Annual Reports

 
Quarterly Reports

  • 10-Q (Aug 13, 2010)
  • 10-Q (May 14, 2010)
  • 10-Q (Nov 12, 2009)
  • 10-Q (Aug 14, 2009)
  • 10-Q (May 15, 2009)
  • 10-Q (Nov 12, 2008)

 
8-K

 
Other

Actel 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
e10vq
Table of Contents

 
 
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 October 5, 2008
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-21970
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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
o Large accelerated filer   þ Accelerated filer   o Non-accelerated filer   o Smaller reporting company
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     Number of shares of Common Stock outstanding as of November 10, 2008: 25,763,896
 
 

 


 


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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     Nine Months Ended  
    Oct. 5,     July 6,     Sept. 30,     Oct. 5,     Sept. 30,  
    2008     2008     2007     2008     2007  
Net revenues
  $ 53,215     $ 57,649     $ 47,880     $ 165,620     $ 145,274  
Costs and expenses:
                                       
Cost of revenues
    22,343       23,035       19,306       68,116       59,072  
Research and development
    16,995       17,103       13,754       50,807       48,251  
Selling, general, and administrative
    15,038       15,613       14,800       47,431       46,285  
Amortization of acquisition-related intangibles
    458                   458        
 
                             
Total costs and expenses
    54,834       55,751       47,860       166,812       153,608  
 
                             
Income (loss) from operations
    (1,619 )     1,898       20       (1,192 )     (8,334 )
Interest income and other, net
    465       1,701       2,156       4,098       6,376  
 
                             
Income (loss) before tax provision (benefit)
    (1,154 )     3,599       2,176       2,906       (1,958 )
Tax provision (benefit)
    219       1,635       391       2,139       (351 )
 
                             
Net income (loss)
  $ (1,373 )   $ 1,964     $ 1,785     $ 767     $ (1,607 )
 
                             
Net income (loss) per share:
                                       
Basic
  $ (0.05 )   $ 0.08     $ 0.07     $ 0.03     $ (0.06 )
 
                             
Diluted
  $ (0.05 )   $ 0.08     $ 0.07     $ 0.03     $ (0.06 )
 
                             
Shares used in computing net income (loss) per share:
                                       
Basic
    25,726       25,408       26,935       25,873       26,842  
 
                             
Diluted
    25,726       26,155       27,234       26,267       26,842  
 
                             
See Notes to Unaudited Condensed Consolidated Financial Statements

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ACTEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
                 
    October 5,     Jan. 6,  
    2008     2008(1)  
    (unaudited)          
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 25,832     $ 30,119  
Short-term investments
    107,559       152,609  
Accounts receivable, net
    29,588       18,116  
Inventories
    56,183       35,587  
Deferred income taxes
    19,331       19,350  
Prepaid expenses and other current assets
    7,757       10,259  
 
           
Total current assets
    246,250       266,040  
Long-term investments
    11,296       6,442  
Property and equipment, net
    35,442       25,417  
Goodwill and other intangible assets, net
    37,533       30,197  
Deferred income taxes
    17,245       16,082  
Other assets, net
    20,843       19,438  
 
           
 
  $ 368,609     $ 363,616  
 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current liabilities:
               
Accounts payable
  $ 22,439     $ 16,972  
Accrued compensation and employee benefits
    8,541       6,181  
Accrued licenses
    3,861       4,927  
Other accrued liabilities
    5,484       3,941  
Deferred income on shipments to distributors
    35,972       26,109  
 
           
Total current liabilities
    76,297       58,130  
Deferred compensation plan liability
    4,682       5,479  
Deferred rent liability
    1,419       1,417  
Accrued sabbatical compensation
    3,380       3,380  
Other long-term liabilities, net
    5,424       3,718  
 
           
Total liabilities
    91,202       72,124  
Commitments and contingencies
               
Shareholders’ equity:
               
Common stock
    25       26  
Additional paid-in capital
    229,514       231,491  
Retained earnings
    49,471       59,189  
Accumulated other comprehensive (loss) income
    (1,603 )     786  
 
           
Total shareholders’ equity
    277,407       291,492  
 
           
 
  $ 368,609     $ 363,616  
 
           
 
(1)   Derived from audited financial statements included in the Form 10-K filed with the Securities and Exchange Commission for the year ended January 6, 2008 (“2007 Form 10-K”).
See Notes to Unaudited Condensed Consolidated Financial Statements

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ACTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
                 
    Nine Months Ended  
    Oct. 5, 2008     Sep. 30, 2007  
Operating activities:
               
Net income (loss)
  $ 767     $ (1,607 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities net of effects of acquired business:
               
Depreciation and amortization
    8,896       7,726  
Loss on fixed assets
    244        
Investment impairment
    873          
Stock compensation costs
    6,581       6,242  
Wafer prepayment charge
          3,700  
Changes in operating assets and liabilities:
               
Accounts receivable
    (10,630 )     (11,903 )
Inventories
    (20,175 )     831  
Deferred income taxes
    327       (411 )
Prepaid expenses and other current assets
    2,502       767  
Other assets, net
    (2,101 )     3,245  
Accounts payable, accrued compensation and employee benefits, and other accrued liabilities
    9,375       (12,942 )
Deferred income on shipments to distributors
    9,759       5,455  
 
           
Net cash provided by operating activities
    6,418       1,103  
Investing activities:
               
Purchases of property and equipment
    (18,706 )     (9,080 )
Purchases of available-for-sale securities
    (52,961 )     (36,538 )
Sales and maturities of available-for-sale securities
    88,424       37,345  
Acquisition of Pigeon Point, net of cash acquired
    (8,350 )      
Changes in other long term assets
    (44 )     (53 )
 
           
Net cash provided by (used in) investing activities
    8,363       (8,326 )
Financing activities:
               
Tax withholding on restricted stock
    (666 )     (2,245 )
Receipt of price differential for remeasured options
          338  
Issuance of common stock under employee stock plans
    6,540        
Repurchase of common stock
    (24,942 )      
 
           
Net cash used in financing activities
    (19,068 )     (1,907 )
 
           
Net decrease in cash and cash equivalents
    (4,287 )     (9,130 )
Cash and cash equivalents, beginning of period
    30,119       33,699  
 
           
Cash and cash equivalents, end of period
  $ 25,832     $ 24,569  
 
           
Supplemental disclosures of cash flow information:
               
Cash paid during the period for income taxes, net
  $ 72     $ 168  
Accrual of long-term license agreement
  $ 4,651     $ 2,549  
See Notes to Unaudited Condensed Consolidated Financial Statements

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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 condensed consolidated 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.
     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 are based on our unaudited condensed consolidated financial statements. Our fiscal year ends the first Sunday on or after December 30th, and our fiscal quarters end the first Sunday on or after March 30, June 30 and September 30.
     These unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries. All 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 2007 Form 10-K. The results of operations for the three and nine months ended October 5, 2008, are not necessarily indicative of future operating results.
     Income Taxes
     Our tax provision (benefit) is based on an estimated annual tax rate in compliance with Statement on Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes, and Accounting Principles Board (“APB”) Opinion No. 28, Interim Financial Reporting. Significant components affecting the tax rate include R&D credits, the composite state tax rate, recognition of certain deferred tax assets subject to valuation allowances, and non-deductible stock-based compensation expense.
     Our net deferred tax assets were $36.6 million at October 5, 2008. We continue to assess the recoverability of the deferred tax assets on an ongoing basis. If we subsequently conclude that it is more likely than not that all or a portion of the deferred tax assets will not be recovered, an additional valuation allowance against deferred tax assets will be necessary. Our income tax expense recorded in the future will be increased to the extent of offsetting increases in our valuation allowance.
     Impact of Recently Issued Accounting Standards
     In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”), which amends the accounting for business acquisitions. SFAS 141R is effective for fiscal years beginning after December 15, 2008, and will be adopted by Actel in the first quarter of fiscal 2009. The effect of the adoption of SFAS 141R on our condensed consolidated financial statements will depend on future business combination transactions, if any.
     In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. This FSP will be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and will be adopted by Actel in the first quarter of fiscal 2009. Early adoption is prohibited. The effect of the adoption of FSP 142-3 on our condensed consolidated financial statements will depend on future business combination transactions, if any.

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     In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP 157-3”). This FSP clarifies the application of SFAS No. 157, Fair Value Measurements (“SFAS 157”), in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective upon issuance, including prior periods for which financial statements have not been issued. The adoption of this FSP did not have an impact on our condensed consolidated financial statements.
2. Fair Value Measurement of Financial Instruments
     On January 7, 2008, we adopted the provisions of SFAS 157, which require us to determine the fair value of financial assets and liabilities using a specified fair-value hierarchy. The objective of the fair-value measurement of our financial instruments is to reflect the hypothetical amounts at which we could sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date (exit price). SFAS 157 describes three levels of inputs that may be used to measure fair value, as follows:
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 inputs are unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability.
The following table summarizes our financial instruments measured at fair value on a recurring basis in accordance with SFAS 157 as of October 5, 2008 (in thousands):
                                 
    Fair Value Measurements Using
            Quoted Prices in        
            Active Markets   Significant Other   Significant
            for Identical   Observable Inputs   Unobservable
Description   Total   Assets (Level 1)   (Level 2)   Inputs (Level 3)
 
Assets:
                               
Available-for-sale securities (1)
  $ 130,963     $ 12,108     $ 118,855        
 
(1)   Included in cash and cash equivalents, short-term and long-term investments on our condensed consolidated balance sheet.
     Our available-for-sale securities are classified within Level 1 or Level 2 of the fair-value hierarchy. The types of securities valued based on Level 1 inputs include money market securities. The types of securities valued based on Level 2 inputs include U.S. government agency notes, corporate and municipal bonds, and asset-backed obligations.
     During the third quarter of 2008, we evaluated indicators of impairment during our review of our investment portfolio. With respect to determining an other-than-temporary impairment charge, our evaluation included reviewing:
    The length of time and extent to which the market value of the investment has been less than cost.
 
    The financial condition and near-term prospects of the issuer, including any specific events that may influence the operations of the issuer.
 
    Our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.
     In light of the bankruptcy filing by Lehman Brothers, we concluded that our investment in Lehman Brothers’ corporate bonds is other-than-temporarily impaired and therefore wrote down the investment in the third quarter of 2008 to its fair market value. The impairment charge of approximately $0.9 million was included in interest income and other, net on our condensed consolidated statement of operations for the three and nine months ended October 5, 2008.
     Excluding the impact of the Lehman Brothers bond, the Company’s investment portfolio reflected net unrealized losses of $2.6 million as of October 5, 2008. Although the current credit environment continues to be extremely volatile and uncertain, we do not

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believe that sufficient evidence exists at this point in time to conclude that any of our remaining investments have experienced an other-than-temporary impairment as of the third quarter of 2008. We continue to monitor our investments closely to determine if additional information becomes available that may have an adverse impact on the fair value and ultimate realizability of our investments.
3. Stock Based Compensation
Determining Fair Value
     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.
     The fair value of the Company’s stock options granted to employees was estimated using the following weighted-average assumptions for the periods presented:
                                 
    Three Months   Nine Months
    Ended   Ended
    Oct. 5,   Sept. 30,   Oct. 5,   Sept. 30,
    2008   2007   2008   2007
Option Plan Shares
                               
Expected term (in years)
    6.0       4.8       5.6       4.8  
Volatility
    39.2 %     42.0 %     39.0 %     43.5 %
Risk-free interest rate
    3.2 %     4.6 %     3.0 %     4.7 %
Weighted-average fair value per share
  $ 6.02     $ 4.88     $ 6.06     $ 6.20  
ESPP Shares
                               
Expected term (in years)
    1.25             1.25        
Volatility
    42 %           42 %      
Risk-free interest rate
    2.12 %           2.12 %      
Weighted-average fair value per share
  $ 4.01           $ 4.01        
Stock-Based Compensation Expense
     The Company recorded $2.3 million and $6.6 million of stock-based compensation expense for the three and nine months ended October 5, 2008, respectively, and $1.6 million and $6.2 million for the three and nine months ended September 30, 2007, respectively (in thousands):
                 
    Three Months Ended  
    Oct. 5, 2008     Sep. 30, 2007  
Cost of revenues
  $ 99     $ 120  
Research and development
    1,212       837  
Selling, general, and administrative
    974       667  
 
           
Total stock-based compensation expense, before income taxes
    2,285       1,624  
Tax benefit
    412       288  
 
           
Total stock-based compensation expense, net of income taxes
  $ 1,873     $ 1,336  
 
           
                 
    Nine Months Ended  
    Oct. 5, 2008     Sep. 30, 2007  
Cost of revenues
  $ 296     $ 444  
Research and development
    3,182       3,209  
Selling, general, and administrative
    3,103       2,589  
 
           
Total stock-based compensation expense, before income taxes
    6,581       6,242  
Tax benefit
    1,244       1,108  
 
           
Total stock-based compensation expense, net of income taxes
  $ 5,337     $ 5,134  
 
           
     Stock-based compensation expense for the three and nine months ended September 30, 2007, includes approximately $23,000 and $0.9 million, respectively, associated with the extension of options that were scheduled to expire in the first three quarters of fiscal

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2007 during the stock option investigation blackout period. The Company agreed to extend the life of the expiring options for continuing employees until 30 days following the end of the blackout period. This extension represented a modification to these options and resulted in the additional charge during the three and nine months ended September 30, 2007, of approximately $23,000 and $0.7 million, respectively. In addition, the Company agreed to extend the life of the expiring options for certain terminated employees until 30 days following the end of the blackout period. This extension represented a modification to these options and resulted in the additional charge during the three and nine months ended September 30, 2007, of $0 and $0.2 million, respectively.
Stock Option Plans
     The following table summarizes our stock option activity and related information for the nine months ended October 5, 2008:
                                 
                    Weighted-Average     Aggregate  
    Number     Weighted-Average     Remaining     Intrinsic Value  
Options   of Shares     Exercise Price     Contractual Term     (in thousands)  
Outstanding at January 6, 2008
    5,873,426     $ 16.07                  
Granted
    1,121,835       13.87                  
Exercised
    (362,805 )     12.07                  
Forfeitures and cancellations
    (374,133 )     16.01                  
 
                           
Outstanding at October 5, 2008
    6,258,323     $ 16.12       6.12     $ 4,663  
 
                       
Vested and expected to vest at October 5, 2008
    6,283,383     $ 16.10       6.06     $ 4,480  
 
                       
Exercisable at October 5, 2008
    4,049,826     $ 17.59       4.53     $ 984  
 
                       
Employee Stock Purchase Plan (ESPP)
     The Company resumed accepting employee contributions under the Company’s Employee Stock Purchase Plan (ESPP) program in February 2008 for the purchase period that ended on July 31, 2008. The current purchase period ends on January 31, 2009. The Company recorded $0.7 million and $2.1 million of stock-based compensation expense relating to the ESPP for the three months and nine months ended October 5, 2008, respectively.
Restricted Stock Units (RSUs)
     The following is a summary of RSU activity for the nine months ended October 5, 2008:
                 
            Weighted-Average  
    Number of shares     Grant Date Fair Value  
Unvested at January 6, 2008
    343,360     $ 13.03  
Granted
    122,923     $ 13.08  
Vested
    (113,466 )   $ 13.81  
Forfeited
    (16,632 )   $ 13.12  
 
           
Unvested at October 5, 2008
    336,185     $ 12.79  
 
           
Other Stock Option Related Expenses
     In September 2006, our Board of Directors appointed a “Special Committee” of independent directors to formally investigate our historical stock option grant practices and related accounting. The Special Committee presented its final report to the Board of Directors on March 9, 2007. Our management then performed its own detailed review of historical stock option grants. As a result of the Special Committee’s investigation and management’s review, we were delinquent in the filing of our reports with the SEC from November 16, 2006 (when the closing price of our Common Stock was $19.03) through February 10, 2008 (when the closing price of our Common Stock was $11.47). During this 15-month “Blackout Period,” our employees were prohibited from exercising their stock options.
     While employee stock options that would otherwise have expired during the Blackout Period were extended by the Compensation Committee of the Board of Directors, these “Extended Options” were exercisable for only 30 days following the end of the Blackout Period. On March 11, 2008 (when the closing price of our Common Stock was $12.83), the Compensation Committee authorized cash payments aggregating approximately $1.0 million to redress employees for their inability to exercise Extended Options during the

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Blackout Period. Since these cash payments were authorized on March 11, 2008, the Company recorded compensation expense of approximately $1.0 million in the quarter ended April 6, 2008. These costs are not considered “stock-based compensation costs” for purposes of SFAS 123R disclosures in the accompanying condensed consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.
4. Credits to Distributors
     We sell our products to distributors who resell our products to original equipment manufacturers (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, effectively representing gross margin, are recorded as “Deferred income on shipments to distributors” in the liability section of the condensed consolidated balance sheet. The amount of deferred income that we actually recognize in future periods will be less than the originally recorded deferred income as a result of negotiated price reductions, which we credit back to the distributor after the resale transaction is complete. In other words, a portion of the deferred income on shipments to distributors recorded on our balance sheet will be credited back to distributors in the future. Based upon historical trends and inventory levels on hand at each of our distributors as of October 5, 2008, we currently estimate that approximately $15.2 million of the deferred income on shipments to distributors on the Company’s balance sheet as of October 5, 2008, will be credited back to the distributors in the future. All amounts credited back to the distributors in the future will not be recognized as revenue (or gross margin) in our condensed consolidated statements of operations.
     Our payment terms generally require the distributor to settle amounts owed to us based on list price, which generally are in excess of their actual cost due to price adjustments and credits. Accordingly, we generally credit back to the distributor a portion of their original purchase price, usually within 30 days after the resale transaction has been reported to the Company. This practice has an adverse impact on the working capital of our distributors since they are required to pay the full list price to Actel and receive a subsequent discount only after the product has been sold to a third party. As a consequence, beginning in the third quarter of fiscal 2007, we entered into written business arrangements with certain distributors under which we issue advance credits to the distributors to minimize the adverse impact on the distributor’s working capital. The advance credits generally amount to a month of credits based on an average of actual historical credits over the prior quarter. The advance credits are updated and settled on a quarterly basis. The advance credits have no affect on our revenue recognition since revenue from distributors is not recognized until the distributor sells the product, but the advance credits reduce our accounts receivable and deferred income on shipments to distributors as reflected in our condensed consolidated balance sheet. The amount of the advance credit as of October 5, 2008, was $7.0 million.
5. Goodwill and Other Intangible Assets
     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 impairment test as of January 6, 2008, and noted no impairment. Our next annual impairment test will be performed in the fourth quarter of 2008. No indicators of impairment were present as of October 5, 2008.
     Our net goodwill was $32.4 million at the end of the third quarter of 2008 and $30.2 million at the end of the fourth quarter of 2007. Net goodwill increased by $2.4 million due to our acquisition of Pigeon Point Systems in the third quarter of 2008, which was partially offset by a slight decrease due to the realization of certain net operating loss carryforwards associated with our acquisition of Gatefield Corporation in 2000. We had originally established a valuation allowance for a portion of the net operating loss carryforwards acquired in connection with the acquisition of Gatefield. To the extent such valuation allowance is subsequently reversed as a result of the realization of the deferred tax asset, SFAS No. 109, Accounting for Income Taxes, requires that the offsetting credit is recognized first as a reduction of goodwill.
     During the third quarter of fiscal 2008, the Company acquired $5.4 million of identified intangible assets in connection with the acquisition of Pigeon Point Systems. As a result of this, we recorded $0.3 million in amortization of identified intangible assets for the three and nine months ended October 5, 2008. See Note 12.

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6. Inventories
     Inventories consist of the following:
                 
    Oct. 5,     Jan. 6,  
    2008     2008  
    (In thousands)  
Inventories:
               
Purchased parts and raw materials
  $ 16,778     $ 7,185  
Work-in-process
    25,519       17,253  
Finished goods
    13,886       11,149  
 
           
 
  $ 56,183     $ 35,587  
 
           
     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 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. If 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 in an amount 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 was 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.
     “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, 2005, and 2007. 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. Evaluations of last-time-buy inventory during the first nine months of 2008 resulted in $0.5 million of write downs of this material. Net inventory as of October 5, 2008, included $2.1 million of last-time-buy material.
     Net inventory increased $20.6 million from the end of 2007 due to an inventory build-up of new Flash products, including Fusion, Igloo, and ProASIC3. The Company has historically built-up inventories of new products early in their life cycles, but the recent build-up in inventory for the new Flash products was particularly pronounced due to a conscious effort to support increased turns business and shorter lead times for the consumer products at which the new Flash products are targeted. In addition, while the sales of Flash products during the third quarter of 2008 increased approximately 15% as compared with the second quarter of fiscal 2008, they were still well below our original expectations and, as a result of the overall slowdown in the global economy, we are currently expecting that sales of Flash products will continue to grow at a much slower pace than we had expected earlier in the year. This has resulted in a substantial increase in our inventory levels as of October 5, 2008. Beginning August 2008, we reduced our wafer starts for Flash products to the lowest levels practicable. We will continue to restrict Flash wafer starts from the fourth quarter of 2008 and beyond based on inventory levels and forecast sales of Flash products. However, we do not believe that there are currently any inventory obsolescence issues since the growth in our inventory consists of new Flash products, which are still attractive to our targeted customer base. We continue to focus our efforts on growing the Flash segment of our business and to monitor market trends

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and significant events that may have an adverse impact on the carrying value of our inventory, but we do not believe that sufficient evidence exists at this point in time to conclude that additional inventory write-downs are required.
7. Earnings per Share
     The following table sets forth the computation of basic and diluted earnings per share:
                                         
    Three Months Ended     Nine Months Ended  
    Oct. 5,     Jul. 6,     Sept. 30,     Oct. 5,     Sept. 30,  
    2008     2008     2007     2008     2007  
    (unaudited, in thousands except per share amounts)  
Basic:
                                       
Weighted-average common shares outstanding
    25,726       25,408       26,935       25,873       26,842  
 
                             
Net income (loss)
  $ (1,373 )   $ 1,964     $ 1,785     $ 767     $ (1,607 )
 
                             
Net income (loss) per share
  $ (0.05 )   $ 0.08     $ 0.07     $ 0.03     $ (0.06 )
 
                             
Diluted:
                                       
Weighted-average common shares outstanding
    25,726       25,408       26,935       25,873       26,842  
Net effect of dilutive employee stock options — based on the treasury stock method
          747       299       394        
 
                             
Shares used in computing net income per share
    25,726       26,155       27,234       26,267       26,842  
 
                             
Net income (loss)
  $ (1,373 )   $ 1,964     $ 1,785     $ 767     $ (1,607 )
 
                             
Net income (loss) per share
  $ (0.05 )   $ 0.08     $ 0.07     $ 0.03     $ (0.06 )
 
                             
     Basic earnings per share are calculated based on net earnings and the weighted-average number of shares of common stock outstanding during the reported period. Diluted earnings per share are calculated similarly, except that the weighted-average number of common shares outstanding during the period are increased by the number of additional shares of common stock that would have been outstanding if dilutive potential shares of common stock had been issued. The dilutive effect of potential common stock (including outstanding stock options, unvested restricted stock, ESPP shares and non-employee director stock units) is reflected in diluted earnings per share by application of the treasury stock method, which includes consideration of share-based compensation as required by SFAS 123(R).
     For the three months ended October 5, 2008 and the nine months ended September 30, 2007, we incurred a net loss and the inclusion of potentially dilutive shares of common stock in the shares used for computing diluted earnings per share would have been anti-dilutive and would have reduced the net loss per share. Accordingly, all potentially dilutive shares of common stock have been excluded from the shares used to calculate diluted earnings per share for those periods.
     For the nine months ended October 5, 2008, options outstanding under our stock option plans to purchase approximately 5,075,267 shares 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 three months ended July 6, 2008, options outstanding under our stock option plans to purchase approximately 2,727,533 shares 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 three months ended September 30, 2007, options outstanding under our stock option plans to purchase approximately 5,210,000 shares 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.

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8. Comprehensive Income (Loss)
     The components of comprehensive income (loss), net of tax, are as follows:
                                         
    Three Months Ended     Nine Months Ended  
    Oct. 5,     Jul. 6,     Sept. 30,     Oct. 5,     Sept. 30  
    2008     2008     2007     2008     2007  
    (unaudited, in thousands)  
Net income (loss)
  $ (1,373 )   $ 1,964     $ 1,785     $ 767     $ (1,607 )
Change in gain (loss) on available-for-sale securities, net of tax amounts of ($1,138), ($366), $328, ($1,534) and 293, respectively
    (1,814 )     (583 )     522       (2,447 )     468  
Reclassification adjustment for gains (losses) included in net income, net of tax amounts of $63, ($18), ($1), $35 and ($4), respectively
    101       (28 )     (1 )     58       (7 )
 
                             
Other comprehensive gain (loss), net of tax amounts of ($1,075), ($384), ($327), ($1,499) and $289 respectively
    (1,713 )     (611 )     521       (2,389 )     461  
 
                             
Total comprehensive income (loss)
  $ (3,086 )   $ 1,353     $ 2,306     $ (1,622 )   $ (1,146 )
 
                             
     Accumulated other comprehensive income (loss) is presented on the accompanying condensed consolidated balance sheets and consists of the accumulated net unrealized gain on available-for-sale securities.
9. 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. 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, or results of operations or cash flows.
     Actel was a nominal defendant in a consolidated shareholder derivative action filed in the United States District Court for the Northern District of California (the “Court”) against certain current and former officers and Directors. Under the terms and conditions of a settlement agreement submitted to the Court for approval, Actel and its insurer paid plaintiffs’ counsel attorneys’ fees and reimbursement of expenses in the aggregate amount of $1.75 million, of which the Company paid $237,500. On July 7, 2008, the Court signed an order granting final approval of the settlement agreement. The order reduced the plaintiffs’ attorney fees from $1.75 million to approximately $1.22 million, as a result of which the Company received a refund of approximately $85,000.
10. Commitments
     As of October 5, 2008, the Company had approximately $9.2 million of remaining non-cancelable obligations to providers of electronic design automation software expiring at various dates through 2012. The current portion of these obligations is recorded in “Accrued licenses” and the long-term portion of these obligations is recorded at net present value in “Other long-term liabilities, net” on the accompanying balance sheet. Approximately $2.1 million and $15.8 million of these contractual obligations are recorded in “Prepaid expenses and other current assets” and “Other assets, net”, respectively.
11. 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 nine months ended October 5, 2008 we repurchased 1,937,061 shares of our common stock for $24.9 million. During the second quarter of 2008 the Board of Directors authorized the Company to repurchase up to one million additional shares of common stock under the Company Stock Repurchase program. As of October 5, 2008, we had remaining authorization to repurchase up to 1,673,742 shares.
12. Acquisition
     On July 9, 2008, the Company acquired 100% of the stock of Pigeon Point Systems for a total purchase price of approximately $11.7 million including acquisition costs. Of this purchase price, a cash payment of $8.4 million was made at closing, no equity interests were issued and contingent payments of up to $3 million may be made through 2010. The results of operations for Pigeon Point Systems, since the date of acquisition, have been included in the condensed consolidated financial statements. Pigeon Point

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Systems is a privately-held supplier of telecommunications computing architecture (TCA) management components. As a result of the stock purchase, Pigeon Point Systems became a wholly-owned subsidiary of the Company. The acquisition of Pigeon Point Systems will allow Actel to offer a complete solution for proprietary and standards-based system management implementations in the industrial, military, telecommunications, and medical markets.
     The purchase price allocation relating to the tangible and intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date are as follows (in thousands):
         
Tangible assets acquired and liabilities assumed
  $ 728  
Identifiable intangible assets
    5,440  
In-process research and development
    120  
Goodwill
    2,399  
 
     
Total purchase price, excluding contingent payments
  $ 8,687  
 
     
     Pigeon Point Systems’ in-process research and development valued at $120,000 as of the acquisition date was written off in the period of acquisition. The contingent payment amount of $3 million relates to securing the representations, warranties and indemnities of the shareholders of Pigeon Point Systems. Half of this amount will be paid in July 2009 and the other remaining half, less any permissible deductions, will be paid in July 2010 subject to continuing employment of certain key Pigeon Point Systems employees. Since these payments are contingent on continuing employment, such amounts will be recorded as compensation expense as service is rendered over the two year contingent payment period. Supplemental proforma information for Pigeon Point Systems is not material to Actel’s condensed consolidated financial statements and therefore is not presented.
     The recorded values and estimated useful lives of the intangibles acquired from Pigeon Point Systems were:
                 
    Estimated        
    Fair Value     Useful Life  
    (in thousands)     (in years)  
Existing technology
  $ 3,670       7  
Customer relationships — Support
    490       7  
Customer relationships — Consulting
    220       4  
Customer backlog
    290       0.5  
Tradename
    470       10  
Other
    300       4  
 
             
Total acquired identifiable intangible assets
  $ 5,440          
 
             
13. Subsequent Events
     On October 16, 2008, we announced a 10 percent reduction in force to improve our operating results. Approximately 60 positions were eliminated. Operating results for the fourth quarter of 2008 will be adversely affected by accounting charges related to the reduction in force, which the Company currently estimates will be about $3.0 million. The Company anticipates that all cash payments related to the reduction in force will be made by January 31, 2009.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
     You should read the following discussion of our financial condition and results of operations in conjunction with our Condensed Consolidated Financial Statements and the related Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and the future results of our Company that are based on current expectations, estimates, forecasts, and projections about the industry in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report under the section entitled “Risk Factors” in Item 1A of Part II and elsewhere, and in other reports we file with the Securities and Exchange Commission (“SEC”). We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Critical Accounting Policies and Estimates
     Our discussion and analysis of our financial condition and results of operations is based upon our condensed 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 SEC 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, stock-based compensation and income taxes. 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 are less likely to have a material effect 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. There have been no significant changes in our critical accounting estimates during the nine months ended October 5, 2008, from the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended January 6, 2008.
Results of Operations
                                                                 
    Three Months Ended   Nine Months Ended
    (a)   (b)   % change   (c)   % change   (d)   (e)   % change
(dollars in thousands)   Oct. 5, 2008   Jul. 6, 2008   (a/b)   Sept. 30, 2007   (a/c)   Oct. 5, 2008   Sept. 30, 2007   (d/e)
Net revenues
  $ 53,215     $ 57,649       (8 %)   $ 47,880       11 %   $ 165,620     $ 145,274       14 %
Gross margin
  $ 30,872     $ 34,614       (11 %)   $ 28,574       8 %   $ 97,504     $ 86,202       13 %
% of net revenues
    58 %     60 %             60 %             59 %     59 %        
Research and development
  $ 16,995     $ 17,103       (1 %)   $ 13,754       24 %   $ 50,807     $ 48,251       5 %
% of net revenues
    32 %     30 %             29 %             31 %     33 %        
Selling, general, and administrative
  $ 15,038     $ 15,613       (4 %)   $ 14,800       2 %   $ 47,431     $ 46,285       2 %
% of net revenues
    28 %     27 %             31 %             29 %     32 %        
Amortization of acquisition-related intangibles
  $ 458     $       100 %   $       100 %   $ 458     $       100 %
 
    1 %     0 %             0 %             0 %     0 %        
Tax provision (benefit)
  $ 219     $ 1,635       (87 %)   $ 391       (44 %)   $ 2,139     $ (351 )     709 %
% of net revenues
    0 %     3 %             1 %             1 %     0 %        

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Net Revenues
     Net revenues were $53.2 million for the third quarter of 2008, an 8% decrease from the second quarter of 2008 and an 11% increase from the third quarter of 2007. Net revenues decreased between the third and second quarters of 2008 due to a 6% decrease in the number of units sold coupled with a 2% decrease in the overall average selling price of units sold (ASP). Unit shipment decreases were largely driven by lower unit sales of legacy products. The overall ASP decreased primarily as a result of lower sales of military and aerospace products. Net revenues for the third quarter of 2008 included $0.4 million in royalty revenue compared with $1.4 million for the second quarter of 2008, which included $1.0 million associated with the settlement of certain prior-year claims. Net revenues for the third quarter of 2008 increased 11% from the third quarter a year ago due to a 36% increase in the number of units shipped, which was partially offset by a 21% decrease in the overall ASP. The unit volume increase was due to increased sales of Flash products, which also contributed to the overall decline in ASP. Flash products typically carry lower ASPs than other product families.
     Net revenues were $165.6 million for the first nine months of 2008, a 14% increase from the first nine months of 2007. Net revenues for 2008 increased due to a 41% increase in unit shipments, which was offset in part by a 20% decrease in the overall ASP. The unit volume increase and lower overall ASP were due primarily to higher sales of Flash products.
Gross Margin
     Gross margin was 58% of net revenues for the third quarter of 2008 compared with 60% for the second quarter of 2008 and 60% for the third quarter of 2007. Gross margin decreased as a result of the mix of products sold, with lower sales of higher-margin aerospace/military products and a higher proportion of lower-margin Flash products. In addition, as noted above, royalty revenue was lower in the third quarter of 2008 compared with the second quarter of 2008.
     Gross margin remained relatively consistent at 59% of net revenues for the first nine months of 2008 and the first nine months of 2007.
     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 & Development (R&D)
     R&D expenditures were $17.0 million, or 32% of net revenues, for the third quarter of 2008 compared with $17.1 million, or 30% of net revenues, for the second quarter of 2008 and $13.8 million, or 29% of net revenues, for the third quarter of 2007. R&D spending decreased slightly in the third quarter of 2008 compared with the second quarter of 2008 due primarily to decreased spending on mask revisions, which was partially offset by increased costs associated with the acquisition of Pigeon Point Systems at the beginning of the third quarter. Compared with the third quarter of 2007, R&D spending increased $3.2 million due primarily to higher salaries and related payroll taxes and benefits associated with increased headcount coupled with operating expenses associated with the acquisition of Pigeon Point Systems. Recognition of stock-based compensation expense under SFAS 123(R) was $1.2 million for the third quarter of 2008 compared with $0.9 million for the second quarter of 2008 and $0.8 million for the third quarter of 2007.
     R&D expenditures were $50.8 million, or 31% of net revenues, for the first nine months of 2008 compared with $48.3 million, or 33% of net revenues, for the first nine months of 2007. R&D spending in 2008 increased due to increased spending on mask revisions, wafer development costs, and outside services and higher costs associated with increased headcount. R&D spending in 2007 included

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a $3.7 million wafer prepayment charge. Stock-based compensation expense was $3.1 million and $3.2 million for the nine months ended October 5, 2008, and September 30, 2007, respectively.
Selling, General and Administrative (SG&A)
     SG&A expenses were $15.0 million, or 28% of net revenues, for the third quarter of 2008 compared with $15.6 million, or 27% of net revenues, for the second quarter of 2008 and $14.8 million, or 31% of net revenues, for the third quarter of 2007. The decrease in SG&A costs in the third quarter of 2008 compared with the second quarter of 2008 was due mainly to reductions in bad-debt expenses, stock-compensation expenses, incentive-compensation, and legal expenses. SG&A expenses for the third quarter of 2008 increased slightly compared with the third quarter of 2007 due to increased sales of 11%, which resulted in increased selling costs, commissions, and incentive-compensation expenses. Stock-based compensation expense was $1.0 million, $1.1 million, and $0.7 million for the three months ended October 5, 2008, July 6, 2008, and September 30, 2007, respectively.
     SG&A expenses were $47.4 million, or 29% of net revenues, for the first nine months of 2008 compared with $46.3 million, or 32% of net revenues, for the first nine months of 2007. This increase was due mostly to higher selling costs, commissions, and incentive compensation, as noted above, which were partially offset by lower stock-option-investigation and related costs. Stock-option-investigation and related costs were $1.6 million for the 2008 period compared with $4.0 million for the 2007 period. Stock-based compensation expense under SFAS 123(R) was $3.1 million for the nine months ended October 6, 2008, compared with $2.6 million for the nine months ended September 30, 2007.
Tax Provision
     The provision for income taxes was based on an annual effective tax rate calculated in compliance with SFAS 109 and APB No. 28. The annual effective rate was calculated based on our expected level of profitability and includes the usage of federal and state tax credits. During the third quarter of fiscal 2008, the Company reported a tax provision of $0.2 million on a third quarter pre-tax loss of $1.2 million. The tax provision for the quarter reflects a cumulative catch up adjustment to the Company’s estimated annual effective tax rate. The year-to-date effective tax rate increased from 47% as of July 6, 2008 to 74% as October 5, 2008. While the Company benefited from the reinstatement of the federal R&D tax credit during the quarter this was more than offset by the impact of non-deductible stock-based compensation expense on sharply lower projected pre-tax profits for the year (resulting from the global economic downturn) coupled with expected non-recurring fourth quarter 2008 costs associated with the Company’s reduction in force.
     To the extent our level of profitability changes during the year, the 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 primarily to the effect of non-deductible SFAS 123(R) stock-based compensation expenses, which is partially offset by tax credits.
     For both the three and nine months ended September 30, 2007, the effective tax rate was 18%. The difference between the provision (benefit) for income taxes that would be derived by applying the statutory rate to our income (loss) before tax and the income tax provision (benefit) actually recorded for the three and nine months ended September 30, 2007, was due primarily to the effect of non-deductible stock-based compensation expense, which was partially offset by tax benefits associated with state and federal tax credits.
     The “Emergency Economic Stabilization Act of 2008,” which contains the “Tax Extenders and Alternative Minimum Tax Relief Act of 2008”, was signed into law on October 3, 2008. Under the Act, the research credit was retroactively extended for amounts paid or incurred after December 31, 2007, and before January 1, 2010. The impact of the retroactive extension of the federal research credit resulted in the Company recording a discrete tax benefit and a reduction to its effective tax rate in the third quarter of 2008.
     On September 30, 2008, California enacted Assembly Bill 1452, which (among other things) suspends net operating loss deductions for 2008 and 2009 and extends the carryforward period of any net operating losses not utilized due to such suspension; adopts the federal 20-year net operating loss carryforward period; phases-in the federal two-year net operating loss carryback periods beginning in 2011; and limits the utilization of tax credits to 50 percent of a taxpayer’s taxable income. We do not expect any impact to our effective tax rate or tax provision in the fourth quarter as the result of this law change.

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     Our net deferred tax assets were $36.6 million at October 5, 2008. We continue to assess the recoverability of the deferred tax assets on an ongoing basis. If we subsequently conclude that it is more likely than not that all or a portion of the deferred tax assets will not be recovered, an additional valuation allowance against deferred tax assets will be necessary. Our income tax expense recorded in the future will be increased to the extent of offsetting increases in our valuation allowance.
Financial Condition, Liquidity, and Capital Resources
     Our total assets were $368.6 million at the end of the third quarter of 2008 compared with $363.6 million at the end of the fourth quarter of 2007. The following table sets forth certain financial data from the condensed consolidated balance sheets expressed as the percentage change from January 6 to October 5, 2008.
                                     
    As of   As of        
Dollars in thousands   Oct. 5, 2008   Jan. 6, 2008   $ change   % change
Cash and cash equivalents, short and long term investments
  $ 144,687     $ 189,170     $ (44,483 )     (24 %)
Accounts receivable, net
  $ 29,588     $ 18,116     $ 11,472       63 %
Inventories
  $ 56,183     $ 35,587     $ 20,596       58 %
     During the third quarter of 2008, we evaluated indicators of impairment during our review of our investment portfolio. With respect to determining an other-than-temporary impairment charge, our evaluation included reviewing:
    The length of the time and the extent to which the market value of the investment has been less than cost.
 
    The financial condition and near-term prospects of the issuer, including any specific events that may influence the operations of the issuer.
 
    Our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.
     In light of the bankruptcy filing by Lehman Brothers in the third quarter of 2008, we concluded that our investment in Lehman Brothers’ corporate bonds was other-than-temporarily impaired and therefore wrote down the investment to its fair market value. The impairment charge of approximately $0.9 million was included in interest income and other, net on our condensed consolidated statement of operations for the three and nine months ended October 5, 2008.
     Excluding the effect of the Lehman Brothers bond, the Company’s investment portfolio reflected net unrealized losses of $2.6 million as of October 5, 2008. Although the current credit environment continues to be extremely volatile and uncertain, we do not believe that sufficient evidence exists at this point in time to conclude that any of our remaining investments experienced an other-than-temporary impairment at the end of the third quarter of 2008. We continue to monitor our investments closely to determine if additional information becomes available that may have an adverse impact on the fair value and ultimate realizability of our investments.
     Accounts receivable at October 5, 2008, increased $11.5 million compared with January 6, 2008. This was due primarily to the timing of billings and proportionally higher shipments during the last month of the third quarter of 2008 as compared with the last month of the fourth quarter of 2007. Days sales outstanding were 51 days at the end of the third quarter of 2008 compared with 34 days at the end of the fourth quarter of 2007.
     Net inventory increased $20.6 million from the end of the fourth quarter of 2007 due to an inventory build-up of new Flash products, including Fusion, Igloo, and ProASIC3. The Company has historically built-up inventories of new products early in their life cycles, but the recent build-up in inventory for the new Flash products was particularly pronounced due to a conscious effort to support increased turns business and shorter lead times for the consumer products at which the new Flash products are targeted. In addition, while sales of Flash products during the third quarter of 2008 increased approximately 15% from the second quarter of fiscal 2008, they were still well below our original expectations and, as a result of the overall slowdown in the global economy, we are currently expecting that sales of Flash products will continue to grow at a much slower pace than we had expected earlier in the year. This has resulted in a substantial increase in our inventory levels as of October 5, 2008, with days of inventory increasing from 139 days at the end of 2007 to 229 days at the end of the third quarter of 2008. Beginning August 2008, we reduced our wafer starts for Flash products to the lowest levels practicable. We will continue to restrict Flash wafer starts from the fourth quarter of 2008 and beyond based on inventory levels and forecast sales of Flash products. However, we do not believe that there are currently inventory obsolescence issues since the growth in our inventory consists of new Flash products, which are still attractive to our targeted customer base. We continue to focus our efforts on growing the Flash segment of our business and to monitor market trends

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and significant events that may have an adverse impact on the carrying value of our inventory, but we do not believe that sufficient evidence exists at this point in time to conclude that additional inventory write-downs are required.
                 
    Nine Months Ended  
In thousands   Oct. 5, 2008     Sept. 30 2007  
Net cash provided by operating activities
  $ 6,418     $ 1,103  
Net cash provided by (used in) investing activities
  $ 8,363     $ (8,326 )
Net cash used in financing activities
  $ (19,068 )   $ (1,907 )
     Cash provided by operating activities was $6.4 million for the nine months ended October 5, 2008. Cash provided by operating activities included net income of $0.8 million; non-cash adjustments related to depreciation, amortization, investment impairment, and stock-based compensation costs of approximately $16.4 million; decreases in prepaid and other current assets of $2.5 million; increases in other liabilities of $9.4 million; and increases in deferred income of $9.8 million. These were partially offset by cash used to fund increases in accounts receivable of $10.6 million, inventories of $20.2 million, and licenses and other assets of $2.1 million.
     Net sales and maturities of available-for-sale securities of $35.5 million, which was partially offset by capital expenditures of $18.7 million and the acquisition of Pigeon Point Systems for $8.4 million, resulted in net cash provided by investing activities of approximately $8.4 million for the nine months ended October 5, 2008. Net cash used in financing activities of $19.1 million for the nine months ended October 5, 2008, related mainly to cash used to repurchase stock of $24.9 million and payroll tax deposits of $0.7 million associated with the vesting of restricted stock unit awards, which were partially offset by proceeds from the issuance of common stock of $6.5 million.
     The difference between the net loss of $1.6 million for the nine months ended September 30, 2007, and the cash provided by operating activities of $1.1 million was the result of several non-cash adjustments related to depreciation and stock-based compensation costs of approximately $14.0 million, a charge of $3.7 million associated with the write-off of certain wafer prepayments, decreases in licenses and other assets of $3.2 million, and increases in deferred income of $5.5 million, which were partially offset by increased receivables balances of $11.9 million and decreases in other liabilities of $12.9 million.
     Capital expenditures of $9.1 million, which was offset in part by net sales of available-for-sale securities of $0.8 million, resulted in net cash used in investing activities of approximately $8.3 million for the nine months ended September 30, 2007. Net cash used in financing activities of $1.9 million for the nine months ended September 30, 2007, related to payroll tax deposits of $2.2 million associated with the vesting of restricted stock unit awards that was partially offset by the receipt of $0.3 million from certain Company executives representing the price differential for certain stock options that were remeasured as part of the stock option investigation.
     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
     In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement on Financial Accounting Standards (“SFAS”)No. 141 (revised 2007), Business Combinations (“SFAS 141R”), which amends the accounting for business acquisitions. SFAS 141R is effective for fiscal years beginning after December 15, 2008, and will be adopted by Actel in the first quarter of fiscal 2009. The effect of the adoption of SFAS 141R on our condensed consolidated financial statements will depend on future business combination transactions, if any.
     In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. This FSP shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal

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years and will be adopted by Actel in the first quarter of fiscal 2009. Early adoption is prohibited. The effect of the adoption of FSP 142-3 on our condensed consolidated financial statements will depend on future business combination transactions, if any.
     In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP 157-3”). This FSP clarifies the application of SFAS No. 157, Fair Value Measurements (“SFAS 157”), in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective upon issuance, including prior periods for which financial statements have not been issued. The adoption of this FSP did not affect our condensed consolidated financial statements.
Acquisition
     On July 9, 2008, the Company acquired 100% of the stock of Pigeon Point Systems for a total purchase price (including acquisition costs) of approximately $11.7 million. Of this purchase price, a cash payment of $8.4 million was made at closing and contingent payments of up to $3 million may be made through 2010. The results of operations for Pigeon Point Systems since the date of acquisition have been included in the condensed consolidated financial statements. Pigeon Point Systems is a privately-held supplier of telecommunications computing architecture (TCA) management components. As a result of the stock purchase, Pigeon Point Systems became a wholly-owned subsidiary of the Company. The acquisition of Pigeon Point Systems will allow Actel to offer a complete solution for proprietary and standards-based system management implementations in the industrial, military, telecommunications, and medical markets.
     The purchase price allocation related to the tangible and intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date are as follows (in thousands):
         
Tangible assets acquired and liabilities assumed
  $ 728  
Identifiable intangible assets
    5,440  
In-process research and development
    120  
Goodwill
    2,399  
 
     
Total purchase price, excluding contingent payments
  $ 8,687  
 
     
     Pigeon Point Systems’ in-process research and development valued at $120,000 as of the acquisition date was written off in the third quarter of 2008. The contingent payment amount of $3 million relates to securing the representations, warranties, and indemnities of the shareholders of Pigeon Point Systems and the continued employment of certain key Pigeon Point Systems employees. Half of this amount will be paid in July 2009 and the other half, will be paid in July 2010, less any permissible deductions. Since these payments are contingent on continued employment, such amounts will be recorded as compensation expense as service is rendered over the two-year contingent payment period. Supplemental proforma information for Pigeon Point Systems is not presented because it is not material to Actel’s condensed consolidated financial statements.
     The recorded values and estimated useful lives of the intangibles acquired from Pigeon Point Systems were:
                 
    Estimated        
    Fair Value     Useful Life  
    (in thousands)     (in years)  
Existing technology
  $ 3,670       7  
Customer relationships — Support
    490       7  
Customer relationships — Consulting
    220       4  
Customer backlog
    290       0.5  
Tradename
    470       10  
Other
    300       4  
 
             
Total acquired identifiable intangible assets
  $ 5,440          
 
             
Subsequent Events

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     On October 16, 2008, we announced a 10 percent reduction in force to improve our operating results. Approximately 60 positions were eliminated. Operating results for the fourth quarter of 2008 will be adversely affected by accounting charges related to the reduction in force, which the Company currently estimates will be about $3.0 million. The Company anticipates that all cash payments related to the reduction in force will be made by January 31, 2009.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
     As of October 5, 2008, our investment portfolio consisted primarily of asset-backed obligations, corporate bonds, floating rate notes, and federal and municipal obligations. The principal objectives of our investment activities are to preserve principal, meet liquidity needs, and maximize yields. To meet these objectives, we invest excess liquidity only in high credit quality debt securities with average maturities of less than two years. We also limit the percentage of total investments that may be invested in any one issuer. Corporate investments as a group are also limited to a maximum percentage of our investment portfolio.
     Our investments are subject to interest rate risk. An increase in interest rates could subject us to a decline in the market value of our investments. These risks are mitigated by our ability to hold these investments for a period of time sufficient to recover the carrying value of the investment, which may not be until maturity. A hypothetical 100 basis point increase in interest rates compared with interest rates at October 5, 2008, and January 6, 2008, would result in a reduction of approximately $0.6 million and $2.1 million in the fair value of our available-for-sale debt securities held at October 5, 2008, and January 6, 2008, respectively.
Item 4. Controls and Procedures
Evaluation of Effectiveness 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.
Inherent Limitations of Internal Controls
     Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
     Management does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can

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provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
     There were no significant changes to our internal controls during the quarter ended October 5, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
In re Actel Derivative Litigation, 5:06-cv-05352-JW
     On August 30, 2006, a shareholder derivative action was filed in the United States District Court for the Northern District of California (the “Court”), entitled Frank Brozovich v. John C. East, et al., 06-cv-05352-JW, against certain of our former and current officers and directors alleging that the individual defendants violated Section 10(b)/Rule 10b-5 of the Securities Exchange Act of 1934 (the “Exchange Act”), breached their fiduciary duties, and were unjustly enriched in connection with the timing of stock option grants from 1996 to 2001. In addition, on November 2, 2006, a second nearly identical shareholder derivative complaint, entitled Samir Younan v. John C. East, et al., 5:06-cv-06832-JW, was filed in the same court. Younan alleged further causes of action in connection with the timing of stock option grants from 1994 to 2000, including violations of Sections 14(a) and 20(a) of the Exchange Act, and violation of California Corporation Code Section 25402. On January 10, 2007, these cases were consolidated as In re Actel Derivative Litigation , 5:06-cv-05352-JW and plaintiffs Younan and Brozovich were appointed lead plaintiffs. Plaintiffs filed a consolidated complaint on February 9, 2007. The consolidated complaint alleges causes of action in connection with the timing of stock option grants from 1996 to 2002, including violations of Sections 10(b), 14(a), and 20(a) of the Exchange Act, breach of fiduciary duty, accounting, unjust enrichment, and violation of California Corporation Code Section 25402. Actel is named solely as a nominal defendant against whom no recovery is sought.
     Under the terms and conditions of a settlement agreement submitted to the Court for approval, Actel and its insurer paid plaintiffs’ counsel attorneys’ fees and reimbursement of expenses in the aggregate amount of $1.75 million, of which the Company paid $237,500. On July 7, 2008, the Court signed an order granting final approval of the settlement agreement. The order reduced the plaintiffs’ attorney fees from $1.75 million to approximately $1.22 million, as a result of which the Company received a refund of approximately $85,000.
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 Quarterly Report on Form 10-Q and subsequent reports on Forms 10K, 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently 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 and has a materially adverse effect on us, our business, financial condition, and results of operations could be seriously harmed. In that event, the market price for our Common Stock will likely decline and you may lose all or part of your investment.
Risks Related to Our Failure to Meet Expectations
     Our quarterly revenues and operating results are subject to fluctuations resulting from general economic conditions and a variety of risks specific to Actel or characteristic of the semiconductor industry, including booking and shipment uncertainties, supply problems, and price erosion. These and other factors make it difficult for us to accurately project quarterly revenues and operating results, which may fail to meet our expectations. When we fall short of our quarterly revenue expectations, our operating results will probably also be adversely affected because the majority of our expenses are fixed and therefore do not vary with revenues. Any failure to meet expectations could cause our stock price to decline significantly.

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We derive a significant percentage of our quarterly revenues from bookings received during the quarter, making quarterly revenues difficult to predict.
     We generate a significant percentage of our quarterly revenues from orders received during the quarter and “turned” for shipment within the quarter. Any shortfall in expected “turns” orders will adversely affect quarterly revenues. There are many factors that can cause a shortfall in turns orders, including declines in general economic conditions or the businesses of our customers, excess inventory in the channel, and conversion of our products to 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 adversely affect quarterly revenues.
We sometimes derive a significant percentage of our quarterly revenues from shipments made in the final weeks of the quarter, making quarterly revenues difficult to predict.
     We sometimes ship a disproportionately large percentage of our quarterly revenues during the final weeks of the quarter, which makes it difficult to accurately project quarterly revenues. Any failure to effect scheduled shipments by the end of a quarter would adversely affect quarterly revenues.
Our military and aerospace shipments tend to be large and are subject to complex scheduling uncertainties, making quarterly revenues difficult to predict.
     Orders from military and aerospace customers tend to be large monetarily and irregular, which contributes to fluctuations in our net revenues and gross margins. These sales are also subject to more extensive governmental regulations, including greater export restrictions. Historically, it has been difficult to predict if and when export licenses will be granted, if required. In addition, products for military and aerospace applications require processing and testing that is more lengthy and stringent than for commercial applications, which increases the complexity of scheduling and forecasting as well as the risk of failure. It is often impossible to determine before the end of processing and testing whether products intended for military or aerospace applications will pass and, if not, 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 adversely affect quarterly revenues.
We derive a majority of our quarterly revenues from products resold by our distributors, making quarterly revenues difficult to predict.
     We generate the majority of our quarterly revenues from sales made through distributors. Since we generally do not recognize revenue on the sale of a product to a distributor until the distributor resells the product, our quarterly revenues are dependent on, and subject to fluctuations in, shipments by our distributors. We are therefore highly dependent on the accuracy of shipment forecasts from our distributors in setting our quarterly revenue expectations. We are also highly dependent on the timeliness and accuracy of resale reports from our distributors. Late or inaccurate resale reports, particularly in the last month of a quarter, contribute to our difficulty in predicting and reporting our quarterly revenues and/or operating results.
An unanticipated shortage of products available for sale may cause our quarterly revenues and/or operating results to fall short of expectations.
     In a typical semiconductor manufacturing process, silicon wafers produced by a foundry are sorted and cut into individual die, which are then assembled into individual packages and tested. The manufacture, assembly, and testing of semiconductor products is highly complex and subject to a wide variety of risks, including defects in photomasks, impurities in the materials used, contaminants in the environment, and performance failures by personnel and equipment. In addition, we may not discover defects or other errors in new products until after we have commenced volume production. Semiconductor products intended for military and aerospace applications and new products, such as our Actel Fusion PSCs and ProASIC 3 and Igloo 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 is becoming more significant as the cost and complexity of photomask sets continue to increase. Lower than expected yields of usable die or other unanticipated increases in the cost of our products could reduce our gross margin, which would adversely affect our quarterly operating results. In addition, in order to win designs, we generally must price new products on the assumption that manufacturing cost reductions will be achieved, which often do not occur as soon as expected. The failure to achieve expected manufacturing or other cost reductions during a quarter could reduce our gross margin, which would adversely affect our quarterly operating results.
Unanticipated reductions in the average selling prices of our products may cause our quarterly revenues and operating results to fall short of expectations.
     The semiconductor industry is characterized by intense price competition. The average selling price of a product typically declines significantly between introduction and maturity. We sometimes are required by competitive pressures to reduce the prices of our new products more quickly than cost reductions can be achieved. We also sometimes approve price reductions on specific direct sales for strategic or other reasons, and provide price concessions to our distributors for a portion of their original purchase price in order for them to address individual negotiations involving high-volume or competitive situations. Typically, a customer purchasing a small quantity of product for prototyping or development from a distributor will pay list price. However, a customer using our products in volume production will often negotiate a substantial price discount from the distributor. Under such circumstances, the distributor will in turn often negotiate and receive a price concession from Actel. This is a standard practice in the semiconductor industry and we provide some level of price concession to every distributor. Unanticipated declines in the average selling prices of our products could cause our quarterly revenues and/or gross margin to fall short of expectations, which would adversely affect our quarterly financial results.
In preparing our financial statements, we make good faith estimates and judgments that may change or turn out to be erroneous.
     In preparing our financial statements in conformity with accounting principles generally accepted in the United States, we must make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. The most difficult estimates and subjective judgments that we make concern income taxes, inventories, legal matters and loss contingencies, revenues, and stock-based compensation expense. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. If these estimates or their related assumptions change, our operating results for the periods in which we revise our estimates or assumptions could be adversely and perhaps materially affected.
     Our net inventory has increased $20.6 million, or 58%, since the beginning of the year due to an inventory build-up of our new Flash products, including Fusion, Igloo, and ProASIC3. We have historically built-up inventories of new products early in their life cycles, but the recent build-up in inventory for the new Flash products has been particularly pronounced due to a conscious effort to support increased turns business and shorter lead times for the consumer products at which the new Flash products are targeted. In addition, as a result of the overall slowdown in the global economy, sales of our Flash products have grown, and we currently expect that they will continue to grow, at a much slower pace than we had expected earlier in the year. This has resulted in the substantial increase in our inventory levels at the end of the third quarter of 2008. Beginning August 2008, we reduced our wafer starts for Flash products to the lowest levels practicable. We will continue to restrict Flash wafer starts from the fourth quarter of 2008 and beyond based on inventory levels and forecast sales of Flash products. While we do not believe that sufficient evidence exists at this point in time to conclude that additional inventory write-downs are required, we will continue to monitor our business, market trends, and any significant events that may have an adverse impact on the carrying value of our inventory. If we concluded that additional inventory write-downs were required, our operating results for the periods in which the write-downs occurred would be adversely and perhaps materially affected.
     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 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. Our net deferred tax assets were $36.6 million at October 5, 2008. We continue to assess the recoverability of the deferred tax assets on an ongoing basis. If we subsequently conclude that it is more likely than not that all or a portion of the deferred tax assets will not be recovered, an additional valuation allowance against deferred tax assets will be necessary, which would adversely and perhaps materially affect our operating results for the periods in which the additional valuation allowances were recorded.

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Our gross margin may decline as we increasingly compete with 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 ASIC and it is easier to convert between competing PLDs or between a PLD and an ASIC. The increased price competition may also be due in part to the increasing penetration of PLDs into price-sensitive markets previously dominated by 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. In addition, gross margins on new products are generally lower than on mature products. Thus, if we generate a greater percentage of our net revenues from new products, our overall gross margin could be adversely affected. Any long-term decline in our overall gross margin may have an adverse effect on our operating results.
We may not win sufficient designs, or the designs we win may not generate sufficient revenues, for us to maintain or expand our business.
     In order for us to sell an FPGA, our customer must incorporate our FPGA into the customer’s product in the design phase. We devote substantial resources, which we may not recover through product sales, to persuade potential customers to incorporate our FPGAs into new or updated products and to support their design efforts (including, among other things, providing design and development software). These efforts usually precede by many months (and often a year or more) the generation of FPGA sales, if any. In addition, the value of any design win depends in large part upon the ultimate success of our customer’s product in its market. Our failure to win sufficient designs, or the failure of the designs we win to generate sufficient revenues, could have a materially adverse effect on our business, financial condition, and/or operating results.
Risks Related to Defective Product
     Our products are complex and may contain errors, manufacturing defects, design defects, or otherwise fail to comply with our specifications, particularly when first introduced or as new versions are released. Our new products are being designed on ever more advanced processes, adding cost, complexity, and elements of experimentation to the development, particularly in the areas of mixed-voltage and mixed-signal design. We rely primarily on our in-house personnel to design test operations and procedures to detect any errors prior to delivery of our products to customers.
Any error or defect in our products could have a material adverse effect on our business, financial condition, and operating results.
     If problems occur in the operation or performance of our products, we may experience delays in meeting key introduction dates or scheduled delivery dates to our customers, in part because our products are manufactured by third parties. These problems also could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from our product development efforts, and cause significant customer relations and business reputation problems. Any error or defect might require product replacement or recall or obligate us to accept product returns. Any of the foregoing could have a material adverse effect on our financial results and business in the short and/or long term.
Any product liability claim could pose a significant risk to our business, financial condition, and operating results.
     Product liability claims may be asserted with respect to our products. Our products are typically sold at prices that are significantly lower than the cost of the end-products into which they are incorporated. A defect or failure in our product could cause failure in our customer’s end-product, so we could face claims for damages that are much higher than the revenues and profits we receive from the products involved. In addition, product liability risks are particularly significant with respect to aerospace, automotive, and medical applications because of the risk of serious harm to users of these products. Any product liability claim, whether or not determined in our favor, can result in significant expense, divert the efforts of our technical and management personnel, and harm our business. In the event of an adverse settlement of any product liability claim or an adverse ruling in any product liability litigation, we could incur significant monetary liabilities, which may not be covered by any insurance that we carry and might have a materially adverse effect on our financial condition and/or operating results.

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Risks Related to New Products
     The market for our products is characterized by rapid technological change, product obsolescence, and price erosion, making the timely introduction of new or improved products critical to our success. Our failure to design, develop, market, and sell new or improved products that satisfy customer needs, compete effectively, and generate acceptable margins may adversely affect our business, financial condition, and/or operating results. While most of our product development programs have achieved a level of success, some have not. For example, we determined during 2007 that a $3.7 million charge for impairment to one of our long-term assets was required under generally accepted accounting principles. The long-term asset was a prepaid wafer credit. We concluded that, due to our decision to abandon the development of commercial Flash product families on a 90-nanometer process, we had only a remote chance to draw the credit down.
     Our experience generally suggests that the risk is greater when we attempt to develop products based in whole or in part on technologies with which we have limited experience. During 2005, we introduced our new Actel Fusion technology, which integrates analog capabilities, Flash memory, and FPGA fabric into a single PSC that may be used with soft processor cores, including the ARM7 processor core that we offer. We have limited experience with analog circuitry and soft processor cores and no prior experience with PSCs.
Our introduction of the Actel Fusion PSC presents numerous significant challenges.
     When entering a new market, the first-mover typically faces the greatest market and technological challenges. To be successful in the PSC market and realize the advantages of being the initial entrant, we need to understand the market, the competition, and the value proposition that we are bringing to potential customers; identify the early adopters and understand their buying process, decision criteria, and support requirements; and select the right sales channels and provide the right customer service, logistical, and technical support, including training. Any or all of these may be different for the PSC market than for the value-based or system-critical FPGA markets. Meeting these challenges is a top priority for Actel generally and for our sales and marketing organizations in particular. Our failure to meet these challenges could have a materially adverse effect on our business, financial condition, and/or operating results.
Numerous factors can cause the development or introduction of new products to fail or be delayed.
     To develop and introduce a product, we must successfully accomplish all of the following:
    anticipate future customer demand and the technology that will be available to meet the demand;
 
    define the product and its architecture, including the technology, silicon, programmer, IP, software, and packaging specifications;
 
    obtain access to advanced manufacturing process technologies;
 
    design and verify the silicon;
 
    develop and release evaluation software;
 
    layout the FPGA and other functional blocks along with the circuitry required for programming;
 
    integrate the FPGA block with the other functional blocks;
 
    simulate (i.e., test) the design of the product;
 
    tapeout the product (i.e., compile a database containing the design information about the product for use in the preparation of photomasks);
 
    generate photomasks for use in manufacturing the product and evaluate the software;
 
    manufacture the product at the foundry;

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    verify the product; and
 
    qualify the process, characterize the product, and release production software.
     Each of these steps is difficult and subject to failure or delay, and the failure or delay of any step can cause the failure or delay of the entire development and introduction. In addition to failing to meet our development and introduction schedules for new products or the supporting software or hardware, our new products may not gain market acceptance, and we may not respond effectively to new technological changes or new product announcements by others. Any failure to successfully define, develop, market, manufacture, assemble, test, or program competitive new products could have a materially adverse effect on our business, financial condition, and/or operating results.
New products are subject to greater design and operational risks.
     Our future success is highly dependent upon the timely development and introduction of competitive new products at acceptable margins. However, there are greater design and operational risks associated with new products. The inability of our wafer suppliers to produce advanced products; delays in commencing or maintaining volume shipments of new products; the discovery of product, process, software, or programming defects or failures; and any related product returns could each have a materially adverse effect on our business, financial condition, and/or results of operation.
New products are subject to greater technology risks.
     As is common in the semiconductor industry, we have experienced from time to time in the past, and expect to experience in the future, difficulties and delays in achieving satisfactory, sustainable yields on new products. The fabrication of antifuse and Flash wafers is a complex process that requires a high degree of technical skill, state-of-the-art equipment, and effective cooperation between Actel and the foundry to produce acceptable yields. Minute impurities, errors in any step of the fabrication process, defects in the photomasks used to print circuits on a wafer, and other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be non-functional. Yield problems increase the cost of our new products as well as time it takes us to bring them to market, which can create inventory shortages and dissatisfied customers. Any prolonged inability to obtain adequate yields or deliveries of new products could have a materially adverse effect on our business, financial condition, and/or operating results.
New products generally have lower gross margins.
     Our gross margin is the difference between the amount it costs Actel to make our products and the revenues we receive from the sale of those products. One of the most important variables affecting the cost of our products is manufacturing yields. With our customized antifuse and Flash manufacturing process requirements, we almost invariably experience difficulties and delays in achieving satisfactory, sustainable yields on new products. Until satisfactory yields are achieved, gross margins on new products are generally lower than on mature products. The lower gross margins typically associated with new products could have a materially adverse effect on our operating results.
Risks Related to Competitive Disadvantages
     The semiconductor industry is intensely competitive. Our competitors include suppliers of ASICs, CPLDs, and FPGAs. Our biggest direct competitors are Xilinx, Altera, and Lattice, all of which are suppliers of CPLDs and SRAM-based FPGAs; and QuickLogic, a supplier of antifuse-based FPGAs. Altera and Lattice have announced the development of FPGAs manufactured on embedded Flash processes. In addition, we face competition from suppliers of logic products based on new or emerging technologies. While we seek to monitor developments in existing and emerging technologies, our technologies may not remain competitive. We also face competition from companies that specialize in converting our products into ASICs.
Many of our current and potential competitors are larger and have more resources.
     We are much smaller than Xilinx and Altera, which have broader product lines, more extensive customer bases, and substantially greater financial and other resources. Additional competition is also possible from major domestic and international semiconductor suppliers, all of which are larger and have broader product lines, more extensive customer bases, and substantially greater financial

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and other resources than Actel, including the capability to manufacture their own wafers. We may not be able to overcome these competitive disadvantages.
Our antifuse technology is not reprogrammable, which is a competitive disadvantage in most cases.
     All existing FPGAs not based on antifuse technology and certain CPLDs are reprogrammable. The one-time programmability of our antifuse FPGAs is necessary or desirable in some applications, but logic designers generally prefer to prototype with a reprogrammable logic device. This is because the designer can reuse the device if an error is made. The visibility associated with discarding a one-time programmable device often causes designers to select a reprogrammable device even when an alternative one-time programmable device offers significant advantages. This bias in favor of designing with reprogrammable logic devices appears to increase as the size of the design increases. Although we now offer reprogrammable Flash devices, we may not be able to overcome this competitive disadvantage.
Our Flash and antifuse technologies are not manufactured on standard processes, which is a competitive disadvantage.
     Our antifuse-based FPGAs and (to a lesser extent) Flash-based PSCs and FPGAs are manufactured using customized steps that are added to otherwise standard manufacturing processes of independent wafer suppliers. There is considerably less operating history for the customized process steps than for the foundries’ standard manufacturing processes. Our dependence on customized processing steps means that, in contrast with competitors using standard manufacturing processes, we generally have more difficulty establishing relationships with independent wafer manufacturers; take longer to qualify a new wafer manufacturer; take longer to achieve satisfactory, sustainable wafer yields on new processes; may experience a higher incidence of production yield problems; must pay more for wafers; and may not obtain early access to the most advanced processes. Any of these factors could be a material disadvantage against competitors using standard manufacturing processes. As a result of these factors, our products typically have been fabricated using processes at least one generation behind the processes used by competing products. As a consequence, we generally have not fully realized the benefits of our technologies. Although we are attempting to obtain earlier access to advanced processes, we may not be able to overcome these competitive disadvantages.
Risks Related to Events Beyond Our Control
     Our performance is subject to events or conditions beyond our control, and the performance of each of our foundries, suppliers, subcontractors, distributors, agents, and customers is subject to events or conditions beyond their control. These events or conditions include labor disputes, acts of public enemies or terrorists, war or other military conflicts, blockades, insurrections, riots, epidemics, quarantine restrictions, landslides, lightning, earthquakes, fires, storms, floods, washouts, arrests, civil disturbances, restraints by or actions of governmental bodies acting in a sovereign capacity (including export or security restrictions on information, material, personnel, equipment, or otherwise), breakdowns of plant or machinery, and inability to obtain transport or supplies. These events or conditions could impair our operations, which may have a materially adverse effect on our business, financial condition, and/or operating results.
Our operations and those of our partners are located in areas subject to volatile natural, economic, social, and political conditions.
     Our corporate offices are located in California, which was subject to power outages and shortages during 2001 and 2002. More extensive power shortages in the state could disrupt our operations and interrupt our research and development activities. Our foundry partners in Japan and Taiwan as well as our operations in California are located in areas that have been seismically active in the recent past. In addition, many of the countries outside of the United States in which our foundry partners and assembly and other subcontractors are located have unpredictable and potentially volatile economic, social, or political conditions, including the risks of conflict between Taiwan and China or between North Korea and South Korea. 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.

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Risks Related to Dependence on Third Parties
     We rely heavily on, but generally have little control over, our independent foundries, suppliers, subcontractors, and distributors, whose interests may diverge from our interests.
Our independent wafer manufacturers may be unable or unwilling to satisfy our needs in a timely manner, which could harm our business.
     We do not manufacture any of the semiconductor wafers used in the production of our FPGAs. Our wafers are currently manufactured by Chartered in Singapore, Infineon in Germany, Matsushita in Japan, UMC in Taiwan, and Winbond in Taiwan. Our reliance on independent wafer manufacturers to fabricate our wafers involves significant risks, including lack of control over capacity allocation, delivery schedules, the resolution of technical difficulties limiting production or reducing yields, and the development of new processes. Although we have supply agreements with some of our wafer manufacturers, a shortage of raw materials or production capacity could lead any of our wafer suppliers to allocate available capacity to other customers, or to internal uses in the case of Infineon, which could impair our ability to meet our product delivery obligations and may have a materially adverse effect on our business, financial condition, and/or operating results.
Our limited volume and customized process requirements generally make us less attractive to independent wafer manufacturers.
     The semiconductor industry has from time to time experienced shortages of manufacturing capacity. When production capacity is tight, the relatively small number of wafers that we purchase from any foundry and the customized process steps that are necessary for our technologies put us at a disadvantage to foundry customers who purchase more wafers manufactured on standard processes. To secure an adequate supply of wafers, we may consider various transactions, including the use of substantial nonrefundable deposits, contractual purchase commitments, equity investments, or the formation of joint ventures. Any of these transactions could have a materially adverse effect on our business, financial condition, and/or operating results.
Identifying and qualifying new independent wafer manufacturers is difficult and might be unsuccessful.
     If our current independent wafer manufacturers were unable or unwilling to manufacture our products as required, we would have to identify and qualify additional foundries. No additional wafer foundries may be able or available to satisfy our requirements on a timely basis. Even if we are able to identify a new third party manufacturer, the costs associated with manufacturing our products may increase. In any event, the qualification process typically takes one year or longer, which could cause product shipment delays, and qualification may not be successful. Any of these developments could have a materially adverse effect on our business, financial condition, and/or operating results.
Our independent assembly subcontractors may be unable or unwilling to meet our requirements, which could delay product shipments and result in the loss of customers or revenues.
     We rely primarily on foreign subcontractors for the assembly and packaging of our products and, to a lesser extent, for the testing of our finished products. Our reliance on independent subcontractors involves certain risks, including lack of control over capacity allocation and delivery schedules. We generally rely on one or two subcontractors to provide particular services for each product and from time to time have experienced difficulties with the timeliness and quality of product deliveries. We have no long-term contracts with our subcontractors and certain of those subcontractors sometimes operate at or near full capacity. Any significant disruption in supplies from, or degradation in the quality of components or services supplied by, our subcontractors could have a materially adverse effect on our business, financial condition, and/or operating results.
Our independent software and hardware developers and suppliers may be unable or unwilling to satisfy our needs in a timely manner, which could impair the introduction of new products or the support of existing products.
     We are dependent on independent software and hardware developers for the design, development, supply, maintenance, and support of some of our analog capabilities, IP cores, design and development software, programming hardware, design diagnostics and debugging tool kits, and demonstration boards (or certain elements of those products). Our reliance on independent developers involves certain risks, including lack of control over delivery schedules and customer support. Any failure of or significant delay by

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our independent developers to complete software and/or hardware under development in a timely manner could disrupt the release of our software and/or the introduction of our new products, which might be detrimental to the capability of our new products to win designs. Any failure of or significant delay by our independent suppliers to provide updates or customer support could disrupt our ability to ship products or provide customer support services, which might result in the loss of revenues or customers. Any of these disruptions could have a materially adverse effect on our business, financial condition, and/or operating results.
Our future performance will depend in part on the effectiveness of our independent distributors in marketing, selling, and supporting our products.
     In 2007 and 2006, sales made through distributors accounted for 77% of our net revenues, compared with 64% for 2005. Our distributors offer products of several different companies, so they may reduce their efforts to win new designs or sell our products or give higher priority to other products. This is particularly a concern with respect to any distributor that also sells products of our direct competitors. A reduction in design win or sales effort, termination of relationship, failure to pay for products, or discontinuance of operations because of financial difficulties or for other reasons by one or more of our current distributors could have a materially adverse effect on our business, financial condition, and/or operating results.
Distributor contracts generally can be terminated on short notice.
     Although we have contracts with our distributors, the agreements are terminable by either party on short notice. We consolidated our distribution channel in 2001 by terminating our agreement with Arrow Electronics, Inc., which accounted for 13% of our net revenues in 2001. On March 1, 2003, we again consolidated our distribution channel by terminating our agreement with Pioneer-Standard Electronics, Inc., which accounted for 26% of our net revenues in 2002, after which Unique Technologies, Inc. (Unique), a sales division of Memec, was our sole distributor in North America. Unique accounted for 33% of our net revenues in 2004. During 2005, Avnet acquired Memec, after which Avnet became our primary distributor in North America. Avnet accounted for 40% of our net revenues in 2007 and 2006. Even though Xilinx is Avnet’s biggest line, our transition from Unique to Avnet was generally satisfactory. The loss of Avnet as a distributor, or a significant reduction in the level of design wins or sales generated by Avnet, could have a materially adverse effect on our business, financial condition, and/or operating results. In 2006, we added Mouser as a distributor in North America and elsewhere.
Fluctuations in inventory levels at our distributors can affect our operating results.
     Our distributors occasionally build inventories in anticipation of significant growth in sales and, when such growth does not occur as rapidly as anticipated, substantially reduce the amount of product ordered from us in subsequent quarters. Such a slowdown in orders generally reduces our gross margin because we are unable to take advantage of any manufacturing cost reductions while the distributor depletes its inventory.
Risk Related to the Conduct of International Business
     Unlike our older RTSX-S and RTSX-SU space-grade FPGAs, our new RTAX-S space-grade FPGAs are subject to the International Traffic in Arms Regulations (“ITAR”), which is administered by the U.S. Department of State. ITAR controls not only the export of RTAX-S FPGAs, but also the export of related technical data and defense services as well as foreign production. While we believe that we have obtained and will continue to obtain all required licenses for RTAX-S FPGA exports, we have undertaken corrective actions with respect to the other ITAR controls and are implementing improvements in our internal compliance program. If the corrective actions and improvements were to fail or be ineffective for a prolonged period of time, it could have a materially adverse effect on our business, financial condition, and/or operating results. In addition, the fact that our new RTAX-S space-grade FPGAs are ITAR-controlled may make them less attractive to foreign customers, which could also have a materially adverse effect on our business, financial condition, and/or operating results.
We depend on international operations for almost all of our products.
     We purchase almost all of our wafers from foreign foundries and have almost all of our commercial products assembled, packaged, and tested by subcontractors located outside the United States. These activities are subject to the uncertainties associated with international business operations, including trade barriers and other restrictions, changes in trade policies, governmental regulations, currency exchange fluctuations, reduced protection for intellectual property, war and other military activities, terrorism,

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changes in social, political, or economic conditions, and other disruptions or delays in production or shipments, any of which could have a materially adverse effect on our business, financial condition, and/or operating results.
We depend on international sales for a substantial portion of our revenues.
     Sales to customers outside North America accounted for 50% of net revenues in 2007, compared with 49% in 2006, and we expect that international sales will continue to represent a significant portion of our total revenues. International sales are subject to the risks described above as well as generally longer payment cycles, greater difficulty collecting accounts receivable, and currency restrictions. We also maintain foreign sales offices to support our international customers, distributors, and sales representatives, which are subject to local regulation. In addition, international sales are subject to the export laws and regulations of the United States and other countries.
     Changes in United States export laws that require us to obtain additional export licenses sometimes cause significant shipment delays. Any future restrictions or charges imposed by the United States or any other country on our international sales or sales offices could have a materially adverse effect on our business, financial condition, and/or operating results.
Risk Related to Economic and Market Fluctuations
     We have experienced substantial period-to-period fluctuations in revenues and operating results due to conditions in the overall economy, in the general semiconductor industry, in our major markets, and at our major customers. We may again experience these fluctuations, which could be adverse and may be severe.
Our revenues and operating results may be adversely affected by future downturns in the semiconductor industry.
     The semiconductor industry historically has been cyclical and periodically subject to significant economic downturns, which are characterized by diminished product demand, accelerated price erosion, and overcapacity. Beginning in the fourth quarter of 2000, we experienced (and the semiconductor industry in general experienced) reduced bookings and backlog cancellations due to excess inventories at communications, computer, and consumer equipment manufacturers and a general softening in the overall economy. During this downturn, which was severe and prolonged, we experienced lower revenues, which had a substantial negative effect on our operating results. Any future downturns in the semiconductor industry may have a similar adverse effect on our business, financial condition, and/or operating results.
Our revenues and operating results may be adversely affected by future downturns in the military and aerospace market.
     We estimate that sales of our products to customers in the military and aerospace industries, which carry higher overall gross margins than sales of products to other customers, accounted for 38% of our net revenues for the first nine months of 2008, 32% of our net revenues for 2007 and 34% of our net revenues for 2006 compared with 41% for 2005 and 36% for 2004 and 2003. 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.
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 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 of our major customers.
     A relatively small number of customers are responsible for a significant portion our net revenues. We have experienced periods in which sales to one or more of our major customers declined significantly as a percentage of our net revenues. For example, Lockheed Martin accounted for 4% of our net revenues during 2004 compared with 11% during 2003. We believe that sales to a limited number of customers will continue to account for a substantial portion of net revenues in future periods. The loss of a major customer, or decreases or delays in shipments to major customers, could have a materially adverse effect on our business, financial condition, and/or operating results.
We are exposed to fluctuations in the market values of our investment portfolio.
     Our investments are subject to interest rate and other risks. Our investment portfolio consists primarily of asset-backed obligations, corporate bonds, floating-rate notes, and federal and municipal obligations. An increase in interest rates could subject us to a decline in the market value of our investments. This risk is mitigated by our ability to hold these investments for a period of time sufficient to recover the carrying value of the investment, which may not be until maturity. In addition, if the issuers of our investment securities default on their obligations, or their credit ratings are negatively affected by liquidity, credit deterioration or losses, financial results, or other factors, the value of our investments could decline and result in a material impairment. To mitigate these risks, we invest only in high credit quality debt securities with average maturities of less than two years. We also limit, as a percentage of total investments, our investment in any one issuer and in corporate issuers as a group.
     In light of the bankruptcy filing by Lehman Brothers in the third quarter of 2008, we concluded that our investment in a Lehman Brothers’ corporate bond was other-than-temporarily impaired and therefore wrote-down the investment to its fair market value. The impairment charge of approximately $0.9 million was included in interest income and other, net on our condensed consolidated statement of operations for the three and nine months ended October 5, 2008. Although the current credit environment continues to be extremely volatile and uncertain, we do not believe that sufficient evidence exists at this point in time to conclude that any of our remaining investments are other-than-temporarily impaired. We continue to monitor our investments closely to determine if additional information becomes available that may have an adverse impact on the fair value and ultimate realizability of our investments. If we concluded that any of our remaining investments were other-than-temporarily impaired, our operating results for the periods in which the write-downs occurred would be adversely and perhaps materially affected.
Risks Related to Changing Rules and Practices
     Pending or new accounting pronouncements, corporate governance or public disclosure requirements, or tax regulatory rulings could have an impact, possibly material and adverse, on our business, financial condition, and/or operating results. Any change in accounting pronouncements, corporate governance or public disclosure requirements, or taxation rules or practices, as well as any change in the interpretation of existing pronouncements, requirements, or rules or practices, may call into question our SEC or tax filings and could affect our reporting of transactions completed before the change.
Changes in accounting for equity compensation adversely affected our operating results and may adversely affect our ability to attract and retain employees.
     In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment: An Amendment of FASB Statements No. 123 and 95.” SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and instead requires companies to recognize compensation expense using a fair-value based method for costs related to share-based payments, including stock options and employee stock purchase plans. We implemented the standard in the fiscal year that began January 2, 2006, and the adoption of SFAS No. 123(R) had a material effect on our consolidated operating results and earnings per share.
     In addition, we historically have used stock options as a key component of employee compensation in order to align employees’ interests with the interests of our shareholders, encourage employee retention, and provide competitive compensation packages. To the extent that SFAS No. 123(R) or other new regulations make it more difficult or expensive to grant options to employees, we may incur increased out-of-pocket compensation costs, change our equity compensation strategy, or find it difficult to attract, retain, and motivate employees. Any of these results could materially and adversely affect our business and/or operating results.

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Compliance with the Sarbanes-Oxley Act of 2002 and related corporate governance and public disclosure requirements have resulted in significant additional expense.
     Changing laws, regulations, and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulations and Nasdaq National Market rules, have resulted in significant additional expense. We are committed to maintaining high standards of corporate governance and public disclosure, and therefore have invested the resources necessary to comply with the evolving laws, regulations, and standards. This investment has resulted in increased general and administrative expenses as well as a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations, and standards differ from the activities intended by regulatory or governing bodies, we might be subject to lawsuits or sanctions or investigation by regulatory authorities, such as the SEC or The Nasdaq National Market, and our reputation may be harmed.
     We evaluated our internal controls systems in order to allow management to report on, and our independent public accountants to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. In performing the system and process evaluation and testing required to comply with the management certification and auditor attestation requirements of Section 404, we incurred significant additional expenses, which adversely affected our operating results and financial condition and diverted a significant amount of management’s time. While we believe that our internal control procedures are adequate, we may not be able to continue complying with the requirements relating to internal controls or other aspects of Section 404 in a timely fashion. If we were not able to comply with the requirements of Section 404 in a timely manner in the future, we may be subject to lawsuits or sanctions or investigation by regulatory authorities. Any such action could adversely affect our financial results and the market price of our Common Stock. In any event, we expect that we will continue to incur significant expenses and diversion of management’s time to comply with the management certification and auditor attestation requirements of Section 404.
Other Risks
Any acquisition we make may harm our business, financial condition, and/or operating results.
     We have a mixed history of success in our acquisitions. 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 would involve subsequent deal-related expenses and 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.
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 ultimate 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. 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

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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.

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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 historically experienced price and volume volatility. 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 fair value were to fall below our book value, we would proceed to the second step of the goodwill impairment test, which measures the amount of impairment loss by comparing the implied fair value of our goodwill with the carrying amount of our goodwill. As long as we remain a single reporting entity, we believe that the difference between the implied fair value of our goodwill and the carrying amount of our goodwill would equal the difference between our market capitalization and our book value. Accordingly, if our market capitalization fell below our book value and we remained a single reporting unit, we expect that we would write down our goodwill, and recognize a goodwill impairment loss, equal to the difference between our market capitalization and our book value.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits
       
Exhibit Number   Description
 
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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SIGNATURE
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  ACTEL CORPORATION
 
 
Date: November 11, 2008  /s/ Jon A. Anderson    
  Jon A. Anderson   
  Vice President of Finance and Chief Financial Officer (as Principal Financial Officer and on behalf of Registrant)   

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Exhibit Index
       
Exhibit Number   Description
 
 
   
 
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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