ACTEL CORPORATION

                      SELECTED CONSOLIDATED FINANCIAL DATA
                      (in thousands, except per share data)
<TABLE>
<CAPTION>


                                                                       Years Ended December 31,
                                                   ------------------------------------------------------------------
                                                       2002          2001          2000          1999          1998
                                                   ----------    ----------    ----------    ----------    ----------
<S>                                                <C>           <C>           <C>           <C>           <C>
Consolidated Statements of Operations Data:
Net revenues...................................    $  134,368    $  145,559    $  226,419    $  171,661    $  154,427
Costs and expenses:
   Cost of revenues............................        52,935        62,210        84,680        66,387        61,642
   Research and development....................        39,349        38,172        36,599        32,338        31,220
   Selling, general, and administrative........        43,033        41,464        47,960        45,903        40,558
   Amortization of goodwill and other
     acquisition-related intangibles (1).......         2,724        14,757         8,056         2,226         1,185
   Restructuring charge (2)....................             -             -             -         1,963             -
   Purchased in-process research and
     development (3)...........................             -             -        10,646           600             -
                                                   ----------    ----------    ----------    ----------    ----------
         Total costs and expenses..............       138,041       156,603       187,941       149,417       134,605
                                                   ----------    ----------    ----------    ----------    ----------
Income (loss) from operations..................        (3,673)      (11,044)       38,478        22,244        19,822

Interest income and other, net of expense......         5,530         7,280         8,310         3,642         2,380
Losses on sales and write-downs of equity
   investments (4).............................        (3,707)            -             -             -             -

Gain on sale of Chartered common stock (5).....             -             -        28,329             -             -
                                                   ----------    ----------    ----------    ----------    ----------
Income (loss) before tax (benefit) provision
   and equity interest in net(loss) of equity
   method investee.............................        (1,850)       (3,764)       75,117        25,886        22,202
Equity interest in net (loss) of equity method
   investee (6)................................             -             -        (2,445)         (193)            -
Tax (benefit) provision........................        (1,925)          937        31,227         8,055         7,215
                                                   ----------    ----------    ----------    ----------    ----------
Net income (loss)..............................    $       75    $   (4,701)   $   41,445    $   17,638    $   14,987
                                                   ==========    ==========    ==========    ==========    ==========
Net income (loss) per share:
   Basic.......................................    $     0.00    $   (0.20)    $     1.77    $     0.81    $     0.71
                                                   ==========    =========     ==========    ==========    ==========
   Diluted.....................................    $     0.00    $   (0.20)    $     1.58    $     0.76    $     0.68
                                                   ==========    =========     ==========    ==========    ==========
Shares used in computing net income (loss)
   per share:
   Basic.......................................        24,302       23,743         23,447        21,664        21,251
                                                   ==========    =========     ==========    ==========    ==========
   Diluted.....................................        25,252       23,743         26,233        23,058        21,921
                                                   ==========    =========     ==========    ==========    ==========
</TABLE>


<PAGE>


                                ACTEL CORPORATION

                SELECTED CONSOLIDATED FINANCIAL DATA (Continued)
                      (in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                          As of December 31,
                                                   ------------------------------------------------------------------
                                                       2002          2001          2000          1999          1998
                                                   ----------    ----------    ----------    ----------    ----------
<S>                                                <C>           <C>           <C>           <C>           <C>
 Consolidated Balance Sheet Data:
 Working capital............................       $  169,939    $  161,246    $  146,952    $  108,818    $   85,858
 Total assets...............................          293,321       290,082       312,434       259,211       179,708
 Total shareholders' equity.................          242,314       237,680       230,101       178,630       127,054
</TABLE>

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


     (1)  Beginning  in  2002,  in  accordance   with   Statement  of  Financial
          Accounting  Standards  (SFAS) No. 142,  "Goodwill and Other Intangible
          Assets,"  goodwill  is no longer  amortized  but is  subject to annual
          impairment  tests and written down only when  identified  as impaired.
          The  amortization  expense of $2,724 recorded for 2002 represented the
          amortization  of non-goodwill  intangible  assets with definite lives,
          which will  continue to be  amortized  under SFAS No. 141 and 142. See
          Note 1 and Note 2 of Notes to  Consolidated  Financial  Statements for
          further discussion of the impact of SFAS No. 142.


     (2)  During the second quarter of 1999, we completed a  restructuring  plan
          that  resulted in a reduction in force along with the  elimination  of
          certain projects and non-critical activities.

     (3)  The 2000  expenses  represent  charges  for  in-process  research  and
          development  arising from our acquisitions of Prosys Technology,  Inc.
          ($5.6  million) and GateField  Corporation  ($5.0  million).  The 1999
          expense  represents a charge for in-process  research and  development
          incurred  in the  fourth  quarter  of  1999  in  connection  with  our
          acquisition  of  AutoGate   Logic,   Inc.  See  Note  5  of  Notes  to
          Consolidated  Financial  Statements  for further  discussion  of these
          expenses.

     (4)  During 2002, we realized losses on sales of a portion of our strategic
          equity  investments  in other  companies  and wrote down our remaining
          investments.  See Note 3 of Notes to Consolidated Financial Statements
          for  further  discussion  of the losses  associated  with the sale and
          write down of equity investments.

     (5)  During  the  second  quarter  of 2000,  we sold all of our  shares  of
          Chartered  Semiconductor  Manufacturing Ltd. common stock for proceeds
          of $39.0 million, resulting in a one-time gain of $28.3 million before
          tax.  See Note 4 of Notes to  Consolidated  Financial  Statements  for
          further discussion of this gain.

     (6)  Represents our equity share of net losses of GateField  Corporation in
          accordance with the equity method of accounting  prior to the purchase
          acquisition  completed on November  15,  2000.  See Note 5 of Notes to
          Consolidated  Financial  Statements  for  further  discussion  of this
          expense.



<PAGE>



                      MANAGEMENT'S DISCUSSION AND ANALYSIS

                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



     Actel  Corporation  and its  consolidated  subsidiaries  are referred to as
"we," "us," or "our."

     You  should  read  the  information  in this  Management's  Discussion  and
Analysis of Financial  Condition and Results of Operations with the Risk Factors
at  the  end  of  Part  I  of  our   Annual   Report  on  Form  10-K  for  2002.
{Forward-looking statements made under the safe harbor provisions of the Private
Securities  Litigation Reform Act of 1995 are bracketed.} The Risk Factors could
cause  actual  results  to  differ   materially  from  those  projected  in  the
forward-looking statements.

     We design,  develop,  and market field programmable gate arrays (FPGAs) and
supporting products and services. FPGAs are used by designers of communications,
computer,  consumer,  industrial,  military and aerospace,  and other electronic
systems to  differentiate  their products and get them to market faster.  We are
the leading supplier of FPGAs based on flash and antifuse technologies.

Results of Operations

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

                                                                                     Years Ended December 31,
                                                                               ------------------------------------
                                                                                 2002          2001          2000
                                                                               ---------    ---------     ---------
<S>                                                                              <C>           <C>           <C>
Net revenues............................................................         100.0%        100.0%        100.0%
Cost of revenues........................................................          39.4          42.7          37.4
                                                                               ---------    ---------     ---------
Gross margin............................................................          60.6          57.3          62.6
Research and development................................................          29.3          26.2          16.2
Selling, general, and administrative....................................          32.0          28.6          21.2
Amortization of goodwill and other acquisition-related intangibles......           2.0          10.1           3.6
Purchased in-process research and development...........................             -             -           4.6
                                                                               ---------    ---------     ---------
Income (loss) from operations...........................................          (2.7)         (7.6)         17.0
Interest income and other, net of expense...............................           4.1           5.0           3.7
Losses on sales and write-downs of equity investments...................          (2.8)            -             -
Gain on sale of Chartered common stock..................................             -             -          12.5
                                                                               ---------    ---------     ---------
Income (loss) before tax provision (benefit) and equity interest in net
    (loss) of equity method investee....................................          (1.4)         (2.6)         33.2
Equity interest in net (loss) of equity method investee.................             -             -          (1.1)
Tax (benefit) provision.................................................          (1.5)          0.6          13.8
                                                                               ---------    ---------     ---------
Net income (loss).......................................................           0.1%         (3.2)%        18.3%
                                                                               =========    =========     =========
</TABLE>

     Our fiscal year ends on the first  Sunday after  December  30.  Fiscal 2002
ended on January 5, 2003,  fiscal 2001 ended on January 6, 2002, and fiscal 2000
ended on December 31, 2000. Fiscal 2001 was a 53 week fiscal year, rather than a
normal 52 week  fiscal  year.  For ease of  presentation,  December  31 has been
indicated as the year end for all fiscal years.


     Net Revenues

     We derive our revenues  primarily from the sale of FPGAs,  which  accounted
for 96% of net revenues in 2002, 2001, and 2000.  Non-FPGA  revenues are derived
from our Protocol Design Services organization,  royalties, and the licensing of
software and sale of hardware used to design and program our FPGAs.

     Net  revenues in 2002 were $134.4  million,  or 8% less than in 2001.  This
decline in net revenues was due  principally  to a decrease of 8% in the overall
average  selling  price  (ASP) of FPGAs.  This  decrease  in the overall ASP was
primarily  driven by an increase in the  percentage  of FPGAs sold to  customers
serving  the  consumer/e-appliance  and  computing  markets,  which we  estimate
accounted  for 17% of net  revenues  in 2002  compared  with 6% in  2001.  These
devices tend to have lower ASPs and ship in higher  volumes than devices sold to
customers serving other markets.  Unit shipments in 2002 were approximately flat
compared with 2001.


     Net  revenues  in 2001  were 36% less  than in 2000.  This  decline  in net
revenues  was due  principally  to a decrease of 11% in the overall ASP of FPGAs
and a decrease  of 28% in unit  shipments.  The overall  ASP  decreased  in 2001
because of a shift in the mix of products sold toward newer  products,  which in
recent  years have had lower ASPs than more mature  products.  Units  shipped in
2001 were down due to lower  customer  demand  across  all market  segments  and
geographic  regions as the result of a general  softening in the world  economy,
with the most notable decline in the communications market.

     Our  distributors  accounted for  approximately  65% of our net revenues in
2002, compared with 68% in 2001 and 58% in 2000. Our North American distributors
during  2002  were  Unique  Technologies,  Inc.  (Unique)  and  Pioneer-Standard
Electronics,  Inc. (Pioneer). On March 1, 2003, we consolidated our distribution
channel by terminating  our agreement  with Pioneer,  leaving Unique as our sole
distributor in North America.  The loss of Unique as a distributor  could have a
materially adverse effect on our business,  financial  condition,  or results of
operations.  We also consolidated our distribution  channel during 2001, when we
terminated our agreement with Arrow  Electronics,  Inc.  (Arrow).  The following
table sets forth the  percentage  of revenues  derived from each  customer  that
accounted for 10% or more of our net revenues in any of the last three years:


                                 2002          2001          2000
                                ------        ------        ------
Pioneer....................       26%           20%           13%
Unique.....................       22            19            15
Arrow......................        -            13            17
Nortel Networks............        1             2            11

We do not  recognize  revenue on  product  shipped  to a  distributor  until the
distributor resells the product to its customer.


     Sales to  customers  outside  the United  States  accounted  for 38% of net
revenues in 2002, 38% in 2001,  and 32% in 2000.  The largest  portion of export
sales is to European customers, which accounted for 23% of net revenues in 2002,
28% in 2001, and 19% in 2000.

     We  estimate   that  sales  of  our  products  to  customers   serving  the
communications  and the military and aerospace  markets  accounted for more than
half of net revenues in 2002, 2001, and 2000. We have experienced, and may again
in the future experience, substantial period-to-period fluctuations in operating
results  due to  conditions  in each of these  markets as well as in the general
economy.

     Gross Margin


     Gross margin was 61% of net revenues in 2002, compared with 57% in 2001 and
63% in 2000.  Gross  margin  was lower in 2001  than in 2002 and 2000  primarily
because of higher  inventory  write-offs in 2001.  Higher than normal  inventory
write-offs were made in 2001 as a result of higher inventory levels coupled with
lower forecasted  customer demand.  Gross margin was favorably  impacted by sell
through of $3.2 million of inventory  that was reserved in previous  periods,  a
benefit  of 2.4% to gross  margin.  Gross  margin  in 2002  was  also  favorably
impacted  by $0.6  million of excess  accrual  that was  reversed  for  expenses
related  to  items  used  in  our  products  upon  the  settlement  of  disputed
contractual  obligations  for amounts less than  originally  anticipated.  Costs
related to lower utilization of manufacturing capacity associated with lower net
revenues and production  levels  contributed to the reduction in gross margin in
both 2001 and 2002 compared with 2000.


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

     Research and Development (R&D)

     R&D  expenditures  were  $39.3  million,  or 29% of net  revenues,  in 2002
compared with $38.2 million, or 26% of net revenues,  in 2001 and $36.6 million,
or 16% of net revenues, in 2000.


     R&D  expenditures in 2001 increased from 2000 primarily as a result of $1.3
million of incremental spending on our BridgeFPGA  initiative.  We announced the
initiative  during the second quarter of 2001 to address the input/output  (I/O)
problems   created   within  the   high-speed   communications   market  by  the
proliferation of interface standards.  The adoption of these interface standards
has created the need for  designers to implement  bridging  functions to connect
incompatible interface standards. The remaining increase in R&D expenditures was
due to  spending  on  technologies  acquired in our  acquisitions  of  GateField
Corporation  (GateField),  a developer of flash-based FPGA products, in November
2000 and of Prosys Technology  (Prosys), a developer of SRAM-based embedded FPGA
intellectual  property  cores (IP),  in June 2000.  R&D spending on the acquired
technologies  was included for all of 2001, but only part of 2000. We introduced
the first  logic  core  based on the SRAM  technology  of Prosys  (our  VariCore
embeddable  reprogrammable  gate array  (EPGA)) in 2001.  Revenues from VariCore
EPGAs  have not  materialized  to date and the  development  of a more  advanced
VariCore EPGA has been postponed.

     Approximately  half of the increase in R&D  expenditures  for 2002 compared
with  2001  was  due to  additional  incremental  spending  on the  Bridge  FPGA
initiative  during the first half of 2002.  We introduced  the first  BridgeFPGA
product, a high-speed antifuse FPGA with dedicated  high-speed I/O circuits that
can support multiple  interface  standards (our Axcelerator family of FPGAs), on
July 1,  2002.  During  the  second  half of  2002,  we  realigned  our  product
development  strategies  to focus  resources on new  products  with the greatest
anticipated  return on  investment.  The  development  of subsequent  BridgeFPGA
products,  which were expected to include embedded high-speed interface protocol
controllers,   has  been  postponed.  As  a  consequence  of  this  realignment,
incremental spending on the BridgeFPGA  initiative was halted and we expensed at
that time masks and prototype wafer lots related to the next BridgeFPGA product.
Approximately half of the increase in R&D expenditures in 2002 from 2001 was due
to the expenses incurred for masks and prototype wafer lots.


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

     Selling, General, and Administrative (SG&A)

     SG&A expenses in 2002 were $43.0 million, or 32% of net revenues,  compared
with $41.5 million,  or 28% of net revenues in 2001 and $48.0 million, or 21% of
net revenues, in 2000.


     SG&A  expenses in 2001  declined by 14% compared  with 2000  primarily as a
result of lower  selling  expenses  (primarily  sales  bonuses and outside sales
commissions) associated with the 36% decrease in net revenues.  These reductions
were  partially  offset by an increase in SG&A  headcount  during  2001,  mostly
during the second  half of the year.  The  headcount  increase  was in sales and
marketing  to support the  introduction  of our new  products,  the  flash-based
ProASIC Plus and antifuse-based Axcelerator FPGA families.


     SG&A expenses in 2002  increased by 4% compared with 2001  primarily due to
an increase in SG&A headcount  during 2002 and the full effect of the additional
headcount  added in 2001. The  introduction  and rollout of our ProASIC Plus and
Axcelerator  product  families in 2002 also  increased  our sales and  marketing
costs.   These  increases  were  partially  offset  by  lower  selling  expenses
(primarily sales bonuses and outside sales  commissions)  associated with the 8%
decrease in net revenues.

     Amortization of Goodwill and Other Acquisition-Related Intangibles

     Amortization of goodwill and other acquisition-related  intangibles in 2002
was $2.7 million, compared with $14.8 million in 2001 and $8.1 million in 2000.

     The  reduction  of   amortization   from  2001  to  2002  was  due  to  the
implementation  of Statement of Financial  Accounting  Standards (SFAS) No. 142,
"Goodwill and Other  Intangible  Assets," at the beginning of fiscal 2002, which
eliminated  the  amortization  of  goodwill.  See  Note 1 and Note 2 of Notes to
Consolidated  Financial  Statements for further discussion of the impact of SFAS
No.  142. In 2001,  the  portion of the  amortization  expense  that  related to
goodwill amounted to $11.7 million.

     The increase in amortization from 2000 to 2001 was due to the timing of the
Prosys  acquisition,  which was completed on June 2, 2002,  and of the GateField
acquisition,  which was completed on November 15, 2000. Amortization of goodwill
and  other  acquisition-related   intangibles  from  the  Prosys  and  GateField
acquisitions  were included for all of 2001 but only part of 2000 (from the date
of acquisition).

     Purchased In-Process Research and Development Expenses (IPR&D)


     During 2001 and 2002, there were no acquisitions with IPR&D. IPR&D from the
Prosys  and  GateField  acquisitions  in 2000  amounted  to $10.6  million.  The
following table summarizes the significant assumptions underlying the valuations
related to IPR&D at the time of the acquisitions in fiscal 2000.

<TABLE>
<CAPTION>

                                                                            Percentage     Discount      Weighted
                                                                             Complete        Rate        Average
                                                                               at         Applied to     Cost of
                            2000                                 IPR&D     Acquisition       IPR&D       Capital
---------------------------------------------------------     -----------  -----------    ----------     ---------
                                                            (in thousands)
<S>                                                           <C>              <C>           <C>           <C>
GateField................................................     $     5,048      50%           25%           16%
Prosys...................................................     $     5,598      53%           25%           16%
</TABLE>


We believe that the amounts  determined for IPR&D represented fair value and did
not exceed the amounts an  independent  party would have paid for these projects
at the time of acquisition.

          GateField

               In November 2000, we completed our  acquisition of GateField in a
          transaction  accounted for as a purchase.  The IPR&D  associated  with
          this purchase resulted in a one-time charge of $5.0 million during the
          fourth quarter of 2000.

               IPR&D was identified and valued using the income approach through
          extensive  interviews  and  analysis  of data  provided  by  GateField
          concerning  developmental  products,  their stage of development,  the
          time,  cost,  and resources  needed to complete  them,  and associated
          risks.  At the date of acquisition,  the in-process  technology had no
          alternative  future use and was not ready for  commercial  production.
          Given that there was  significant  technological  risk relating to the
          development of the  next-generation  ProASIC product and that not even
          the first-generation  ProASIC product had generated any revenue,  this
          product family was classified as in-process technology.  {Based on our
          fair value  estimation  of future cash flows in the years 2001 through
          2005,  we  estimated  the fair  value on  November  15,  2000,  of the
          next-generation ProASIC product to be $5.0 million.}

               The  next-generation  ProASIC Plus family was introduced in 2002,
          which  corresponded with the date originally  contemplated at the date
          of  acquisition.  {Based on our fair value  estimation  of future cash
          flows,  we believe the value  attributed to IPR&D is still  materially
          valid.}

               Prosys

               In June 2000,  we announced  and  completed  our  acquisition  of
          Prosys in a transaction accounted for as a purchase. The IPR&D expense
          associated  with this purchase  resulted in a one-time  charge of $5.6
          million during the second quarter of 2000.

               IPR&D was identified through extensive interviews and analysis of
          data provided by Prosys concerning developmental products, their stage
          of development, the time, cost, and resources needed to complete them,
          and associated risks. The identified IPR&D was valued using the income
          approach. At the date of acquisition, the in-process technology had no
          alternative future use and had not reached technological  feasibility.
          {Based on our fair value  estimation of future cash flows in the years
          2000 through 2005, we estimated the fair value on June 2, 2000, of the
          Prosys in-process technology to be $5.6 million.}

               The  technology  purchased  from  Prosys was  developed  into our
          VariCore EPGA, which was introduced in 2001. The economic  environment
          during 2001 and 2002 was not favorable for the growth of market demand
          for  programmable  logic cores.  Revenues from VariCore EPGAs have not
          materialized to date and the  development of a more advanced  VariCore
          EPGA has been  postponed.  {We  continue to believe  that a market for
          programmable  logic cores will emerge and that our VariCore  EPGA will
          be competitive.  We do not believe that either the lack of revenues to
          date or the  postponement  of development of a more advanced  embedded
          block core from the Prosys  technology  is  sufficient at this time to
          impair the values we attributed  to IPR&D,  goodwill,  and  intangible
          assets.  More  particularly,  based on our fair  value  estimation  of
          future  cash flows  from the  currently  available  EPGA  product,  we
          believe that the value attributed to IPR&D is still materially valid.}

     Interest Income and Other, Net of Expense

     Interest income and other, net of expenses,  was $5.5 million in 2002, $7.3
million in 2001,  and $8.3  million in 2000.  The decrease in interest and other
income  experienced  in 2002  compared with 2001 was primarily a result of lower
interest rates, which was partially offset by higher cash balances in the fourth
quarter  of 2002.  The  decrease  in 2001 from 2000 was due to a drop in amounts
available for investment  during the year as well as lower interest  rates.  The
combined  balance of cash,  cash  equivalents,  and short-term  investments  was
$133.8  million at the end of 2002,  compared with $128.8  million at the end of
2001 and $140.8  million at the end of 2000. In addition,  the amount  available
for  investment  during  most of 2000 was  significantly  higher than the ending
balance due to cash usage in the fourth  quarter for the  purchase of  GateField
($24.0 million) and repurchase of our Common Stock ($21.0 million).

     Losses on Sales and Write-Downs of Equity Investments

     During  2002,  we  realized  losses  and  recorded  impairment  write-downs
totaling $3.7 million in connection with our strategic equity investments, which
consisted of $1.6 million  related to an investment in a publicly traded company
and $2.1 million related to an equity investment in a private company.  The $1.6
million of losses  related to the  investment  in a publicly  traded  company is
composed of $0.7 million of realized  losses on shares sold during the first and
second quarters of 2002 and $0.9 million of impairment  write-downs  recorded in
the  second and fourth  quarters  of 2002.  These  impairment  write-downs  were
recorded as a result of declines in the market value of shares still held by us.
The $2.1  million  loss  related to an equity  investment  in a private  company
consisted  entirely  of an  impairment  write-down  that was  recorded  when the
estimated  fair value of the  private  company  was  determined  to be below its
carrying  value after the private  company  received new financing in the fourth
quarter  of 2002 at a per  share  price  significantly  less  than  our  initial
investment.  As of December  31, 2002,  we had $0.3 million of strategic  equity
investments  remaining on the balance sheet. See "Critical Accounting Policies",
Note 1, and Note 3 of Notes to  Consolidated  Financial  Statements  for further
discussion of our policy for accounting for equity investments.


     Gain on Sale of Chartered Common Stock

     During the second  quarter of 2000, we sold all 515,000 shares of Chartered
Semiconductor  Manufacturing  Ltd.  (Chartered) common stock that we owned for a
one-time gain of $28.3 million.

     Equity Interest in Net Loss of Equity Method Investee

     Prior to our  acquisition  of GateField on November 15, 2000,  we accounted
for our  investments in and agreements with GateField under the equity method of
accounting.  We began  accounting for our equity interest in GateField under the
equity  method of  accounting  during  the third  quarter of 1999.  We  incurred
charges of $2.4 million in 2000 and $0.2 million in 1999 for our equity interest
in the net loss of GateField.

     Tax (Benefit)/Provision

     Our $1.9 million tax benefit for 2002 was based on the combined  effects of
a pre-tax  loss and large  R&D tax  credits.  Excluding  the  effect of  certain
acquisition-related  charges and  investment  gains,  our effective tax rate was
8.9% for 2001 and 31.3% for 2000. Significant components affecting the effective
tax rate include  federal R&D credits,  income from tax-exempt  securities,  the
state composite rate, and recognition of certain  deferred tax assets subject to
valuation allowances at the end of the preceding year.

Financial Condition, Liquidity, and Capital Resources


     Our total  assets were  $293.3  million at the end of 2002,  compared  with
$290.1 million at the end of 2001. The increase in total assets was attributable
principally  to increases in cash,  cash  equivalents,  short-term  investments,
accounts receivable,  and property and equipment. The following table sets forth
certain  financial  data from the  consolidated  balance  sheets  expressed as a
percentage change from December 31, 2001, to December 31, 2002:

<TABLE>
<CAPTION>

<S>                                                                                                           <C>
Cash, cash equivalents, and short-term investments...................................................         3.9%
Accounts receivable, net.............................................................................         5.1
Inventories..........................................................................................        (4.8)
Property and equipment, net..........................................................................        10.5
Goodwill, net........................................................................................       (13.6)
Other assets, net (primarily deferred income taxes and purchased intangible assets other than
  goodwill)..........................................................................................         4.7
Total assets.........................................................................................         1.1
Total current liabilities............................................................................        (2.6)
Total liabilities....................................................................................        (2.7)
Shareholders' equity.................................................................................         1.9
</TABLE>

     Cash, Cash Equivalents, and Short-Term Investments


     Our cash, cash equivalents,  and short-term investments were $133.8 million
at the end of 2002,  compared  with  $128.8  million  at the end of  2001.  This
increase of $5.0 million from the end of 2001 was due primarily to $12.8 million
of net cash provided by operating  activities,  as well as $9.4 million from the
issuance of Common  Stock under  employee  stock plans and $0.4 million from the
repayment of a note receivable  from an officer.  These increases were partially
offset by $8.8  million of property  and  equipment  purchases,  $7.9 million of
Common  Stock  repurchases,  and $0.9  million of  marketable  strategic  equity
investment impairment write-downs.


     The significant components within operating activities that provided
cash during 2002 included $13.3 million from the net results for the year
adjusted for non-cash items ($10.0 million of which relates to depreciation and
amortization) and $2.6 million of tax benefit from exercise of stock options.
The significant components within operating activities that resulted in a
reduction of cash from operations in 2002 included $4.0 million of cash used in
the reduction of accounts payable, accrued salaries and employee benefits, and
other accrued liabilities.

     We meet all of our funding  needs for ongoing  operations  with  internally
generated  cash flows from  operations  and with  existing  cash and  short-term
investment  balances.  {We believe that existing  cash,  cash  equivalents,  and
short-term  investments,  together with cash generated from operations,  will be
sufficient to meet our cash  requirements for 2003.} A portion of available cash
may be used  for  investment  in or  acquisition  of  complementary  businesses,
products, or technologies.  Wafer manufacturers have at times demanded financial
support from customers in the form of equity  investments  and advance  purchase
price  deposits,  which in some cases have been  substantial.  Should we require
additional  capacity,  we may be required to incur  significant  expenditures to
secure such capacity.

     The following represents contractual  commitments associated with operating
leases and royalty and licensing agreements as of December 31, 2002:
<TABLE>
<CAPTION>

                                                                        Payments Due by Period
                                                   ------------------------------------------------------------------
                                                                                                            2006
                                                     Total          2003          2004          2005       and later
                                                   ----------    ----------    ----------    ----------    ----------
                                                                            (in thousands)

<S>                                              <C>           <C>           <C>           <C>           <C>
 Operating leases...........................       $    2,709    $    2,480    $      229    $        -    $        -
 Royalty/licensing agreements...............           17,940         5,508         5,609         6,198           625
                                                   ----------    ----------    ----------    ----------    ----------
 Total......................................       $   20,649    $    7,988    $    5,838    $    6,198    $      625
                                                   ==========    ==========    ==========    ==========    ==========
</TABLE>



Subsequent   to  December  31,  2002,   we  signed  a  ten-year   $27.4  million
non-cancelable  lease for our  principal  facilities  and  executive  offices in
Mountain View,  California.  This  commitment is not included in the table.  See
Note 14 (unaudited) of Notes to  Consolidated  Financial  Statements for further
discussion.  At December 31, 2002, we also had a number of purchase  commitments
from wafer  manufacturers  for orders  that were  expected  to be filled  within
ninety  days.  The  wafer  purchase  commitments  represent  a  normal  level of
outstanding orders, are not material and are not included in the table.


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

     Accounts Receivable

     Our net accounts  receivable was $17.6 million at the end of 2002, compared
with $16.8  million  at the end of 2001.  This  increase  was due  primarily  to
increased  shipments in the last quarter of 2002.  Revenue was $34.1  million in
the fourth quarter of 2002, compared with $32.1 million in the fourth quarter of
2001.  Days  sales  outstanding  remained  stable at 44 days at the end of 2002,
compared with 43 days at the end of 2001.

     Inventories


     Our net  inventories  were $34.6 million at the end of 2002,  compared with
$36.3  million  at the end of 2001.  Inventories  decreased  during  2002 due to
significant  reductions  in the  level of  silicon  wafers  ordered  from  wafer
suppliers  during the year.  Inventory days of supply decreased from 265 days at
the end of 2001 to 234 days at the end of 2002. Since our FPGAs are manufactured
using customized steps that are added to the standard manufacturing processes of
our independent wafer suppliers, our manufacturing cycle is generally longer and
hence more  difficult  to adjust in  response  to  changing  demands or delivery
schedules.  Accordingly, our inventory model will probably always be higher than
that of our major competitors using standard processes.


     Property and Equipment


     Our net  property  and  equipment  was  $16.2  million  at the end of 2002,
compared  with $14.7  million at the end of 2001.  We invested  $8.8  million in
property and  equipment in 2002,  compared with $9.5 million in 2001, to support
the development and production of new products.  Capital expenditures during the
past two years have been primarily for  engineering,  manufacturing,  and office
equipment.  Depreciation  of property  and  equipment  was $7.3 million in 2002,
compared  with $7.0 million in 2001.  We also  eliminated a reserve for property
and  equipment  of $0.5  million,  which  resulted  in a benefit  to the  income
statement, after completing a full physical count of property and equipment that
resulted in lower than expected asset write-offs.


     Goodwill


     Our net goodwill was $32.1 million at the end of 2002,  compared with $37.2
million at the end of 2001. The reduction in net goodwill was due primarily to a
balance  sheet  reclassification  of $5.0 million from  goodwill to deferred tax
assets. {The goodwill was reclassified  because we believe (based on a number of
factors,  including  our  estimate  of  future  taxable  income)  that  some net
operating  losses  generated  by  GateField  and valued at zero when we acquired
GateField  will be used by us to reduce taxes payable in the future.} See Note 5
of  Notes  to  Consolidated  Financial  Statements  for  further  discussion  of
adjustments to goodwill.

     Goodwill is recorded when the consideration paid in an acquisition  exceeds
the fair value of the net tangible and intangible assets acquired.  Historically
and through the end of 2001,  goodwill was  amortized on a  straight-line  basis
over its useful life. At the  beginning of 2002, we adopted SFAS No. 142,  which
addresses the  financial  accounting  and  reporting  standards for goodwill and
other intangible assets subsequent to their acquisition.  This standard requires
that  goodwill  no longer be  amortized,  and  instead be tested for  impairment
annually  or more  frequently  if certain  events or  changes  in  circumstances
indicate that the carrying value may not be  recoverable.  In addition,  we were
required to perform a  transitional  impairment  review  related to the carrying
value of goodwill as of the  beginning of 2002.  We completed  our  transitional
impairment tests as of March 31, 2002, and our annual goodwill  impairment tests
as of December 31, 2002, and noted no impairment.

     The first step of the  transitional  and annual goodwill  impairment  tests
consisted of a comparison of our fair value our book value,  including goodwill.
Our fair value was determined based on our total market capitalization, which we
believe  represents  the best  indicator of our fair value.  Based on this first
step  analysis,  we  determined  that our fair  value  was in excess of our book
value. Accordingly, we were not required to proceed to the second step.


     Other Assets


     Our other assets were $25.9 million at the end of 2002, compared with $26.6
million at the end of 2001.  The  decrease  was due  primarily  to $2.7  million
amortization of identified  intangible  assets, a $2.1 million  impairment write
down on a strategic  equity  investment in a private  company,  and $0.5 million
amortization of long-term license fees. These decreases were partially offset by
an increase in deferred tax assets of $5.3 million.

     At December 31, 2002, we have definite lived intangible assets arising form
prior  business  acquisitions  with a net book value of $7.2 million,  which are
being  amortized  on a  straight  line  basis over  their  estimated  lives.  In
accordance  with SFAS No. 144,  "Accounting  for the  Impairment  or Disposal of
Long-Lived  Assets," we recognize  impairment  losses on long-lived  assets when
indicators of impairment are present and the  undiscounted  cash flows estimated
to be  generated  by  those  assets  are less  than the net book  value of those
assets. The impairment loss is measured by comparing the fair value of the asset
to its  carrying  value.  Fair value is based on  discounted  cash  flows  using
present value techniques  identified in SFAS No. 144. Due to the postponement of
the advanced  EPGA core product and the lack of revenues to date in the embedded
core market,  we performed a SFAS No. 144  impairment  review of the  intangible
assets  we  acquired  from  Prosys.  {Based  on our  fair  value  estimation  of
undiscounted  future cash flows from the currently  available  EPGA product,  we
believe that the intangible assets we acquired from Prosys are not impaired.} If
these  estimates or their  related  assumptions  change in the future,  it could
result in lower  estimated  future  cash flows that may not  support the current
carrying  value of these  assets,  which would  require us to record  impairment
charges for these assets.


     Current Liabilities

     Our  total  current  liabilities  were  $49.1  million  at the end of 2002,
compared with $50.4 million at the end of 2001. The decrease was due principally
to a reduction of $1.2 million for income tax payable. We recorded a tax benefit
for 2002, resulting in no income tax payable at the end of 2002.

     Shareholders' Equity

     Shareholders'  equity was $242.3 million at the end of 2002,  compared with
$237.7  million  at the end of 2001.  The  increase  included  proceeds  of $9.4
million from the sale of Common Stock under employee  stock plans,  $2.6 million
of tax  benefits  arising  from  employee  stock  plans,  and $0.4  million from
repayment of a note-receivable  from an officer.  These increases were partially
offset by stock repurchases of $7.9 million.

Employees

     At the  end of  2002,  we had 538  full-time  employees,  including  148 in
marketing,  sales, and customer  support;  182 in R&D; 155 in operations;  16 in
Protocol Design Services;  and 37 in administration  and finance.  This compares
with 521 full-time employees at the end of 2001, an increase of 3%. Net revenues
were approximately  $250,000 per employee for 2002,  compared with approximately
$279,000 for 2001. This represents a decrease of 10%.

Impact of Recently Issued Accounting Standards


     In July 2002, the Financial  Accounting  Standards Board (FASB) issued SFAS
No. 146,  "Accounting for Costs  Associated  with Exit or Disposal  Activities."
SFAS 146 requires that a liability for cost  associated with an exit or disposal
activity  be  recognized  and  measured  initially  at fair  value only when the
liability is incurred.  SFAS 146 is  effective  for exit or disposal  activities
that are initiated  after  December 31, 2002. We do not expect that the adoption
of SFAS No. 146 will have a material impact on our financial position, operating
results, or cash flows.


     In November 2002, the Emerging Issues Task Force (EITF) reached a consensus
on  Issue  No.  00-21   (EITF00-21),   "Revenue   Arrangements   with   Multiple
Deliverables."  EITF 00-21  addresses  certain  aspects of the  accounting  by a
vendor for  arrangements  under which the vendor will perform  multiple  revenue
generating  activities.  The  provisions  of EITF  00-21  will  apply to revenue
arrangements  entered in fiscal periods beginning after June 15, 2003. We do not
expect the  adoption  of EITF 00-21 to have a material  impact on our  financial
position, operating results, or cash flows.


     In November  2002,  the FASB issued  FASB  Interpretation  No. 45 (FIN 45),
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the  guarantor's  balance sheet upon issuance of a guarantee.  In
addition,  FIN 45 requires  disclosures  about the guarantees that an entity has
issued,  including a reconciliation  of changes in the entity's product warranty
liabilities.  The initial recognition and initial measurement  provisions of FIN
45 are applicable on a prospective  basis to guarantees issued or modified after
December  31 2002.  The  disclosure  requirements  of FIN 45 are  effective  for
financial  statements  of interim or annual  periods  ending after  December 15,
2002.  The  adoption  of this  standard  did not have a  material  impact on our
financial position, operating results, or cash flows.


     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition   and  Disclosure."   SFAS  148  amends  SFAS  No.  123,
"Accounting for Stock-Based  Compensation,"  to provide  alternative  methods of
transition  for a voluntary  change to the fair value based method of accounting
for  stock-based  employee  compensation.  In  addition,  SFAS  148  amends  the
disclosure  requirements  of SFAS 123 to require  prominent  disclosures in both
annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee  compensation and the effect of the method used on reported
results.  The transition  guidance and annual disclosure  provisions of SFAS 148
are  effective  for fiscal  years ending  after  December 15, 2002.  The interim
disclosure  provisions are effective for financial reports containing  financial
statements for interim  periods  beginning  after December 15, 2002. SFAS 148 is
effective for our year 2002 annual report and quarterly  reports  beginning with
the first quarter 2003 interim  report.  Since we use the intrinsic value method
for  accounting  for  stock-based  employee  compensation,  the adoption of this
standard did not have a material  impact on our  financial  position,  operating
results, or cash flows. See Note 1 of Notes to Consolidated Financial Statements
for further  discussion  of our  accounting  for stock options and the pro-forma
disclosures required by SFAS No. 148.

     In  January  2003,  the  FASB  issued   Interpretation  No.  46  (FIN  46),
"Consolidation of Variable Interest  Entities." FIN 46 requires an investor with
a  majority  of  the  variable  interests  in  a  variable  interest  entity  to
consolidate  the entity and also  requires  majority  and  significant  variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity  investors do not have a  controlling  interest or
the equity investment at risk is insufficient to finance the entity's activities
without  receiving  additional  subordinated  financial  support  from the other
parties.  We are  currently  reviewing  our  investment  portfolio  to determine
whether any of our investee companies are variable interest entities.  We do not
expect to identify any variable interest entities that must be consolidated, but
may be  required to make  additional  disclosures.  The maximum  exposure of any
investment that may be determined to be in a variable interest entity is limited
to the amount invested.

Critical Accounting Policies and Estimates


     Our  discussion  and  analysis of our  financial  condition  and results of
operations is based upon our consolidated financial statements,  which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues,  and  expenses and the related  disclosure  of  contingent  assets and
liabilities.  The U.S.  Securities and Exchange  Commission has defined the most
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  and  subjective  judgments,  often  as a  result  of the need to make
estimates of matters that are inherently uncertain.  Based upon this definition,
our most critical  policies include:  Inventories,  Impairment of Investments in
Other  Companies,  Intangible  Assets  and  Goodwill,  Income  Taxes,  and Legal
Matters.  These  policies are  discussed  below,  as well as the  estimates  and
judgments  involved.  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.
We also have other key  accounting  policies,  such as policies  for Revenue and
Accounts Receivable.  These other policies either do not generally require us to
make  estimates and judgments that are as difficult or as subjective or they are
less likely to have a material impact on our reported  results of operations for
a given period.


          Inventories

          As of  December  31,  2002,  we had a net  inventory  balance of $34.6
     million.  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  either  orders  received  from  customers  or internal
     forecasts of demand for these products. Other considerations in determining
     inventory  levels  include the stage of products in the product life cycle,
     design win activity,  manufacturing lead times, customer demands, strategic
     relationships   with   foundries,   and   competitive   situations  in  the
     marketplace.  Should any of these factors  develop other than  anticipated,
     inventory levels may be adversely and materially affected.


          We write down our inventory for estimated obsolescence or unmarketable
     inventory  equal to the  difference  between the cost of inventory  and the
     estimated  realizable value based upon assumptions  about future demand and
     market conditions. To address this difficult,  subjective, and complex area
     of judgment, we apply a methodology that includes assumptions and estimates
     to arrive at the net  realizable  value.  First,  we identify any inventory
     that has been previously reserved in prior periods.  This inventory remains
     reserved until sold,  destroyed,  or otherwise  dispositioned.  Second, our
     quality assurance personnel examine inventory line items that may have some
     form of obsolescence due to non-conformance  with electrical and mechanical
     standards.  Third,  we assess the inventory not otherwise  identified to be
     reserved  against  product  history and  forecasted  demand,  typically 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.

          Impairment of Investments in Other Companies

          We occasionally make equity investments in public or private companies
     for the  promotion of business  and  strategic  objectives.  We monitor our
     equity  investments  for impairment on a periodic  basis. In the event that
     the carrying value of the equity investment exceeds its fair value, and the
     decline in value is  determined  to be other than  temporary,  the carrying
     value is reduced to its current fair value.

          In accordance with SFAS No. 115,  "Accounting for Certain  Investments
     in Debt and  Equity  Securities,"  if the  decline  in value  below cost is
     determined  to be other  than  temporary,  the  unrealized  losses  will be
     recorded  as  expense  on the  income  statement  in the  period  when that
     determination  is made.  In the  absence of other  overriding  factors,  we
     consider a decline in market value to be other than  temporary when a stock
     has traded  below  book value for a  consecutive  six-month  period.  If an
     investment  continues  to trade  below book value for more than six months,
     and mitigating factors such as general economic or industry specific trends
     are not present,  the  investment  would be evaluated  for  impairment  and
     written down to a balance equal to the estimated  fair value at the time of
     impairment,  with the amount of the  write-down  realized as expense on the
     income  statement.  During 2002, we held an investment in a publicly traded
     company  that had  traded  below book  value.  Based on our  assessment  of
     industry  trends,  as well as the  volatility  and trading  volumes of this
     equity security,  we concluded that the declines in value at the end of the
     second and fourth quarters of 2002 were other than temporary.  Accordingly,
     we  recorded  as  expense,  in  accordance  with SFAS No.  115,  impairment
     write-downs  of $0.5 million in the second  quarter and $0.4 million in the
     fourth  quarter.  At the end of 2002, we continued to hold an investment in
     the publicly  traded  equity  security with a market value of $0.2 million,
     which is included in short-term investments.

          At December 31, 2001,  we held a strategic  equity  investment of $2.2
     million  in a private  company  located in the  United  Kingdom.  Under our
     accounting policy, the carrying value of a non-marketable investment is the
     amount paid for the  investment  unless it has been  determined to be other
     than  temporarily  impaired,  in which case we write the investment down to
     its  impaired  value.  We review all of our  investments  periodically  for
     impairment;  however, for non-marketable equity securities,  the impairment
     analysis requires significant  judgment.  This analysis includes assessment
     of the  investee's  financial  condition,  the  business  outlook  for  its
     products  and  technology,  its  projected  results  and  cash  flows,  the
     likelihood of obtaining  subsequent rounds of financing,  and the impact of
     any relevant  contractual  equity  preferences held by us or others.  If an
     investee obtains  additional funding at a valuation lower than our carrying
     amount, we presume that the investment is other than temporarily  impaired,
     unless specific facts and circumstances indicate otherwise (for example, if
     we hold  contractual  rights that give us a  preference  over the rights of
     other investors).  During 2002, a sufficient market for the U.K.  company's
     technology  did not develop  and  additional  financing  was raised from an
     existing  shareholder  during  the  fourth  quarter  of 2002 to enable  the
     company to continue operations.  The market value of the company implied in
     the 2002 financing  indicated  significant  impairment of our investment in
     the  company.  In  accordance  with our  accounting  policy,  we wrote  the
     investment  down to $0.1 million,  a balance  equal to the  estimated  fair
     value of our  investment in the company at the time of the  financing.  The
     $0.1 million balance is included on the balance sheet in other assets.  The
     impairment  write-down  of $2.1  million was  realized as an expense on the
     income statement in the fourth quarter of 2002.

          Intangible Assets and Goodwill

          During 1999 and 2000, we completed the acquisitions of AutoGate Logic,
     Inc., Prosys, and GateField,  resulting in a significant amount of goodwill
     and   identified   intangible   assets.   Goodwill  is  recorded  when  the
     consideration  paid in an  acquisition  exceeds  the fair  value of the net
     tangible and intangible assets acquired. At December 31, 2002, we had $32.1
     million  of  remaining  net book  value  assigned  to  goodwill  from those
     acquisitions  and $7.2  million of  remaining  net book value  assigned  to
     identified intangible assets, such as patents and completed technology.


          Goodwill is recorded  when the  consideration  paid in an  acquisition
     exceeds the fair value of the net tangible and intangible  assets acquired.
     Historically  and  through the end of 2001,  goodwill  was  amortized  on a
     straight-line  basis over its useful life.  At the  beginning  of 2002,  we
     adopted  SFAS  No.  142,  which  addresses  the  financial  accounting  and
     reporting  standards for goodwill and other intangible assets subsequent to
     their  acquisition.  This  standard  requires  that  goodwill  no longer be
     amortized,  and  instead,  be  tested  for  impairment  annually,  or  more
     frequently if certain events or changes in circumstances  indicate that the
     carrying  value may not be  recoverable.  In addition,  we were required to
     perform a transitional  impairment  review related to the carrying value of
     goodwill  as of the  beginning  of  2002.  We  completed  our  transitional
     impairment  tests as of March 31, 2002, and our annual goodwill  impairment
     tests as of December 31, 2002, and noted no impairment.

          The first  step of the  transitional  and annual  goodwill  impairment
     tests  consisted  of a  comparison  of our fair value with our book  value,
     including goodwill. Our fair value was determined based on our total market
     capitalization,  which we believe represents the best indicator of our fair
     value. Based on this first step analysis, we determined that our fair value
     was in excess  of our book  value.  Accordingly,  we were not  required  to
     proceed to the second step.

          At December 31, 2002, we have definite lived intangible assets arising
     form prior  business  acquisitions  with a net book value of $7.2  million,
     which are being  amortized  on a straight  line basis over their  estimated
     lives. In accordance  with SFAS No. 144,  "Accounting for the Impairment or
     Disposal  of  Long-Lived   Assets,"  we  recognize   impairment  losses  on
     long-lived  assets  when  indicators  of  impairment  are  present  and the
     undiscounted  cash flows estimated to be generated by those assets are less
     than the net book value of those assets. The impairment loss is measured by
     comparing the fair value of the asset to its carrying value.  Fair value is
     based on discounted cash flows using present value techniques identified in
     SFAS No. 144. Due to the postponement of the advanced EPGA core product and
     the lack of revenues to date in the embedded  core  market,  we performed a
     SFAS No. 144 impairment  review of the  intangible  assets we acquired from
     Prosys.  {Based on our fair value  estimation of  undiscounted  future cash
     flows from the  currently  available  EPGA  product,  we  believe  that the
     intangible  assets we  acquired  from  Prosys are not  impaired.}  If these
     estimates  or their  related  assumptions  change in the  future,  it could
     result in lower  estimated  future  cash  flows  that may not  support  the
     current  carrying  value of these assets,  which would require us to record
     impairment charges for these assets.


          Income Taxes

          We  account  for  income  taxes  in  accordance  with  SFAS  No.  109,
     "Accounting  for Income Taxes," which requires that deferred tax assets and
     liabilities  be  recognized  using  enacted  tax  rates  for the  effect of
     temporary differences between the book and tax bases of recorded assets and
     liabilities. SFAS No. 109 also requires that deferred tax assets be reduced
     by a valuation  allowance if it is more likely than not that some or all of
     the  deferred  tax assets will not be  realized.  We evaluate  annually the
     realizability  of our  deferred  tax  assets  by  assessing  our  valuation
     allowance and, if necessary,  we adjust the amount of such  allowance.  The
     factors used to assess the  likelihood of  realization  are our forecast of
     future taxable income and available tax planning  strategies  that could be
     implemented to realize the net deferred tax assets.

          At December  31,  2002,  we had $66.1  million of gross  deferred  tax
     assets in excess of deferred tax liabilities.  { Based on the factors cited
     above,  including  our forecast of future  taxable  income and  limitations
     under  Section 382 of the Internal  Revenue Code, we determined at December
     31,  2002,  that it is more likely than not that $42.3  million of deferred
     tax assets will be  realized.}  This  resulted in a valuation  allowance of
     $23.8 million.  In order to fully utilize the $42.3 million of deferred tax
     assets,  taxable income in the amount of approximately  $93 million must be
     earned in future periods. For proper valuation of deferred tax assets under
     SFAS No.  109 in  situations  where a company  has  incurred  a  three-year
     cumulative loss before taxes in recent years, significant negative evidence
     is  considered  to exist in the  evaluation  of the  company's  ability  to
     generate future taxable income. In evaluating  positive evidence available,
     expectations  of future  taxable  income on an  extended  time  horizon are
     rarely  sufficient to overcome the negative  evidence of recent  cumulative
     losses. {Failure to achieve positive taxable income in 2003 would result in
     a cumulative  three year loss before tax, which would result in significant
     negative  evidence under SFAS No. 109 regarding the realizability of our of
     net deferred tax assets and probably  result in additional  tax  provisions
     being  recorded on the income  statement in 2003.}  Factors that may affect
     our ability to achieve sufficient  forecasted  taxable income include,  but
     are not limited to, increased  competition,  a decline in sales or margins,
     loss of market share,  delays in product  availability,  and  technological
     obsolescence.


          Legal Matters

          As is typical in the semiconductor  industry,  we have been and expect
     to be  notified  from  time  to time of  claims  that we may be  infringing
     patents  owned  by  others.  During  2002,  we held  discussions  regarding
     potential  patent  infringement  issues with several  third  parties.  When
     probable and reasonably estimable, we have made provision for the estimated
     settlement costs of claims for alleged infringement. The provision is based
     on an estimated  royalty rate applied to shipments  made in the periods and
     to or from the geographic  areas under dispute.  In the absence of facts or
     circumstances unique to a particular dispute, the royalty rate is estimated
     based on our  understanding  of royalty  rates other  technology  companies
     typically  agree to pay in similar types of disputes.  As we sometimes have
     in the past,  we may obtain  licenses  under patents that we are alleged to
     infringe. While we believe that reasonable resolution will occur, there can
     be no assurance  that these claims will be resolved or that the  resolution
     of these claims will not have a materially  adverse effect on our business,
     financial condition, or results of operations.  In addition, our evaluation
     of the  impact  of these  pending  disputes  could  change  based  upon new
     information  learned by us.  {Subject to the  foregoing,  we do not believe
     that the  resolution  of any  pending  patent  dispute  is likely to have a
     materially adverse effect on our business,  financial condition, or results
     of operations.}


          Revenues

          A  significant  portion of our revenue is derived  from  shipments  to
     distributors.  Shipments to distributors are made under agreements allowing
     certain rights of return and price adjustments on unsold  merchandise.  For
     that reason,  we defer recognition of revenues and related cost of revenues
     on sales of our products to  distributors  until the products are resold by
     the distributor and title transfers to the end user.

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

          Accounts Receivable

          As of December  31,  2002,  we had an accounts  receivable  balance of
     $18.7 million,  net of an allowance for doubtful  accounts of $1.1 million.
     If  sales  levels  were  to  increase,  it is  likely  that  the  level  of
     receivables  would also increase.  In the event that customers  delay their
     payments to us, the levels of accounts  receivable would also increase.  We
     maintain  allowances for doubtful  accounts for estimated  losses resulting
     from  the  inability  of our  customers  to  make  required  payments.  The
     allowance for doubtful  accounts is based on past payment  history with the
     customer,   analysis  of  the  customer's   current  financial   condition,
     outstanding  invoices  older  than  90  days,  and  other  factors.  If the
     financial  condition of our customers were to deteriorate,  resulting in an
     impairment of their ability to make payments,  additional allowances may be
     required.

Investment Market Risk

     As of December 31, 2002, our investment  portfolio  consisted  primarily of
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 debt security investments totaling $115.4 million at December 31, 2002,
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 to maturity.  A hypothetical
100 basis  point  increase  in interest  rates  would  result in a reduction  of
approximately  $1.1  million  in the fair value of our  available-for-sale  debt
securities held at December 31, 2002.

     Our  marketable  equity  securities  totaling  $0.2  million are subject to
equity  price risk.  A decrease in equity  prices of 10% would not result in any
material  decline in the market value of our marketable  equity  securities from
the fair value at December 31, 2002.

     The  potential  changes  noted  above are based upon  sensitivity  analyses
performed on our financial  position and expected  operating  levels at December
31, 2002. Actual results may differ materially.

Other Risks

     Our  operating  results are subject to general  economic  conditions  and a
variety of risks characteristic of the semiconductor industry (including booking
and shipment  uncertainties,  wafer supply  fluctuations,  and price erosion) or
specific  to us,  any of which  could  cause  our  operating  results  to differ
materially from past results.  See the Risk Factors set forth at the end of Part
I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

Quarterly Information

     The table on the next page presents certain unaudited quarterly results for
each of the eight  quarters  in the  period  ended  December  31,  2002.  In our
opinion,  this  information  has been presented on the same basis as the audited
consolidated  financial statements appearing elsewhere in this Annual Report and
all necessary  adjustments  (consisting only of normal recurring  accruals) have
been  included  in the  amounts  stated  below to present  fairly the  unaudited
quarterly  results  when  read in  conjunction  with  our  audited  consolidated
financial  statements  and notes thereto.  However,  these  quarterly  operating
results are not indicative of the results for any future period.



<PAGE>

<TABLE>
<CAPTION>


                                                                         Three Months Ended
                                      ---------------------------------------------------------------------------------------------
                                        Dec. 31,   Sep. 30,   Jun. 30,     Mar. 31,   Dec. 31,     Sep. 30,    Jun. 30,    Mar. 31,
                                          2002       2002       2002         2002       2001         2001        2001        2001
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------
                                                           (unaudited, in thousands except per share amounts)

<S>                                   <C>         <C>         <C>         <C>         <C>        <C>          <C>         <C>
Statements of Operations Data:
Net revenues.......................   $  34,103   $  32,912   $  34,293   $  33,060   $  32,059   $  32,006   $  36,460   $  45,034
Gross profit.......................      20,591      19,229      21,337      20,276      19,567      16,734      18,888      28,160
Income (loss) from operations......        (951)     (1,587)       (282)       (853)     (4,086)     (6,188)     (4,233)      3,463
Net income (loss)..................      (1,831)      1,107         404         395      (2,531)     (2,334)     (2,631)      2,795
Net income (loss) per share:
   Basic...........................   $   (0.08)   $   0.05   $    0.02   $    0.02   $   (0.11)   $  (0.10)   $  (0.11)   $   0.12
                                      =========    ========   =========   =========   =========    ========    ========    ========
   Diluted*........................   $   (0.08)   $   0.04   $    0.02   $    0.02   $   (0.11)   $  (0.10)   $  (0.11)   $   0.11
                                      =========    ========   =========   =========   =========    ========    ========    ========
Shares used in computing net income
   (loss) per share:
   Basic...........................      24,126      24,531      24,382      24,170      23,987      23,852      23,642      23,472
                                      =========    ========   =========   =========   =========    ========    ========    ========
   Diluted*........................      24,126      24,959      26,036      25,388      23,987      23,852      23,642      25,126
                                      =========    ========   =========   =========   =========    ========    ========    ========
</TABLE>

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


     *    For the second through fourth  quarters of 2001 and the fourth quarter
          of 2002,  we incurred  quarterly net losses and the inclusion of stock
          options in the shares used for  computing  diluted  earnings per share
          would  have  been  anti-dilutive  and  reduced  the  loss  per  share.
          Accordingly, all Common Stock equivalents (such as stock options) have
          been excluded from the shares used to calculate  diluted  earnings per
          share for these respective periods.

<TABLE>
<CAPTION>

                                                                         Three Months Ended
                                      ---------------------------------------------------------------------------------------------
                                        Dec. 31,   Sep. 30,   Jun. 30,     Mar. 31,   Dec. 31,     Sep. 30,    Jun. 30,    Mar. 31,
                                          2002       2002       2002         2002       2001         2001        2001        2001
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------
<S>                                       <C>         <C>         <C>         <C>        <C>          <C>        <C>          <C>
As a Percentage of Net Revenues:
Net revenues.......................       100.0%      100.0%      100.0%      100.0%     100.0%       100.0%      100.0%      100.0%
Gross profit.......................        60.4        58.4        62.2        61.3       61.0         52.3        51.8        62.5
Income (loss) from operations......        (2.8)       (4.8)       (0.8)       (2.6)     (12.7)       (19.3)      (11.6)        7.7
Net income (loss)..................        (5.4)        3.4         1.2         1.2       (7.9)        (7.3)       (7.2)        6.2

</TABLE>

<PAGE>







                                ACTEL CORPORATION
                           CONSOLIDATED BALANCE SHEETS
               (in thousands, except share and per share amounts)
<TABLE>
<CAPTION>

                                                                                                  December 31,
                                                                                           --------------------------
                                                                                                 2002          2001
                                                                                           ------------  ------------
                                     ASSETS
<S>                                                                                        <C>           <C>
Current assets:
   Cash and cash equivalents...........................................................    $     18,207  $      7,912
   Short-term investments..............................................................         115,622       120,923
   Accounts receivable, net............................................................          17,615        16,759
   Inventories, net....................................................................          34,591        36,338
   Deferred income taxes...............................................................          28,054        25,471
   Prepaid expenses and other current assets...........................................           4,968         4,251
                                                                                           ------------  ------------
         Total current assets..........................................................         219,057       211,654
Property and equipment, net............................................................          16,204        14,665
Goodwill, net..........................................................................          32,142        37,180
Other assets, net......................................................................          25,918        26,583
                                                                                           ------------  ------------
                                                                                           $    293,321  $    290,082
                                                                                           ============  ============
                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable....................................................................    $     11,500  $     10,129
   Accrued salaries and employee benefits..............................................           7,280         7,822
   Other accrued liabilities...........................................................           3,879         5,699
   Deferred income on shipments to distributors........................................          26,459        26,758
                                                                                           ------------  ------------
         Total current liabilities.....................................................          49,118        50,408
Deferred compensation plan liability...................................................           1,889         1,994
                                                                                           ------------  ------------
         Total liabilities.............................................................          51,007        52,402
Commitments and contingencies
Shareholders' equity:
   Preferred stock, $.001 par value; 5,000,000 shares authorized; 1,000,000 issued and
     converted to common stock; and none outstanding...................................               -             -
   Common stock, $.001 par value; 55,000,000 shares authorized; 24,176,540 and
     24,055,949 shares issued and outstanding at December 31, 2002 and 2001,
     respectively......................................................................              24            24
   Additional paid-in capital..........................................................         168,428       162,324
   Retained earnings ..................................................................          73,290        75,207
   Note receivable from officer .......................................................              --          (368)
   Unearned compensation cost .........................................................            (179)         (314)
   Accumulated other comprehensive income .............................................             751           807
                                                                                           ------------  ------------
         Total shareholders' equity....................................................         242,314       237,680
                                                                                           ------------  ------------
                                                                                           $    293,321  $    290,082
                                                                                           ============  ============
</TABLE>

<PAGE>


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

<TABLE>
<CAPTION>

                                                                                     Years Ended December 31,
                                                                               --------------------------------------
                                                                                  2002          2001          2000
                                                                               ----------    ----------    ----------
<S>                                                                            <C>           <C>           <C>
Net revenues............................................................       $  134,368    $  145,559    $  226,419
Costs and expenses:
   Cost of revenues.....................................................           52,935        62,210        84,680
   Research and development.............................................           39,349        38,172        36,599
   Selling, general, and administrative.................................           43,033        41,464        47,960
   Amortization of goodwill and other acquisition-related intangibles               2,724        14,757         8,056
   Purchased in-process research and development........................                -             -        10,646
                                                                               ----------     ---------    ----------
         Total costs and expenses.......................................          138,041       156,603       187,941
                                                                               ----------     ---------    ----------
Income (loss) from operations...........................................           (3,673)      (11,044)       38,478
Interest income and other, net of expense...............................            5,530         7,280         8,310
Losses on sales and write-downs of equity investments...................           (3,707)            -             -
Gain on the sale of Chartered common stock..............................                -             -        28,329
                                                                               ----------     ---------    ----------
Income (loss) before tax (benefit) provision and equity interest in net
   (loss) of equity method investee.....................................           (1,850)       (3,764)       75,117
Equity interest in net (loss) of equity method investee.................               --            --        (2,445)
Tax (benefit) provision.................................................           (1,925)          937        31,227
                                                                               ----------    ----------    ----------
Net income (loss).......................................................       $       75    $   (4,701)   $   41,445
                                                                               ==========    ==========    ==========
Net income (loss) per share:
   Basic................................................................       $     0.00    $    (0.20)   $     1.77
                                                                               ==========    ==========    ==========
   Diluted..............................................................       $     0.00    $    (0.20)   $     1.58
                                                                               ==========    ==========    ==========
Shares used in computing net income (loss) per share:
   Basic................................................................           24,302        23,743        23,447
                                                                               ==========    ==========    ==========
   Diluted..............................................................           25,252        23,743        26,233
                                                                               ==========    ==========    ==========
</TABLE>


<PAGE>



                                ACTEL CORPORATION
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                      AND OTHER COMPREHENSIVE INCOME/(LOSS)
                      (in thousands, except share amounts)
<TABLE>
<CAPTION>


                                                                                              Notes                    Accumulated
                                                        Additional              Receivable  Unearned       Other         Total
                                               Common    Paid-In    Retained      From     Compensation Comprehensive  Shareholders'
                                               Stock     Capital    Earnings     Officer      Cost         Income        Equity
                                              -------  ----------  ---------    ----------  -----------  ------------   -----------

<S>                                           <C>      <C>         <C>          <C>         <C>          <C>           <C>
Balance at December 31, 1999................. $   22   $  110,146  $  52,401    $        -  $         -  $     16,061  $    178,630
                                              =======  ==========  =========    ==========  ===========  ============   ===========
Net income...................................       -           -     41,445             -            -             -        41,445
 Other comprehensive income (loss):
   Change in unrealized gain (loss)
     on investments..........................       -           -          -             -            -       (15,310)      (15,310)
                                                                                                                         -----------
   Comprehensive income (loss)...............                                                                                26,135

 Issuance of 1,574,334 shares of common stock
   under employee stock plans................        2     16,363          -          (368)           -             -        15,997
Repurchase of common stock..................        (1)    (7,077)   (13,938)            -            -             -       (21,016)
Issuance of 220,518 shares of common stock for
   purchase of Prosys........................        -      7,525          -             -            -             -         7,525
Assumption of stock options in connection with
   acquisitions of GateField and Prosys
   including unearned compensation expense for
   those options..............................       -     13,665          -             -         (922)            -        12,743
Tax benefit from exercise of stock options....       -     10,087          -             -            -             -        10,087
                                               -------  ---------   --------    ----------  -----------  ------------  ------------
Balance at December 31, 2000.................. $    23  $ 150,709   $ 79,908    $     (368) $      (922) $        751  $    230,101
                                               =======  =========   ========    ==========  ===========  ============  ============
</TABLE>

<PAGE>


                                ACTEL CORPORATION
               CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
                        OTHER COMPREHENSIVE INCOME/(LOSS)
                                   (Continued)
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                                                      Accumulated
                                                        Additional              Receivable  Unearned       Other         Total
                                               Common    Paid-In    Retained      From     Compensation Comprehensive  Shareholders'
                                               Stock     Capital    Earnings     Officer      Cost         Income        Equity
                                               ------  ----------  ---------    ----------  -----------  ------------   -----------

<S>                                            <C>     <C>         <C>          <C>         <C>          <C>           <C>
Balance at December 31, 2000.................. $   23  $  150,709  $  79,908    $     (368) $     (922)  $        751  $    230,101
                                               ======  ==========  =========    ==========  ==========   ============  ============
Net loss......................................      -           -     (4,701)            -           -              -        (4,701)
Other comprehensive income (loss):
   Change in unrealized gain (loss)
     on investments...........................      -           -          -             -           -             56            56
                                                                                                                       ------------
   Comprehensive income (loss)................                                                                               (4,645)

Issuance of 670,499 shares of common stock
   under employee stock plans, net of
   repurchases................................      1       7,675          -             -            -             -         7,676
Issuance of 54,290 shares to Prosys security
   holders in connection with achievement of
   technological milestones...................      -       1,132          -             -            -             -         1,132
Issuance of stock options to consultant.......      -         116          -             -            -             -           116
Amortization of unearned compensation cost....      -           -          -             -          225             -           225
Purchase price adjustment related to GateField
   employees' unvested stock options
   originally assumed in connection with the
   GateField acquisition......................      -           -          -             -          383             -           383
Tax benefit from exercise of stock options....      -       2,692          -             -            -             -         2,692
                                               -------  ---------  ---------    ----------   ----------   -----------   -----------
Balance at December 31, 2001.................. $    24  $ 162,324  $  75,207    $     (368)  $     (314)  $       807   $   237,680
                                               =======  =========  =========    ==========   ==========   ===========   ===========
</TABLE>



<PAGE>


                                ACTEL CORPORATION
               CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
                        OTHER COMPREHENSIVE INCOME/(LOSS)
                                   (Continued)
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                                                      Accumulated
                                                        Additional              Receivable  Unearned        Other         Total
                                               Common    Paid-In    Retained      From     Compensation Comprehensive  Shareholders'
                                               Stock     Capital    Earnings     Officer      Cost         Income        Equity
                                               ------  ----------  ---------    ----------   -----------  -----------   -----------

<S>                                            <C>     <C>         <C>          <C>          <C>          <C>          <C>
Balance at December 31, 2001.................. $   24  $  162,324  $  75,207    $     (368)  $      (314) $       807  $    237,680
                                               ======  ==========  =========    ==========   ===========  ===========  ============
Net income....................................      -           -         75             -             -            -            75
Other comprehensive income (loss):
   Change in unrealized gain (loss)
     on investments...........................      -           -          -             -             -          (56)          (56)
                                                                                                                       ------------
   Comprehensive income (loss)................                                                                                   19
Repayment of note-payable from officer........      -           -          -           368             -            -           368

Issuance of 784,073 shares of common stock
   under employee stock plans.................      -       9,430          -             -             -            -         9,430
Repurchase of 663,482 shares of common stock..      -      (5,907)    (1,992)            -             -            -        (7,899)
Amortization of unearned compensation cost....      -           -          -             -           135            -           135
Tax benefit from exercise of stock options....      -       2,581          -             -             -            -         2,581
                                               ------  ----------  ---------    ----------  ------------  ------------  -----------
Balance at December 31, 2002.................. $   24  $  168,428  $  73,290    $        -  $       (179) $        751  $   242,314
                                               ======  ==========  =========    ==========  ============  ============  ===========

</TABLE>

<PAGE>


                                ACTEL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                                     Years Ended December 31,
                                                                               --------------------------------------
                                                                                   2002          2001          2000
                                                                               ----------    ----------    ----------
<S>                                                                            <C>           <C>           <C>
Operating activities:
    Net income (loss)...................................................       $       75    $   (4,701)   $   41,445
    Adjustments to reconcile net income (loss) to net cash provided by
       (used in) operating activities:
       Depreciation and amortization....................................           10,012        21,755        15,463
       Stock compensation cost recognized...............................              135           341             -
       Impairment of equity investments.................................            3,041             -             -
       Gain on sale of Chartered stock..................................                -             -       (28,329)
       Purchased in-process research and development....................                -             -        10,646
       Equity interest in net loss of equity method investee............                -             -         2,445
       Changes in operating assets and liabilities:
          Accounts receivable...........................................             (856)       12,497        (6,609)
          Inventories...................................................            1,747       (10,835)         (179)
          Deferred income taxes.........................................              104           (47)         (384)
          Prepaid expenses and other current assets.....................              246           237        (5,466)

          Accounts payable, accrued salaries and employee benefits, and
              other accrued liabilities.................................           (4,002)      (14,109)        6,573
          Tax benefits from exercise of stock options...................            2,581         2,692        10,087
          Deferred income on shipments to distributors..................             (299)      (18,100)        4,464
                                                                               ----------    ----------    ----------
    Net cash provided by (used in) operating activities.................           12,784       (10,270)       50,156
Investing activities:
    Purchases of property and equipment.................................           (8,827)       (9,526)       (6,173)
    Purchases of available-for-sale securities..........................         (177,473)     (135,016)     (396,325)
    Sales and maturities of available for sale securities...............          181,763       145,878       367,835
    Cash paid in business acquisitions..................................                -             -       (30,853)
    Issuance of notes receivable from GateField prior to acquisition ...                -             -        (7,000)
    Cash received from sale of Chartered stock..........................                -             -        39,009
    Changes in other long term assets...................................              149           (96)       (7,303)
                                                                               ----------    ----------    ----------
    Net cash provided by (used in) investing activities.................           (4,388)        1,240       (40,810)
Financing activities:
    Repayment of note-receivable from officer...........................              368             -             -
    Common stock issuance under employee stock plans....................            9,430         7,676        15,997
    Repurchase of common stock..........................................           (7,899)            -       (21,016)
                                                                               ----------    ----------    ----------
    Net cash provided by (used in) financing activities.................            1,899         7,676        (5,019)
Net increase (decrease) in cash and cash equivalents....................           10,295        (1,354)        4,327
Cash and cash equivalents, beginning of year............................            7,912         9,266         4,939
                                                                               ----------    ----------    ----------
Cash and cash equivalents, end of year..................................       $   18,207    $    7,912    $    9,266
                                                                               ==========    ==========    ==========
</TABLE>


<PAGE>


                                ACTEL CORPORATION
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                                     Years Ended December 31,
                                                                               --------------------------------------
                                                                                   2002          2001          2000
                                                                               ----------    ----------    ----------
Supplemental disclosures of cash flow information and non-cash investing and
    financing activities:
<S>                                                                            <C>           <C>           <C>
Cash (received)/paid during the year for taxes..........................       $     (157)   $      473    $   32,989
Issuance of common stock for acquisitions...............................                -         1,132        17,389
Receipt of note receivable from officer.................................                -             -           368
</TABLE>



<PAGE>



                                ACTEL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





1.   Organization and Summary of Significant Accounting Policies

     Actel Corporation (Actel or us, we, or our) was incorporated under the laws
of  California  on October  16,  1985.  We  design,  develop,  and market  field
programmable  gate arrays  (FPGAs) and  supporting  products and  services.  Net
revenues  from the sale of FPGAs  accounted for 96% of our net revenues in 2002,
2001, and 2000. Our Protocol  Design Services  organization  accounted for 1% of
our net revenues in 2002 and 2001 and 2% in 2000. Royalties and the licensing of
software  and sale of  hardware  that  are  used to  design  and  program  FPGAs
accounted for 3% of our net revenues in 2002 and 2001 and 2% in 2000.

     FPGAs  are  integrated  circuits  that  adapt  the  processing  and  memory
capabilities of electronic systems to specific  applications.  FPGAs are used by
designers  of  communications,  computer,  consumer,  industrial,  military  and
aerospace,  and other electronic systems to differentiate their products and get
them to market faster.  We are the leading  supplier of FPGAs based on flash and
antifuse  technologies.  See Note 11 for  information on our sales by geographic
area.

     Advertising and Promotion Costs

     Our  policy  is to  expense  advertising  and  promotion  costs as they are
incurred. Our advertising and promotion expenses were approximately $3.7 million
in 2002, $3.8 million in 2001, and $3.9 million in 2000.

     Basis of Presentation

     The  consolidated  financial  statements  include  the  accounts  of  Actel
Corporation  and our wholly owned  subsidiaries.  We use the U.S.  Dollar as the
functional  currency in our foreign  operations.  All  significant  intercompany
accounts and transactions have been eliminated in consolidation.

     Our fiscal year ends on the first  Sunday after  December  30.  Fiscal 2002
ended on January 5, 2003;  fiscal 2001 ended on January 6, 2002; and fiscal 2000
ended on December 31, 2000. Fiscal 2001 was a 53 week fiscal year, rather than a
normal 52 week  fiscal  year.  For ease of  presentation,  December  31 has been
indicated as the year end for all fiscal years.

     Cash Equivalents and Investments

     For  financial  statement  purposes,  we  consider  all highly  liquid debt
instruments with insignificant interest rate risk and a maturity of three months
or  less  when  purchased  to be  cash  equivalents.  Cash  equivalents  consist
primarily  of cash  deposits  in  money  market  funds  that are  available  for
withdrawal without  restriction.  Short-term  investments consist principally of
federal,  state,  and  local  municipal  obligations.  See  Note  3 for  further
information regarding short-term investments.



<PAGE>



                                ACTEL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



     We  account  for our  investments  in  accordance  with the  provisions  of
Statement of Financial  Accounting  Standards  (SFAS) No. 115,  "Accounting  for
Certain Investments in Debt and Equity Securities." We determine the appropriate
classification  of debt securities at the time of purchase and re-evaluate  such
designation  as of each  balance  sheet date.  At December  31,  2002,  all debt
securities are designated as available-for-sale. We also make equity investments
for the promotion of business and strategic  objectives.  The marketable portion
of these  strategic  investments is included in short-term  investments at their
market  value of $0.2  million  on  December  31,  2002,  and is  designated  as
available-for-sale.  Non-marketable  equity  investments  are  included in other
assets  and are  valued  at $0.1  million.  See Note 3 for  further  information
regarding investments.


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

     We maintain  trading  assets to  generate  returns  that offset  changes in
liabilities  related to our  deferred  compensation  plan.  The  trading  assets
consist  of  insurance  contracts  and our  Common  Stock and are stated at fair
value.  Both realized and  unrealized  gains and losses are included in interest
income  and  other,  net,  and  generally  offset  the  change  in the  deferred
compensation  liability,  which is also  included in interest  income and other,
net. Net gains (losses) on the trading asset  portfolio were not significant for
2002, 2001, and 2000. The deferred  compensation  assets were $1.8 million,  and
the deferred compensation liabilities were $1.9 million, at December 31, 2002.

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


     In accordance  with SFAS No. 115,  "Accounting  for Certain  Investments in
Debt and Equity Securities," if the decline in value below cost is determined to
be other than  temporary,  the unrealized  losses will be recorded as expense on
the income  statement  in the period  when that  determination  is made.  In the
absence of other overriding factors, we consider a decline in market value to be
other than  temporary when a stock has traded below book value for a consecutive
six-month period. If an investment  continues to trade below book value for more
than six months,  and mitigating  factors such as general  economic and industry
specific  trends  are not  present,  this  investment  would  be  evaluated  for
impairment  and written down to a balance equal to the  estimated  fair value at
the time of impairment, with the amount of the write-down realized as expense on
the income  statement.  During 2002, we held an investment in a publicly  traded
company that had traded below book value.  Based on our  assessment  of industry
trends,  as well as the volatility and trading volumes of this equity  security,
we  concluded  that the  declines  in value at the end of the  second and fourth
quarters of 2002 were other than temporary. Accordingly, we recorded as expense,
in accordance with SFAS No. 115,  impairment  write-downs of $0.5 million in the
second quarter and $0.4 million in the fourth quarter.  At December 31, 2002, we
continued to hold an investment in the  publicly-traded  equity  security with a
market value of $0.2 million, which is included in short-term investments.


     At December 31, 2001, we held a strategic equity investment of $2.2 million
in a private company located in the United Kingdom. Under our accounting policy,
the carrying  value of a  non-marketable  investment  is the amount paid for the
investment unless it has been determined to be other than temporarily  impaired,
in which case we write the investment  down to its impaired value. We review all
of our investments  periodically  for impairment;  however,  for  non-marketable
equity securities,  the impairment analysis requires significant judgment.  This
analysis includes assessment of the investee's financial condition, the business
outlook for its products and technology,  its projected  results and cash flows,
the likelihood of obtaining  subsequent  rounds of financing,  and the impact of
any relevant contractual equity preferences held by us or others. If an investee
obtains  additional  funding at a valuation lower than our carrying  amount,  we
presume that the investment is other than temporarily impaired,  unless specific
facts and circumstances  indicate otherwise (for example, if we hold contractual
rights that give us a  preference  over the rights of other  investors).  During
2002, a sufficient market for the U.K. company's  technology did not develop and
additional  financing was raised from an existing  shareholder during the fourth
quarter to enable the company to continue  operations.  The market  value of the
company implied in the 2002 financing  indicated  significant  impairment of our
investment in the company.  In accordance with our accounting  policy,  we wrote
the investment down to $0.1 million, a balance equal to the estimated fair value
of our investment in the company at the time of the financing.  The $0.1 million
balance  is  included  on the  balance  sheet in other  assets.  The  impairment
write-down of $2.1 million was realized as an expense on the income statement in
the fourth quarter of 2002.

     Concentration of Credit Risk

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

     We sell our products to customers in diversified industries. We are exposed
to credit  risks in the  event of  non-payment  by  customers  to the  extent of
amounts  recorded on the balance sheet.  We limit our exposure to credit risk by
performing ongoing credit evaluations of our customers'  financial condition and
generally require no collateral.  We are exposed to credit risks in the event of
insolvency by our  customers  and limit such  exposure to  accounting  losses by
limiting  the  amount  of  credit  extended  whenever  deemed   necessary.   Our
distributors accounted for approximately 65% of our net revenues in 2002, 68% in
2001, and 58% in 2000. During 2001, we consolidated our distribution  channel by
terminating  our agreement with Arrow  Electronics,  Inc.  (Arrow).  On March 1,
2003,  we further  consolidated  our  distribution  channel by  terminating  our
agreement with  Pioneer-Standard  Electronics,  Inc.  (Pioneer),  leaving Unique
Technologies,  Inc. (Unique) as our sole distributor in North America.  The loss
of  Unique  as a  distributor  could  have a  materially  adverse  effect on our
business, financial condition, or results of operations. See Note 14 (unaudited)
for further  information.  None of our direct customers  accounted for more than
10% of our net revenues in 2002 or 2001.  Nortel  Networks  accounted for 11% of
revenues  in  2000.  See  Note  11 for  further  information  regarding  our 10%
customers.

     As of December 31,  2002,  we had an accounts  receivable  balance of $18.7
million,  net of an allowance for doubtful  accounts of $1.1  million.  If sales
levels were to increase,  it is likely that the level of receivables  would also
increase.  In the event that customers delay their payments to us, the levels of
accounts  receivable  would also increase.  We maintain  allowances for doubtful
accounts for estimated  losses  resulting from the inability of our customers to
make required  payments.  The  allowance for doubtful  accounts is based on past
payment history with the customer,  analysis of the customer's current financial
condition,  outstanding invoices older than 90 days, and other known factors. If
the financial  condition of our customers were to  deteriorate,  resulting in an
impairment  of their  ability to make  payments,  additional  allowances  may be
required.

     Fair Value of Financial Instruments

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

          Accounts  Payable.  The carrying amount reported in the balance sheets
     for accounts payable approximates fair value.

          Cash  and Cash  Equivalents.  The  carrying  amounts  reported  in the
     balance sheets for cash and cash equivalents approximate fair value.

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

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

     Goodwill and other Acquisition-Related Intangibles


     During 1999 and 2000,  we completed  the  acquisitions  of AutoGate  Logic,
Prosys  Technology,   Inc.  (Prosys),  and  GateField  Corporation   (GateField)
resulting in a significant amount of goodwill and identified  intangible assets.
At December 31, 2002, we had $32.1 million of net goodwill. Goodwill is recorded
when the consideration paid in an acquisition  exceeds the fair value of the net
tangible and intangible  assets  acquired.  Historically  and through the end of
2001,  goodwill was amortized on a straight-line  basis over its useful life. At
the  beginning of 2002, we adopted SFAS No. 142,  which  addresses the financial
accounting  and  reporting  standards for goodwill and other  intangible  assets
subsequent to their acquisition.  This standard requires that goodwill no longer
be amortized,  and instead be tested for impairment  annually or more frequently
if certain events or changes in  circumstances  indicate that the carrying value
may not be recoverable.  In addition, we were required to perform a transitional
impairment  review related to the carrying value of goodwill as of the beginning
of 2002. We completed our  transitional  impairment  tests as of March 31, 2002,
and our annual goodwill  impairment  tests as of December 31, 2002, and noted no
impairment.

     The first step of the  transitional  and annual goodwill  impairment  tests
consisted  of a  comparison  of the fair  value of Actel  with the book value of
Actel,  including goodwill.  The fair value of Actel was determined based on our
total market  capitalization,  which we believe represents the best indicator of
Actel's fair value.  Based on this first step  analysis,  we determined the fair
value  of  Actel  was in  excess  of our book  value.  Accordingly,  we were not
required  to  proceed  to the  second  step.

     At December 31, 2002, we have definite lived intangible assets arising form
prior  business  acquisitions  with a net book value of $7.2 million,  which are
being  amortized  on a  straight  line  basis over  their  estimated  lives.  In
accordance  with SFAS No. 144,  "Accounting  for the  Impairment  or Disposal of
Long-Lived  Assets," we recognize  impairment  losses on long-lived  assets when
indicators of impairment are present and the  undiscounted  cash flows estimated
to be  generated  by  those  assets  are less  than the net book  value of those
assets. The impairment loss is measured by comparing the fair value of the asset
to its  carrying  value.  Fair value is based on  discounted  cash  flows  using
present value techniques  identified in SFAS No. 144. Due to the postponement of
the advanced  EPGA core product and the lack of revenues to date in the embedded
core market,  we performed a SFAS No. 144  impairment  review of the  intangible
assets  we  acquired  from  Prosys.  Based  on  our  fair  value  estimation  of
undiscounted  future cash flows from the currently  available  EPGA product,  we
believe that the intangible assets we acquired from Prosys are not impaired.  If
these  estimates or their  related  assumptions  change in the future,  it could
result in lower  estimated  future  cash flows that may not  support the current
carrying  value of these  assets,  which would  require us to record  impairment
charges for these assets. See Note 2 for further information  regarding goodwill
and other acquisition related intangibles.


     Impact of Recently Issued Accounting Standards


     In July 2002, the Financial  Accounting  Standards Board (FASB) issued SFAS
No. 146,  "Accounting for Costs  Associated  with Exit or Disposal  Activities."
SFAS 146 requires that a liability for cost  associated with an exit or disposal
activity  be  recognized  and  measured  initially  at fair  value only when the
liability is incurred.  SFAS 146 is  effective  for exit or disposal  activities
that are initiated  after  December 31, 2002. We do not expect that the adoption
of SFAS No. 146 will have a material impact on our financial position, operating
results, or cash flows.


     In November 2002, the Emerging Issues Task Force (EITF) reached a consensus
on  Issue  No.  00-21   (EITF00-21),   "Revenue   Arrangements   with   Multiple
Deliverables."  EITF 00-21  addresses  certain  aspects of the  accounting  by a
vendor for  arrangements  under which the vendor will perform  multiple  revenue
generating  activities.  The  provisions  of EITF  00-21  will  apply to revenue
arrangements  entered in fiscal periods beginning after June 15, 2003. We do not
expect the  adoption  of EITF 00-21 to have a material  impact on our  financial
position, operating results, or cash flows.


     In November  2002,  the FASB issued  FASB  Interpretation  No. 45 (FIN 45),
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the  guarantor's  balance sheet upon issuance of a guarantee.  In
addition,  FIN 45 requires  disclosures  about the guarantees that an entity has
issued,  including a reconciliation  of changes in the entity's product warranty
liabilities.  The initial recognition and initial measurement  provisions of FIN
45 are applicable on a prospective  basis to guarantees issued or modified after
December  31 2002.  The  disclosure  requirements  of FIN 45 are  effective  for
financial  statements  of interim or annual  periods  ending after  December 15,
2002.  The  adoption  of this  standard  did not have a  material  impact on our
financial position, operating results, or cash flows.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition   and  Disclosure."   SFAS  148  amends  SFAS  No.  123,
"Accounting for Stock-Based  Compensation,"  to provide  alternative  methods of
transition  for a voluntary  change to the fair value based method of accounting
for  stock-based  employee  compensation.  In  addition,  SFAS  148  amends  the
disclosure  requirements  of SFAS 123 to require  prominent  disclosures in both
annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee  compensation and the effect of the method used on reported
results.  The transition  guidance and annual disclosure  provisions of SFAS 148
are  effective  for fiscal  years ending  after  December 15, 2002.  The interim
disclosure  provisions are effective for financial reports containing  financial
statements for interim  periods  beginning  after December 15, 2002. SFAS 148 is
effective for our year 2002 annual report and quarterly  reports  beginning with
the first quarter 2003 interim  report.  Since we use the intrinsic value method
for  accounting  for  stock-based  employee  compensation,  the adoption of this
standard did not have a material  impact on our  financial  position,  operating
results,  or cash  flows.  See Stock  Based  Compensation  in Note 2 of Notes to
Consolidated  Financial  Statements for further discussion of our accounting for
stock options and the pro-forma disclosures required by SFAS No. 148.


     In  January  2003,  the  FASB  issued   Interpretation  No.  46  (FIN  46),
"Consolidation of Variable Interest  Entities." FIN 46 requires an investor with
a  majority  of  the  variable  interests  in  a  variable  interest  entity  to
consolidate  the entity and also  requires  majority  and  significant  variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity  investors do not have a  controlling  interest or
the equity investment at risk is insufficient to finance the entity's activities
without  receiving  additional  subordinated  financial  support  from the other
parties.  We are  currently  reviewing  our  investment  portfolio  to determine
whether any of our investee companies are variable interest entities.  We do not
expect to identify any variable interest entities that must be consolidated, but
may be  required to make  additional  disclosures.  The maximum  exposure of any
investment that may be determined to be in a variable interest entity is limited
to the amount invested.

     Income Taxes

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


     At December 31, 2002, we had $66.1 million of gross  deferred tax assets in
excess of deferred tax liabilities.  Based on the factors cited above, including
our forecast of future taxable income and  limitations  under section 382 of the
Internal  Revenue  Code,  we  determined  at December 31, 2002,  that it is more
likely than not that $42.3 million of deferred tax assets will be realized. This
resulted in a valuation  allowance of $23.8  million.  In order to fully utilize
the $42.3  million  of  deferred  tax  assets,  taxable  income in the amount of
approximately $93 million must be earned in future periods. For proper valuation
of  deferred  tax assets  under SFAS No. 109 in  situations  where a company has
incurred a three-year cumulative loss before taxes in recent years,  significant
negative  evidence  is  considered  to exist in the  evaluation  of a  company's
ability to generate  future  taxable  income.  In evaluating  positive  evidence
available, expectations of future taxable income on an extended time horizon are
rarely sufficient to overcome the negative evidence of recent cumulative losses.
Failure to achieve  positive taxable income in 2003 would result in a cumulative
three year loss before tax, which would result in significant  negative evidence
under SFAS No. 109 regarding the realizability of our of net deferred tax assets
and may  result in  additional  tax  provisions  being  recorded  on the  income
statement  in 2003.  Factors  that may affect our ability to achieve  sufficient
forecasted   taxable  income  include,   but  are  not  limited  to,   increased
competition,  a decline in sales or  margins,  loss of market  share,  delays in
product availability, and technological obsolescence.


     Inventories

     As of December 31, 2002, we had a net inventory  balance of $34.6  million,
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 either orders  received from customers or internal  forecasts of demand for
these products. Other considerations in determining inventory levels include the
stage of products in the product life cycle, design win activity,  manufacturing
lead times,  customer  demands,  strategic  relationships  with  foundries,  and
competitive  situations in the  marketplace.  Should any of these factors have a
result other than anticipated,  inventory levels may be adversely and materially
affected.


     We write down our  inventory  for estimated  obsolescence  or  unmarketable
inventory  equal  to the  difference  between  the  cost  of  inventory  and the
estimated realizable value based upon assumptions about future demand and market
conditions. To address this difficult, subjective, and complex area of judgment,
we apply a methodology that includes  assumptions and estimates to arrive at the
net realizable value.  First, we identify any inventory that has been previously
reserved  in  prior  periods.   This  inventory  remains  reserved  until  sold,
destroyed, or otherwise  dispositioned.  Second, our quality assurance personnel
examine  inventory  line  items that may have some form of  obsolescence  due to
non-conformance with electrical and mechanical  standards.  Third, we assess the
inventory not otherwise  identified to be reserved  against  product history and
forecasted demand, typically six months. Finally, the result of this methodology
is analyzed by us in light of the product life cycle,  design win activity,  and
competitive  situations 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.  See Note 2 for
further information on Inventory amounts.


     Legal Matters

     As is typical in the semiconductor  industry, we have been and expect to be
notified from time to time of claims that we may be infringing  patents owned by
others.  When  probable and  reasonably  estimable,  we make  provision  for the
estimated settlement costs of claims for alleged infringement.  The provision is
based on an estimated  royalty rate applied to shipments made in the periods and
to or from the  geographic  areas  under  dispute.  In the  absence  of facts or
circumstances  unique to a  particular  dispute,  the royalty  rate is estimated
based on our understanding of royalty rates other technology companies typically
agree to pay in similar types of disputes.  See Note 12 for further  information
on legal matters.

     Product Warranty

     Our product warranty accrual includes  specific  accruals for known product
issues and an accrual  for an  estimate of  incurred  but  unidentified  product
issues based on historical  activity.  Due to effective  product testing and the
short time between product  shipment and the detection and correction of product
failures,  the warranty  accrual  based on  historical  activity and the related
expense for known product issues were not significant in 2002, 2001, or 2000.

     Property and Equipment

     Property and equipment is carried at cost less accumulated depreciation and
amortization (see Note 2). Depreciation and amortization have been provided on a
straight-line basis over the following estimated useful lives:

Equipment.................    2 to 5 years
Furniture and fixtures....    3 to 5 years
Leasehold improvements....    Estimated useful life or lease term, whichever is
                                shorter

     Reclassifications

     Certain  amounts  reported  in  previous  years have been  reclassified  to
conform to the 2002 presentation.

     Revenue Recognition

     In  accordance  with SEC Staff  Accounting  Bulletin  No.  101,  revenue is
recognized  when there is evidence of an  arrangement,  delivery has occurred or
services  have  been  completed,  the  price  is  fixed  or  determinable,   and
collectability  is  reasonably  assured.  Revenue  from  product  shipped to end
customers is recorded when all of the foregoing  conditions  are met and risk of
loss and title  passes to the  customer.  Revenue  related to  products  shipped
subject to customers' evaluation is recognized upon final acceptance.  Shipments
to distributors are made under agreements  allowing certain rights of return and
price protection on unsold merchandise. For that reason, we defer recognition of
revenues and related cost of revenues on sales of products to distributors until
such products are sold by the  distributor  and title transfers to the end user.
Royalty income is recognized upon notice to us of the sale by others of products
subject  to  royalties.  Revenues  generated  by the  Protocol  Design  Services
organization are recognized as the services are performed.


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


     Research and Development

     Research and development  expenditures  are charged to expense as incurred.
SFAS No. 86,  "Accounting for the Costs of Computer  Software to Be Sold, Leased
or  Otherwise   Marketed,"  requires  the  capitalization  of  certain  software
development costs subsequent to the establishment of technological  feasibility.
Through December 31, 2002, software development has been completed  concurrently
with the  establishment of technological  feasibility and, as a result,  we have
charged all costs to research and development expense in the periods incurred.

     Stock-Based Compensation

     We have employee  stock plans that are  described  more fully in Note 8. We
account  for our  stock  options  and  equity  awards  in  accordance  with  the
provisions of Accounting  Principles Board (APB) Opinion No. 25, "Accounting for
Stock  Issued to  Employees,"  and related  interpretations  and have elected to
follow the "disclosure only" alternative prescribed by SFAS No. 123, "Accounting
for Stock-Based Compensation."

     Options and warrants  granted to consultants  and vendors are accounted for
at fair value  determined by using the  Black-Scholes  method in accordance with
EITF Issue No.  96-18,  "Accounting  for Equity  Instruments  that are Issued to
Other than Employees for Acquiring,  or in  Conjunction  with Selling,  Goods or
Services."

     We account for  stock-based  awards to employees  using the intrinsic value
method in accordance with APB Opinion No. 25 and Financial Standards  Accounting
Board  Interpretation  No. 44 (FIN 44),  "Accounting  for  Certain  Transactions
Involving  Stock  Compensation  - an  Interpretation  of APB  Opinion  No.  25."
Accordingly,  no compensation  cost has been recognized for our fixed-cost stock
option plans as stock-based awards are generally issued at the fair market value
on the date of grant,  or 85% of fair market  value at the date of grant for our
employee  stock  purchase  plan.  We account for equity  compensation  issued to
non-employees in accordance with EITF 96-18 and FIN 44.

     Pro forma  information  regarding  net  income  and net income per share is
required by SFAS 148, which also requires that the  information be determined as
if we had accounted for our  stock-based  awards to employees  granted under the
fair value method.  The stock based awards consist of options and employee stock
purchase rights.  The fair value for these  stock-based  awards to employees was
estimated at the date of grant using the  Black-Scholes  pricing  model with the
following  weighted-average  assumptions:  risk-free interest rates of 3.73% for
2002, 4.06% for 2001, and 6.13% for 2000; no dividend yield;  volatility  factor
of the expected  market price of our Common Stock of 66% for 2002, 67% for 2001,
and 65% for 2000; and a  weighted-average  expected life for the options of four
years and for employee stock purchase rights of two years. The  weighted-average
fair value of options  granted  during 2002 was $10.19,  during 2001 was $10.49,
and during  2000 was  $15.07.  The  weighted-average  fair value of ESPP  rights
granted during 2002 was $6.27, during 2001 was $8.14, and during 2000 was $6.64.

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
estimating the fair value of traded options,  which have no vesting restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions,  including  the  expected  stock price
volatility.  Because our  stock-based  awards to employees have  characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
our opinion the existing  models do not  necessarily  provide a reliable  single
measure of the fair value of our stock-based awards to employees.

     For  purposes of pro forma  disclosures,  the  estimated  fair value of our
stock-based  awards to employees is amortized to expense over the vesting period
for options and during the purchase  periods for employee stock purchase rights.
Our pro forma information is as follows:
<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                               --------------------------------------
                                                                                 2002          2001          2000
                                                                               ----------    ----------    ----------
                                                                              (in thousands, except per share amounts)
<S>                                                                            <C>           <C>           <C>
Reported amounts under intrinsic value method:
Stock based employee compensation cost, net of related tax, included in
net income..............................................................       $        0    $        0    $        0
Net income (loss).......................................................       $       75    $   (4,701)   $   41,445
Earnings per share:
   Basic................................................................       $     0.00    $    (0.20)    $    1.77
   Diluted..............................................................       $     0.00    $    (0.20)    $    1.58

Pro Forma amounts under fair value method:
Pro Forma stock based employee compensation cost, net of related tax....       $   19,610    $   15,011    $    9,848
Pro forma net income (loss).............................................       $  (19,535)   $  (19,712)   $   31,597
Pro forma earnings per share:
   Basic................................................................       $    (0.80)   $    (0.83)   $     1.35
   Diluted..............................................................       $    (0.80)   $    (0.83)   $     1.22
</TABLE>

     The effects on pro forma disclosures of applying SFAS 123 are not likely to
be  representative  of the effects on pro forma disclosures in future years. See
Note 8 for further discussion of our stock option plans.


     Use of Estimates

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

2.   Balance Sheet Detail

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                               ----------------------
                                                                                   2002        2001
                                                                               ----------  ----------
                                                                                    (in thousands)
<S>                                                                            <C>         <C>
 Accounts receivable:
    Trade accounts receivable................................................  $   17,421  $   16,388
    Interest receivable......................................................       1,272       1,699
    Allowance for doubtful accounts..........................................      (1,078)     (1,328)
                                                                               ----------  ----------
                                                                               $   17,615  $   16,759
                                                                               ==========  ==========
 Inventories:
    Purchased parts and raw materials........................................  $    4,066  $    6,972
    Work-in-process..........................................................      26,484      26,670
    Finished goods...........................................................       4,041       2,696
                                                                               ----------  ----------
                                                                               $   34,591  $   36,338
                                                                               ==========  ==========
 Property and equipment:
    Equipment................................................................  $   56,529  $   57,888
    Furniture and fixtures...................................................       2,409       2,431
    Leasehold improvements...................................................       5,662       5,658
                                                                               ----------  ----------
                                                                                   64,600      65,977
    Accumulated depreciation and amortization................................     (48,396)    (51,312)
                                                                               ----------  ----------
                                                                               $   16,204  $   14,665
                                                                               ==========  ==========
</TABLE>

     Depreciation  expense was approximately  $7.3 million in 2002, $7.0 million
in 2001, and $7.4 million in 2000, and is included with amortization  expense in
the Consolidated Statement of Cash Flows.


     During 2002,  we  eliminated  a reserve for property and  equipment of $0.5
million, which resulted in a benefit to the income statement, after completing a
full  physical  count of  property  and  equipment  that  resulted in lower than
expected asset write-offs. We also removed certain fully depreciated assets with
a cost of $10.2 million which were no longer being utilized,  that had no impact
on the income statement.
<TABLE>
<CAPTION>

                                                                                                  December 31,
                                                                                           ------------------------
                                                                                               2002          2001
                                                                                           ----------    ----------
                                                                                                 (in thousands)

<S>                                                                                       <C>            <C>
Goodwill:
    Goodwill...........................................................................    $   48,575    $   53,613
    Less accumulated amortization......................................................       (16,433)      (16,433)
                                                                                           ----------    ----------
                                                                                           $   32,142    $   37,180
                                                                                           ==========    ==========
Other Assets:
    Prepaid long-term license fees.....................................................    $    1,500    $    1,999
    Deferred compensation plan assets..................................................         1,830         2,082
    AutoGate Logic identifiable intangible assets......................................         2,950         2,950
    Prosys identifiable intangible assets..............................................           273           273
    GateField identifiable intangible assets...........................................         9,505         9,505
    Acquired patents...................................................................         1,842         1,842
    Strategic equity investments.......................................................            74         2,198
    Non-current deferred tax asset (net of related deferred tax liability of $2,764 in
       2002 and $3,927 in 2001)........................................................        14,247         8,935
    Other..............................................................................         1,023         1,401
                                                                                           ----------    ----------
         Subtotal......................................................................        33,244        31,185
    Accumulated amortization expenses..................................................        (7,326)       (4,602)
                                                                                           ----------    ----------
                                                                                           $   25,918    $   26,583
                                                                                           ==========    ==========
</TABLE>



     Our net goodwill was $32.1 million at the end of 2002,  compared with $37.2
million at the end of 2001. The reduction in net goodwill was due primarily to a
balance  sheet  reclassification  of $5.0 million from  goodwill to deferred tax
assets.  The goodwill was reclassified  because we believe (based on a number of
factors,  including  our  estimate  of  future  taxable  income)  that  some net
operating  losses  generated  by  GateField  and valued at zero when we acquired
GateField  will be used by us to reduce taxes payable in the future.  See Note 5
for further discussion of adjustments to goodwill.


     Effective the beginning of 2002, we completed the adoption of SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." We assessed goodwill for impairment in accordance with SFAS No. 142 and
noted no impairment in 2002. Identified intangible assets were assessed for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," and noted no impairment in 2002. Upon adoption
of the new Business Combination rules, workforce-in-place no longer meets the
definition of an identifiable intangible asset. We had no remaining net book
value associated with acquired workforces-in-place at either December 31, 2001,
or December 31, 2002, and have not reclassified any balances related to
workforce-in-place.

     A reconciliation  of previously  reported net income and earnings per share
to the amounts adjusted for the exclusion of goodwill  amortization,  net of the
related income tax effect, is as follows:




<PAGE>





<TABLE>
<CAPTION>
                                                                                      Years Ended December 31,
                                                                               --------------------------------------
                                                                                 2002          2001          2000
                                                                               ----------    ----------    ----------
                                                                              (in thousands, except per share amounts)

<S>                                                                            <C>           <C>           <C>
Reported net income/(loss)..............................................       $       75    $   (4,701)   $   41,445
Amortization of goodwill................................................                -        11,691         4,229
                                                                               ----------    ----------    ----------
Adjusted net income excluding amortization of goodwill..................       $       75    $    6,990    $   45,674
                                                                               ==========    ==========    ==========

Reported net income/(loss) per share:
Basic...................................................................       $     0.00    $   (0.20)    $     1.77
                                                                               ==========    =========     ==========
Diluted.................................................................       $     0.00    $   (0.20)    $     1.58
                                                                               ==========    =========     ==========

Adjusted net income per share:
Basic...................................................................       $     0.00    $    0.29     $     1.95
                                                                               ==========    =========     ==========
Diluted.................................................................       $     0.00    $    0.28     $     1.74
                                                                               ==========    =========     ==========

Shares used in computing net income/(loss) per share:
Basic...................................................................           24,302       23,743         23,447
                                                                               ==========    =========     ==========
Diluted.................................................................           25,252       25,125         26,233
                                                                               ==========    =========     ==========
</TABLE>





     Goodwill was adjusted in during the two years ended  December 31, 2002,  as
follows:
<TABLE>
<CAPTION>
<S>                                                                                                      <C>
                               Goodwill                                                                      Balance
-----------------------------------------------------------------------------------------------------    --------------
                                                                                                         (in thousands)
At December 31, 2000.................................................................................      $   46,820
                                                                                                           ==========
Additions............................................................................................           2,051
Amortization.........................................................................................         (11,691)
                                                                                                           ----------
At December 31, 2001.................................................................................      $   37,180
                                                                                                           ==========
Additions............................................................................................               -
Amortization.........................................................................................               -
Adjustment for recognition of deferred tax asset.....................................................          (5,038)
                                                                                                           ----------
At December 31, 2002.................................................................................      $   32,142
                                                                                                           ==========
</TABLE>



     During  2002,  no  goodwill  was  acquired  or  impaired.  A  $5.0  million
reclassification  adjustment  was made to goodwill  during  2002  related to the
reduction of a valuation  allowance on deferred tax assets due to changes in the
expected  realizability of certain tax benefits related to GateField,  which was
purchased  in 2000.  During 2001  additional  consideration  of $1.7 million was
issued to Prosys  shareholders  pursuant  to the  achievement  of  technological
milestones  specified  in  the  Purchase  agreement.  See  Note  5  for  further
discussion of both these adjustments.

     We made no acquisitions of intangible  assets during 2002.  During 2001, we
acquired  patents  valued at $0.2  million with an  amortization  period of five
years.  Identified  intangible  assets as of December 31, 2002  consisted of the
following:

<TABLE>
<CAPTION>
                                                                                        Accumulated
(in thousands)                                                          Gross Assets    Amortization          Net
                                                                        ------------   -------------     ------------
<S>                                                                     <C>            <C>               <C>
Acquisition-related developed technology..............................  $     11,454   $     (5,253)     $      6,201
Other acquisition-related intangibles.................................         2,600         (1,681)              919
Acquired patents......................................................           516           (392)              124
                                                                        ------------   -------------     ------------
         Total identified intangible assets...........................  $     14,570   $     (7,326)     $      7,244
                                                                        ============   =============     ============


     Identified  intangible  assets as of  December  31, 2001  consisted  of the
following:

                                                                                        Accumulated
                                                                        Gross Assets    Amortization         Net
                                                                        ------------   -------------     ------------
Acquisition-related developed technology..............................  $     11,454   $     (2,962)     $      8,492
Other acquisition-related intangibles.................................         2,600         (1,351)            1,249
Acquired patents......................................................           516           (289)              227
                                                                        ------------   -------------     ------------
         Total identified intangible assets...........................  $     14,570   $     (4,602)     $      9,968
                                                                        ============   =============     ============


         All of our identified intangible assets are subject to amortization.
Amortization of identified intangibles included the following:

                                                                            2002             2001            2000
                                                                        ------------   ------------      ------------
Acquisition-related developed technology..............................  $      2,291   $      2,291      $        870
Other acquisition-related intangibles.................................           330            687               466
Acquired patents......................................................           103             88                72
                                                                        ------------   ------------      ------------
         Total amortization expense...................................  $      2,724   $      3,066      $      1,408
                                                                        ============   ============      ============
</TABLE>



     From the third  quarter of 1999 and through  November 15, 2000 (the date we
acquired  GateField),  we  held  certain  investments  in  GateField  that  were
accounted  for  under the  equity  method of  accounting.  Amortization  expense
related to equity  accounting for those investments was $2.4 million in 2000 and
is not included in the table above.

     Based on the carrying  value of identified  intangible  assets  recorded at
December  31, 2002,  and assuming no  subsequent  impairment  of the  underlying
assets, the annual amortization expense is expected to be $2.7 million for 2003,
$2.7 million for 2004,  $1.9 million for 2005, and none  thereafter.  See Note 5
for further  discussion of  intangible  assets  acquired in connection  with the
GateField, Prosys, and AutoGate Logic acquisitions.




3.   Available-for-Sale Securities



     The following is a summary of  available-for-sale  securities  December 31,
2002 and 2001:
<TABLE>
<CAPTION>

                                                                               Gross          Gross
                                                                             Unrealized     Unrealized   Estimated
                                                                  Cost         Gains         Losses     Fair Values
                                                                ---------    ----------    ----------    ----------
                                                                                  (in thousands)
<S>                                                             <C>          <C>           <C>           <C>
December 31, 2002
Certificate of deposit....................................      $   1,999    $       11    $        -    $    2,010
Commercial paper..........................................          5,865             1            (2)        5,864
Corporate bonds...........................................         43,010           537           (92)       43,455
U.S. government securities................................         47,962           570             -        48,532
Floating rate notes.......................................          5,800             -             -         5,800
Municipal obligations.....................................         12,866           226             -        13,092
                                                                ---------    ----------    ----------    ----------
Total available-for-sale securities.......................        117,502         1,345           (94)      118,753
Less amounts classified as cash equivalents...............         (3,363)            -             -        (3,363)
                                                                ---------    ----------    ----------    ----------
Total short-term available-for-sale debt securities.......        114,139         1,345           (94)      115,390
                                                                ---------    ----------    ----------    ----------
Short-term marketable strategic equity investments........            232             -             -           232
                                                                ---------    ----------    ----------    ----------
Total available-for-sale securities.......................      $ 114,371    $    1,345    $      (94)   $  115,622
                                                                =========    ==========    ==========    ==========

December 31, 2001
Corporate bonds...........................................      $  41,926    $    1,085    $      (31)   $   42,980
Corporate preferred stock.................................          1,900             -             -         1,900
U.S. government securities................................         16,098           400           (37)       16,461
Floating rate notes.......................................          9,400             -             -         9,400
Municipal obligations.....................................         45,628           976            (3)       46,601
                                                                ---------    ----------    ----------    ----------
Total available-for-sale securities.......................        114,952         2,461           (71)      117,342
Less amounts classified as cash equivalents...............         (1,008)            -             -        (1,008)
                                                                ---------    ----------    ----------    ----------
Total short-term available-for-sale debt securities.......        113,944         2,461           (71)      116,334
                                                                ---------    ----------    ----------    ----------
Short-term marketable strategic equity investment.........          5,634             -        (1,045)        4,589
                                                                ---------    ----------    ----------    ----------
Total available-for-sale securities.......................      $ 119,578    $    2,461    $   (1,116)   $  120,923
                                                                =========    ==========    ==========    ==========
</TABLE>



     We occasionally make equity  investments in public or private companies for
the promotion of business and strategic  objectives.  The marketable  portion of
these   investments,   valued  at  $0.2  million,   is  included  in  short-term
investments.  Non-marketable  private equity  investments valued at $0.1 million
are  included in other  assets.  During  2002,  we realized  losses and recorded
impairment  write-downs  totaling $3.7 million in connection  with our strategic
equity investments,  which consisted of $1.6 million related to an investment in
a publicly traded company and $2.1 million related to an equity  investment in a
private company.  The $1.6 million  consisted of $0.7 million of realized losses
on shares sold during the first and second  quarters of 2002 and $0.9 million of
impairment write-downs recorded in the second and fourth quarters of 2002. These
impairment write-downs were recorded as a result of declines in the market value
of shares still held by us that were deemed to be other than temporary. The $2.1
million  loss related to an equity  investment  in a private  company  consisted
entirely of an impairment  write-down  that was recorded when the estimated fair
value of the private company was determined to be below its carrying value after
the private  company  acquired new financing in the fourth  quarter of 2002. See
Note 1 for further  discussion of these losses and our policy on accounting  for
investments and the manner in which fair values were determined.  See Note 9 for
discussion of Other Comprehensive Income/(Loss).

     The  adjustments to unrealized  gains and (losses) on  investments,  net of
taxes,  included  as  a  separate  component  of  shareholders'  equity  totaled
approximately  ($0.1 million) for the year ended December 31, 2002, $0.1 million
for the year ended  December  31, 2001,  and ($15.3  million) for the year ended
December  31,  2000.  The $15.3  million  adjustment  during 2000 was due to the
liquidation  of our  investment in Chartered  Semiconductor  Manufacturing  Ltd.
(Chartered).  Realized gains were $0.2 million during 2002,  $0.4 million during
2001,  and $28.3 million  during 2000. The realized gain of $28.3 million during
2000 was from the sale of our investment in Chartered.

     The expected  maturities of our  investments in debt securities at December
31,  2002,  are shown below.  Expected  maturities  can differ from  contractual
maturities  because the issuers of the  securities  may have the right to prepay
obligations without prepayment penalties.

 Available-for-sale debt securities                               (in thousands)
    Due in less than one year...................................    $     39,925
    Due in one to five years....................................          67,165
    Due in five to ten years....................................               -
    Due after ten years.........................................           8,300
                                                                    ------------
                                                                    $    115,390
                                                                    ============

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

4.   Gain on Sale of Chartered Stock

     At  December  31,  1999,  we held an  equity  investment  in  Chartered,  a
semiconductor  company  located in Singapore,  which completed an initial public
offering in the fourth  quarter of 1999.  Our  investment  in Chartered was less
than 1% of the total equity of Chartered  and was held as an  available-for-sale
investment.  The  Chartered  investment  was valued at its market value of $37.6
million at the end of 1999.  During the second  quarter of 2000,  we sold all of
our shares of Chartered common stock for a one-time gain of $28.3 million.

5.   Business Acquisitions

     Purchased In-Process Research and Development Expenses (IPR&D)

     During 2001 and 2002, there were no acquisitions with IPR&D. IPR&D from the
Prosys  and  GateField  acquisitions  in 2000  amounted  to $10.6  million.  The
following table summarizes the significant assumptions underlying the valuations
related to IPR&D at the time of the acquisitions in fiscal 2000.
<TABLE>
<CAPTION>
                                                                            Percentage     Discount      Weighted
                                                                             Complete        Rate        Average
                                                                               at         Applied to     Cost of
                            2000                                 IPR&D     Acquisition       IPR&D       Capital
---------------------------------------------------------     -----------  -----------    ----------     ---------
                                                            (in thousands)
<S>                                                           <C>              <C>           <C>           <C>
GateField................................................     $     5,048      50%           25%           16%
Prosys...................................................     $     5,598      53%           25%           16%
</TABLE>


We believe that the amounts  determined for IPR&D represented fair value and did
not exceed the amounts an  independent  party would have paid for these projects
at the time of acquisition.


          GateField

          During 1998, we entered into a product marketing rights agreement with
     GateField  and made  investments  in GateField  common stock and  GateField
     convertible  preferred  stock,  which were valued at cost.  During 1999, we
     made additional  investments in GateField,  which resulted in us accounting
     for our investments in GateField  under the equity method,  commencing July
     1, 1999.  From July 1 through  December 31, 1999,  the impact of this was a
     $1.1  million  charge to our  pre-tax  income  ($0.9  million  included  in
     amortization  of goodwill and $0.2 million  included in equity  interest in
     net losses of equity method investee).

          On May  31,  2000,  we  announced  with  GateField  the  signing  of a
     definitive  merger  agreement.  On November 15, 2000, the  acquisition  was
     completed  and we paid  cash  consideration  of  $5.25  for  each  share of
     GateField  common  stock  that we didn't  already  own.  From  January 1 to
     November 15, 2000,  we recorded  charges of $4.8 million to pre-tax  income
     under  the  equity   method  of  accounting   ($2.4  million   included  in
     amortization  of goodwill and $2.4 million  included in equity  interest in
     net losses of equity method  investee).  GateField's  results of operations
     are  included in our income  statement  for the period from  November 15 to
     December 31, 2000, and succeeding years.

          The GateField  acquisition was accounted for using the purchase method
     of accounting and the total purchase price was approximately $46.2 million.
     We paid total cash consideration of $24.0 million,  or $5.25 per share, for
     the 4.6 million  shares of GateField  common  stock that we didn't  already
     own.  The net book value of our  investments  in  GateField at November 15,
     2000, was also included in the purchase price.  These investments  included
     1.6 million shares of GateField  common stock that we already owned,  which
     had a net book value of $5.4 million;  outstanding  notes  receivable  from
     GateField,  which had a net book value of $6.5 million; and the capitalized
     value of our product  marketing  agreement with GateField,  which had a net
     book value of $6.0 million.  We also  incurred $0.6 million of  acquisition
     expenses,  including  financial advisory and direct transaction costs, that
     are included as a component of the purchase price.

          In accordance with FIN 44, all vested and unvested  GateField employee
     stock  options that were  assumed by us are included in the purchase  price
     for accounting purposes based on their fair value of $3.8 million as of the
     announcement  date.  The  portion of the  intrinsic  value of the  unvested
     options deemed to be earned over the remaining  vesting period (total value
     of $0.9  million) was  allocated as part of the purchase  price to unearned
     compensation  and  is  being  amortized  to  operating  expenses  over  the
     remaining  vesting  period.  The fair  value  of the  options  assumed  was
     calculated based on the Black-Scholes option pricing model.

          In accordance  with the  provisions  of APB Opinion No. 16,  "Business
     Combinations,"  all  identifiable  assets and  liabilities  were assigned a
     preliminary  portion  of the  total  consideration  on the  basis  of their
     respective  fair values as of November 15, 2000. The  preliminary  purchase
     price allocation made in 2000 was adjusted in 2002 upon finalization of our
     analysis  regarding  the  realizability  for tax purposes of the  operating
     losses we acquired from GateField in the acquisition. The completion of the
     net operating loss analysis  resulted in a  reclassification  adjustment of
     $5.0  million from  goodwill to net  deferred  tax asset by  adjusting  the
     valuation  allowance on the deferred tax asset. The adjusted  allocation of
     consideration,  based on the valuation  report of an independent  valuation
     specialist,  and after consideration of the 2002 adjustment to deferred tax
     assets, is as follows (in thousands):

<TABLE>
<CAPTION>

     <S>                                                                                             <C>
     Net tangible assets (liabilities) of GateField..............................................    $     (1,083)
     In-process research and development.........................................................           5,088
     Acquired work-force.........................................................................             475
     Developed technology........................................................................           5,808
     Core Technology.............................................................................           2,896
     Tradename...................................................................................             326
     Patents.....................................................................................             976
     Goodwill....................................................................................          21,641
     Unearned compensation costs.................................................................             922
     Net deferred tax asset......................................................................           9,135
                                                                                                      -----------
                                                                                                     $     46,184
                                                                                                      ===========
</TABLE>


          A valuation  allowance  of $22.2  million is reflected in the purchase
     price allocation above due to the uncertainty surrounding the realizability
     of these net operating loss carryforwards.

          IPR&D was  identified  and valued  through  extensive  interviews  and
     analysis of data provided by GateField concerning  developmental  products,
     their  stage of  development,  the  time,  cost,  and  resources  needed to
     complete them, and associated  risks. The income approach,  which bases the
     value of an asset on its future earnings capacity,  was utilized in valuing
     the IPR&D.  This  approach  values an asset  based on the future cash flows
     projected to be generated by the asset over its  estimated  useful life. To
     estimate the value of the IPR&D,  the future cash flows were  discounted to
     their present value utilizing a discount rate that would provide sufficient
     return to a potential investor. At the date of acquisition,  the in-process
     technology had no  alternative  future use and was not ready for commercial
     production.  Based on our fair value estimation of future cash flows in the
     years 2001 through  2005, we estimated the fair value on November 15, 2000,
     of  the   next-generation   ProASIC   product  to  be  $5.0  million.   The
     next-generation   ProASIC  Plus  family  was  introduced  in  2002,   which
     corresponded  with  the  date  originally   contemplated  at  the  date  of
     acquisition.  Based on our fair value  estimation of future cash flows,  we
     believe the value attributed to IPR&D is still materially valid.

          The  value  of the  assembled  workforce  was  estimated  using a cost
     approach.  This  approach  identifies  the  employees  that  would  require
     significant  cost to replace and train.  This analysis  then  estimates the
     fully-burdened  costs (locating,  interviewing,  and hiring)  attributed to
     each employee.  These costs are aggregated and tax-effected to estimate the
     value  of the  acquired  workforce.  The  value  assigned  to the  acquired
     workforce was $0.5  million,  which we fully  amortized on a  straight-line
     basis over the estimated useful life of six months.

          The amounts  attributed to developed  technology  and core  technology
     were valued using the income approach  described  above. The value assigned
     to  developed   technology  is  based  on  technology   that  has  achieved
     technological  feasibility.  The  amounts  assigned to  developed  and core
     technology, $5.8 million and $2.9 million, respectively, is being amortized
     on a straight-line basis over an estimated useful life of five years.

          The value assigned to tradename represents the value attributed to the
     ProASIC tradename owned by GateField.  The relief from royalty  methodology
     was  utilized to value the  tradename.  This  methodology  assumes that the
     value of the asset equals the amount a third party would pay for the asset.
     We are  amortizing  the $0.3 million  value  assigned to the tradename on a
     straight-line basis over an estimated useful life of five years.

          To value the patent applications,  the relief from royalty methodology
     described  above was  utilized.  We are  amortizing  the $1.0 million value
     assigned  to the  patent  applications  on a  straight-line  basis  over an
     estimated useful life of five years.


          Goodwill,  which  represents  the  excess  of the  purchase  price  of
     GateField over the fair value of the underlying  net  identifiable  assets,
     was amortized  during 2000 and 2001 based on a  straight-line  basis and an
     estimated  useful  life of five  years.  In  accordance  with SFAS No. 142,
     beginning  with the first  quarter  of 2002,  goodwill  is no longer  being
     amortized,  but is reviewed  annually  for  impairment  and adjusted to the
     extent that  impairment  exists.  During  2002,  goodwill  was reviewed for
     indicators of  impairment  in accordance  with SFAS No. 142 and we found no
     indicators of impairment.  See Note 1 and Note 2 for further  discussion of
     the impact of adopting SFAS No. 142.


          Deferred tax assets and liabilities  have been recorded to reflect the
     future  benefits  and  obligations  associated  with the  deductibility  of
     GateField net operating loss  carryforwards  and the  non-deductibility  of
     amortization  related to acquired  goodwill and intangible  assets.  At the
     date of  acquisition,  we estimated  this amount to be $3.6  million.  Upon
     completion of the net operating  loss analysis,  a $5.0 million  adjustment
     was  recorded  in the fourth  quarter of 2002.  As of  December  31,  2002,
     approximately $9.1 million of net deferred tax assets are reflected as part
     of the purchase price.

          Prosys

          On June 2, 2000, we announced and completed the acquisition of Prosys,
     a developer of embedded  FPGA cores,  in a  transaction  accounted for as a
     purchase. Total consideration for the Prosys acquisition was $24.5 million.
     In connection with the acquisition, we paid $6.9 million in cash and issued
     220,518 shares of our Common Stock, at a value of $34.13 per share, for all
     outstanding  shares of Prosys stock. We assumed $0.1 million of liabilities
     and  incurred  $0.1  million of  acquisition  costs.  We also  assumed  all
     outstanding  Prosys  options,  all of which were  vested.  The  outstanding
     options were  estimated  to have a fair value equal to $9.9 million  (using
     the  Black-Scholes  option  pricing model) and are included in the purchase
     price.  Prosys's results of operations are included in our income statement
     for the period from June 2 to December 31, 2000, and succeeding years.

          In  accordance  with  the  provisions  of  APB  Opinion  No.  16,  all
     identifiable  assets and  liabilities  were assigned a portion of the total
     consideration   on  the  basis  of  their   respective  fair  values.   The
     consideration   was  allocated,   based  on  the  valuation  report  of  an
     independent valuation specialist, as follows (in thousands):
<TABLE>
<CAPTION>

<S>                                                                                                  <C>
     In-process research and development.........................................................    $      5,558
     Acquired work-force.........................................................................             273
     Patent applications.........................................................................             349
     Cash & other current assets.................................................................              57
     Deferred tax liability......................................................................            (249)
     Goodwill....................................................................................          18,534
                                                                                                     ------------
                                                                                                     $     24,522
                                                                                                     ============
</TABLE>


          The IPR&D expense associated with this purchase resulted in a one-time
     charge   of   $5.6   million   during   the   second   quarter   of   2000.

          IPR&D was identified through extensive interviews and analysis of data
     provided  by  Prosys  concerning  developmental  products,  their  stage of
     development,  the time,  cost,  and resources  needed to complete them, and
     associated  risks.  The  identified  IPR&D  was  valued  using  the  income
     approach.  At the date of  acquisition,  the  in-process  technology had no
     alternative future use and had not reached technological feasibility. Based
     on our fair value estimation of future cash flows in the years 2000 through
     2005, we estimated the fair value on June 2, 2000, of the Prosys in-process
     technology to be $5.6 million.

          The  technology  purchased from Prosys was developed into our VariCore
     EPGA which was introduced in 2001. The economic environment during 2001 and
     2002 was not  favorable  for the growth of market  demand for  programmable
     logic cores. Revenues from VariCore EPGAs have not materialized to date and
     the  development of a more advanced  VariCore EPGA has been  postponed.  We
     continue to believe that a market for programmable  logic cores will emerge
     and that our  VariCore  EPGA will be  competitive.  We do not believe  that
     either the lack of revenues to date or the postponement of development of a
     more advanced  embedded block core from the Prosys technology is sufficient
     at this time to impair the values we  attributed  to IPR&D,  goodwill,  and
     intangible assets.  Based on our fair value estimation of future cash flows
     from the  currently  available  EPGA  product,  we  believe  that the value
     attributed to IPR&D is still materially valid.

          The  value  of the  assembled  workforce  was  estimated  using a cost
     approach.  We  amortized  the $0.3 million  value  assigned to the acquired
     workforce on a  straight-line  basis over the estimated  useful life of six
     months.

          To value the patent applications,  the relief from royalty methodology
     was  utilized  with a  discount  rate of 25%.  We are  amortizing  the $0.3
     million value assigned to the patent  applications on a straight-line basis
     over an estimated useful life of five years.

          $18.5 million of goodwill, which represents the excess of the purchase
     price of Prosys  over the fair  value of the  underlying  net  identifiable
     assets,  was amortized during 2000 and 2001 based on a straight-line  basis
     and an estimated  useful life of five years.  In  accordance  with SFAS No.
     142, beginning with the first quarter of 2002,  goodwill is no longer being
     amortized,  but is instead reviewed annually for impairment and adjusted to
     the extent that impairment exists.  During 2002,  goodwill was reviewed for
     indicators of impairment in accordance  with SFAS No. 142 and no impairment
     was deemed to exist.  See Note 2 for  further  discussion  of the impact of
     adopting SFAS No. 142.

          During 2001,  additional  consideration  of $1.7 million was issued to
     Prosys security holders. The additional  consideration,  which consisted of
     54,290  shares of our Common  Stock valued at $1.1 million and $0.6 million
     of cash, was issued to Prosys security  holders pursuant to the achievement
     of certain  technological  milestones  specified  in the  Prosys  June 2000
     purchase  agreement and was distributed to all shareholders of Prosys based
     on their relative equity interests at the date of acquisition. Accordingly,
     additional goodwill of $1.7 million was recorded during 2001.

6.   Commitments

     We lease our facilities under non-cancelable lease agreements.  The current
primary  facilities  lease  agreement  expires in June  2003.  We have a renewal
option for an additional  five-year term, which we have decided not to exercise.
The  equipment  lease terms are  month-to-month.  Our  facilities  and equipment
leases are  accounted  for as  operating  leases and require us to pay  property
taxes,  insurance and  maintenance  and repair  costs.  At December 31, 2002 and
2001, we had no capital lease obligations.

     We have entered into  non-cancelable  licensing  agreements  with  external
software developers to enable us to include their proprietary  technology in our
design  and  programming   software.   The  following   represents   contractual
commitments   associated  with  operating   leases  and  royalty  and  licensing
agreements:
<TABLE>
<CAPTION>
                                                                        Payments Due by Period
                                                   ------------------------------------------------------------------
                                                                                                             2006
                                                     Total          2003          2004          2005       and later
                                                   ----------    ----------    ----------    ----------    ----------
                                                                             (in thousands)
<S>                                              <C>           <C>           <C>           <C>           <C>
 Operating leases...........................       $    2,709    $    2,480    $      229    $        -    $        -
 Royalty/licensing agreements...............           17,940         5,508         5,609         6,198           625
                                                   ----------    ----------    ----------    ----------    ----------
 Total......................................       $   20,649    $    7,988    $    5,838    $    6,198    $      625
                                                   ==========    ==========    ==========    ==========    ==========
</TABLE>

Subsequent   to  December  31,  2002,   we  signed  a  ten-year   $27.4  million
non-cancelable  lease for our  principal  facilities  and  executive  offices in
Mountain View,  California.  This  commitment is not included in the table.  See
Note 14 (unaudited)  for further  discussion of  commitments  related to the new
facilities  lease.  At  December  31,  2002,  we also had a number  of  purchase
commitments from wafer  manufacturers for orders that were expected to be filled
within ninety days. The wafer purchase  commitments  represent a normal level of
outstanding orders, are not material and are not included in the table.

     Rental expense under operating  leases was  approximately  $4.2 million for
2002, $4.4 million for 2001, and $4.3 million for 2000.

7.   Retirement Plan

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

     We may make  contributions  to the plan at the  discretion  of the Board of
Directors.  We made no  contributions  to the plan for 2002 and  2001,  but made
contributions of $0.5 million for 2000. Contributions were based on net revenues
and  net  income  for the  fiscal  years.  The  contributions  vested  annually,
retroactively  from an eligible  employee's date of hire, at the rate of 25% per
year. In addition,  contributions become fully vested upon retirement from Actel
at age 65. There is no guarantee we will make any  contributions  to the plan in
the future,  regardless of our financial performance.  If we, in our discretion,
choose to make a contribution again in the future, the amount could be higher or
lower.

8.   Shareholders' Equity

     Stock Option Exchange Program

     We offered our United States  employees the  opportunity  to cancel options
that were outstanding on June 29, 2001, in exchange for the grant of a new stock
option six months and one day later.  Under the stock option  exchange  program,
approximately  510,000  stock  options  were granted to employees at an exercise
price of $19.91, the closing price of our Common Stock on December 31, 2001. The
weighted  average  exercise  price of the options  canceled in the stock  option
exchange program was $35.23.

     Stock Repurchase

     Our Board of Directors  authorized a stock repurchase  program in September
1998  whereby up to 1,000,000  shares of our Common Stock may be purchased  from
time to time in the open market at the discretion of  management.  An additional
1,000,000  shares were  authorized  for  repurchase in each of 1999 and 2002. In
2002, we  repurchased  663,482  shares of Common Stock for $7.9 million.  During
2001,  we did not  repurchase  any Common  Stock.  During 2000,  we  repurchased
886,108 shares of Common Stock for $21.0 million.  We reissue repurchased shares
through our employee stock option and purchase  plans.  As of December 31, 2002,
we have remaining authorization to repurchase up to 900,000 shares.

     Stock Option Plans

     We have adopted  stock option plans under which  officers,  employees,  and
consultants may be granted  incentive  stock options or nonqualified  options to
purchase  shares of our Common Stock.  In  connection  with the  acquisition  of
Prosys and  GateField,  we assumed the stock  option  plans of  AutoGate  Logic,
Prosys,  and GateField and the related  options are  incorporated in the amounts
below. At December 31, 2002, 16,513,942 shares of Common Stock were reserved for
issuance under these plans, of which  2,371,784 were available for grant.  There
were no options  granted to consultants  in 2002 or 2000 and options  granted to
consultants  in 2001  were  recorded  at fair  value of $0.1  million  using the
Black-Scholes  model in  accordance  with EITF 96-18 and FIN No. 44. See Note 14
for further  information  related to increases in the number of shares available
for stock option grants that occurred after December 31, 2002.

     We have also adopted a Directors'  Stock Option Plan, under which directors
who are not employees of Actel may be granted  nonqualified  options to purchase
shares of our Common Stock. At December 31, 2002, 317,500 shares of Common Stock
were reserved for issuance  under such plan, of which 75,000 were  available for
grant.

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

     The  following  table  summarizes  our stock  option  activity  and related
information for the three years ended December 31, 2002:
<TABLE>
<CAPTION>

                                              2002                        2001                        2000
                                     ------------------------   -------------------------   -------------------------
                                                    Weighted                    Weighted                    Weighted
                                                    Average                     Average                     Average
                                      Number of     Exercise      Number of     Exercise      Number of     Exercise
                                       Shares        Price         Shares        Price         Shares        Price
                                     ----------    ----------   -----------    ----------   -----------    ----------
<S>                                   <C>            <C>        <C>              <C>        <C>              <C>        <C>
Outstanding at January 1......        7,508,292    $    18.70     6,840,991    $    19.08     5,862,933    $    12.62
Granted.......................        1,492,076         19.15     2,472,715         21.21     3,264,468         26.44
Exercised.....................         (514,727)        10.57      (514,574)         9.86    (1,189,898)        10.49
Canceled......................         (157,743)        20.02    (1,290,840)        29.00    (1,096,512)        15.72
                                     ----------                 -----------                 -----------
Outstanding at December 31....        8,327,898    $    19.26     7,508,292    $    18.70     6,840,991    $    19.08
                                     ==========                 ===========                 ===========
</TABLE>


The following table summarizes  information  about stock options  outstanding at
December 31, 2002:
<TABLE>
<CAPTION>

                                                                          December 31, 2002
                                                  -----------------------------------------------------------------
                                                           Options Outstanding                Options Exercisable
                                                  ---------------------------------------   -----------------------
                                                                  Weighted
                                                                  Average
                                                                 Remaining      Weighted                   Weighted
                                                                  Contract      Average                    Average
                                                    Number of       Life        Exercise    Number of      Exercise
           Range of Exercise Prices                   Shares     (in years)      Price        Shares       Price
---------------------------------------------     -----------    ----------    ----------   ----------   ----------
<S>                                                 <C>              <C>     <C>            <C>          <C>
$   0.07 - 11.75............................        1,370,953        4.18    $    10.59     1,330,833    $    10.62
   11.88 - 13.56............................          848,588        6.76         13.24       630,152         13.27
   13.63 - 17.13............................          661,916        6.34         15.70       457,818         15.45
   17.27 - 19.73............................        1,173,208        9.06         19.52        50,729         18.12
   19.91 - 20.56............................        1,027,021        8.49         20.13       482,554         20.13
   20.66 - 21.88............................          273,500        8.36         21.24        95,404         21.42
   21.90 - 21.90............................        1,010,274        8.57         21.90        60,553         21.90
   21.93 - 25.00............................          836,711        8.17         23.58       265,772         23.62
   26.06 - 31.19............................          836,878        7.18         27.42       556,604         27.46
   31.72 - 54.45............................          288,849        7.49         34.86        97,868         33.41
                                                    ---------                               ---------
                                                    8,327,898        7.32    $    19.26     4,028,287    $    16.98
                                                    =========                               =========
</TABLE>



At December 31, 2001,  2,634,531  outstanding  options were exercisable;  and at
December   31,   2000,   1,761,989   outstanding   options   were   exercisable.

     Employee Stock Purchase Plan

     We have  adopted an  Employee  Stock  Purchase  Plan  (ESPP),  under  which
eligible employees may designate not more than 15% of their cash compensation to
be deducted each pay period for the purchase of Common Stock (up to a maximum of
$25,000  worth  of  Common  Stock  each  year).  The  ESPP  is  administered  in
consecutive,  overlapping  offering  periods of up to 24 months each,  with each
offering  period  divided  into  four  consecutive  six-month  purchase  periods
beginning August 1 and February 1 of each year. On the last business day of each
purchase  period,  shares of Common Stock are purchased with employees'  payroll
deductions accumulated during the prior six months at a price per share equal to
85% of the market price of the Common  Stock on the first day of the  applicable
offering period or the last day of the purchase  period,  whichever is lower. At
December 31, 2002, 3,019,680 shares of Common Stock were authorized for issuance
under the ESPP. There were 269,346 shares issued under the ESPP in 2002, 223,311
shares in 2001, and 384,436 shares in 2000.  724,247 shares  remained  available
for issuance at December 31, 2002.


9.   Comprehensive Income (Loss)

     The components of comprehensive income (loss), net of tax, are as follows:
<TABLE>
<CAPTION>

                                                                                     Years Ended December 31,
                                                                               --------------------------------------
                                                                                   2002          2001          2000
                                                                               ----------    ----------    ----------
                                                                                            (in thousands)

<S>                                                                          <C>           <C>           <C>
Net income (loss).......................................................       $       75    $   (4,701)   $   41,445
Change in gain on available-for-sale securities, net of tax of $(38) in
   2002, $185 in 2001, and $172 in 2000.................................              189           276           853
Less reclassification adjustment for gains included in net income (loss)             (245)         (220)      (16,163)
                                                                               ----------    ----------    ----------
Other comprehensive income (loss).......................................              (56)           56       (15,310)
                                                                               ----------    ----------    ----------
Total comprehensive income (loss).......................................       $       19    $   (4,645)   $   26,135
                                                                               ==========    ==========    ==========
</TABLE>


     Accumulated  other  comprehensive  income for 2002 and 2001 is presented on
the accompanying consolidated balance sheets and consists of the accumulated net
unrealized gain on available-for-sale securities.


<PAGE>


10.  Tax Provision

     The tax provision (benefit) consists of:
<TABLE>
<CAPTION>

                                                                                     Years Ended December 31,
                                                                               --------------------------------------
                                                                                   2002          2001          2000
                                                                               ----------    ----------    ----------
                                                                                          (in thousands)
<S>                                                                            <C>             <C>             <C>
Federal - current.......................................................       $     (177)   $     (146)   $   31,554
Federal - deferred......................................................           (1,052)        1,917        (5,402)
State - current.........................................................               10           (84)        5,078
State - deferred........................................................             (914)       (1,045)         (299)
Foreign - current.......................................................              208           295           296
                                                                               ----------    ----------    ----------
                                                                               $   (1,925)   $      937    $   31,227
                                                                               ==========    ==========    ==========
</TABLE>


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

<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                               --------------------------------------
                                                                                   2002          2001          2000
                                                                               ----------    ----------    ----------
                                                                                          (in thousands)
<S>                                                                            <C>           <C>           <C>
Provision/(benefit) at federal statutory rate...........................       $     (648)   $   (1,317)   $   25,435
Change in valuation allowance...........................................              625          (440)         (440)
Tax exempt interest income..............................................             (455)         (910)       (1,050)
Federal research credits................................................             (989)       (1,100)       (1,600)
State taxes, net of federal benefit.....................................             (588)         (420)        3,106
Write-down of deferred tax asset due to state tax rate reduction........               --         1,044            --
Non-deductible impact of amortization of intangibles/investments........               --         4,092         3,183
Non-deductible impact of in-process research and development............               --            --         3,726
Other...................................................................              130           (12)       (1,133)
                                                                               ----------    ----------    ----------
Tax provision...........................................................       $   (1,925)   $      937    $   31,227
                                                                               ==========    ==========    ==========
</TABLE>

     Significant  components  of our  deferred  tax assets and  liabilities  for
federal and state income taxes are as follows:
<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                             ------------------------
                                                                                                 2002          2001
                                                                                             ----------    ----------
                                                                                                   (in thousands)
<S>                                                                                          <C>           <C>
Deferred tax assets:
        Depreciation...................................................................      $    2,524    $    2,228
        Deferred income on shipments to distributors...................................          10,417        10,243
        Intangible assets..............................................................           4,035         4,422
        Inventories....................................................................           6,357         7,284
        Net operating losses...........................................................          36,007        34,139
        Other, net.....................................................................           9,551         8,645
                                                                                             ----------    ----------
                                                                                                 68,891        66,961
        Valuation allowance............................................................         (23,826)      (28,003)
                                                                                             ----------    ----------
                Net deferred tax assets................................................      $   45,065    $   38,958
                                                                                             ==========    ==========

Deferred tax liabilities:
         Intangible assets.............................................................      $    2,764    $    3,927
                                                                                             ==========    ==========
</TABLE>


     The valuation  allowance declined by approximately $4.2 million in 2002 and
$0.4 million  during 2000.  The valuation  allowance  decreased in 2002 due to a
$5.0 million  reclassification  adjustment to reduce goodwill as a result of the
realization of previously  reserved  deferred tax assets associated with the net
operating  losses  acquired  from  GateField.  This  reduction in the  valuation
allowance was offset by an increase to the  valuation  allowance of $0.6 million
which was primarily  related to impairments on equity  investments  for which we
believe it is more likely  than not such  impairments  will be realized  for tax
purposes.  See Note 5 for further  discussion  of  realization  of acquired  net
operating losses realized in 2002.  Approximately $21.8 million of the valuation
allowance at December 31,  2002,  will be allocated to reduce  goodwill or other
non-current intangible assets from the acquisition of GateField when realized.


     We have a net operating loss  carryforward  of  approximately  $91 million,
which will  expire at various  times  beginning  in 2006 and ending in 2021.  In
addition,  we  have  California  research  and  development  and  manufacturer's
investment  credits of  approximately  $1.9 million that will expire in 2006 and
2007. Pre-tax income from foreign subsidiaries is immaterial.

11.  Segment Disclosures

     We  operate  in a single  operating  segment:  designing,  developing,  and
marketing  FPGAs.  FPGA sales accounted for 96% of net revenues for 2002,  2001,
and  2000.  We  derive  non-FPGA  revenues  from our  Protocol  Design  Services
organization, royalties, and the licensing of software and sale of hardware that
is used to design and program FPGAs. The Protocol Design Services  organization,
which we acquired from GateField in the third quarter of 1998,  accounted for 1%
of our net revenues for 2002 and 2001 and 2% of our net revenues for 2000.

     We market  our  products  in the United  States  and in  foreign  countries
through   our  sales   personnel,   independent   sales   representatives,   and
distributors. Our geographic sales are as follows:
<TABLE>
<CAPTION>

                                                                Years Ended December 31,
                                     ---------------------------------------------------------------------------
                                              2002                        2001                       2000
                                     ----------------------   -------------------------   ----------------------
                                                         (in thousands, except percentages)
<S>                                  <C>              <C>        <C>              <C>        <C>              <C>
United States.................       $   83,276       62%        $   89,847       62%        $  153,847       68%
Export:
     Europe...................           30,716       23             40,652       28             43,282       19
     Japan....................            8,398        6              6,630        4             16,561        7
     Other international......           11,978        9              8,430        6             12,729        6
                                     ----------    ------        ----------    ------        ----------    ------
                                     $  134,368      100%        $  145,559      100%        $  226,419      100%
                                     ==========    ======        ==========    ======        ==========    ======
</TABLE>


     We  generate  a  majority  of our  revenues  from the sale of our  products
through distributors.  As of December 31, 2002, our principal  distributors were
Unique and Pioneer.  See Note 14 (unaudited) for further  information related to
our distributor relationships.  The following table sets forth the percentage of
revenues  derived from each customer  that  accounted for 10% or more of our net
revenues in any of the last three years:

<TABLE>
<CAPTION>

                                                                                 2002          2001          2000
                                                                                -------       -------       -------
<S>                                                                               <C>           <C>           <C>
Pioneer.................................................................          26%           20%           13%
Unique..................................................................          22            19            15
Arrow...................................................................           -            13            17
Nortel Networks.........................................................           1             2            11
</TABLE>


     We  estimate   that  sales  of  our  products  to  customers   serving  the
communications and the military and aerospace markets accounted for over half of
net revenues in 2002, 2001, and 2000. We have experienced,  and may again in the
future  experience,   substantial  period-to-period  fluctuations  in  operating
results  due to  conditions  in each of these  markets as well as in the general
economy.

     Our property  and  equipment  is located  primarily  in the United  States.
Property and equipment located outside of the United States is not material.

12.  Patent Infringement

     On March 29, 2000, Unisys  Corporation  (Unisys) brought suit in the United
States District Court for the Northern District of California, San Jose Division
(Court),  against us seeking monetary damages and injunctive  relief.  We orally
agreed  with  Unisys  to settle  the case on April  25,  2001,  and  executed  a
definitive  written  settlement  agreement on June 29, 2001. The Court dismissed
the case with  prejudice on July 13, 2001.  The settlement was immaterial to our
business, financial condition, and operating results.


     As is typical in the semiconductor  industry, we have been and expect to be
notified from time to time of claims that we may be infringing  patents owned by
others. During 2002, we held discussions regarding potential patent infringement
issues with several third parties.  When probable and reasonably  estimable,  we
have made  provision  for the estimated  settlement  costs of claims for alleged
infringement.  As we sometimes  have in the past, we may obtain  licenses  under
patents  that we are  alleged  to  infringe.  While we believe  that  reasonable
resolution  will  occur,  there can be no  assurance  that these  claims will be
resolved  or that the  resolution  of these  claims  will not have a  materially
adverse effect on our business,  financial condition,  or results of operations.
In addition, our evaluation of the impact of these pending disputes could change
based upon new  information  learned by us. Subject to the foregoing,  we do not
believe that any pending patent  dispute is likely to have a materially  adverse
effect on our business, financial condition, or results of operations.


13.  Earnings Per Share

     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings per share:
<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                               --------------------------------------
                                                                                   2002          2001          2000
                                                                               ----------    ----------    ----------
                                                                                           (in thousands,
                                                                                     except per share amounts)
<S>                                                                            <C>           <C>           <C>
Basic:
Weighted-average common shares outstanding..............................           24,302        23,743        23,447
                                                                               ----------    ----------    ----------
Shares used in computing net income per share...........................           24,302        23,743        23,447
                                                                               ----------    ----------    ----------
Net income (loss).......................................................       $       75    $   (4,701)   $   41,445
                                                                               ==========    ==========    ==========
Net income (loss) per share.............................................       $     0.00    $    (0.20)    $    1.77
                                                                               ==========    ==========    ==========
Diluted:
Weighted-average common shares outstanding..............................           24,302        23,743        23,447
Net effect of dilutive stock options, warrants, and convertible preferred
   stock - based on the treasury stock method...........................              950             -         2,786
                                                                               ----------    ----------    ----------
Shares used in computing net income per share...........................           25,252        23,743        26,233
                                                                               ==========    ==========    ==========
Net income (loss).......................................................       $       75    $   (4,701)   $   41,445
                                                                               ==========    ==========    ==========
Net income (loss) per share.............................................       $     0.00    $    (0.20)   $     1.58
                                                                               ==========    ==========    ==========
</TABLE>


     For 2002,  options  outstanding  under our stock  option  plans to purchase
approximately  5,160,000  shares of our  Common  Stock  were  excluded  from the
calculation  to derive diluted  income per share because their  inclusion  would
have had an anti-dilutive effect.



     For 2001,  we were in a net loss  position  and the  inclusion of any stock
options in the shares used for  computing  diluted net loss per share would have
been  anti-dilutive  (reduced  the loss  per  share).  Therefore,  approximately
4,016,000  options were excluded from the  calculation  of net less per share in
2001 because their inclusion would have had an anti-dilutive effect.


     For 2000,  options  outstanding  under our stock  option  plans to purchase
approximately  361,000  shares  of our  Common  Stock  were  excluded  from  the
calculation  to derive diluted  income per share because their  inclusion  would
have had an anti-dilutive effect.



<PAGE>


14.  Subsequent Events (Unaudited)

          New  Facilities Lease

          Subsequent  to December 31, 2002,  we signed a ten-year  $27.4 million
     non-cancelable  lease for our principal facilities and executive offices in
     Mountain View, California. The new lease agreement expires in 2014. Minimum
     lease payments on the new facilities  lease have been included in the table
     below:
<TABLE>
<CAPTION>

                                                                        Payments Due by Period
                                                   ------------------------------------------------------------------
                                                                                                             2006
                                                      Total          2003          2004          2005       and later
                                                   ----------    ----------    ----------    ----------    ----------
                                                                             (in thousands)
<S>                                                <C>           <C>           <C>           <C>           <C>
         New building lease.................       $   27,374    $      584    $    2,337    $    2,407    $   22,046
</TABLE>



          Distributor Termination

          Subsequent  to December 31, 2002,  we  consolidated  our  distribution
     channel by terminating  our agreement  with Pioneer,  leaving Unique as our
     sole  distributor  in North  America.  The loss of Unique as a  distributor
     could  have  a  materially  adverse  effect  on  our  business,   financial
     condition, or results of operations.

          Increase to 1986 Stock Option Plan


          Our 1986  Incentive  Stock  Option Plan  provides  that the  aggregate
     number of shares that may be optioned  and sold under the Plan is increased
     annually  on the  first  day of  each  fiscal  year by  such  amount  as is
     necessary to make the total number of shares  available for grant under the
     Plan equal to 5% of our Common Stock issued and outstanding at the close of
     business  on the  last  day  of  the  immediately  preceding  fiscal  year.
     Consequently,  on the first day of fiscal 2003, 1,208,624 additional shares
     were made available for grant under the Plan.




<PAGE>





                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


THE BOARD OF DIRECTORS AND SHAREHOLDERS
ACTEL CORPORATION

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Actel
Corporation  as of  December  31, 2002 and 2001,  and the  related  consolidated
statements  of  operations,   shareholders'   equity  and  other   comprehensive
income/(loss),  and cash flows for each of the three  years in the period  ended
December 31, 2002. These financial  statements are the responsibility of Actel's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated  financial position of Actel
Corporation at December,  31 2002 and 2001 and the  consolidated  results of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 2002, in conformity with accounting  principles  generally accepted
in the United States.

As  discussed  in Note 1 and Note 2 to the  consolidated  financial  statements,
effective  December January 1, 2002, the company adopted  Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets."





                                                           /s/ ERNST & YOUNG LLP

San Jose, California
January 22, 2003