e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 2, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-21970

ACTEL CORPORATION

(Exact name of Registrant as specified in its charter)


California		77-0097724
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

2061 Stierlin Court
Mountain View, California		94043-4655
(Address of principal executive offices)		(Zip Code)

(650) 318-4200
(Registrant’s telephone number, including area code)

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

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions 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

Number of shares of Common Stock outstanding as of August 8, 2006: 26,048,702

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

ACTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)


	Three Months Ended							Six Months Ended
	July 2,		Apr. 2,			July 3,		July 2,		July 3,
	2006		2006			2005		2006		2005
Net revenues	$	47,701	$	46,268		$	45,327	$	93,969	$	89,311
Costs and expenses:
Cost of revenues		18,098		18,550			18,560		36,648		36,476
Research and development		14,417		13,779			11,759		28,196		23,617
Selling, general, and administrative		14,208		14,805			12,667		29,013		25,504
Amortization of acquisition-related intangibles		7		8			552		15		1,110

Total costs and expenses		46,730		47,142			43,538		93,872		86,707

Income (loss) from operations		971		(874	)		1,789		97		2,604
Interest income and other, net		1,641		1,363			926		3,004		1,706

Income before tax provision		2,612		489			2,715		3,101		4,310
Tax provision		1,320		641			508		1,961		666

Net income (loss)	$	1,292	$	(152	)	$	2,207	$	1,140	$	3,644


Net income (loss) per share:
Basic	$	0.05	$	(0.01	)	$	0.09	$	0.04	$	0.14

Diluted	$	0.05	$	(0.01	)	$	0.09	$	0.04	$	0.14


Shares used in computing net income (loss) per share:
Basic		25,874		25,753			25,183		25,814		25,147

Diluted		27,087		25,753			25,400		26,977		25,526

See Notes to Unaudited Condensed Consolidated Financial Statements

ACTEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)


	July 2,			Jan. 1,
	2006 (1)			2006 (2)
ASSETS
Current assets:
Cash and cash equivalents	$	40,441		$	24,033
Short-term investments		107,418			117,577
Accounts receivable, net		23,251			26,836
Inventories, net		36,466			37,372
Deferred income taxes		21,489			21,489
Prepaid expenses and other current assets		6,437			7,005

Total current assets		235,502			234,312
Property and equipment, net		23,616			23,859
Long-term investments, net		38,261			26,706
Goodwill		32,142			32,142
Deferred tax asset		10,283			9,979
Other assets, net		16,781			13,391

	$	356,585		$	340,389


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	14,063		$	14,503
Accrued salaries and employee benefits		6,714			4,994
Other accrued liabilities		14,692			10,196
Deferred income on shipments to distributors		30,351			29,238

Total current liabilities		65,820			58,931
Deferred compensation plan liability		4,085			3,667
Deferred rent liability		1,307			1,242
Long term royalty, net		2,755			3,828

Total liabilities		73,967			67,668

Commitments and contingencies

Shareholders’ equity:
Common stock		26			26
Additional paid-in capital		203,967			194,916
Retained earnings		79,659			78,519
Accumulated other comprehensive loss		(1,034	)		(740	)

Total shareholders’ equity		282,618			272,721

	$	356,585		$	340,389


(1)		Unaudited.

(2)		Derived from the consolidated audited financial statements included in our report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended January 1, 2006 (2005 Form 10-K).

See Notes to Unaudited Condensed Consolidated Financial Statements

ACTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)


	Six Months Ended
	July 2,			July 3,
	2006			2005
Operating activities:
Net income	$	1,140		$	3,644
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,839			5,592
Stock compensation cost recognized		5,729			—
Changes in operating assets and liabilities:
Accounts receivable		2,580			(549	)
Inventories		1,323			(987	)
Deferred income taxes		(148	)		400
Prepaid expenses and other current assets		471			32
Royalty and other long-term assets		(1,303	)		588
Accounts payable, accrued salaries and employee benefits, and other accrued liabilities		4,157			(3,457	)
Deferred income on shipments to distributors		1,113			1,063

Net cash provided by operating activities		19,901			6,326
Investing activities:
Purchases of property and equipment		(4,581	)		(6,070	)
Purchases of available-for-sale securities		(53,147	)		(26,759	)
Sales and maturities of available for sale securities		51,301			34,355
Changes in other long term assets		30			51

Net cash (used in) provided by investing activities		(6,397	)		1,577
Financing activities:
Repurchase of common stock		—			(9,796	)
Issuance of common stock under employee stock plans		2,904			7,087

Net cash provided by (used in) financing activities		2,904			(2,709	)


Net increase in cash and cash equivalents		16,408			5,194
Cash and cash equivalents, beginning of period		24,033			6,405

Cash and cash equivalents, end of period	$	40,441		$	11,599

Supplemental disclosures of cash flow information:
Cash paid during the period for taxes, net	$	386		$	18
Accrual of long-term royalty agreement	$	2,091		$	—

See Notes to Unaudited Condensed Consolidated Financial Statements

ACTEL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of Actel Corporation have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Certain previously reported amounts have been reclassified to conform to the current presentation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.

Actel Corporation and its consolidated subsidiaries are referred to as “we,” “us,” or “our.” Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements. Our fiscal year ends the first Sunday on or after December 31, and our fiscal quarters end the first Sunday on or after March 31, June 30, September 30, and December 31.

These unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements included in our 2005 Form 10-K. The results of operations for the three and six months ended July 2, 2006, are not necessarily indicative of future operating results.

Income Taxes

Our tax provision is based on an estimated annual tax rate in compliance with SFAS No. 109 “Accounting for Income Taxes.” Significant components affecting the tax rate include R&D credits, income from tax-exempt securities, the composite state tax rate, recognition of certain deferred tax assets subject to valuation allowances and non-deductible stock-based compensation expense.

Impact of Recently Issued Accounting Standards

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 is currently evaluating the effect that the adoption of EITF 06-2 will have on its 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. Actel is currently evaluating the effect that the adoption of FIN 48 will have on its consolidated results of operations and financial condition.

2. Stock Based Compensation

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

The following pro forma net income (loss) and net income (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.


	Three			Six
	Months			Months
	Ended			Ended
	July 3, 2005			July 3, 2005
Net income as reported	$	2,207		$	3,644
Less:
Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax		(3,118	)		(6,586	)

Pro forma net loss	$	(911	)	$	(2,942	)

Net income per share as reported:
Basic	$	0.09		$	0.14

Diluted	$	0.09		$	0.14

Pro forma net loss per share:
Basic	$	(0.04	)	$	(0.12	)

Diluted	$	(0.04	)	$	(0.12	)

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 has been recognized for our fixed-cost stock option plans because stock-based awards are 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.

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 the quarter and six months ended July 2, 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 SFAS123(R).

As a result of adopting SFAS 123(R) on January 2, 2006, the Company’s income before income taxes and net income for the three and six months ended July 2, 2006, are $2.9 million and $5.7 million lower, respectively, than if the Company had continued to account for share-based compensation under Opinion 25. Basic and diluted net income per share for the three months ended July 2, 2006 is $0.11 per share lower, and basic and diluted net income per share for the six months ended July 2, 2006 are $0.23 per share and $0.21 per share lower, respectively, than if the Company had continued to account for share-based compensation under Opinion 25.

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.

Fair Value —The fair value of the Company’s stock options granted to employees for the three and six months ended July 2, 2006 and July 3, 2005, respectively, was estimated using the following weighted- average assumptions:


	Three Months Ended						Six Months Ended
	July 2,			July 3,			July 2,			July 3,
	2006			2005			2006			2005
Option Plan Shares
Expected term (in years)		4.8			2.8			5.1			3.9
Volatility		47.5	%		50.3	%		49.7	%		51.9	%
Risk-free interest rate		5.0	%		3.7	%		4.5	%		3.6	%
Estimated forfeitures		3	%		—			3	%		—
Weighted-average fair value	$	7.01		$	5.17		$	7.18		$	6.68

ESPP Shares
Expected term (in years)		—			—			2.08			1.26
Volatility		—			—			36.7	%		52.1	%
Risk-free interest rate		—			—			4.5	%		3.1	%
Weighted-average fair value		—			—		$	5.05		$	6.46

Stock-Based Compensation Expense

As of July 2, 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 $12.8 million, net of estimated forfeitures of approximately $1 million. This cost will be amortized over a weighted-average period of 1.48 years and will be adjusted for subsequent changes in estimated forfeitures.

As of July 2, 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 $2.2 million. This cost will be amortized over a weighted-average period of 0.82 years.

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. As of July 2, 2006, 20,536,769 shares of common stock were reserved for issuance under these plans, of which 4,918,374 shares of common stock were available for grant. There were no options granted to consultants in 2005 or 2006.

We also adopted a Directors’ Stock Option Plan in 2003, under which directors who are not employees of Actel are granted nonqualified options to purchase shares of our common stock. The new Directors’ Stock Option Plan replaced a 1993 plan that expired in 2003. As of July 2, 2006, 500,000 shares of common stock were reserved for issuance under such Plan, of which 362,500 shares of common stock 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.

The Company issues shares of common stock upon the exercise of stock options. The following is a summary of option activity for our stock option plans:


						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
Options	Shares			Price		Term		Value
								(in thousands)
Outstanding at January 1, 2006		9,646,487		$	19.57
Granted		697,655			14.74
Exercised		(237,816	)		12.21
Exchanged		(4,182,027	)		23.39
Forfeitures and cancellations		(109,432	)		19.64

Outstanding at July 2, 2006		5,814,867		$	16.54		6.29	$	2,316

Vested and expected to vest at July 2, 2006		5,718,776		$	16.56		6.29	$	2,313

Exercisable at July 2, 2006		3,610,957		$	16.75		4.87	$	2,234

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for the 1.3 million options that were in-the-money at July 2, 2006. During the three and six months ended July 2, 2006, the aggregate intrinsic value of options exercised under the Company’s stock option plans were $0.5 million and $0.6 million, respectively, determined as of the date of option exercise. During the three and six months ended July 3, 2005, the aggregate intrinsic value of options exercised under the Company’s stock option plans were less than $0.1 million and $1.1 million, respectively, determined as of the date of option exercise.

The following table summarizes information about stock options outstanding at July 2, 2006:


	July 2, 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 — 12.82		564,552		2.04	$	11.29		559,421	$	11.28
12.88 — 13.78		555,136		3.72		13.40		540,073		13.40
13.81 — 14.75		464,255		7.75		14.36		219,320		14.60
14.77 — 14.88		616,773		9.13		14.77		49,535		14.82
14.89 — 15.15		877,833		6.73		15.12		552,451		15.14
15.25 — 15.70		858,133		8.52		15.70		263,806		15.70
15.83 — 17.05		201,154		5.94		16.38		115,874		16.42
17.06 — 19.05		506,384		6.72		17.91		341,811		17.71
19.50 — 22.70		582,510		5.19		20.81		571,687		20.83
22.94 — 54.45		588,137		5.51		26.13		396,979		26.81

		5,814,867		6.29	$	16.54		3,610,957	$	16.75

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). Effective January 3, 2006, all ESPP participants will be subject to a calendar year limit of $10,000. This change in the ESPP was made to reduce the stock-based compensation charge under SFAS 123(R) associated with the ESPP. As of July 2, 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 701,669 shares issued in 2005, 422,947 shares issued in 2004, and 361,688 shares issued in 2003 under the ESPP. There were 737,943 shares available for issuance under the ESPP as of July 2, 2006.

The following is a summary of outstanding options under the current offering period based on estimated contributions for the four consecutive purchase periods:


					Weighted-
			Weighted-		Average
			Average		Remaining		Aggregate
	Number of		Exercise		Contractual		Intrinsic
	Shares		Price		Term		Value
							(in thousands)
Outstanding at July 2, 2006		940,763	$	12.12		0.82	$	2,100

Vested and expected to vest at July 2, 2006		912,541	$	12.12		0.82	$	2,037

During the six months ended July 3, 2005, the aggregate intrinsic value of options exercised under the Company’s ESPP was $1.4 million. There were no exercises during the six months ended July 2, 2006.

Restricted Stock Units (RSUs)

On December 1, 2005, Actel offered 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 RSUs. “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 RSUs that an employee would receive in

exchange for the eligible stock options, as well as the vesting schedule of the RSUs, 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 RSUs to purchase 1,130,965 of the Company’s common stock resulting in an overall exchange ratio of approximately 3.7 options per RSU. Included in these figures were 1,474,500 options previously held by our executive officers who received a total of 422,544 RSUs in the Exchange Program. As of July 2, 2006, the total compensation cost not yet recognized related to RSUs granted under the Exchange Program was approximately $2.2 million.

During the six months ended July 2, 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 July 2, 2006, the total compensation cost not yet recognized related to RSUs granted subsequent to January 3, 2006 was approximately $1.3 million. The Company issues shares of common stock upon vesting of RSUs. The following is a summary of RSU activity:


				Weighted-
				Average
	Number of			Grant Date
	shares			Fair Value
Nonvested at January 1, 2006		—
Granted		107,310		$	14.77
Granted under exchange program		1,130,965		$	13.17
Forfeited		(11,530	)	$	13.28


Nonvested at July 2, 2006		1,226,745		$	13.31

3. Goodwill

We account for goodwill 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 value may not be recoverable. We completed our annual goodwill impairments tests as of January 1, 2006, and noted no impairment. Our next annual impairment test will be performed in the fourth quarter of 2006. No indicators of impairment were present during the six months ended July 2, 2006.

4. Inventories

Inventories consist of the following:


	July 2,		Jan. 1,
	2006		2006
	(unaudited, in thousands)
Inventories, net:
Purchased parts and raw materials	$	6,507	$	6,403
Work-in-process		21,632		25,599
Finished goods		8,327		5,370

	$	36,466	$	37,372

Inventory is 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 demands, strategic relationships with foundries, “last time buy” inventory purchases, and competitive situations in the marketplace. Should any of these factors develop other than anticipated, inventory levels may be materially and adversely affected.

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.

“Last time buy” inventory purchases are excluded from our standard excess and obsolescence write down policy and are instead subject to a discrete write down policy. We make last time buys when a wafer supplier is about to shut down the manufacturing line used to make a product and we believe that current inventories are insufficient to meet foreseeable future demand. We made last time buys of certain products from our wafer suppliers during 2003 and the first quarter of 2005. Since this inventory was not acquired to meet current demand, we do not believe the application of our standard inventory write down policy would be appropriate. 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 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 or estimations of expected future demand decrease, inventory write downs of last time buy inventory may be required. We recorded a write-down of last time buy material of $0.3 million in 2005. Evaluations of last time buy inventory during the first six months of 2006 did not result in any additional write downs of this material. Inventory at the end of the second quarter of 2006 included $2.2 million of last time buy material.

5. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:


	Three Months Ended							Six Months Ended
	July 2, 2006		Apr. 2, 2006			July 3, 2005		July 2, 2006		July 3, 2005
	(unaudited, in thousands except per share amounts)
Basic:
Weighted-average common shares outstanding		25,874		25,753			25,183		25,814		25,147

Net income (loss)	$	1,292	$	(152	)	$	2,207	$	1,140	$	3,644

Net income (loss) per share	$	0.05	$	(0.01	)	$	0.09	$	0.04	$	0.14


Diluted:
Weighted-average common shares outstanding		25,874		25,753			25,183		25,814		25,147
Net effect of dilutive employee stock options - based on the treasury stock method		1,213		—			217		1,163		379

Shares used in computing net income per share		27,087		25,753			25,400		26,977		25,526

Net income (loss)	$	1,292	$	(152	)	$	2,207	$	1,140	$	3,644

Net income (loss) per share	$	0.05	$	(0.01	)	$	0.09	$	0.04	$	0.14

For the three months ended July 2, 2006 and July 3, 2005, options outstanding under our stock option plans to purchase approximately 4,550,000 and 8,098,000 shares, respectively, of our common stock were excluded from the treasury stock method used to determine the net effect of dilutive employee stock options because their inclusion would have had an anti-dilutive effect on net income per share.

For the six months ended July 2, 2006, and July 3, 2005, options outstanding under our stock option plans to purchase approximately 4,471,000 and 7,137,000 shares, respectively, of our common stock were excluded from the treasury stock method used to determine the net effect of dilutive employee stock options because their inclusion would had an anti-dilutive effect on net income per share.

6. Comprehensive Income (Loss)

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


	Three Months Ended								Six Months Ended
	July 2,			Apr. 2,			July 3,		July 2,			July 3,
	2006			2006			2005		2006			2005
	(unaudited, in thousands)
Net income (loss)	$	1,292		$	(152	)	$	2,207	$	1,140		$	3,644
Change in (loss) gain on available-for-sale securities, net of tax amounts of ($93), ($63), $143, ($156) and ($111), respectively		(148	)		(146	)		214		(294	)		(167	)
Less reclassification adjustment for gains included in net income, net of tax amounts of $0, $0, $9, $0 and $15, respectively		—			—			13		—			21

Other comprehensive (loss), net of tax amounts of ($93), ($63), $151, ($156) and ($97), respectively		(148	)		(146	)		227		(294	)		(146	)

Total comprehensive income (loss)	$	1,144		$	(298	)	$	2,434	$	846		$	3,498

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

7. 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. We are currently involved in arbitration with BTR, Inc., under a License Agreement between the parties.

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 July 2, 2006, or results of operations or cash flows for the quarter then ended.

8. Commitments

As of July 2, 2006, the Company had approximately $10.4 million of non-cancelable obligations to providers of electronic design automation software expiring at various dates through 2008. The current portion of these obligations is recorded in “Other accrued liabilities” and the long-term portion of these obligations is recorded at net present value in “Long term royalty, net” on the accompanying balance sheet. Approximately $2.8 million and $16.6 million of these contractual obligations are recorded in “Prepaid expenses and other current assets” and “Other assets, net”, respectively.

9. Shareholders’ Equity

Our Board of Directors authorized a stock repurchase program, whereby shares of our common stock may be purchased from time to time in the open market at the discretion of management. In the three months ended April 3, 2005 we repurchased 627,500 shares for $9.8 million. There have been no additional stock repurchases since then. As of July 2, 2006, we had remaining authorization to repurchase up to 1,610,803 shares.

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

In this Quarterly Report on Form 10-Q, Actel Corporation and its consolidated subsidiaries are referred to as “we,” “us,” “our,” or “Actel.” You should read the information in this Quarterly Report with the Risk Factors in Part II, Item 1A. Unless otherwise indicated, the information in this Quarterly Report is given as of August 8, 2006 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. Our actual results may differ materially from those projected in the forward-looking statements for many reasons, including those set forth in the Risk Factors.

Overview

The purpose of this overview is to provide context for the discussion and analysis of our financial statements that follows by briefly summarizing the most important known trends and uncertainties, as well as the key performance indicators, on which our executives are primarily focused for both the short and long term.

We design, develop, and market FPGAs and PSCs and supporting products and services. FPGAs are programmable logic devices (PLDs) that adapt the processing and memory capabilities of electronic systems to specific applications. PSCs are programmable “system-on-a-chip” integrated circuits that contain all of the necessary hardware and electronic circuitry for a complete system. PSCs and FPGAs are used by designers of automotive, communications, computer, consumer, industrial, military and aerospace, and other electronic systems to differentiate their products and get them to market faster. We are the leading supplier of FPGAs based on Flash and antifuse technologies and believe that we are the leading supplier of high system-critical FPGAs and the first supplier to offer a truly programmable PSC.

• Key Indicators

Although we measure the condition and performance of our business in numerous ways, the key quantitative indicators that we generally use to manage the business are bookings, design wins, margins, yields, and backlog. We also carefully monitor the progress of our product development efforts. Of these, we think that bookings and backlog are the best indicators of short-term performance and that designs wins and product development progress are the best indicators of long-term performance. Measured as end-customer orders placed with us and our distributors, our bookings were higher during the second quarter of 2006 than during the first quarter of 2006, and our backlog was higher at the end of the second quarter of 2006 than at the end of the first quarter of 2006. Our design wins were relatively flat between the first and second quarter of 2006, and our product development progress during the second quarter was mixed.

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 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

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 OEMs upon shipment. Because sales to 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 back to the distributor in the future. These amounts will not be recognized as revenue and gross margin in our Statement of Income. 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 months 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.

• 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.

During 2003, we modified our inventory valuation policies to properly account for “last time buy” inventory purchases. We make last time buys 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 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 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 2005 resulted in a write down of $0.3 million of material. This write down was taken because actual sell through results did not meet expectations or estimations of expected future demand. No additional write-downs of this inventory were taken in the six months ended July 2, 2006.

• Legal Matters and Loss Contingencies

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. We are currently involved in an arbitration with BTR, Inc., under a License Agreement between the parties. 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 July 2, 2006, or results of operations or cash flows for the quarter 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 2005 and determined that it was more likely than not that we would be able to realize approximately $31.5 million of net deferred tax assets based upon our forecast of future taxable income.

• 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 $2.9 million and $5.7 million of stock-based compensation expense for the three and six months ended July 2, 2006, respectively. 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 July 2, 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 $12.8 million, net of estimated forfeitures of approximately $1 million. This cost will be amortized over a weighted-average period of 1.48 years and will be adjusted for subsequent changes in estimated forfeitures. As of July 2, 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 $2.2 million. This cost will be amortized over a weighted-average period of 0.82 years.

Results of Operations


	Three Months Ended															Six Months Ended
	(a)			(b)						(c)			%			(d)			(e)			%
	July 2,			Apr. 2,			% change			July 3,			change			July 2,			July 3,			change
	2006			2006			(a/b)			2005			(a/c)			2006			2005			(d/e)
Net revenues	$	47,701		$	46,268			3	%	$	45,327			5	%	$	93,969		$	89,311			5	%

Gross margin	$	29,603		$	27,718			7	%	$	26,767			11	%	$	57,321		$	52,835			9	%
% of net revenues		62	%		60	%					59	%					61	%		59	%

Research and development	$	14,417		$	13,779			5	%	$	11,759			23	%	$	28,196		$	23,617			19	%
% of net revenues		30	%		30	%					26	%					30	%		26	%

Selling, general, and administrative	$	14,208		$	14,805			(4	%)	$	12,667			12	%	$	29,013		$	25,504			14	%
% of net revenues		30	%		32	%					28	%					31	%		29	%

Amortization of acquisition-related intangibles	$	7		$	8			(13	%)	$	552			(99	%)	$	15		$	1,110			(99	%)
% of net revenues		0	%		0	%					1	%					0	%		1	%

Tax provision	$	1,320		$	641			106	%	$	508			160	%	$	1,961		$	666			194	%
% of net revenues		3	%		1	%					1	%					2	%		1	%

Net Revenues

Net revenues were $47.7 million for the second quarter of 2006, a 3% increase from the first quarter of 2006 and a 5% increase from the second quarter of 2005. Net revenues increased between the first and second quarters of 2006 due to a 4% increase in overall average selling prices (ASPs) offset by a 1% decrease in unit shipments. Quarterly net revenues increased from the second quarter a year ago due to a 15% increase in ASPs offset by an 8% decrease in unit shipments. Unit volumes and ASP levels fluctuate principally because of changes in the mix of products sold. Our product portfolio includes products ranging from devices with lower ASPs which typically sell in higher volumes, to devices with higher ASPs which typically sell in lower volumes.

Net revenues were $94.0 million for the first six months of 2006, a 5% increase from the first six months of 2005. Net revenues increased due to a 5% increase in overall ASPs. The increase in ASPs was primarily the result of a shift toward higher ASP versions in both our mature product families as well as some of our newer product families.

Gross Margin

Gross margin was 62% on net revenues for the second quarter of 2006 compared with 60% for the first quarter of 2006 and 59% for the second quarter of 2005. Gross margin was 61% for the first six months of 2006 compared with 59% for the first six months of 2005. The increase in gross margin during the first half of 2006 was attributable to a more favorable mix of products sold during the first six months of the year. In addition, gross margin for the three and six months ended July 2, 2006 benefited from a payment received from a supplier in the second quarter of 2006 of approximately $0.4 million related to material scrapped in prior periods. As our newer product families mature, we typically experience some margin improvement with increased yields and manufacturing efficiencies.

We strive to reduce costs 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 $14.4 million, or 30% of net revenues, for the second quarter of 2006 compared with $13.8 million, or 30% of net revenues, for the first quarter of 2006 and $11.8 million, or 26% of net revenues, for the second quarter of 2005. R&D expenditures were $28.2 million, or 30% of net revenues, for the first six months of 2006 compared with $23.2 million, or 26% of net revenues, for the first six months of 2005. R&D expenditures in the first and second quarters of 2006 were higher than the second quarter of 2005 primarily due to the recognition of stock-based compensation expense of $1.5 million under SFAS 123(R) in each of the two quarters and increased spending due to expanded R&D efforts. In addition, we recorded cost reimbursement benefits under government funded contracts in the first and second quarters of 2006. We believe that reimbursable R&D expenditures under these contracts will continue to range from $0.6 million to $0.8 million per quarter through 2006.

Selling, General, and Administrative (SG&A)

SG&A expenses were $14.2 million or 30% of net revenues, for the second quarter of 2006 compared with $14.8 million or 32% of net revenues for the first quarter of 2006 and $12.7 million or 28% of revenues, for the second quarter of 2005. SG&A expenses were $29.0 million, or 31% of net revenues, for the first six months of 2006 compared with $25.5 million, or 29% of net revenues, for the first six months of 2005. Both the first and second quarter of 2006 reflect higher spending due to the recognition of stock-based compensation expense of $1.3 million and $1.4 million, respectively under SFAS 123(R). In addition, SG&A expense in the first quarter of 2006 included increased marketing expense due to new product introductions and higher legal fees.

Amortization of Acquisition-Related Intangibles

Amortization of acquisition-related intangibles was $0.02 million for the first six months of 2006 compared to $1.1 million for the first six months of 2005. The decrease in 2006 was attributable to non-goodwill intangibles, related to an acquisition completed in the year 2000, being fully amortized during 2005.

Tax Provision

For the three and six months ended July 2, 2006, the provision for income taxes was based on an estimated annual effective tax rate calculated in compliance with SFAS 109. The estimated annual effective rate was calculated based on our expected level of profitability and includes the usage of state tax credits. To the extent our level of profitability changes during the year, the estimated annual effective tax rate will be revised to reflect these changes. The difference between the provision for income taxes that would be derived by applying the statutory rate to our income before tax and the income tax provision actually recorded is due to the impact of non-deductible SFAS 123(R) stock-based compensation expenses which is offset in part by state tax credits.

Financial Condition, Liquidity, and Capital Resources

Our total assets were $356.6 million as of the end of the second quarter of 2006 compared with $340.4 million as of the end of the fourth quarter of 2005. The following table sets forth certain financial data from the condensed consolidated balance sheets expressed as the percentage change from January 1, 2006, to July 2, 2006:


	As of		As of
In thousands	July 2, 2006		Jan. 1, 2006		$ change			% change
Cash and cash equivalents, short and long term investments	$	186,120	$	168,316	$	17,804			11	%
Accounts receivable, net	$	23,251	$	26,836	$	(3,585	)		(13	%)
Inventories, net	$	36,466	$	37,372	$	(906	)		(2	%)

The $3.6 million decrease in net accounts receivable was primarily due to more linear shipments during the second quarter of 2006 which led to improved collections resulting in a reduced days sales outstanding of 41 days at the end of the second quarter of 2006 compared to days sales outstanding of 55 days at the end of the fourth quarter of 2005.

Net inventories decreased in the second quarter of 2006 by $0.9 million compared to the fourth quarter of 2005 as a result of a reduction in inventory levels in some of our older product families. This resulted in inventory days decreasing from 191 days at the end of 2005 to 184 days at the end of the second quarter of 2006.


	Six Months Ended
In thousands	July 2, 2006			July 3, 2005
Net cash provided by operating activities	$	19,901		$	6,326
Net cash (used in) provided by investing activities	$	(6,397	)	$	1,577
Net cash provided by (used in) financing activities	$	2,904		$	(2,709	)

The difference between net income of $1.1 million and cash provided by operating activities of $19.9 million for the six months ended July 2, 2006 was the result of several non-cash adjustments relating to depreciation, amortization and stock based compensation costs of approximately $10.6 million and primarily favorable changes in working capital balances of approximately $8.2 million. Favorable changes in working capital balances include decreases in net accounts receivable of $2.6 million and net inventories of $1.3 million accompanied by an increase in current liabilities and deferred income on shipments to distributors of $5.3 million offset by royalty payments of $1.8 million. Sales of available for sale securities of $51.3 million offset by purchases of available for sale securities of $53.1 million and capital expenditure of $4.6 million resulted in net cash used in investing activities of approximately $6.4 million for the six months ended July 2, 2006. Net cash provided by financing activities of $2.9 million for the six months ended July 2, 2006 relates to proceeds from the issuance of common stock under employee stock plans.

Cash provided by operating activities was $6.3 million for the first six months of 2005. Net income of $3.6 million and non-cash adjustments relating to depreciation and amortization of $5.6 million contributed to cash provided by operations, offset primarily by decreases in accrued salaries and employee benefits. Net cash provided by investing activities was $1.6 million during the first six months of 2005 and included net sales and maturities of available for sale securities of $7.6 million, which was offset by $6.0 million for purchases of property and equipment. Net cash used in financing activities was $2.7 million for the first six months of fiscal 2005 and consisted of $9.8 million for the repurchase of common stock, which was offset in part by $7.1 million of proceeds from the issuance of common stock under employee stock plans.

We currently meet all of our funding needs for ongoing operations with internally generated cash flows from operations and with existing cash and short-term and long-term investment balances. We believe that existing cash, cash equivalents, and short-term and long-term investments, together with cash generated from operations, will be sufficient to meet our cash requirements for the next four quarters. 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. If we require additional capacity, we may be required to incur significant expenditures to secure such capacity.

Impact of Recently Issued Accounting Standards

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 as that term is used in FASB Statement No. 43. This EITF is effective for fiscal years beginning after December 15, 2006 and we will adopt in the first quarter of fiscal 2007. We are currently evaluating the effect that the adoption of EITF 06-2 will have 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 we will adopt in the first quarter of fiscal 2007. We are currently evaluating the effect that the adoption of FIN 48 will have on our consolidated results of operations and financial condition.

Additional Quarterly Information

The following table presents certain unaudited quarterly results for each of the eight quarters in the period ended July 2, 2006. In our opinion, all necessary adjustments (consisting only of normal recurring accruals) have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction with our audited consolidated condensed financial statements and notes thereto included in our 2005 Form 10-K. However, these quarterly operating results are not indicative of the results for any future period.


	Quarterly Operating Results for the Three Months Ended
	Jul. 2,		Apr. 2,			Jan. 1,		Oct. 2,		Jul. 3,		Apr. 3,		Jan. 2,			Oct. 3,
	2006		2006			2006		2005		2005		2005		2005 (1)			2004
	(Unaudited, in thousands except per share amounts)
Statement of Operations Data:
Net revenues	$	47,701	$	46,268		$	43,708	$	46,378	$	45,327	$	43,984	$	40,256		$	39,439
Gross profit		29,603		27,718			25,825		27,345		26,767		26,068		19,392			23,403
Income (loss) from operations		971		(874	)		829		2,435		1,789		815		(5,400	)		(855	)
Net income (loss)		1,292		(152	)		1,154		2,238		2,207		1,437		(3,167	)		517
Net income (loss) per share:
Basic	$	0.05	$	(0.01	)	$	0.05	$	0.09	$	0.09	$	0.06	$	(0.12	)	$	0.02

Diluted (2)	$	0.05	$	(0.01	)	$	0.05	$	0.09	$	0.09	$	0.06	$	(0.12	)	$	0.02


Shares used in computing net income (loss) per share:
Basic		25,874		25,753			25,425		25,388		25,183		25,111		25,368			25,600

Diluted (2)		27,087		25,753			25,577		25,596		25,400		25,652		25,368			25,930


(1)		During the fourth quarter of 2004 we recorded a charge of $3.2 million for costs associated with the testing of the RTSX-S space qualified FPGAs and the write down of RTSX-S inventory from the original manufacturer.

(2)		For the first quarter of 2006 and the fourth quarter of 2004, 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 those periods.


	Jul. 2,			Apr. 2,			Jan. 1,			Oct. 2,			Jul. 3,			Apr. 3,			Jan. 2,			Oct. 3,
	2006			2006			2006			2005			2005			2005			2005			2004
As a Percentage of Net Revenues:
Net revenues		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%
Gross profit		62			60			59			59			59			59			48			59
Income (loss) from operations		2			(2	)		2			5			4			2			(13	)		(2	)
Net income (loss)		3			0			3			5			5			3			(8	)		1

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of July 2, 2006, our investment portfolio consisted primarily of corporate bonds, floating rate short term 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 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.

We are exposed to financial market risks, including changes in interest rates. All of the potential changes noted below are based on sensitivity analysis performed on our financial position and expected operating levels at July 2, 2006. Actual results may differ materially.

Our investments are subject to interest rate risk. During the six months ended July 2, 2006, interest rates available in the market for government and corporate bonds experienced an increase. During that time the market value of our investment portfolio consisting of government and corporate bonds decreased $0.4 million. A further 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 to maturity. A hypothetical 100 basis point increase in interest rates would result in a reduction of approximately $1.8 million in the fair value of our available-for-sale securities held at July 2, 2006.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting.

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Information with respect to this Item may be found in Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements in this Form 10-Q, which information is incorporated into this Item 1 by reference.

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 Report and in our other filings with the SEC, including our Annual Report on Form 10-K for the year ended January 1, 2006, 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.

Our future revenues and operating results are likely to fluctuate and may fail to meet expectations, which could cause our stock price to decline, perhaps significantly.

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 (but not limited to) booking and shipment uncertainties, supply problems, price erosion, and other risks described in this Report. These and other factors make it difficult for us to accurately project quarterly revenues and operating results, which may fail to meet our expectations. Any failure to meet expectations could cause our stock price to decline significantly.

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A variety of booking and shipping uncertainties may cause our quarterly revenues and/or operating results to fall short of 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.

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” will have an immediate and adverse impact on quarterly revenues. There are many factors that can cause a shortfall in turns, 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 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.

Our military and aerospace shipments tend to be large monetarily 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.

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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.

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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 has become more significant as the cost and complexity of photomask sets has continued 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.

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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. In addition, if these estimates or their related assumptions change in the future, 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.

Our products are complex and may contain errors or defects that could have a materially adverse effect on our business, financial condition, and operating results.

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 has 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 will continue.

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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.

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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.

We may be unsuccessful in defining, developing, or selling competitive new or improved products at acceptable margins.

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.

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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 should 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 and particularly our sales and marketing organization. Our failure to meeting these challenges could have a materially adverse effect on our business, financial condition, and/or operating results.

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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.

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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.

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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.

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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.

We face intense competition and have some competitive disadvantages that we may not be able to overcome.

The semiconductor industry is intensely competitive. Our competitors include suppliers of hard-wired ASICs, CPLDs, and FPGAs. Our biggest direct competitors are Xilinx, Inc. (Xilinx), Altera Corporation (Altera), and Lattice Semiconductor Corporation (Lattice), all of which are suppliers of CPLDs and SRAM-based FPGAs; and QuickLogic Corporation, a supplier of antifuse-based FPGAs. Altera and Lattice also recently 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.

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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.

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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.

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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.

Our business and operations may be disrupted by events that are beyond our control or the control of our business partners.

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. This type of disruption could impair our operations, which may have a materially adverse effect on our business, financial condition, and/or operating results.

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.

Our business depends on numerous independent third parties whose interests may diverge from our interests.

We rely heavily on, but generally have little control over, our independent foundries, suppliers, subcontractors, and distributors.

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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.

We will not generate significant revenues from the sale of RH products for some time after our supply of RH1020 and RH1280 parts is exhausted.

During the second quarter of 2005, we informed customers that our RH1020 and RH1280 parts had been discontinued and provided customers with a last-time opportunity to purchase such parts, subject to availability. We typically have generated quarterly revenues of several million dollars from the sale of RH parts. After our supply of RH1020 and RH1280 parts is exhausted, which we anticipate will occur by the end of 2006, we will generate minimal revenue from the sale of RH parts (in contrast to revenue from the sale of RT parts, which may actually benefit from the discontinuation) until sales of our RHAX250S part begin to ramp. Delivery of RHAX250S production parts is planned during the first half of 2007. Our quarterly revenues will be adversely affected by any decline in revenue from the sale of RH parts.

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.

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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.

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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.

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

In 2005, sales made through distributors accounted for 64% of our net revenues. 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. Unique and Avnet accounted for 30% of our net revenues in 2005. 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.

Fluctuations in the level of price concessions provided to our distributors can affect our operating results.

In accordance with our distribution agreements and industry practice, we have granted our distributors the contractual right to return certain amounts of unsold product on a periodic basis and also to receive price concessions for unsold product in the case of a subsequent decrease in list prices. We also 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. An overall increase in the level of price concessions provided to our distributors will reduce our gross margin.

We are subject to all of the risks and uncertainties associated with 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 generally 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.

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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.

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

Sales to customers outside North America accounted for 44% of net revenues 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.

Our revenues and operating results may be adversely affected by downturns or other changes in the general economy, in the semiconductor industry, in our major markets, or at our major customers.

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.

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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.

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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 41% of our net revenues for 2005. 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 future downturn in the military and aerospace market could have a materially adverse effect on our revenues and/or operating results.

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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.

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Our revenues and/or operating results may be adversely affected by future downturns at any 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 EPGA 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.

Changing accounting, corporate governance, public disclosure, or tax rules or practices could have a materially adverse effect on our business, financial condition, and operating results.

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.

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Changes in accounting for equity compensation will adversely affect 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 require 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 materially adverse 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 will incur increased out-of-pocket compensation costs and may change our equity compensation strategy, which could make it difficult to attract, retain, and motivate employees. Any of these results could materially and adversely affect our business and/or operating results.

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

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 and uncertainty. We are committed to maintaining high standards of corporate governance and public disclosure, and therefore intend to invest the resources necessary to comply with evolving laws, regulations, and standards. This investment may result in increased general and administrative expenses as well as a diversion of management time and attention from revenue-generating activities to compliance activities. These new or changed laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity. As a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. 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. We are currently involved in an arbitration with BTR. 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.


Exhibit Number		Description
10.17 (1)		2006 Key Employee Incentive Plan.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


						ACTEL CORPORATION

		Date: August 10, 2006

						/s/ Jon A. Anderson

						Jon A. Anderson
						Vice President of Finance
						and Chief Financial Officer
						(as Principal Financial Officer
						and on behalf of Registrant)


Exhibit Number		Description
10.17 (1)		2006 Key Employee Incentive Plan.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
ITEM 1A. RISK FACTORS
Item 6. Exhibits
SIGNATURE
Exhibit Index
EXHIBIT 10.17
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32


(1)		This Exhibit is a management contract or compensatory plan or arrangement.