim could result in litigation or arbitration, which can result in significant expense and divert the efforts of our technical and management personnel, whether or not determined in our favor. Actel is a nominal defendant in a consolidated shareholder derivative action filed in the United States District Court for the Northern District of California against certain current and former officers and Directors. The Company and the individual defendants intend to defend these cases vigorously. In addition, our evaluation of the impact of these claims and contingencies could change based upon new information. Subject to the foregoing, we do not believe that the resolution of any pending or threatened legal claim or loss contingency is likely to have a materially adverse effect on our financial position at December 31, 2006, or results of operations or cash flows for the fiscal year then ended.


14.	Subsequent Events

In September 2005, Actel initiated an arbitration proceeding against BTR, Inc. to determine the validity of BTR’s assertion that Actel owed BTR royalties under a 1995 license agreement (amended and restated in 2000 (“License Agreement”)) because Actel products were covered by BTR patents. BTR later added trade secret claims to the arbitration. In December 2006, the parties agreed to settle the arbitration, with Actel acquiring the patents and trade secrets at issue, as well as other intellectual property assets controlled by BTR, for a purchase price agreed to at that time. The parties executed the asset purchase and settlement agreements closing the transaction in March 2007. Management currently does not anticipate future cash flows or product sales specifically associated with the patents and other intellectual property assets acquired. Accordingly, the Company recorded charges of $8.7 million during the fourth quarter of fiscal 2006 ($10.0 million for the full fiscal 2006) which represents all amounts associated with the asset purchase and settlement agreements and associated legal and other costs.

In December 2006, Zilog, Inc. filed suit against Actel, alleging that Actel products infringed a single patent owned by Zilog. In its answer to the complaint, Actel denied all allegations of infringement. The parties negotiated a settlement prior to any substantive litigation, executing a settlement agreement in June 2007. The Company recorded a charge of $435,000 during the fourth quarter of fiscal 2006 in connection with the settlement and associated legal and other costs

During the second quarter of fiscal 2007 Actel recorded a $3.7 million charge to reserve for certain prepaid wafer costs included in other assets in the accompanying consolidated balance sheet at December 31, 2006. Due to changes in the Company’s product plans in the second quarter of fiscal 2007, the Company determined that there is

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

only a remote chance to utilize these prepaid amounts and thus an establishment of a reserve was necessary as of July 1, 2007.


15.	Unaudited Quarterly Information

The following tables set forth selected condensed consolidated statement of operations data for each of the eight quarters ended December 31, 2006. Operating results for any quarter are not necessarily indicative of results for any future period. (in thousands, except share and per share amounts).

Year Ended December 31, 2006


	Fourth Quarter			Third Quarter		Second Quarter		First Quarter
						Restated(1)		Restated(1)

Net revenues	$	48,151		$	49,639	$	47,576	$	46,133
Costs and expenses:
Cost of revenues		20,583			18,471		18,067		18,496
Research and development		14,294			14,475		14,428		13,728
Selling, general, and administrative		24,861			14,105		14,202		14,792
Amortization of acquisition-related intangibles		—			—		7		8

Total costs and expenses		59,738			47,051		46,704		47,024

Income (loss) from operations		(11,587	)		2,588		872		(891	)
Interest income and other, net of expense		2,103			2,021		1,641		1,363

Income (loss) before tax (benefit) provision		(9,484	)		4,609		2,513		472
Tax (benefit) provision		(1,961	)		1,198		864		162

Net income (loss)	$	(7,523	)	$	3,411	$	1,649	$	310

Net income (loss) per share:
Basic	$	(0.28	)	$	0.13	$	0.06	$	0.01

Diluted(2)	$	(0.28	)	$	0.12	$	0.06	$	0.01

Shares used in computing net income (loss) per share:
Basic		26,515			26,281		25,874		25,753

Diluted(2)		26,515			27,393		27,087		26,879


(1)		See “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatements of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements of this Form 10-K.

(2)		For the fourth quarter of 2006, we incurred a quarterly net loss and the inclusion of stock options in the shares used for computing diluted earnings per share would have been anti-dilutive and reduced the loss per share. Accordingly, all Common Stock equivalents (such as stock options) have been excluded from the shares used to calculate diluted earnings per share for that period.

100

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Statement of Operations Data (unaudited, in thousands, except per share data):

For the Three Months Ended July 2, 2006


	As Previously		Restatement
	Reported		Adjustments(1)(2)			As Restated

Net revenues	$	47,701	$	(125	)	$	47,576
Costs and expenses:
Cost of revenues		18,098		(31	)		18,067
Research and development		14,417		11			14,428
Selling, general, and administrative		14,208		(6	)		14,202
Amortization of acquisition-related intangibles		7		—			7

Total costs and expenses		46,730		(26	)		46,704

Income from operations		971		(99	)		872
Interest income and other, net of expense		1,641		—			1,641

Income before tax provision		2,612		(99	)		2,513
Tax provision		1,320		(456	)		864

Net income	$	1,292	$	357		$	1,649

Net income per share:
Basic	$	0.05	$	0.01		$	0.06

Diluted	$	0.05	$	0.01		$	0.06

Shares used in computing net income per share:
Basic		25,874		—			25,874

Diluted		27,087		—			27,087


(1)		Adjustment of $125 to revenue and adjustment of ($31) to cost of revenue for European distributor deferred revenue.

(2)		Restatement adjustments for payroll tax expense of $8, FAS 123R benefit of ($3) and adjustment of ($456) relating to changes in the effective income tax rate.

102

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended January 1, 2006


	As Previously		Restatement
	Reported		Adjustments(1)(2)			As Restated

Net revenues	$	43,708	$	(100	)	$	43,608
Costs and expenses:
Cost of revenues		17,883		(23	)		17,860
Research and development		12,390		27			12,417
Selling, general, and administrative		12,348		(118	)		12,230
Amortization of acquisition-related intangibles		258		—			258

Total costs and expenses		42,879		(114	)		42,765

Income from operations		829		14			843
Interest income and other, net of expense		1,199		—			1,199

Income before tax provision		2,028		14			2,042
Tax provision		874		(301	)		573

Net income	$	1,154	$	315		$	1,469

Net income per share:
Basic	$	0.05	$	0.01		$	0.06

Diluted	$	0.05	$	0.01		$	0.06

Shares used in computing net income per share:
Basic		25,425		—			25,425

Diluted		25,577		(6	)		25,571


(1)		Adjustment of $100 to revenue and adjustment of ($25) to cost of revenue for European distributor deferred income.

(2)		Restatement adjustments of ($94) for stock-based compensation expenses relating to improper measurement dates and other stock option modifications, and related payroll tax expense and income tax impacts of $5 and ($301), respectively.

104

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended October 2, 2005


	As Previously		Restatement
	Reported		Adjustments(1)(2)			As Restated

Net revenues	$	46,378	$	(150	)	$	46,228
Costs and expenses:
Cost of revenues		19,033		(35	)		18,998
Research and development		12,166		30			12,196
Selling, general, and administrative		12,204		67			12,271
Amortization of acquisition-related intangibles		540		—			540

Total costs and expenses		43,943		62			44,005

Income from operations		2,435		(212	)		2,223
Interest income and other, net of expense		1,019		—			1,019

Income before tax provision		3,454		(212	)		3,242
Tax provision		1,216		(307	)		909

Net income	$	2,238	$	95		$	2,333

Net income per share:
Basic	$	0.09	$	0.00		$	0.09

Diluted	$	0.09	$	0.00		$	0.09

Shares used in computing net income per share:
Basic		25,388		—			25,388

Diluted		25,596		(9	)		25,587


(1)		Adjustment of $150 to revenue and adjustment of ($38) to cost of revenue for European distributor deferred income.

(2)		Restatement adjustments of $94 for stock-based compensation expenses relating to improper measurement dates and other stock option modifications, and related payroll tax expense and income tax impacts of $6 and ($307), respectively.

105

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 3, 2005


	As Previously		Restatement
	Reported		Adjustments(1)(2)			As Restated

Net revenues	$	45,327	$	(100	)	$	45,227
Costs and expenses:
Cost of revenues		18,560		(22	)		18,538
Research and development		11,759		32			11,791
Selling, general, and administrative		12,667		(110	)		12,557
Amortization of acquisition-related intangibles		552		—			552

Total costs and expenses		43,538		(100	)		43,438

Income from operations		1,789		—			1,789
Interest income and other, net of expense		926		—			926

Income before tax provision		2,715		—			2,715
Tax provision		508		253			761

Net income	$	2,207	$	(253	)	$	1,954

Net income per share:
Basic	$	0.09	$	(0.01	)	$	0.08

Diluted	$	0.09	$	(0.01	)	$	0.08

Shares used in computing net income per share:
Basic		25,183		—			25,183

Diluted		25,400		(13	)		25,387


(1)		Adjustment of $100 to revenue and adjustment of ($25) to cost of revenue for European distributor deferred income.

(2)		Restatement adjustments of ($80) for stock-based compensation expenses relating to improper measurement dates and other stock option modifications, and related payroll tax expense and income tax impacts of $5 and $253, respectively.

106

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended April 3, 2005


	As Previously		Restatement
	Reported		Adjustments(1)(2)			As Restated

Net revenues	$	43,984	$	(100	)	$	43,884
Costs and expenses:
Cost of revenues		17,916		(30	)		17,886
Research and development		11,858		(20	)		11,838
Selling, general, and administrative		12,837		(245	)		12,592
Amortization of acquisition-related intangibles		558		—			558

Total costs and expenses		43,169		(295	)		42,874

Income from operations		815		195			1,010
Interest income and other, net of expense		780		(12	)		768

Income before tax provision		1,595		183			1,778
Tax provision		158		341			499

Net income	$	1,437	$	(158	)	$	1,279

Net income per share:
Basic	$	0.06	$	(0.01	)	$	0.05

Diluted	$	0.06	$	(0.01	)	$	0.05

Shares used in computing net income per share:
Basic		25,111		—			25,111

Diluted		25,652		(14	)		25,638


(1)		Adjustment of $100 to revenue and adjustment of ($25) to cost of revenue for European distributor deferred income.

(2)		Restatement adjustments of ($165) for stock-based compensation expenses relating to improper measurement dates and other stock option modifications, and related payroll tax expense and income tax impacts of ($105) and $341, respectively.

107

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidated Balance Sheets


	As Previously			Restatement
July 2, 2006	Reported			Adjustments(1)(2)			As Restated
	(Unaudited, in thousands)

ASSETS
Current assets:
Cash and cash equivalents	$	40,441		$	—		$	40,441
Short-term investments(4)		105,455			—			105,455
Accounts receivable, net(3)		21,375			—			21,375
Inventories		36,466			—			36,466
Deferred income taxes		21,489			—			21,489
Prepaid expenses and other current assets(3)		8,313			—			8,313

Total current assets		233,539			—			233,539
Long-term investments(4)		40,224			—			40,224
Property and equipment, net		23,616			—			23,616
Goodwill		32,142			—			32,142
Deferred tax asset		10,283			2,807			13,090
Other assets, net		16,781			—			16,781

	$	356,585		$	2,807		$	359,392


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	14,063		$	—		$	14,063
Accrued salaries and employee benefits		6,714			362			7,076
Other accrued liabilities		14,692			(935	)		13,757
Deferred income on shipments to distributors		30,351			(792	)		29,559

Total current liabilities		65,820			(1,365	)		64,455
Deferred compensation plan liability		4,085			—			4,085
Deferred rent liability		1,307			—			1,307
Long term accrued license agreements, net		2,755			—			2,755

Total liabilities		73,967			(1,365	)		72,602
Commitments and contingencies
Shareholders’ equity:
Common stock		26			—			26
Additional paid-in capital		203,967			15,139			219,106
Retained earnings		79,659			(10,967	)		68,692
Accumulated other comprehensive loss		(1,034	)		—			(1,034	)

Total shareholders’ equity		282,618			4,172			286,790

	$	356,585		$	2,807		$	359,392


(1)		Cumulative adjustment of ($792) for European distributor deferred income.

(2)		Cumulative restatement adjustments for stock-based compensation expenses, relating to improper measurement dates, other stock option modifications and related payroll and income tax expense (benefit) impacts.

(3)		The Company reclassified $1,876 of previously reported accounts receivable to prepaid and other current assets to conform to the current presentation.

(4)		The Company reclassified $1,963 of previously reported short-term investments to long-term to conform to the current presentation.

108

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	As Previously			Restatement
April 2, 2006	Reported			Adjustments(1)(2)			As Restated
	(Unaudited, in thousands)

ASSETS
Current assets:
Cash and cash equivalents	$	22,047		$	—		$	22,047
Short-term investments(4)		107,676			—			107,676
Accounts receivable, net(3)		26,746			—			26,746
Inventories		36,988			—			36,988
Deferred income taxes		21,489			—			21,489
Prepaid expenses and other current assets(3)		8,402			—			8,402

Total current assets		223,348			—			223,348
Long-term investments(4)		41,808			—			41,808
Property and equipment, net		23,432			—			23,432
Goodwill		32,142			—			32,142
Deferred tax asset		10,177			2,807			12,984
Other assets, net		15,873			—			15,873

	$	346,780		$	2,807		$	349,587


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	13,136		$	—		$	13,136
Accrued salaries and employee benefits		5,626			354			5,980
Accrued license agreements		5,871			—			5,871
Other accrued liabilities		4,924			(479	)		4,445
Deferred income on shipments to distributors		32,501			(886	)		31,615

Total current liabilities		62,058			(1,011	)		61,047
Deferred compensation plan liability		4,083			—			4,083
Deferred rent liability		1,278			—			1,278
Long term accrued license agreements, net		3,385			—			3,385

Total liabilities		70,804			(1,011	)		69,793
Commitments and contingencies
Shareholders’ equity:
Common stock		26			—			26
Additional paid-in capital		198,469			15,143			213,612
Retained earnings		78,367			(11,325	)		67,042
Accumulated other comprehensive loss		(886	)		—			(886	)

Total shareholders’ equity		275,976			3,818			279,794

	$	346,780		$	2,807		$	349,587


(1)		Cumulative adjustment of ($886) for European distributor deferred income.

(2)		Cumulative restatement adjustments for stock-based compensation expenses, relating to improper measurement dates, other stock option modifications and related payroll and income tax expense (benefit) impacts.

(3)		The Company reclassified $1,680 of previously reported accounts receivable to prepaid and other current assets to conform to the current presentation.

(4)		The Company reclassified $215 of previously reported long-term investments to short-term to conform to the current presentation.

109

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	As Previously			Restatement
January 1, 2006	Reported			Adjustments(1)(2)			As Restated
	(In thousands)

ASSETS
Current assets:
Cash and cash equivalents	$	24,033		$	—		$	24,033
Short-term investments(3)		119,158			—			119,158
Accounts receivable, net(4)		25,287			—			25,287
Inventories		37,372			—			37,372
Deferred income taxes		21,489			—			21,489
Prepaid expenses and other current assets(4)		8,554			—			8,554

Total current assets		235,893			—			235,893
Long-term investments(3)		25,125			—			25,125
Property and equipment, net		23,859			—			23,859
Goodwill		32,142			—			32,142
Deferred tax asset		9,979			2,807			12,786
Other assets, net		13,391			—			13,391

	$	340,389		$	2,807		$	343,196


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	14,503		$	—		$	14,503
Accrued salaries and employee benefits		4,994			458			5,452
Accrued license agreements		5,714			—			5,714
Other accrued liabilities		4,482			—			4,482
Deferred income on shipments to distributors		29,238			(987	)		28,251

Total current liabilities		58,931			(529	)		58,402
Deferred compensation plan liability		3,667			—			3,667
Deferred rent liability		1,242			—			1,242
Long term accrued license agreements, net		3,828			—			3,828

Total liabilities		67,668			(529	)		67,139
Commitments and contingencies
Shareholders’ equity:
Common stock		26			—			26
Additional paid-in capital		194,916			15,185			210,101
Deferred compensation		—			(63	)		(63	)
Retained earnings		78,519			(11,786	)		66,733
Accumulated other comprehensive loss		(740	)		—			(740	)

Total shareholders’ equity		272,721			3,336			276,057

	$	340,389		$	2,807		$	343,196


(1)		Cumulative adjustment of ($987) for European distributor deferred income.

(2)		Cumulative restatement adjustments for stock-based compensation expenses, relating to improper measurement dates, other stock option modifications and related payroll and income tax expense (benefit) impacts.

(3)		The Company has reclassified $1,581 of previously reported long-term investments to short-term to conform to the current presentation.

(4)		The Company reclassified $1,549 of previously reported accounts receivable to prepaid expenses and other current assets to conform to current presentation.

110

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	As Previously			Restatement
October 2, 2005	Reported			Adjustments(1)(2)			As Restated
	(Unaudited, in thousands)

ASSETS
Current assets:
Cash and cash equivalents	$	17,288		$	—		$	17,288
Short-term investments		136,349			—			136,349
Accounts receivable, net(3)		28,762			—			28,762
Inventories		40,148			—			40,148
Deferred income taxes		22,124			—			22,124
Prepaid expenses and other current assets(3)		6,305			—			6,305

Total current assets		250,976			—			250,976
Property and equipment, net		23,670			—			23,670
Goodwill		32,142			—			32,142
Deferred tax asset		—			2,881			2,881
Other assets, net		25,939			—			25,939

	$	332,727		$	2,881		$	335,608


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,202		$	—		$	11,202
Accrued salaries and employee benefits		5,834			453			6,287
Other accrued liabilities		5,753			933			6,686
Deferred income on shipments to distributors		29,332			(1,062	)		28,270

Total current liabilities		52,121			324			52,445
Deferred compensation plan liability		3,545			—			3,545
Deferred rent liability		1,194			—			1,194
Long term accrued license agreements, net		7,890			—			7,890

Total liabilities		64,750			324			65,074
Commitments and contingencies
Shareholders’ equity:
Common stock		25			—			25
Additional paid-in capital		191,306			14,762			206,068
Deferred compensation		—			(105	)		(105	)
Retained earnings		77,365			(12,100	)		65,265
Accumulated other comprehensive loss		(719	)		—			(719	)

Total shareholders’ equity		267,977			2,557			270,534

	$	332,727		$	2,881		$	335,608


(1)		Cumulative adjustment of ($1,062) for European distributor deferred income.

(2)		Cumulative restatement adjustments for stock-based compensation expenses, relating to improper measurement dates, other stock option modifications and related payroll and income tax expense (benefit) impacts.

(3)		The Company reclassified $1,412 of previously reported accounts receivable to prepaid and other current assets to conform to the current presentation.

111

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	As Previously			Restatement
July 3, 2005	Reported			Adjustments(1)(2)			As Restated
	(Unaudited, in thousands)

ASSETS
Current assets:
Cash and cash equivalents	$	11,599		$	—		$	11,599
Short-term investments		140,458			—			140,458
Accounts receivable, net(3)		16,901			—			16,901
Inventories		42,205			—			42,205
Deferred income taxes		22,124			—			22,124
Prepaid expenses and other current assets(3)		6,133			—			6,133

Total current assets		239,420			—			239,420
Property and equipment, net		24,392			—			24,392
Goodwill		32,142			—			32,142
Deferred tax asset		—			2,881			2,881
Other assets, net		17,816			—			17,816

	$	313,770		$	2,881		$	316,651


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,387		$	—		$	11,387
Accrued salaries and employee benefits		3,739			448			4,187
Other accrued liabilities		3,852			1,240			5,092
Deferred income on shipments to distributors		24,721			(1,175	)		23,546

Total current liabilities		43,699			513			44,212
Deferred compensation plan liability		3,343			—			3,343
Deferred rent liability		1,146			—			1,146

Total liabilities		48,188			513			48,701
Commitments and contingencies
Shareholders’ equity:
Common stock		25			—			25
Additional paid-in capital		191,016			14,713			205,729
Deferred compensation		—			(149	)		(149	)
Retained earnings		75,127			(12,196	)		62,931
Accumulated other comprehensive loss		(586	)		—			(586	)

Total shareholders’ equity		265,582			2,368			267,950

	$	313,770		$	2,881		$	316,651


(1)		Cumulative adjustment of ($1,175) for European distributor deferred income.

(2)		Cumulative restatement adjustments for stock-based compensation expenses, relating to improper measurement dates, other stock option modifications and related payroll and income tax expense (benefit) impacts.

(3)		The Company reclassified $1,334 of previously reported accounts receivable to prepaid and other current assets to conform to the current presentation.

112

ACTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	As Previously			Restatement
April 3, 2005	Reported			Adjustments(1)(2)			As Restated
	(Unaudited, in thousands)

ASSETS
Current assets:
Cash and cash equivalents	$	7,449		$	—		$	7,449
Short-term investments		138,877			—			138,877
Accounts receivable, net(3)		20,718			—			20,718
Inventories		44,844			—			44,844
Deferred income taxes		22,124			—			22,124
Prepaid expenses and other current assets(3)		6,577			—			6,577

Total current assets		240,589			—			240,589
Property and equipment, net		22,575			—			22,575
Goodwill		32,142			—			32,142
Deferred tax asset		—			2,881			2,881
Other assets, net		18,595			—			18,595

	$	313,901		$	2,881		$	316,782


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,120		$	—		$	11,120
Accrued salaries and employee benefits		4,797			443			5,240
Other accrued liabilities		3,668			987			4,655
Deferred income on shipments to distributors		29,244			(1,250	)		27,994

Total current liabilities		48,829			180			49,009
Deferred compensation plan liability		3,238			—			3,238
Deferred rent liability		1,097			—			1,097

Total liabilities		53,164			180			53,344
Commitments and contingencies
Shareholders’ equity:
Common stock		25			—			25
Additional paid-in capital		188,605			14,842			203,447
Deferred compensation		—			(198	)		(198	)
Retained earnings		72,920			(11,943	)		60,977
Accumulated other comprehensive loss		(813	)		—			(813	)

Total shareholders’ equity		260,737			2,701			263,438

	$	313,901		$	2,881		$	316,782


(1)		Cumulative adjustment of ($1,250) for European distributor deferred income.

(2)		Cumulative restatement adjustments for stock-based compensation expenses, relating to improper measurement dates, other stock option modifications and related payroll and income tax expense (benefit) impacts.

(3)		The Company reclassified $1,342 of previously reported accounts receivable to prepaid and other current assets to conform to the current presentation.

113

REPORT OF ERNST & YOUNG LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of
Actel Corporation

We have audited the accompanying consolidated balance sheets of Actel Corporation as of December 31, 2006 and January 1, 2006 (restated), and the related consolidated statements of operations, shareholders’ equity and accumulated other comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2006 (2005 and 2004, restated). Our audits also included the financial statement schedule listed on item 15 (a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Actel Corporation at December 31, 2006 and January 1, 2006 (restated), and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 (2005 and 2004, restated), in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company has restated its previously issued financial statements as of January 1, 2006 and for the years ended January 1, 2006 and January 2, 2005 to correct for errors in share-based compensation, the related tax effects and errors in deferred income originating in 2000 and prior years.

As discussed in Note 1 to the consolidated financial statements, on January 2, 2006 the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment, using the modified-prospective transition method.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Actel Corporation’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 21, 2008 expressed an unqualified opinion thereon

/s/ Ernst & Young LLP

San Jose, California

January 21, 2008

114

REPORT OF ERNST & YOUNG LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of
Actel Corporation

We have audited Actel Corporation’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Actel Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Actel Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Actel Corporation as of December 31, 2006 and January 1, 2006 (restated), and the related consolidated statements of operations, shareholders’ equity and accumulated other comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2006 (2005 and 2004, restated) and our report dated January 21, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Jose, California

January 21, 2008

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ITEM 9.	*CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE*

None.


ITEM 9A.	*CONTROLS AND PROCEDURES*

Stock Option Reviews, Investigation, and Restatement

Per the recommendation of the Special Committee, our management reviewed the information made available to it by the Special Committee and performed its own detailed review of historical stock option grants (including the examination of options granted during the period between our initial public offering on August 2, 1993, and January 1, 1996 ) as part of the effort to establish appropriate measurement dates. Management analyzed all available evidence related to each grant. Based on relevant facts and circumstances, management applied the applicable accounting standards to determine appropriate measurement dates for all grants. In addition to the grants found by the Special Committee to have lacked adequate documentation supporting the recorded measurement dates, our management concluded that there was inadequate documentation supporting the recorded measurement date for the four company-wide grants during the period 2002-2004, and for one company-wide grant in 1995. If the measurement date was other than the grant date, we made accounting adjustments as required, resulting in stock-based compensation expense and related tax effects. We have determined that we had unrecorded non-cash equity-based compensation charges associated with our equity incentive plans for the period 1995 through 2006. Since these charges were material to our financial statements for the years 1995 through 2005, we are restating our historical financial statements to record additional non-cash charges for stock-based compensation expense.

Remedial Measures Instituted by the Company

At various times prior to July 2, 2006, we implemented the following practices for our equity awards:


	•	Our procedures for granting stock options was enhanced to facilitate the public reporting of stock option grants to executive officers and Directors within two business days after the grant date, in accordance with Section 403 of the Sarbanes-Oxley Act of 2002. Prior to the Sarbanes-Oxley Act, insiders were required to file Forms 4 to report transactions in our securities no later than 10 days after the end of the month in which the transaction occurred.

	•	The procedure for approving new-hire, promotion, merit-adjustment, and patent-award options by the Unanimous Written Consent (“UWC”) of the Compensation Committee for grant on the first Friday of each month was revised to include more rigorous cut-off procedures, preparation of the grant list by the Finance

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Department, and enhanced reconciliations to underlying support documents (i.e., offer letters, employee reviews, and patent applications).


	•	By policy, our Company-wide annual grants were also granted on the first Friday of a month, making them subject to the procedures described above.

	•	All grants are communicated to employees within a relatively short period after the grant date.

	•	Our General Counsel or his designee drafts all UWCs and reviews the minutes of all Compensation Committee meetings.

In the third quarter of 2006, we enhanced our stock option grant approval practices to ensure that all required corporate granting actions were completed by the stated grant date. These enhancements included earlier cut-off and UWC distribution dates. In the fourth quarter of 2006, we further enhanced our stock option grant approval practices by enabling the approval of UWCs by email and scheduling a Compensation Committee meeting on the stated grant date, which is cancelled if all UWC signatures pages have been received.

We have tested controls placed into operation as part of the remedial actions above and found them to be operating effectively as of December 31, 2006, enabling us to conclude that the reoccurrence of stock option grant measurement date errors is a remote possibility.

Evaluation of Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of December 31, 2006, the end of the period covered by this Annual Report on Form 10-K. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported on a timely basis and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As a result of the review of our past stock option granting practices and the related restatement, our management, including our CEO and CFO, concluded that we had control deficiencies in our measurement date determination process that represented material weaknesses in our internal control over financial reporting prior to 2005. The measurement date determination errors occurred because there were not processes in place to ensure that all required corporate granting actions were completed by the stated grant date. However, based on our evaluation as of December 31, 2006, our CEO and CFO have concluded that we have remediated the material weakness discussed above in internal control over financial reporting related to stock option granting practices and our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2006.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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Based on its assessment, management has concluded that our internal control over financial reporting was effective at the reasonable assurance level as of December 31, 2006, based on criteria in Internal Control — Integrated Framework, issued by the COSO. The effectiveness of our internal control over financial reporting as of December 31, 2006, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Inherent Limitations of Internal Controls

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:


	•	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

	•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

	•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Management does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There were no significant changes to our internal controls during the quarter ended December 31, 2006, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.


ITEM 9B.	*OTHER INFORMATION*

None.

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PART III


ITEM 10.	*DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE*

Directors

The following table identifies each of our directors:


Name of Director	Age		Principal Occupation	Director Since

John C. East		62	President and Chief Executive Officer, Actel Corporation		1988
James R. Fiebiger		67	Business Consultant		2000
Jacob S. Jacobsson		55	President and Chief Executive Officer, Blaze, Inc.		1998
J. Daniel McCranie		64	Business Consultant		2004
Robert G. Spencer		63	Principal, The Spencer Group		1989

Mr. East has been a director, and served as our President and Chief Executive Officer, since December 1988.

Dr. Fiebiger has been a director since December 2000. He has been an independent consultant to the semiconductor industry since October 2004. From December 1999 to September 2004, Dr. Fiebiger was Chairman and Chief Executive Officer of Lovoltech Inc., a privately held semiconductor company specializing in low voltage devices. He also serves as a director of Mentor Graphics Corporation, Pixelworks Inc., Power Integrations Inc., and QLogic Corporation. Dr. Fiebiger was Vice Chairman and Managing Director of Technology Licensing of GateField Corporation, a semiconductor company that we purchased in November 2000, from 1998 to 2000, and President and Chief Executive Officer and a director of GateField from 1996 to 1998. He has also held the positions of President and Chief Operating Officer of VLSI Technology, Inc., an ASIC semiconductor company, President and Chief Executive Officer of Thomsom-Mosteck, a semiconductor company, and Senior Corporate Vice President and Assistant General Manager of Motorola Inc.’s worldwide semiconductor sector.

Mr. Jacobsson has been a director since May 1998. Since March 2006, he has been President and Chief Executive Officer of Blaze, Inc., a privately-held company that offers products for Design For Manufacturability (DFM) products. For the six years before that, he was President and Chief Executive Officer and a director of Cynapps, Inc., and its successor by merger, Forte Design Systems, a privately-held company that offers products and services for the hierarchical design and verification of large, complex systems and integrated circuits. Mr. Jacobsson also serves as a director of various other private companies.

Mr. McCranie has been an independent business consultant since 2001. Mr. McCranie has been Chairman of the Board of Virage Logic Corporation, a provider of application-optimized semiconductor intellectual property platforms based on memory, logic, and design tools, since August 2003; and of ON Semiconductor Corporation, a global supplier of power and data management and standard semiconductor components, since August 2002. He is also a member of the Board of Directors of Cypress Semiconductor Corporation, a diversified, broadline semiconductor supplier with a communications focus located in San Jose, California, where he was employed from 1993 to 2001, most recently as Vice President, Marketing and Sales. From 1986 to 1993, Mr. McCranie was President, Chief Executive Officer, and Chairman of SEEQ Technology, Inc., a manufacturer of semiconductor devices. He was previously Chairman of the Board of Xicor Inc. and has served on the Boards of California Micro Devices and ASAT Holdings Limited.

Mr. Spencer has been the principal of The Spencer Group, a consulting firm, for the past five years.

A director serves in office until his or her respective successor is duly elected and qualified or until his or her death or resignation. There are no immediate family relationships between or among any of our directors or our executive officers.

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Executive Officers

The following table identifies each of our executive officers:


Name(1)	Age		Position

John C. East		62	President and Chief Executive Officer
Esmat Z. Hamdy		57	Senior Vice President of Technology and Operations
Jay A. Legenhausen		41	Senior Vice President of Worldwide Sales
Fares N. Mubarak		46	Senior Vice President of Engineering & Marketing
Jon A. Anderson		49	Vice President of Finance and Chief Financial Officer
Anthony Farinaro		45	Vice President & General Manager of Design Services
Barbara L. McArthur		57	Vice President of Human Resources
David L. Van De Hey		52	Vice President & General Counsel and Secretary

Mr. East has served as our President and Chief Executive Officer since December 1988. From April 1979 until joining us, Mr. East served in various positions with Advanced Micro Devices, a semiconductor manufacturer, including Senior Vice President of Logic Products from November 1986 to November 1988. From December 1976 to March 1979, he served as Operations Manager for Raytheon Semiconductor. From September 1968 to December 1976, Mr. East served in various marketing, manufacturing, and engineering positions for Fairchild Camera and Instrument Corporation, a semiconductor manufacturer.

Dr. Hamdy is one of our founders, was our Vice President of Technology from August 1991 to March 1996 and Senior Vice President of Technology from March 1996 to September 1996, and has been our Senior Vice President of Technology and Operations since September 1996. From November 1985 to July 1991, he held a number of management positions with our technology and development group. From January 1981 to November 1985, Dr. Hamdy held various positions at Intel Corporation, a semiconductor manufacturer, lastly as project manager.

Mr. Mubarak joined Actel in November 1992, was our Director of Product and Test Engineering until October 1997, and became our Vice President of Engineering in October 1997, our Senior Vice President of Engineering in February 2006, and our Senior Vice President of Engineering & Marketing in October 2007. From 1989 until joining us, he held various engineering and engineering management positions with Samsung Semiconductor Inc., a semiconductor manufacturer, and its spin-off, IC Works, Inc. From 1984 to 1989, Mr. Mubarak held various engineering, product planning, and engineering management positions with Advanced Micro Devices, a semiconductor manufacturer.

Mr. Legenhausen joined Actel in October 2007 as Senior Vice President of Worldwide Sales. From 1990 until joining us, he held various management, sales, marketing and engineering positions with Cypress Semiconductor, a semiconductor manufacturer, with the most recent position of Vice President of Sales, Americas.

Mr. Anderson joined Actel in March 1998 as Controller and has been our Vice President of Finance and Chief Financial Officer since August 2001. From 1987 until joining us, he held various financial positions at National Semiconductor, a semiconductor company, with the most recent position of Director of Finance, Local Area Networks Division. From 1982 to 1986, he was an auditor with Touche Ross & Co., a public accounting firm.

Mr. Farinaro joined Actel in August 1998 as Vice President & General Manager of Design Services. From February 1990 until joining us, he held various engineering and management positions with GateField (formally Zycad Corporation until 1997), a semiconductor company, with the most recent position of Vice President of Application & Design Services. From 1985 to 1990, Mr. Farinaro held various engineering and management positions at Singer Kearfott, an aerospace electronics company, and its spin-off, Plessey Electronic Systems Corporation.

Ms. McArthur joined Actel in July of 2000 as Vice President of Human Resources. From 1997 until joining us, she was Vice President of Human Resources at Talus Solutions. Before that, Ms. McArthur held senior human

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resource positions at Applied Materials from 1993 to 1997, at 3Com Corporation from 1987 to 1993, and at Saga Corporation from 1978 to 1986.

Mr. Van De Hey joined Actel in July 1993 as Corporate Counsel, became our Secretary in May 1994, and has been our Vice President & General Counsel since August 1995. From November 1988 to September 1993, he was an associate with Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, a law firm in Palo Alto, California, and our outside legal counsel. From August 1985 until October 1988, he was an associate with the Cleveland office of Jones Day, a law firm.

Our executive officers are appointed by, and serve at the discretion of, our board of directors, subject to their rights under any contract of employment or other agreement. There are no immediate family relationships between or among any of our directors or our executive officers.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange requires our directors, executive officers, and persons who beneficially own more than 10 percent of our Common Stock to file with the Securities and Exchange Commission (“SEC”) reports of ownership regarding the Common Stock and other Actel equity securities. These persons are required by the SEC regulations to furnish us with copies of all Section 16(a) reports they file. To our knowledge, based solely on a review of copies of the Section 16(a) reports received during the period from January 1 until December 31, 2006, and written representations from each of our directors and executive officers, all of our directors and executive officers complied with the applicable Section 16(a) filing requirements, except that Mr. Van De Hey filed one report two business days late due to technical difficulties.

Code of Ethics

We have a Code of Business Conduct and Ethics for all of our directors, officers, and employees. Our Code of Business Conduct and Ethics is available on our website at http://www.actel.com. To date, there have been no waivers under our Code of Business Conduct and Ethics. We will post any waivers, if and when granted, of our Code of Business Conduct and Ethics on our website at http://www.actel.com on the Investor Relations page (http://media.corporate-ir.net/media — files/irol/11/112185/pdfs/CodeEthics.pdf).

This website address is intended to be an inactive, textual reference only. None of the material on this website is part of this Annual Report on Form 10-K.

Audit Committee

The Audit Committee currently consists of Messrs. Fiebiger (Chairman), Spencer, and Jacobsson. Our Audit Committee is primarily responsible for selecting our independent registered public accounting firm, overseeing our internal financial reporting and financial controls, and consulting with and reviewing the services provided by our independent registered public accounting firm. The Board of Directors has determined that each member of the Audit Committee is an “independent director” as defined in Nasdaq Rule 4200. Our Board of Directors has also determined that there is currently no “audit committee financial expert,” as defined in the applicable SEC rules and regulations, serving on the Audit Committee and is currently attempting to find an individual who is an audit committee financial expert and is willing to serve as a Director and as a member of our Audit Committee.


ITEM 11.	*EXECUTIVE COMPENSATION*

Compensation Discussion and Analysis

Overview

The Compensation Committee, which currently consists of Directors McCranie (Chairman), Fiebiger, and Spencer, approves executive salary, benefit, and incentive compensation matters. The Compensation Committee determines compensation based on recommendations of management (other than for our Chief Executive Officer), analysis of relevant compensation data, and the advice of an independent compensation consultant hired by the Compensation Committee. We seek to have a compensation program that fairly rewards executives for their responsibilities and performance, aligns management and shareholder interests, and provides incentives for both

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short- and long-term performance. The primary components of our compensation program are base salary, an annual incentive bonus plan, and stock and option awards.

Objectives and Principles of Our Executive Compensation

The primary goal of our compensation system is to ensure that we have talented, experienced, and motivated executive leadership that is capable of achieving our financial and strategic objectives.

As a starting point, we believe our executives should be fairly rewarded for their experience and for their level of responsibility. We therefore seek to ensure that our level of executive compensation is similar to that paid to comparable executives at comparable companies.

We strongly believe that executive compensation should be directly linked to our performance. Our compensation system is designed so that a substantial portion of the potential compensation of all of our Named Executives Officers is contingent on our financial results and our stock price.

In rewarding performance, we are careful to reward short- and long-term performance in a balanced manner. We expect our executive leadership to manage the Company so that we achieve our annual fiscal plan while at the same time positioning us to achieve our longer-term strategic objectives. Our performance based compensation therefore contains both long- and short-term elements.

In order to achieve longer-term strategic objectives, we believe it is important that we have a cohesive executive team with deep experience in the FPGA industry and at Actel. Therefore, our compensation system provides incentives for our existing executives to remain with us. To the extent that we need to hire new executives, we believe our compensation system allows us to attract individuals with the requisite experience and qualifications.

As a matter of corporate culture, we believe that executives should be compensated in a manner similar to all other employees of the Company. We have no executive perquisites, and decisions regarding executive salaries, raises and stock or option awards are made in the context of the compensation that is paid to employees generally.

Finally, our compensation system is intended to be consistent with our shareholders’ interests. As discussed above, our compensation system is intended to motivate our executives to achieve high levels of performance. In addition, our compensation system is designed to ensure that executives do not receive a disproportionate share of corporate profits and that stock and option awards do not cause excessive dilution to shareholders.

Elements of Executive Compensation

Our executive compensation system consists of three main elements: base salary, an annual incentive bonus plan, and stock and option awards. In addition, executives may participate in our Employee Stock Purchase Plan and our non-qualified deferred compensation plan. In the event of a change of control of Actel, our executives would be eligible for payments pursuant to our Employee Retention Plan and, under certain circumstances, accelerated vesting of stock and option awards under our Management Continuity Agreements.

Our compensation system deliberately excludes certain elements. Our Named Executive Officers do not have employment contracts, and, consistent with our belief that pay should be directly linked with performance, none is entitled to receive severance pay upon termination of employment. We have also chosen not to have executive perquisites as those would be inconsistent with our corporate culture. We do not have a pension plan, employer contributions to our deferred compensation plan, or other post-employment benefits (other than, under certain circumstances, under our change-of-control arrangements) as we do not believe those are efficient means of motivating improved performance.

Our Compensation Committee uses the services of an independent compensation consultant, Wade Meyercord of Meyercord & Associates, Inc., who attends the meetings of the Compensation Committee together with our Chief Executive Officer and our Vice President of Human Resources. The consultant’s responsibilities are to gather and present to the Committee relevant compensation data that is publicly available through filings with the Securities and Exchange Commission or in various surveys. While the consultant provides comparable salary ranges for the Company’s various executive positions, he does not recommend specific amounts. These recommendations are made by management for review and discussion by the Committee. Management does not recommend specific

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compensation amounts for our Chief Executive Officer, and these amounts are determined by the Committee, with input from the Vice President of Human Resources as requested.

In structuring our compensation system, we are aware that there is strong competition for executive talent. We therefore seek to ensure that the compensation we pay our executives is competitive with what they could earn at other companies. As part of our compensation process, we obtain publicly disclosed compensation data from 19 semiconductor companies. We believe that these companies are potential competitors for our executives and that their compensation practices are therefore meaningful to our compensation decisions. These companies have revenue and market capitalizations that are similar to ours with approximately two-thirds having greater and one-third having lesser revenue and market capitalizations. The companies are located primarily in California and all are in the United States. This information is supplemented by broader commercially-available salary surveys. We use all of this information for reference purposes but do not attempt to benchmark our compensation against the comparable companies or any particular survey.

The following is a description of each element of our compensation system:

Base Salary. The Compensation Committee establishes base salaries based on the scope of responsibility for each position, taking into account base salaries at comparable companies. Because our executives have significant industry experience and most have long tenures with us, their base salaries are generally higher than the median base salary for comparable companies. We review base salaries annually and may adjust them to reflect market conditions or individual performance.

We made no general increase in executive base salaries in 2006. We had increased base salaries in October 2005. Those increases reflected decisions that we had made earlier in that year but had delayed implementing for financial reasons. However, two of our Named Executive Officers did receive increases in their base salaries in 2006 because of their particular circumstances. In February 2006, we increased the salary of Dennis Kish from $273,000 to $298,480 to reflect his promotion to Senior Vice President of Sales and Marketing. Mr. Kish subsequently left the Company in August 2007. In October 2006, we increased the salary of Jon Anderson, our Chief Financial Officer, from $252,000 to $277,000 because we determined that his salary was significantly below market. In August 2007, we implemented our 2007 salary increases.

We believe that the base salaries and potential incentive bonuses of our executive officers, when combined, are below the $1 million deductibility limit set forth in Section 162(m) of the Internal Revenue Code and, therefore, that provision of the tax law does not influence our compensation decisions significantly.

Incentive Bonus Plan. In 2006, each Named Executive Officer was eligible to receive a bonus under our 2006 Key Employee Incentive Plan (the “Incentive Plan”). This plan is intended to reward executives and key employees for achieving certain levels of financial performance during the fiscal year. The executive portion of the 2006 Key Employee Incentive Plan was similar to bonus plans adopted in prior years, and we have adopted a similar plan for 2007.

The Incentive Plan is intended to provide a significant portion of an executive’s potential compensation. It is designed to help ensure that executives are focused on our near-term performance and on financial objectives that are of interest to shareholders. The Incentive Plan is designed so that the fiscal plan target levels should be achievable in any given year but only with a satisfactory level of performance. Payments significantly above the fiscal plan target levels would require a higher level of performance. The Incentive Plan includes a threshold level of non-GAAP profitability that must be achieved for payments to be made in order to ensure that unsatisfactory performance is not rewarded. Due to the fact that our base salaries are somewhat higher than the median for comparable companies, we believe that overall our target payments under the Incentive Plan as a percentage of base salary are somewhat lower than bonuses paid by comparable companies.

The total payment under the Incentive Plan is determined primarily by a formula based on two variables: our annual revenues and our non-GAAP profit before tax. “Non-GAAP profit before tax,” which excludes amortization of acquisition-related intangibles and stock-based compensation expense, is customarily reported in our earnings release for the fourth quarter. However, because we were prevented from filing full financial statements for 2006 in early 2007 due to our stock option investigation, we only reported revenues for the fourth quarter of 2006. As a consequence, the Compensation Committee determined bonuses for 2006 under the Incentive Plan using the Company’s non-GAAP profit before tax for 2006 as it was determined internally on January 29, 2007. Our Audit

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Committee reviewed this determination. The Compensation Committee believed this was an appropriate course of action, even though it was possible that the Company’s operating results would change as a result of the stock option investigation and related restatements. The Incentive Plan already excluded stock-based compensation, and the Committee believed that any other changes would likely not be operational in nature. We have chosen revenues and non-GAAP profit before tax as our targets because we believe they are the best indicators of our annual financial performance. The levels of revenues and non-GAAP profit before tax used under the Incentive Plan are determined by the Compensation Committee with reference to the fiscal plan for the year adopted by our full Board of Directors. For 2006, the target revenue level used for the Incentive Plan was $189.9 million and the target non-GAAP profit before tax used was $12.25 million.

The aggregate payment under the Incentive Plan is subject to certain adjustments and limitations. The total payment for executives can be adjusted upward or downward by up to 20% based on a formula that depends on our revenue growth relative to our four chief competitors in the FGPA market. This adjustment is included because we believe it is important that executives focus on maintaining or improving our competitive position in the FPGA market. In addition, no bonus is paid unless a threshold level of non-GAAP profit before tax is reached (75%, or $9.2 million for 2006), and total payments to executive officers under the Incentive Plan for 2006 could not exceed 12.8% of non-GAAP profit before tax. We included these limitations to motivate our executives to focus on annual profitability and to ensure that executives do not receive a disproportionate amount of the profit we generate. Finally, subject to the approval of the Compensation Committee, our Chief Executive Officer can modify the payments to executives other than himself to reflect individual achievement or special financial circumstances. In 2006, the Chief Executive Officer did not modify the payments to any Named Executive Officer.

The total amount available under the Incentive Plan is allocated among the executive officers in proportion to their base salaries. The payment available to Mr. East, as a percentage of his base salary, was 150% of the payments available to the other Named Executive Officers, as a percentage of their base salaries, to reflect his greater responsibility for the Company’s success in achieving its financial objectives. The Grants of Plan Based Awards table below sets forth the threshold, target and maximum amounts that would have been payable under the Incentive Plan for 2006 to Named Executive Officers if the amounts payable under the Incentive Plan were not adjusted for the Company’s relative performance to other FPGA companies. For 2006, the target amounts (which assume that our revenue growth would exceed two of our four main competitors) represented 13% of the base salaries of the Named Executive Officers except Mr. East and 19.6% of his base salary. The actual amounts paid to the Named Executive Officers for 2006 under the Incentive Plan were approximately 27.8% of the base salary of Mr. East and 18.5% of the base salary of the other Named Executive Officers. In calculating the amounts actually paid, our non-GAAP profit before tax was greater than projected under our fiscal plan for 2006, which was partially offset by our relative revenue growth exceeding only one of our four main competitors.

Stock and Option Awards. In 2006, the Company granted its Chief Executive Officer options to purchase shares of Common Sock and its other Named Executive Officers options to purchase shares of Common Stock and restricted stock units. We believe that stock option awards are an effective means of aligning the interests of executives and shareholders and rewarding executives for our achieving success over the long term, and that all equity awards provide executives an incentive to remain with us.

All stock option awards have an exercise price equal to the fair market value of our Common Stock as of the date of the grant and a ten-year term. The stock option awards granted in 2006 vest over four years at the rate of 50% after two years and 6.25% each quarter thereafter. Because stock option awards have value only if our stock price increases, we believe they strongly link pay to performance.

The restricted stock units granted in 2006 vest over four years at rate of 50% after two years and 25% each year thereafter. Because restricted stock units have value even if our stock price remains stable or declines, they less strongly link pay and performance than stock option awards. However, the fact that they retain value makes them a stronger tool for encouraging executive retention. We believe that having restricted stock units as part of our stock-based compensation provides executives with a balance of certainty and upside potential. Because we believe the CEO is ultimately responsible for our performance and therefore should be rewarded primarily for performance, we chose not to grant Mr. East any restricted stock units in 2006.

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Restricted stock units are also useful for managing “overhang” (i.e., the number of stock options outstanding as a percentage of total shares outstanding). We believe that a large overhang can have negative impact on the performance of our Common Stock. Restricted stock units are a means of providing executive officers with stock-based compensation without negatively impacting our overhang. Like stock options, however, restricted stock units cause shareholder dilution, and we take this impact into account when granting restricted stock units.

In determining the number of stock options and awards to grant, we attempt to grant a sufficient number so that amounts realized from the awards can constitute a significant portion of our executive’s compensation if our stock performs strongly. While we are cognizant of the financial statement impact of stock and option awards, we do not believe the accounting value of the awards (such as is indicated in the Summary Compensation Table and the Plant Grant Awards table below) reflects the value of awards to the recipient. Accounting cost, therefore, is not a significant consideration in our decisions to grant stock and option awards. As with our determination of base salary and structuring of the incentive plan, we attempt to structure our stock and option awards so that they are competitive with comparable companies based on data supplied by our compensation consultant.

In 2006, the Compensation Committee awarded each of our Named Executive Officers, other than Mr. East, awards of options to purchase 33,750 shares of Common Stock and 4,500 restricted stock units. The basis for the equal awards was the belief of Mr. East and the Compensation Committee that these individuals generally have equally-weighted responsibilities within the Company. The Compensation Committee granted Mr. East options to purchase 130,000 shares of Common Stock based on its belief that his responsibilities are significantly greater.

In 2006, all options to our executive offers were granted on March 3, 2006, and the exercise price of the options was the closing price of our Common Stock on that day. March 3 was the date our Compensation Committee met and granted the options. Option awards will continue to be approved at a meeting of the Compensation Committee but, beginning in 2007, the options will not be granted until the first subsequent trading day in a “trading window” under our Insider Trading Policy. The exercise price of the options will be the closing price of our Common Stock on the date of grant. We believe that this approach will help ensure that that the exercise price of our options reflect all material information regarding the Company at the time of the grant.

In December of 2005, we offered all of our employees other than our Chief Executive Officer the opportunity to exchange all of their outstanding options with exercise prices of $19.73 or more for restricted stock units. The purposes of the exchange offer were to provide employees with an opportunity to receive equity awards that would have a meaningful incentive effect and to reduce our overhang of outstanding options. The restricted stock unit exchange offer closed in January 2006. On average, employees surrendered options to purchase 3.75 shares of Common Stock for each restricted stock unit received. We determined the exchange ratios in accordance with the methodologies used by Institutional Shareholder Services (“ISS”) in evaluating option exchange proxy solicitations, and believe that ISS would have considered the exchange to be value-neutral. The exchange reduced our overhang by 17.2%. Details of the exchange offer can be found below at “Additional Material Information Regarding Compensation Tables — Option Exchange Offer.”

Change-in-Control Arrangements. We have adopted two plans that could provide benefits to our Named Executive officers in the event of a change of control. For the purposes of the plans, a change of control is defined as (i) the acquisition by any person of beneficial ownership of more than 30% of the combined voting power of our outstanding securities; (ii) a change in a majority of our Board of Directors within a two-year period; (iii) our merger or consolidation with any other corporation that has been approved by our shareholders, other than a merger or consolidation that would result in our voting securities outstanding immediately prior the merger or consolidation continuing to represent at least 50% of the total voting power of the surviving entity outstanding immediately after such merger or consolidation; or (iv) approval by our shareholders of a plan of complete liquidation or an agreement for the sale or disposition of all or substantially all of our assets.

Our Employee Retention Plan provides that all employees who hold unvested stock options and/or restricted stock units as of the date of any change of control shall receive, upon remaining in our employ for six months following the date of such change of control (or upon an earlier termination of employment other than for cause), an amount equal to one-third of the aggregate value of the restricted stock units and “spread” on their unvested options as of the date of such change of control. “Spread” is defined as the difference between the change of control price and the option exercise price. Payment may be made in cash, common stock of the Company or the acquirer, or a combination

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of cash and common stock. Such payment is in addition to any value realized by the employee upon exercise of any such unvested options. The purpose of the Employee Retention Plan is to help ensure that the interests of our employees and our shareholders are aligned in the event we are potentially subject to a change of control.

Our Management Continuity Agreements provide that an executive officer’s stock options and restricted stock units outstanding at the time of a change of control shall become fully vested if the officer dies or in the event of an involuntary termination of the officer’s employment other than for cause following the change of control. Change-of-control events often result in termination of executive officers’ employment. As a result, executive officers may have a strong personal financial incentive to avoid or resist a change of control even if that change of control would be beneficial to shareholders. Our change-of-control arrangements are intended to ameliorate this potential conflict of interest and make our executives neutral from a personal financial perspective with respect to potential change of control events. We believe that the amount of compensation our executives could potentially receive after a change of control pursuant to our Employee Retention Plan and Management Continuity Agreements is relatively modest in comparison to the amounts potentially receivable by executives at comparable companies under their change-of-control arrangements.

Non-Qualified Deferred Compensation. We administer a non-qualified deferred compensation plan in which all employees with a base salary of at least $150,000 are eligible to participate. The plan allows employees to place cash compensation into their choice of investment vehicles and to not be taxed on the returns from such investment until they withdraw amounts from the accounts. We do not make any contributions to any employee’s account and do not guarantee any return on the accounts. We provide this plan so that more highly compensated employees have the opportunity to place the same proportion of their compensation in a tax-favored vehicle that lower compensated employees have through vehicles such as our 401(k) plan. The cost of administering the plan is small, so we do not consider this a significant element of our executive compensation system.

Employee Stock Purchase Plan. We offer all full-time and most part-time employees the opportunity to participate in our Employee Stock Purchase Plan (“ESPP”). The ESPP is generally implemented during consecutive and overlapping 24-month offering periods, each of which is divided into four six-month purchase periods. Generally, offering and purchase periods commence on February 1 and August 1 of each year. Under the terms of the ESPP, an employee may at the beginning of each purchase period elect to place up to 15% of their base salary into the plan. At the end of each purchase period, the amounts in each participant’s account are used to purchase shares of our Common Stock at a price equal to the lower of 85% of the price of our Common Stock at the beginning of the purchase period or 85% of the price of our Common Stock at the end of the purchase period. The primary purpose of the ESSP is to encourage lower-level employees who may not receive significant stock option awards to purchase and hold our Common Stock. As such, we have limited the total amount of contributions that any employee may use to purchase Common Stock pursuant to the ESPP to $10,000 in any calendar year. We do not consider the ESPP to be a significant element of our executive compensation system.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis set forth above with Actel’s management. Based upon the review and discussions noted above, the Compensation Committee has recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

This report is submitted by the Compensation Committee.

J. Daniel McCranie, Committee Chairman

James R. Fiebiger

Robert G. Spencer

Compensation Committee Interlocks and Insider Participation

During fiscal year 2006, no member of the Compensation Committee was an officer or employee or former officer or employee of Actel or any of its subsidiaries. No member of the Compensation Committee or executive officer of Actel served as a member of the Board of Directors or Compensation Committee of any entity that has an executive officer serving as a member of our Board of Directors or Compensation Committee. Finally, no member of the Compensation Committee had any other relationship requiring disclosure.

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Summary Compensation Table

The following table presents information concerning the total compensation of the Company’s Chief Executive Officer, Chief Financial Officer, and the three other Named Executive Officers for services rendered to the Company in all capacities for the fiscal year ended December 31, 2006. None of our Named Executive Officers received any other compensation required to be disclosed by law or in excess of $10,000 annually.

SUMMARY COMPENSATION TABLE


													Change in
													Pension
											Non-		Value and
											Equity		Nonqualified
											Incentive		Deferred
							Stock		Option		Plan		Compensation		All Other
Name and			Salary		Bonus		Awards		Awards		Compensation		Earnings		Compensation		Total
Principal Position	Year		($)		($)		($)(1)		($)(1)		($)(2)		($)		($)		($)

John C. East		2006	$	422,000		—	$	—	$	1,002,493	$	117,415		—		—	$	1,541,908
President and Chief Executive Officer (Principal Executive Officer)
Esmat Z. Hamdy		2006	$	306,800		—	$	361,243	$	327,187	$	56,908		—		—	$	1,052,138
Senior Vice President, Technology and Operations
Dennis G. Kish(3)		2006	$	296,357		—	$	486,779	$	363,573	$	55,365		—		—	$	1,202,074
Former Senior Vice President, Sales and Marketing
Fares N. Mubarak		2006	$	298,480		—	$	374,365	$	356,241	$	55,365		—		—	$	1,084,451
Senior Vice President, Engineering
Jon A. Anderson		2006	$	258,250		—	$	304,566	$	324,162	$	51,381		—		—	$	938,359
Vice President, Finance and Chief Financial Officer (Principal Financial Officer)


(1)		The amounts shown do not reflect compensation actually received. Instead, the amounts shown are the compensation costs recognized by Actel in 2006 for stock option and stock awards granted during or prior to 2006 as determined pursuant to SFAS 123(R). The assumptions used to calculate the value of the stock option and stock awards are set forth in Note 1 to Consolidated Financial Statements included in this Annual Report on Form 10-K.

(2)		Represents amounts paid pursuant to our 2006 Key Employee Incentive Plan for performance during 2006. These amounts were determined on January 19, 2007, and paid on February 15, 2007.

(3)		Mr. Kish resigned effective August 1, 2007.

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Grants of Plan-Based Awards

The following table presents information concerning grants of plan-based awards to each of the Named Executive Officers during our 2006 fiscal year:

GRANTS OF PLAN-BASED AWARDS


													All Other		All Other				Grant
													Stock		Option		Exercise or		Date
													Awards		Awards:		Base		Fair
													Number of		Number of		Price of		Value of
				Estimated Possible Payouts Under Non-Equity Incentive Plan Awards(2)						Estimated Possible Payouts Under Equity Incentive Plan Awards			Shares or		Securities		Option		Stock &
	Grant			Threshold		Target		Maximum		Threshold	Target	Maximum	Stock		Underlying		Awards		Options
Name	Date			($)		($)		($)		($)	($)	($)	Units (#)		Options (#)		($/Sh)		Awards ($)

John C. East		3/03/2006														130,000		14.77		946,675
					48,614		82,796		199,076
Esmat Z. Hamdy		01/03/2006	(1)											4,547
		01/03/2006	(1)											10,858
		01/03/2006	(1)											14,287
		01/03/2006	(1)											15,000
		01/03/2006	(1)											12,858
		03/03/2006														33,750		14.77		245,772
		03/03/2006												4,500						66,465
					23,562		40,129		96,487
Dennis G. Kish		1/03/2006	(1)											18,572
		01/03/2006	(1)											4,547
		01/03/2006	(1)											11,429
		01/03/2006	(1)											14,287
		01/03/2006	(1)											15,000
		01/03/2006	(1)											12,858
		03/03/2006														33,750		14.77		245,772
		03/03/2006														25,000		14.77		171,840
		03/03/2006												4,500						66,465
					22,923		39,041		93,871
Fares N. Mubarak		01/03/2006	(1)											1,430
		01/03/2006	(1)											4,547
		01/03/2006	(1)											11,429
		01/03/2006	(1)											14,287
		01/03/2006	(1)											15,000
		01/03/2006	(1)											12,858
		03/03/2006														33,750		14.77		245,772
		03/03/2006														20,000		14.77		137,695
		03/03/2006												4,500
					22,923		39,041		93,871											66,465
Jon A. Anderson		01/03/2006	(1)											3,547
		01/03/2006	(1)											19,573
		01/03/2006	(1)											12,500
		01/03/2006	(1)											12,858
		03/03/2006														33,750		14.77		245,772
		03/03/2006												4,500						66,465
					21,274		36,232		87,115


(1)		Represents restricted stock units issued pursuant to our Option Exchange Offer.

(2)		These columns show the range of potential payouts under the 2006 Key Employee Incentive Plan as described under the caption “Elements of Executive Compensation — Incentive Bonus Plan” in the Compensation Discussion and Analysis.

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Additional Material Information Regarding Compensation Tables

Below is additional information regarding the compensation described in the Summary Compensation Table and the Grant of Plan Based Awards table above.

1986 Equity Incentive Plan

Stock and option awards to Named Executive Officers are made pursuant to the our 1986 Equity Incentive Plan (Equity Plan) The Equity Plan was initially approved by our Board of Directors in January 1986 and by our shareholders in May 1986. Since then, our Board and shareholders have approved numerous amendments to the Equity Plan, including increases in the number of shares of Common Stock issuable under the Plan. The Equity Plan provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (Code), the granting of nonstatutory options to employees and consultants (including sales representatives), and for the granting of stock appreciation rights, restricted stock, restricted stock units, performance shares, and performance units to employees. The Equity Plan is not a qualified deferred compensation plan under Section 401(a) of the Code, and is not subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA).

At December 31, 2006, options to purchase a total of 4,972,616 shares were outstanding at a weighted average exercise price of $16.71 per share; 810,686 restricted stock units were outstanding and unvested; and 1,902,160 shares remained available for future grants under the Equity Plan.

The stock options and restricted stock units granted under the Equity Plan to executives during 2006 vest over four years at the rate of 50% after two years and 6.25% each quarter thereafter. The other material features of the Equity Plan relating to stock options and restricted stock units are described below:

Administration. The Equity Plan may be administered by our Board of Directors or a committee designated by the Board that is constituted in accordance with applicable rules and regulations (Administrator)

Stock Options. Each option granted under the Equity Plan is to be evidenced by a written stock option agreement between Actel and the optionee and is subject to the following additional terms and conditions:

Exercise of Option. The Administrator determines on the date of grant when options become exercisable. An option is exercised by giving written notice of exercise to Actel specifying the number of full shares of Common Stock to be purchased and tendering payment of the purchase price to Actel. Subject to applicable law, the acceptable methods of payment for shares issued upon exercise of an option are set forth in the option agreement and may consist of (i) cash, (ii) check, (iii) promissory note, (iv) shares of Common Stock, (v) the delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise and delivery to Actel of the exercise price from the sale proceeds, (vi) any combination of the foregoing methods, or (vii) such other consideration and method of payment permitted under applicable law.

Exercise Price. The exercise price of options granted under the Equity Plan is determined on the date of grant. The exercise price of stock options must be at least 100% of the fair market value per share at the time of grant. In the case of options granted to an employee who at the time of grant owns more than 10% of the voting power of all classes of stock of Actel or any parent or subsidiary, the exercise price must be at least 110% of the fair market value per share of the Common Stock at the time of grant. The fair market value of a share of Common Stock is the closing sales price for such stock as quoted on the Nasdaq National Market on the date of grant.

Termination of Relationship. If the optionee’s employment or consulting relationship with Actel is terminated for any reason (other than death or total and permanent disability, as discussed below), options may be exercised within 90 days (or such other period of time as is determined by the Administrator) after such termination as to all or part of the shares as to which the optionee was entitled to exercise at the date of such termination, provided that the option may be exercised no later than its expiration date.

Disability. If an optionee is unable to continue his or her employment or consulting relationship with us as a result of total and permanent disability, options may be exercised at any time within six months (or such other period of time not exceeding 12 months as is determined by the Administrator) from the date of disability to the extent such

129

options were exercisable at the date of disability, provided that the option may be exercised no later than its expiration date.

Death. If an optionee dies while serving as our employee or consultant, options become fully vested and may be exercised at any time within 12 months after the date of death by the optionee’s estate or a person who acquired the right to exercise the option by bequest or inheritance, provided that the option may be exercised no later than its expiration date.

Term and Termination of Option. At the time an option is granted, the Administrator determines the period within which the option may be exercised. The form of option agreement provides that options granted under the Equity Plan expire ten years from the date of grant. In no event may the term of an incentive stock option be longer than ten years. No option may be exercised by any person after the expiration of its term. An incentive stock option granted to an optionee who, at the time such option is granted, owns more than 10% of the voting power of all classes of stock of Actel may not have a term of more than five years.

Restricted StockUnits. Restricted stock units are awards that obligate the Company to deliver shares of Common Stock to the participant as specified on each vesting date. Subject to annual share limitations set forth in the Equity Plan, the Administrator has complete discretion to determine (i) the number of shares subject to a restricted stock unit award granted to any participant and (ii) the conditions for grant or for vesting that must be satisfied, which typically will be based principally or solely on continued provision of services but may include a performance-based component. If a participant dies while serving as our employee or consultant, any restricted stock units shall vest in full. Until the shares are issued, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the underlying shares, unless a dividend equivalent has been issued in tandem with the restricted stock unit.

Nontransferability of Awards. Unless determined otherwise by the Administrator, an award granted under the Equity Plan is not transferable other than by will or the laws of descent and distribution, and may be exercised only by the participant during the participant’s lifetime or, in the event of death, by the participant’s estate or by a person who acquires the right to exercise the award. No awards granted under the Equity Plan may ever be transferred for value.

Stock Subject to Equity Plan. The Equity Plan provides that the aggregate number of options that may be sold under the Plan is increased annually on the first day of each fiscal year by such amount as is necessary to make the total number of options available for grant under the Equity Plan equal to 5% of our Common Stock issued and outstanding at the close of business on the last day of the immediately preceding fiscal year. Each restricted stock unit that is granted counts as two options under the Equity Plan.

Adjustments; Dissolutions; Mergers and Asset Sales. In the event any change, such as a stock split or dividend, is made in Actel’s capitalization that results in an increase or decrease in the number of outstanding shares of Common Stock without receipt of consideration by us, an appropriate adjustment shall be made in the number of shares under the Equity Plan, the price per share covered by each outstanding award, and the annual limits applicable to share-based awards.

In the event of the proposed dissolution or liquidation of Actel, all awards that have not been exercised (with respect to options and stock appreciation rights) or vested will terminate immediately prior to the consummation of such proposed action. The Administrator may, in its discretion, make provision for accelerating the vesting of shares subject to options and stock appreciation rights under the Equity Plan in the event of such a proposed dissolution or liquidation. In addition, the Administrator may provide that any Company repurchase option or forfeiture rights applicable to other types of awards will lapse, and vesting will accelerate, subject to the dissolution or liquidation taking place at the time and in the manner contemplated.

In the event of the merger of Actel with or into another corporation or the sale of all or substantially all of the assets of Actel, each outstanding award shall be assumed or substituted for by the successor corporation. If the successor corporation refuses to assume or substitute for the awards, they shall become fully vested.

Amendment and Termination. The Board may amend the Equity Plan at any time or from time to time or may terminate the Equity Plan without approval of the shareholders, except that shareholder approval is required for any

130

amendment to the Equity Plan requiring shareholder approval under applicable law as in effect at the time. However, no action by the Board of Directors or shareholders may alter or impair any award previously granted under the Equity Plan without the written consent of holder of such award. The Board may accelerate the vesting of any award or waive any condition or restriction pertaining to such award at any time. The Board may not substitute new stock options or stock appreciation rights for previously granted stock options or stock appreciation rights, or amend any stock option or stock appreciation right to reduce the exercise price, without shareholder approval.

Last extended in 2001, the Equity Plan will terminate on May 18, 2011, unless further extended or earlier terminated. Any awards outstanding under the Equity Plan at the time of its termination will remain outstanding until they expire by their terms.

Option Exchange Offer

In December of 2005, we offered all of our employees except our Chief Executive Officer the opportunity to exchange all (but not less than all) outstanding options held by them with exercise prices of $19.73 or more for restricted stock units. The exchange was effected through a tender offer registered with the U.S. Securities and Exchange Commission. Because these options had exercise prices that were significantly higher than the fair market value of Common Stock, they were not providing the desired level of incentive or retention for our employees. By exchanging them for restricted stock units, we reduced our overhang of outstanding stock options by 17.2% and provided employees with an equity award with more certain value. The restricted stock units issued in the exchange vest over a period of 2 to 4 years.

The tender offer closed on January 3, 2006. Pursuant to the offer, we accepted for cancellation options to purchase 4,182,027 shares of our Common Stock and granted restricted stock units representing 1,132,393 shares of our Common Stock. The Option Exchange Offer included 1,474,500 options previously held by our executive officers, who received a total of 422,544 restricted stock units in the Exchange Offer. We entered into restricted stock unit agreements dated January 3, 2006, with each participating employee.

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Outstanding Equity Awards at Fiscal Year-End

The following table presents certain information concerning equity awards held by the Named Executive Officers at the end of our 2006 fiscal year:

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END


	Option Awards														Stock Awards
																		Equity
																	Equity	Incentive
																	Incentive	Plan
																	Plan	Awards:
							Equity										Awards:	Market or
							Incentive										Number of	Payout
							Plan								Market		Unearned	Value of
							Awards:					Number of			Value		Shares,	Unearned
	Number of			Number of			Number of					Shares or			of Shares or		Units or	Shares,
	Securities			Securities			Securities					Units			Units of		Other	Units or
	Underlying			Underlying			Underlying					of Stock			Stock		Rights	Other Rights
	Unexercised			Unexercised			Unexercised	Option		Option		That			That		That	That
	Options (#)			Options (#)			Unearned	Exercise		Expiration		Have not			Have not		Have not	Have not
Name	Exercisable			Unexercisable			Options (#)	Price ($)		Date		Vested (#)			Vested ($)		Vested (#)	Vested ($)

John C. East		6,106	(1)						16.38		07/03/2007
		23,385	(1)						16.38		07/03/2007
		3,636	(2)						27.50		02/18/2010
		71,364	(2)						27.50		02/18/2010
		54,616	(3)						20.56		12/21/2010
		10,384	(3)						20.56		12/21/2010
		4,566	(4)						21.90		07/31/2011
		120,000	(5)						19.73		03/13/2012
		86,937	(6)		20,063				15.15		01/28/2013
		73,125	(7)		56,875				24.76		03/02/2014
		61,250	(13)		78,750				15.70		01/07/2015
					130,000	(8)			14.77		03/03/2016
		120,434	(4)						21.90		07/31/2011
Esmat Z. Hamdy													7,500	(9)		136,200
													868	(9)		15,763
													4,562	(9)		82,846
													6,119	(9)		111,121
													1,025	(9)		18,614
													12,858	(10)		233,501
													4,099	(11)		74,438
													448	(11)		8,136
													4,500	(12)		81,720
		32,500	(6)		7,500				15.15		01/28/2013
		19,687	(13)		25,313				15.70		01/07/2015
					33,750	(8)			14.77		03/03/2016
Dennis G. Kish													7,500	(9)		136,200
													2,170	(9)		39,407
													4,313	(9)		78,324
													2,804	(9)		50,921
													913	(9)		16,580
													4,802	(9)		87,204
													6,119	(9)		111,121
													1,025	(9)		18,614
													12,858	(10)		233,501
													4,262	(11)		77,398
													285	(12)		5,176
													4,500	(12)		81,720
		32,500	(6)		7,500				15.15		01/28/2013
		19,687	(13)		25,313				15.70		01/07/2015
					33,750	(9)			14.77		03/03/2016
		4,687	(14)		20,313				14.77		03/03/2016

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	Option Awards														Stock Awards
																		Equity
																	Equity	Incentive
																	Incentive	Plan
																	Plan	Awards:
							Equity										Awards:	Market or
							Incentive										Number of	Payout
							Plan								Market		Unearned	Value of
							Awards:					Number of			Value		Shares,	Unearned
	Number of			Number of			Number of					Shares or			of Shares or		Units or	Shares,
	Securities			Securities			Securities					Units			Units of		Other	Units or
	Underlying			Underlying			Underlying					of Stock			Stock		Rights	Other Rights
	Unexercised			Unexercised			Unexercised	Option		Option		That			That		That	That
	Options (#)			Options (#)			Unearned	Exercise		Expiration		Have not			Have not		Have not	Have not
Name	Exercisable			Unexercisable			Options (#)	Price ($)		Date		Vested (#)			Vested ($)		Vested (#)	Vested ($)

Fares N. Mubarak													7,500	(9)		136,200
													913	(9)		16,580
													4,802	(9)		87,204
													6,119	(9)		111,121
													1,025	(9)		18,614
													583	(9)		10,587
													132	(9)		2,397
													12,858	(10)		233,501
													4,099	(11)		74,438
													448	(11)		8,136
													4,500	(12)		81,720
		5,679	(1)						16.38		07/03/2007
		2,321	(1)						16.38		07/03/2007
		20,625	(15)						13.06		03/01/2009
		1,875	(15)						13.06		03/01/2009
		3,750	(16)						13.56		08/06/2009
		16,250	(16)						13.56		08/06/2009
		32,500	(6)		7,500				15.15		01/28/2013
		19,687	(13)		25,313				15.70		01/07/2015
					33,750	(8)			14.77		03/03/2016
		3,750	(14)		16,250				14.77		03/03/2016
Jon A. Anderson													6,250	(9)		113,500
													683	(9)		12,403
													8,017	(9)		145,589
													532	(9)		9,661
													555	(9)		10,079
													12,858	(10)		233,501
													1,480	(11)		26,877
													248	(11)		4,504
													940	(11)		17,070
													879	(11)		15,963
													4,500	(12)		81,720
		32,500	(6)		7,500				15.15		01/28/2013
		19,687	(13)		25,313				15.70		01/07/2015
					33,750	(12)			14.77		03/03/2016


(1)		Option grant date is July 3, 1997; 100% of the shares subject to the grant vested on August 1, 2001.

(2)		Option grant date is February 18, 2000; 50% of the shares subject to the grant vested 2 years from that date and 6.25% vest at the end of each three month period thereafter until February 18, 2004.

(3)		Option grant date is December 21, 2000; 6.25% of the shares subject to the grant vested at the end of each three month period after that date until December 21, 2004.

(4)		Option grant date is July 31, 2001; 50% of the shares subject to the grant vested on August 1, 2001, and 6.25% vested at the end of each three month period thereafter until August 1, 2005.

(5)		Option grant date is March 14, 2002; 50% of the shares subject to the grant vested on August 1, 2004, and 6.25% vested at the end of each three month period thereafter until August 1, 2006.

(6)		Option grant date is January 28, 2003; 50% of the shares subject to the grant vested on August 1, 2005, and 6.25% vest at the end of each three month period thereafter until August 1, 2007.

(7)		Option grant date is March 2, 2004; 50% of the shares subject to the grant vested on August 1, 2006, and 6.25% vest at the end of each three month period thereafter until August 1, 2008.

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(8)		Option grant date is March 3, 2006; 50% of the shares subject to the grant vest two years from that date and 6.25% vest at the end of each three month period thereafter until March 3, 2010.

(9)		Restricted Stock Unit grant date is January 3, 2006; 50% of the shares subject to the award vested on December 31, 2006, and 12.5% vest quarterly thereafter until December 31, 2007.

(10)		Restricted Stock Unit grant date is January 3, 2006; 50% of the shares subject to the award vest on March 31, 2007, and 10% vest quarterly thereafter until June 30, 2008.

(11)		Restricted Stock Unit grant date is January 3, 2006; 50% of the shares subject to the award vest on September 30, 2007, and 7.143% vest quarterly thereafter until June 30, 2009.

(12)		Restricted Stock Unit grant date is March 3, 2006; 50% of the shares subject to the award vest on March 31, 2008, and 25% vest annually thereafter until March 31, 2010.

(13)		Option grant date is January 7, 2005; 6.25% of the shares subject to the grant vest at the end of each three month period after that date until January 7, 2009.

(14)		Option grant date is March 3, 2006; 6.25% of the shares subject to this grant vest on May 1, 2006, and 6.25% vest at the end of each three month period thereafter until February 1, 2010.

(15)		Option grant date is March 1, 1999; 6.25% of the shares subject to the grant vest at the end of each three month period after that date until March 1, 2003.

(16)		Option grant date is August 6, 1999; 50% of the shares subject to the grant vested on August 1, 2001, and 6.25% vest every month thereafter until August 1, 2003.

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Option Exercises and Stock Vested

The following table presents certain information concerning the exercise of options by each of the Named Executive Officers during our 2006 fiscal year, as well as information regarding stock awards that vested during the fiscal year:

OPTION EXERCISES AND STOCK VESTED AT FISCAL YEAR END


	Option Awards				Stock Awards
	Number of Shares				Number of Shares
	Acquired on		Value Realized on		Acquired on Vesting		Value Realized on
Name of Executive Officer	Exercise (#)		Exercise ($)		(#)		Vesting ($)

John C. East		—		—		—		—
Esmat Z. Handy		—		—		20,071		364,489
Dennis G. Kish		—		—		29,642		538,299
Fares N. Mubarak		—		—		21,072		382,668
Jon A. Anderson		—		—		16,036		291,214

Nonqualified Deferred Compensation

The following table discloses contributions, earnings, withdrawals and balances under non-qualified defined contribution and other deferred compensation plans for each Named Executive Officer for our 2006 fiscal year.

NONQUALIFIED DEFERRED COMPENSATION


	Executive
	Contributions			Registrant		Aggregate		Aggregate		Aggregate
	in Last			Contributions		Earnings in		Withdrawals/		Balance at Last
Name	FY ($)			in Last FY ($)		Last FY ($)(3)		Distributions ($)		FYE ($)

John D. East(1)		118,198(1	)		—		103,853		—		898,491
		0(2	)		—		110,517		—		369,610
Esmat Z. Hamdy		20,110(1	)		—		20,524		—		162,631
Dennis G. Kish		0(1	)		—		4,694		—		35,100
Fares N. Mubarak		33,281(1	)		—		31,418		—		294,102
Jon A. Anderson		0(1	)		—		—		—		—


(1)		Represents cash contributions.

(2)		Represents contributions of stock.

(3)		Amounts in this column are not included in the Summary Compensation Table.

The Named Executive Officers, along with all other employees with a base annual salary above $150,000, may elect to participate in our Deferred Compensation Plan. We do not make any contributions to any Deferred Compensation accounts nor do we guarantee any rate of return under the plan.

Potential Payments upon Termination or Change of Control

As discussed in the Compensation Discussion and Analysis, our Named Executive Officers do not have employment contracts, and none is entitled to receive severance pay or other benefits if we decide to terminate his employment in the absence of a change of control.

We have adopted two plans that could provide benefits to our Named Executive Officers in the event of a change of control. For the purposes of the plans, a change of control is defined as (i) the acquisition by any person of beneficial ownership of more than 30% of the combined voting power of our outstanding securities; (ii) a change in a majority of our Board of Directors within a two-year period; (iii) our merger or consolidation with any other corporation that has been approved by our shareholders (the definition for purposes of the Employee Retention Plan

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excludes a merger or consolidation that would result in our voting securities outstanding immediately prior the merger or consolidation continuing to represent at least 50% of the total voting power of the surviving entity outstanding immediately after such merger or consolidation); or (iv) approval by our shareholders of a plan of complete liquidation or an agreement for the sale or disposition of all or substantially all of our assets.

Our Employee Retention Plan provides that all employees who hold unvested stock options and/or restricted stock units as of the date of any change of control shall receive, upon remaining in our employ for six months following the date of such change of control (or upon an earlier termination of employment other than for cause), an amount equal to one-third of the aggregate value of the restricted stock units and “spread” on their unvested options as of the date of such change of control. “Spread” is defined as the difference between the change of control price and the option exercise price. Payment may be made in cash, cash, common stock of the Company or the acquirer, or a combination of cash and common stock. Such payment is in addition to any value realized by the employee upon exercise of any such unvested options.

Our Management Continuity Agreements provide that a Named Executive Officer’s stock options and restricted stock units outstanding at the time of a change of control shall become fully vested if the officer dies or in the event of an involuntary termination of the officer’s employment other than for cause following the change of control.

The following table shows the amounts each of our Named Executive Officers could receive upon a change in control pursuant to our Employee Retention Plan and their respective Management Continuity Agreements, assuming the change of control took place on December 29, 2006, the last business day of our 2006 fiscal year:


		Employee		Management
		Retention		Continuity
Name	Benefit	Plan(1)		Agreement(2)

John C. East	Retention payment	$	352,073		—
	Acceleration of stock options		—	$	1,001,940
	Acceleration of restricted stock units		—		—
Esmat Z. Hamdy	Retention payment	$	327,406		—
	Acceleration of stock options		—	$	199,257
	Acceleration of restricted stock units		—	$	762,339
Dennis G. Kish	Retention payment	$	410,195		—
	Acceleration of stock options		—	$	268,119
	Acceleration of restricted stock units		—	$	936,166
Fares N. Mubarak	Retention payment	$	333,523		—
	Acceleration of stock options		—	$	199,257
	Acceleration of restricted stock units		—	$	780,499
Jon A. Anderson	Retention payment	$	296,597		—
	Acceleration of stock options		—	$	199,257
	Acceleration of restricted stock units		—	$	670,867


(1)		Retention payments are earned by employees who remain employed for six months following a change in control or upon earlier termination of employment other than for Cause (see Note (3) below) and who hold unvested stock options and/or restricted stock units on the date of the change of control. The amounts shown are equal to one third of the sum of (X) the aggregate fair market value of any unvested restricted stock units held on December 29, 2006, and (Y) the difference between $18.35, the closing price of a share of Actel common stock on December 28, 2006 (one day prior to assumed change of control date pursuant to the plan), and the option exercise price for each unvested stock option held on December 29, 2006, multiplied by the number of shares subject to such options.

(2)		If an executive officer dies or his employment is involuntarily terminated (see Note (4) below), other than for Cause (see Note (5) below) following a change in control, his stock options and restricted stock units accelerate and become fully vested. The amounts shown for acceleration of stock options are based upon the difference between $18.16, the closing price of a share of Actel common stock on December 29, 2006, and the option exercise price for all unvested stock options held on such date, multiplied by the number of shares subject to such options. The Named Executive Officer may exercise such options for a period of twelve months following

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		termination but in no event later than the expiration of the term of the option. The amounts shown for restricted stock units are based upon the product obtained by multiplying the number of restricted stock units vesting by $18.16, the closing price of a share of Actel common stock on December 29, 2006.

(3)		“Cause” is defined under the Employee Retention Plan as (i) any act of personal dishonesty taken by the participant in connection with his or her responsibilities as an employee and intended to result in substantial personal enrichment of the participant, (ii) the conviction of a felony, (iii) a willful act by the participant which constitutes gross misconduct and which is injurious to the Company, and (iv) continued and substantial violation by the participant of the participant’s employment duties which are demonstrably willful and deliberate on the participant’s part after there has been delivered to the participant a written demand for performance from the Company which specifically sets forth the factual basis for the Company’s belief that the participant has not substantially performed his or her duties.

(4)		“Involuntary Termination” is defined under the Management Continuity Agreement as (i) without the employee’s express written consent, a significant reduction in the employee’s duties, authority or responsibilities, relative to the employee’s duties, authority or responsibilities as in effect immediately prior to such reduction, or the assignment to employee of such reduced duties, authority or responsibilities; (ii) without the employee’s express written consent, a substantial reduction, without good business reasons, in the facilities and perquisites (including office space and location) available to the employee immediately prior to such reduction; (iii) a reduction by the Company in the base salary of the employee as in effect immediately prior to such reduction; (iv) a material reduction by the Company in the kind or level of employee benefits, including bonuses, to which the employee was entitled immediately prior to such reduction with the result that the employee’s overall benefits package is significantly reduced; (v) the relocation of the employee to a facility or a location more than thirty (30) miles from the employee’s then present location, without the employee’s express written consent; (vi) any purported termination of the employee by the Company which is not effected for Disability or for Cause, or any purported termination for which the grounds relied upon are not valid; (vii) the failure of the Company to obtain the assumption of this agreement by any successors contemplated in a change of control; or (viii) any act or set of facts or circumstances which would, under California case law or statute, constitute a constructive termination of the employee.

(5)		“Cause” is defined under the Management Continuity Agreements as (i) any act of personal dishonesty taken by the employee in connection with his responsibilities as an employee and intended to result in substantial personal enrichment of the employee, (ii) the conviction of a felony, (iii) a willful act by the employee which constitutes gross misconduct and which is injurious to the Company, and (iv) following delivery to the employee of a written demand for performance from the Company which describes the basis for the Company’s belief that the employee has not substantially performed his duties, continued violations by the employee of the employee’s obligations to the Company which are demonstrably willful and deliberate on the employee’s part..

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Compensation of Directors

The following table sets forth information concerning compensation paid or accrued for services rendered to the Company in all capacities by the members of the Company’s Board of Directors for the fiscal year ended December 31, 2006:

DIRECTOR COMPENSATION


									Change in
									Pension
							Non-Equity		Value and
							Incentive		Nonqualified
	Fees Earned						Plan		Deferred		All Other
	or Paid in		Stock		Option		Compensa-		Compensation		Compensa-
Name	Cash ($)		Awards ($)		Awards(1)($)		tion ($)		Earnings ($)		tion ($)		Total ($)

James R. Fiebiger(2)		79,000		—		—		—		—		—		79,000
Jacob S. Jacobsson(2)		46,000		—		—		—		—		—		46,000
J. Daniel McCranie(2)		94,000		—		—		—		—		—		94,000
Robert G. Spencer(2)		38,000		—		—		—		—		—		38,000
Henry L. Perret(1)(2)		55,000		—		—		—		—		—		55,000


(1)		Mr. Perret resigned from the Board of Directors on January 30, 2007.

(2)		The aggregate number of shares subject to stock awards and stock options outstanding at December, 2006 for each director is as follows:


	Aggregate Number of Stock Awards		Aggregate Number of Option Awards
Name	Outstanding as Dec. 31, 2006 (#)		Outstanding as Dec. 31, 2006 (#)(1)

James R. Fiebiger		—		55,000
Jacob S. Jacobsson		—		65,000
J. Daniel McCranie		—		37,500
Robert G. Spencer		—		60,000
Henry L. Perret		—		45,000


(1)		As discussed below, no options were granted to our Directors in 2006 because we did not hold an Annual Meeting. On the date of our Combined 2006-2007 Annual Meeting, each Director then in office will receive an option to purchase 12,500 shares of our Common Stock relating to the Director’s service during 2006 (which will be fully vested) and an additional option to purchase 12,500 shares of our Common Stock relating to the Director’s service during 2007.

Explanation of Director Compensation

As compensation for their services, directors who are not employees receive an annual retainer of $30,000. In addition, the Audit Committee Financial Expert and Chairman receives $25,000, and each other member of the Audit Committee receives $10,000; the Chairman of the Compensation Committee receives $10,000, and each other member of the Compensation Committee receives $5,000; and the Chairman of the Nominating Committee receives $6,000, and each other member of the Nominating Committee receives $3,000. In 2006, the Directors who served on the Special Committee of the Board of Directors investing our stock option granting practices received an additional retainer of $5,000 (Mr. Fiebiger) and the Chairman of the Special Committee received $10,000 (Mr. McCranie). In addition, each member of the Special Committee received a fee of $2,000 for each meeting attended in person and $1,000 for each meeting attended telephonically. Directors are also reimbursed for reasonable out-of-pocket expenses incurred in the performance of their duties.

Our 2003 Directors’ Stock Option Plan (the “Director Plan”) provides for the grant of nonstatutory stock options to nonemployee directors. Under the Director Plan, each eligible Director is granted an initial option to purchase 12,500 shares of Common Stock on the date on which such person first becomes an eligible Director and an additional option to purchase 12,500 shares on each subsequent date that such person is elected as a Director at an

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Annual Meeting of our Shareholders. The exercise price is the closing sales price of Common Stock quoted on the Nasdaq National Market on the date of grant. All options become exercisable on the date of the next Annual Meeting of Shareholders (provided that the Director has then served on the Board for at least six months), subject to the optionee remaining a Director until that Annual Meeting. Vested options are exercisable for four years after the date an optionee ceases to serve as a Director, provided that no option may be exercised after its expiration date (which is ten years from the date of grant).

Because we did not hold an Annual Meeting in 2006, our Directors did not receive an option grant in 2006. It is our intention to grant our Directors two options to purchase 12,500 shares at the Combined 2006-2007 Annual Meeting. The first grant will be awarded in consideration of the Director’s service during 2006 and will be fully vested upon grant. The second grant will be awarded in consideration of the Director’s service during 2007 and will vest on the date of our 2008 Annual Meeting (provided that the Director has then served on the Board for at least six months).


ITEM 12.	*SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS*

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding the beneficial ownership of our Common Stock as of December 31, 2006, by each shareholder known by us to beneficially own more than 5% of our outstanding shares of Common Stock; and as of December 31, 2007, by:

each of our Directors;

each of the Named Executive Officers named in the “Summary Compensation Table” on page 127; and

all of our Directors and executive officers as a group.

The information on beneficial ownership in the table and the footnotes is based upon our records and the most recent Schedule 13D or 13G filed by each such person or entity and information supplied to us by such person or entity. For our named executive officers who are no longer employed by us, the information on beneficial ownership reflects the most recent records we have for such person as of their separation date. Unless otherwise noted, the shareholders named in the table have sole voting and investment power with respect to all shares of common stock owned by them, subject to applicable common property laws.


		(3) Amount and Nature of
(1) Title of Class	(2) Name and Address of Beneficial Owner	Beneficial Ownership			(4) Percent of Class

	5% or Greater Shareholders:
Common Stock	Charles Jobson		2,106,923	(1)		8.0	%(2)
	One International Place, Suite 2401 Boston, MA 02110
Common Stock	Dimensional Fund Advisors LP		2,195,786	(3)		8.3	%(2)
	1299 Ocean Avenue Santa Monica, CA 90401
	Current Directors and Named Executive Officers:
Common Stock	John C. East		788,154	(4)		2.8	%(5)
Common Stock	Esmat Z. Hamdy		168,245	(4)			* (5)
Common Stock	Fares N. Mubarak		185,987	(4)			* (5)
Common Stock	Jon A. Anderson		118,318	(4)			* (5)
Common Stock	James R. Fiebiger		55,000	(4)			* (5)
Common Stock	Jacob S. Jacobsson		65,000	(4)			* (5)
Common Stock	J. Daniel McCranie		37,500	(4)			* (5)
Common Stock	Robert G. Spencer		67,666	(4)			* (5)
Common Stock	All current directors and executive officers as a group (12 persons)		1,827,969	(4)		6.5	%(5)


*		Less than 1%.

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(1)		As reported by the beneficial owner as of December 31, 2006, in a Schedule 13G (Amendment No. 1) filed with the Securities and Exchange Commission (SEC) on February 12, 2007. Shares reported for the reporting person, who is a United States citizen, include 2,066,623 shares beneficially owned by Delta Partners LLC, a Delaware Limited Liability Company and investment adviser, Tetra Capital Partners, LP, Tetra Offshore Fund, Ltd., and a second separate account. In addition, shares reported for the reporting person include shares that could be obtained from the exercise of option contracts.

(2)		Calculated as a percentage of shares of Common Stock outstanding as of December 31, 2006.

(3)		As reported by the beneficial owner as of December 31, 2006, in a Schedule 13G (Amendment No. 1) filed with the SEC on February 9, 2007. The reporting person, an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager to certain other commingled group trusts and separate accounts. These investment companies, trusts, and accounts are the “Funds.” In its role as investment advisor or manager, the reporting person possesses investment and/or voting power over the securities of the Company that are owned by the Funds, and may be deemed to be the beneficial owner of the shares held by the Funds. However, all securities reported in this schedule are owned by the Funds. The reporting person disclaims beneficial ownership of such securities and any admission that the reporting person or any of its affiliates is the beneficial owner of any such securities for any purpose other than reporting purposes under Section 13(d) of the Securities Exchange Act of 1934.

(4)		Includes shares issuable pursuant to stock options that are exercisable within 60 days after December 31, 2007, as follows: for Mr. East, 710,750, shares; for Mr. Hamdy, 73,500 shares; for Mr. Mubarak, 127,500 shares; for Mr. Anderson, 73,750 shares; for Mr. Fiebiger, 55,000 shares; for Mr. Jacobsson, 65,000 shares; for Mr. McCranie, 37,500 shares; and for Mr. Spencer, 55,000 shares; and for all Directors and officers as a group, 1,470,841 shares.

(5)		Calculated as a percentage of shares of Common Stock outstanding as of December 31, 2007. For each named person, Common Stock that the person has the right to acquire either currently or within 60 days after December 31, 2007, including through the exercise of an option, is included in the shares beneficially owned by that person and in the total number of shares of Common Stock outstanding; however, such Common Stock is not deemed outstanding for the purpose of computing the percentage owned by any other person.

Equity Compensation Plan Information

The following table provides information as of December 31, 2006, with respect to the shares of our Common Stock that may be issued under our existing equity compensation plans.


							C
							Number of Securities
							Remaining Available
	A			B			for Future Issuance
	Number of Securities to			Weighted Average			under Equity
	be Issued upon Exercise			Exercise Price of			Compensation Plans
	of Outstanding Options,			Outstanding Options,			(Excluding Securities
Plan Category	Warrants and Rights			Warrants and Rights			Reflected in Column A)

Equity Compensation Plans Approved by Security Holders		6,068,609		$	16.56	(4)		2,759,464	(1)
Equity Compensation Plans Not Approved by Security Holders		406,931		$	18.60			2,844,604	(2)
Total		6,475,540	(3)	$	16.71	(3)(4)		5,604,068


(1)		Consists of 1,902,160 shares available for issuance under our Amended and Restated 1986 Equity Incentive Plan (Equity Plan), 362,500 shares available for issuance under our 2003 Director Stock Option Plan, and 494,804 shares available for issuance under our Amended and Restated 1993 Employee Stock Purchase Plan.

(2)		Consists of options granted and available for issuance under our 1995 Employee and Consultant Stock Plan.

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(3)		Includes information for options assumed in connection with mergers and acquisitions. As of December 31, 2006, a total of 15,778 shares of Common Stock with a weighted-average exercise price of $26.36 were issuable upon exercise of such outstanding options.

(4)		Weighted average price calculation excludes 810,686 restricted stock unit awards, which have no exercise price.


ITEM 13.	*CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE*

Review, Approval or Ratification of Transactions with Related Persons

Our Directors and executive officers are subject to our Code of Business Conduct and Ethics. Our Code of Business Conduct and Ethics demands that our Directors and executive officers avoid situations where a conflict of interest might occur or appear to occur.

In the event that a Director or executive officer is going to enter into a related party transaction with a relative or significant other, or with a business in which a relative or significant other is associated in any significant role, the Director or executive officer must fully disclose the nature of the related party transaction to the Chief Financial Officer. Such related party transaction then must be reviewed and approved in writing in advance by the Company’s Board of Directors.

In addition, on an annual basis and upon any new appointment, each Director and executive officer is required to complete a Director and Officer Questionnaire that requires disclosure of any related party transactions pertaining to the director or executive officer. Our Board of Directors will consider such information in its determinations of independence with respect to our Directors under NASD Rule 4200 and the applicable rules promulgated by the SEC.

Director Independence

The Board undertook a review of the independence of its members and considered whether any Director had a material relationship with Actel or its management that could compromise his ability to exercise independent judgment in carrying out his responsibilities. As a result of this review, the Board affirmatively determined that James R. Fiebiger, Jacob S. Jacobsson, J. Daniel McCranie, and Robert G. Spencer are independent of Actel and its management under the corporate governance standards of the NASDAQ Global Market.


ITEM 14.	*PRINCIPAL ACCOUNTANT FEES AND SERVICES*

Ernst & Young LLP has audited our financial statements since 1993. The aggregate fees for professional services rendered by Ernst & Young LLP during the 2005 and 2006 fiscal years are summarized below:


	Fiscal Year 2005		Fiscal Year 2006

Audit Fees(1)	$	1,225,500	$	3,397,222	(2)
Audit-Related Fees	$	—	$	—
Tax Fees(3)	$	100,000	$	128,290
All Other Fees	$	—	$	—


(1)		Represents the aggregate fees for professional services rendered for the audit of our annual financial statements, the review of the financial statements included in our quarterly reports during such period, the review and consent procedures for our Form S-8 Registration Statements during such period, and Section 404 attestation.

(2)		Includes $2,344,227 in fees for services performed in connection with the stock option investigation, reviews, and related restatement of financial statements.

(3)		Consists of tax-related services performed in connection with the preparation of state and federal tax returns as well as other tax consulting matters, including an analysis regarding the realizability of net operating losses, international tax planning (including the set-up of a sales office in China), and assistance with an IRS audit. Includes $100,000 in fees for services performed in connection with the preparation of state and federal tax returns.

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Policy on Audit Committee Pre-Approval of Audit and the Permissible Non-Audit Services of Independent Registered Public Accounting Firm

Our Audit Committee pre-approves all audit and permissible non-audit services provided by our registered public accounting firm. These services may include audit services, audit-related services, tax services, and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the registered public accounting firm in accordance with this pre-approval. The Audit Committee may also pre-approve particular services on a case-by-case basis. In addition, the Audit Committee has delegated to its Chairman the authority to pre-approve audit and permissible non-audit services, provided that any such pre-approval decision is presented to the full Audit Committee at its next scheduled meeting. All audit, audit-related, and tax services rendered by Ernst & Young for our 2005 and 2006 fiscal years were pre-approved by the Audit Committee.

PART IV


ITEM 15.	*EXHIBITS, FINANCIAL STATEMENT SCHEDULES*

(a) The following documents are filed as part of this Annual Report on Form 10-K:

(1) Financial Statements. The following consolidated financial statements of Actel Corporation are filed in Item 8 of this Annual Report on Form 10-K:

Consolidated balance sheets at December 31, 2006 and January 1, 2006

Consolidated statements of operations for each of the three years in the period ended December 31, 2006

Consolidated statements of shareholders’ equity and other comprehensive income/(loss) for each of the three years in the period ended December 31, 2006

Consolidated statements of cash flows for each of the three years in the period ended December 31, 2006

Notes to consolidated financial statements

(2) Financial Statement Schedule. The financial statement schedule listed under 15(c) hereof is filed with this Annual Report on Form 10-K.

(3) Exhibits. The exhibits listed under Item 15(b) hereof are filed with, or incorporated by reference into, this Annual Report on Form 10-K.

(b) Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this Report on Form 10-K:


Exhibit
Number			Description

	3	.1	Restated Articles of Incorporation, as amended (filed as Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 5, 2003).
	3	.2	Restated Bylaws (filed as Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 5, 2003).
	3	.3	Certificate of Amendment to Certificate of Determination of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Actel Corporation (filed as Exhibit 3.3 to the Registrant’s Registration Statement on Form 8-A (File No. 000-2197), filed on October 24, 2003).
	4	.1	Preferred Stock Rights Agreement, dated as of October 17, 2003, between the Registrant and Wells Fargo Bank, MN N.A., including the Certificate of Amendment of Certificate to Determination, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B, and C, respectively (filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form 8-A (File No. 000-2197), filed on October 24, 2003).

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Exhibit
Number			Description

	10	.1(1)	Form of Indemnification Agreement for directors and officers (filed as Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993).
	10	.2 (1)	Amended and Restated 1986 Equity Incentive Plan (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 0-21970) for the fiscal quarter ended July 3, 2005).
	10	.3(1)	2003 Director Stock Option Plan (filed as Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8 (File No. 333-112215), declared effective on January 26, 2004).
	10	.4(1)	Amended and Restated 1993 Employee Stock Purchase Plan (filed as Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal quarter ended July 3, 2005).
	10	.5	1995 Employee and Consultant Stock Plan, as amended and restated (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 0-21970) for the fiscal quarter ended July 7, 2002).
	10	.6(1)	Amended and Restated Employee Retention Plan (filed as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No. 0-21970) field with the Securities and Exchange Commission on December 5, 2005).
	10	.7(1)	Deferred Compensation Plan, as amended and restated (filed as Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 31, 2000).
	10	.8	Form of Distribution Agreement (filed as Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993).
	10	.9	Patent Cross License Agreement dated April 22, 1993 between the Registrant and Xilinx, Inc. (filed as Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993).
	10	.10	Manufacturing Agreement dated February 3, 1994 between the Registrant and Chartered Semiconductor Manufacturing Pte Ltd (filed as Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 2, 1994).
	10	.11	Foundry Agreement dated as of June 29, 1995, between the Registrant and Matsushita Electric Industrial Co., Ltd and Matsushita Electronics Corporation (filed as Exhibit 10.25 to the Registrant’s Quarterly Report on Form 10-Q (File No. 0-21970) for the fiscal quarter ended July 2, 1995).
	10	.12	Asset Purchase Agreement dated as of March 16, 2007, between the Registrant and BTR, Inc., Advantage Logic Inc., Benjamin Ting, Peter Pani, and Richard Abraham.
	10	.13	Patent Cross License Agreement dated August 25, 1998, between the Registrant and QuickLogic Corporation. (filed as Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 3, 1999).
	10	.14	Development Agreement by and between the Registrant and Infineon Technologies AG effective as of June 6, 2002 (filed as Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 5, 2003).
	10	.15	Supply Agreement by and between the Registrant and Infineon Technologies AG effective as of June 6, 2002 (filed as Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 5, 2003).
	10	.16	Office Lease Agreement for the Registrant’s facilities in Mountain View, California, dated February 27, 2003 (filed as Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 5, 2003).
	14		Code of Ethics for Principal Executive and Senior Financial Officers (filed as Exhibit 14 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 4, 2004).
	21		Subsidiaries of Registrant.
	23		Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
	24		Power of Attorney.
	31	.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
	31	.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
	32		Section 1350 Certifications.

143

Exhibit Index


Exhibit
Number.			Description

	3	.1	Restated Articles of Incorporation, as amended (filed as Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 5, 2003).
	3	.2	Restated Bylaws (filed as Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 5, 2003).
	3	.3	Certificate of Amendment to Certificate of Determination of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Actel Corporation (filed as Exhibit 3.3 to the Registrant’s Registration Statement on Form 8-A (File No. 000-2197), filed on October 24, 2003).
	4	.1	Preferred Stock Rights Agreement, dated as of October 17, 2003, between the Registrant and Wells Fargo Bank, MN N.A., including the Certificate of Amendment of Certificate to Determination, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B, and C, respectively (filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form 8-A (File No. 000-2197), filed on October 24, 2003).
	10	.1(1)	Form of Indemnification Agreement for directors and officers (filed as Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993).
	10	.2(1)	Amended and Restated 1986 Equity Incentive Plan (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 0-21970) for the fiscal quarter ended July 3, 2005).
	10	.3(1)	2003 Director Stock Option Plan (filed as Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8 (File No. 333-112215), declared effective on January 26, 2004).
	10	.4(1)	Amended and Restated 1993 Employee Stock Purchase Plan (filed as Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal quarter ended July 3, 2005).
	10	.5	1995 Employee and Consultant Stock Plan, as amended and restated (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 0-21970) for the fiscal quarter ended July 7, 2002).
	10	.6(1)	Amended and Restated Employee Retention Plan (filed as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No. 0-21970) field with the Securities and Exchange Commission on December 5, 2005).
	10	.7(1)	Deferred Compensation Plan, as amended and restated (filed as Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 31, 2000).
	10	.8	Form of Distribution Agreement (filed as Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993).
	10	.9	Patent Cross License Agreement dated April 22, 1993 between the Registrant and Xilinx, Inc. (filed as Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993).
	10	.10	Manufacturing Agreement dated February 3, 1994 between the Registrant and Chartered Semiconductor Manufacturing Pte Ltd (filed as Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 2, 1994).
	10	.11	Foundry Agreement dated as of June 29, 1995, between the Registrant and Matsushita Electric Industrial Co., Ltd and Matsushita Electronics Corporation (filed as Exhibit 10.25 to the Registrant’s Quarterly Report on Form 10-Q (File No. 0-21970) for the fiscal quarter ended July 2, 1995).
	10	.12	Asset Purchase Agreement dated as of March 16, 2007, between the Registrant and BTR, Inc., Advantage Logic Inc., Benjamin Ting, Peter Pani, and Richard Abraham.
	10	.13	Patent Cross License Agreement dated August 25, 1998, between the Registrant and QuickLogic Corporation. (filed as Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 3, 1999).
	10	.14	Development Agreement by and between the Registrant and Infineon Technologies AG effective as of June 6, 2002 (filed as Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 5, 2003).


	Common Stock &
	Additional Paid in			Deferred Stock						Net Impact to
Fiscal Year	Capital			Compensation			Retained Earnings			Shareholders’ Equity

1994	$	60		$	—		$	(36	)	$	24
1995		2,142			(1,911	)		(159	)		72
1996		678			(191	)		(412	)		75
1997		2,048			(1,293	)		(616	)		139
1998		(269	)		1,034			(683	)		82
1999		3,350			(2,762	)		(689	)		(101	)
2000		6,011			(3,711	)		(1,049	)		1,251
2001		1,011			3,283			(3,800	)		494
2002		494			1,992			(2,049	)		437
2003		255			2,292			(2,673	)		(126	)

Cumulative through January 4, 2004		15,780			(1,267	)		(12,166	)		2,347
2004		(716	)		1,012			380			676
2005		121			192			0			314

Total	$	15,185		$	(63	)	$	(11,786	)	$	3,337


(1)		Adjustment of $135 to revenue and adjustment of ($34) to cost of revenue for European distributor deferred income.

(2)		Restatement adjustments for payroll tax benefit of ($103), FAS 123R expense of $19 and adjustment of ($479) relating to changes in the effective income tax rate.


(1)		This Exhibit is a management contract or compensatory plan or arrangement.


Schedule	Description		Page

II		Valuation and qualifying accounts		146


Signature	Title	Date


/s/ John C. East (John C. East)	President and Chief Executive Officer (Principal Executive Officer) and Director	January 21, 2008

/s/ Jon A. Anderson (Jon A. Anderson)	Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer)	January 21, 2008

/s/ James R. Fiebiger (James R. Fiebiger)	Director	January 21, 2008

/s/ Jacob S. Jacobsson (Jacob S. Jacobsson)	Director	January 21, 2008

/s/ J. Daniel McCranie (J. Daniel McCranie)	Director	January 21, 2008

/s/ Robert G. Spencer (Robert G. Spencer)	Director	January 21, 2008


	Balance at							Balance at
	Beginning							End of
	of Period		Provisions			Write-Offs		Period
	(In thousands)

Allowance for doubtful accounts:
Year ended January 2, 2005		1,078		28			227		879
Year ended January 1, 2006		879		329			—		1,208
Year ended December 31, 2006		1,208		(594	)				614


If to Buyer:		If to BTR/ALI and the Officers:
Actel Corporation		BTR, Inc.
2061 Stierlin Court		c/o Advantage Logic, Inc.
Mountain View, CA 94043		20380 Town Center Lane, Suite 250
Attn.: David L. Van De Hey		Cupertino, CA 95014
Fax: (650) 318-2444		Attn.: Richard Abraham
Email: vandehey@actel.com		Fax: 408-253-3469
david.foster@actel.com		Email: lwabraham@msn.com


		BUYER

ACTEL CORPORATION


Date	Signature	Printed Name	Title

		BTR/ALI

BTR, INC.


Date	Signature	Printed Name	Title

ADVANTAGE LOGIC, INC.


Date	Signature	Printed Name	Title

		OFFICERS

RICHARD ABRAHAM


Date	Signature	Printed Name

PETER PANI


Date	Signature	Printed Name

BENJAMIN TING


Date	Signature	Printed Name


	Contract Title	Parties	Date
1.	Agreement for Assignment of Rights in Intellectual Property and Covenant Against Disclosure	ALI Peter Pani	September 23, 1993

2.	Agreement for Assignment of Rights in Intellectual Property and Covenant Against Disclosure	ALI Michael Pelham	September 23, 1993

3.	Agreement for Assignment of Rights in Intellectual Property and Covenant Against Disclosure	ALI Richard Abraham	September 23, 1993

4.	Agreement for Assignment of Rights in Intellectual Property and Covenant Against Disclosure	ALI Benjamin Ting	September 23, 1993

5.	Assignment of Patent Application	ALI Benjamin Ting	October 30, 1993

6.	Agreement for Assignment of Rights in Intellectual Property and Covenant Against Disclosure	ALI Alan Fletcher	September 23, 1993

7.	Consulting Agreement	ALI Antony Bell	April 7, 1995

8.	Consulting Agreement Addendum	ALI Antony Bell	June 29, 1995

9.	Confidential Disclosure Agreement	ALI Antony Bell	December 14, 1993

10.	Assignment of Trade Secrets	BTR Benjamin Ting	March 14, 2007

11.	Nondisclosure Agreement	ALI AMD	April 14, 1994

	1		U.S. patents and patent application nos. 5,457,410 ; 08/484,922; 6,433,580; 6,507,217; 6,703,861; 7,017,136; 11/299,248; US94/07187; 08/186,770; 5,640,327; US95/00313; 08/229,923; 08/534,500; 6,051,991; 6,462,578; 6,597,196; 6,747,482; 6,989,688; 7,078,933; 7,142,012; US95/04639; 08/433,041; 6,088,526; 6,300,793; US96/05964; 5,850,564; 6,417,690; 7,009,422; 7,126,375; US96/05982; 6,320,412; US00/35019; 5,640,344; US96/09889; 6,034,547; 6,329,839; 6,504,399; 6,624,658; 6,781,410; 6,975,138; 11/219,597; and US97/15614.

	2		All foreign counterparts of the above-listed U.S. patents or patent applications (whether or not the foreign counterparts claim priority from such U.S. patents or patent applications), including EU: 0712548; EU: 0,806,836; France: 0,806,836; Germany: 0,806,836; UK: 0,806,836; Japan: 505821/95; Korea (South): 413,881; China: ZL94,192,983.3; Singapore: 44,600; 95907356.1; 9605244-4; EU: 00,755,588; Austria: 00,755,588; Belgium: 00,755,588; Denmark: 00,755,588; France: 00,755,588; Germany: 00,755,588; Greece: 00,755,588; Ireland: 00,755,588; Italy: 00,755,588; Luxembourg: 00,755,588; Monaco: 00,755,588; Netherlands: 00,755,588; Portugal: 00,755,588; Spain: 00,755,588; Sweden: 00,755,588; Switzerland: 00,755,588; UK: 00,755,588; China: ZL95,193,431.7; Singapore: 34,648; Japan: 3,581,152; Korea(South): 96-705,754; EU: 1,162,746; France: 1,162,746; Germany: 1,162,746; UK: 1,162,746; EU: 01118849.7; EU: 05015294.1; EU: 0,824,791; UK: 0,824,791; EU: 02024873.8; China: ZL96,194,985.6; Japan: 3,727,065; Korea (South): 97-707796; Singapore: 46,840; Taiwan: NI-082,978; EU: 0,824,792; UK: 0,824,792; Japan: 3,684,241; Korea (South): 97-707797; China: ZL96,194,984.8; Taiwan: NI-081,900; Singapore: 53,402; EU: 0,840,930; France: 0,840,930; Germany: 0,840,930; Monaco: 0,840,930; Portugal: 0,840,930; UK: 0,840,930; Japan: 3,881,020; Korea (South): 397,062; China: ZL96,196,964.4; Singapore: 51,262; EU: 97939805.4; EU:04021656.6; and Japan: 511084/98.

	3		Any and all revisions, reexaminations, continuations, divisions, substitutions, reissues, renewals, continuations in part, continuing prosecution applications, divisions, parents, counterparts, and extensions thereof, and all other patents and patent applications, whether filed in or granted by the United States or another country, claiming, in whole or in part, the benefit of the filing date of any of the above-listed patents or patent applications.


Appl. No.	Issue Number	Filing Date	Title	Inventors
08/101,197	5,457,410	08-03-1993	ARCHITECTURE AND	Benjamin S. Ting
	INVALIDATED/ABANDONED		INTERCONNECT SCHEME	Saratoga, CA
08/484,922	ABANDONED	06-07-1995	FOR PROGRAMMABLE
09/034,769	6,433,580	03-02-1998	LOGIC CIRCUITS
09/955,589	6,507,217	09-13-2001
10/269,364	6,703,861	10-11-2002
10/692,880	7,017,136	10-23-2003
11/299,248	PENDING	12-09-2005
94922455.4	EU: 0712548	06-24-1994
94922455.4	UK: 0712548	06-24-1994
97111287.5	EU: 0806836	07-04-1997
97111287.5	France: 0806836	07-04-1997
97111287.5	Germany: 0806836	07-04-1997
97111287.5	UK: 0806836	07-04-1997
505821/95	Japan: PENDING	06-24-1994
96-700569	Korea (South): 413881	02-03-1996
US94/07187	Entered National Phase	06-24-1994
94192983.3	China: 49812	06-24-1994
9603530-8	Singapore: 44600	02-22-1996

08/186,770	ABANDONED	01-25-1994	APPARATUS AND METHOD FOR PARTITIONING RESOURCES FOR INTERCONNECTIONS	Benjamin S. Ting Saratoga, CA
08/559,122	5,640,327 ABANDONED	02-09-1996		Benjamin S. Ting Saratoga, CA

95907365.1	ABANDONED	01-10-1995
US95/00313	Entered National Phase	01-10-1995
9605244-4	ABANDONED	02-03-1996

1.		NDA between Ting and Pani dated May 18, 1993

2.		NDA between Ting and Ma dated May 24, 1993

3.		NDA between Ting and Fletcher dated June 7, 1993

4.		NDA between Ting and Pelham dated June 18, 1993

5.		Agreement between Ma and ALI dated May 7, 1995

6.		Amendment to Agreement between Ma and ALI, dated December 22, 2004

7.		Exclusive Royalty Sharing Agreement between Pelham and BTR dated October 27, 1995

8.		Amendment to Exclusive Royalty Sharing Agreement between Pelham and BTR, dated May 10, 1998

9.		Exclusive Royalty Sharing Agreement between Fletcher and BTR dated April 26, 1995

10.		Amendment to Exclusive Royalty Sharing Agreement between Fletcher and BTR, dated May 1, 1998

11.		Oral Agreement with Niantsu Wang: On or about 1996, BTR/ALI had an oral agreement to pay Wang for design and implementation of Actel’s Specification for the DLL

12.		Agreements listed in Attachment A (Assigned Contracts List)

13.		Agreements listed in Attachment C (Prior Use of IP Assets)


	Inventor Name	Address	Phone
1.	Peter M. Pani	20380 Town Center Lane, Suite 250 Cupertino, CA 95014	(408) 253-5870

2.	Benjamin S. Ting	20380 Town Center Lane, Suite 250 Cupertino, CA 95014	(408) 253-5840

3.	Antony G. Bell	126 Smithcreek Drive Los Gatos, CA 95030	(408) 395-1694

4.	Benny Ma	1798 Rocky Mountain Ave. Milpitas, CA 95035


					L/T or S/T Capital
Appl. No.	Issue Number	Filing Date	Assigned Price		Gains
P001 Family: $2,500,000
08/101,197	5,457,410	08-03-1993
	INVALIDATED/ABANDONED

08/484,922	ABANDONED	06-07-1995

09/034,769	6,433,580	03-02-1998	$	200,000	L/T

09/955,589	6,507,217	09-13-2001	$	200,000	L/T

10/269,364	6,703,861	10-11-2002	$	200,000	L/T

10/692,880	7,017,136	10-23-2003	$	200,000	L/T

11/299,248	PENDING	12-09-2005	$	200,000	L/T

94922455.4	EU: 0712548	06-24-1994	$	750,000	L/T
94922455.4	UK: 0712548	06-24-1994
97111287.5	EU: 0806836	07-04-1997
97111287.5	France: 0806836	07-04-1997
97111287.5	Germany: 0806836	07-04-1997
97111287.5	UK: 0806836	07-04-1997

505821/95	Japan: PENDING	06-24-1994	$	375,000	L/T

96-700569	Korea (South): 413881	02-03-1996	$	150,000	L/T

US94/07187	Entered National Phase	06-24-1994

94192983.3	China: 49812	06-24-1994	$	150,000	L/T

9603530-8	Singapore: 44600	02-22-1996	$	75,000	L/T

P003 Family: $0
08/186,770	ABANDONED	01-25-1994
08/559,122	5,640,327 ABANDONED	02-09-1996
95907365.1	ABANDONED	01-10-1995
US95/00313	Entered National Phase	01-10-1995


BTR Technology,	Assigned
Confidential Information,	Price		Assigned Price		L/T or S/T
Mask Works, Copy	Intangibles		Tangible		Capital
Rights, etc.	Delivery		Delivery		Gains
Assignment of trade secret rights in Technology previously delivered under the License Agreement	$	225,000			L/T


Delivery of Originals in Paper or Media			$	25,000	L/T

Assignment of mask work rights in Mask Works Installed on site by BTR and assignment of Copyrights, etc.	$	250,000			L/T



	/s/ John C. East
	John C. East
	President and Chief Executive Officer


		/s/ Jon A. Anderson

		Jon A. Anderson
		Vice President of Finance
		and Chief Financial Officer