ACTEL CORPORATION

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

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                --------------------------------------------------------------------
                                                    1998          1997          1996          1995          1994
                                                ------------  ------------  ------------  ------------  ------------
<S>                                             <C>           <C>           <C>           <C>           <C>         
Statements of Operations Data:
Net revenues................................    $    154,427  $    155,858  $    148,779  $    108,516  $     76,007
Costs and expenses:
   Cost of revenues.........................          61,642        64,244        64,420        52,517        33,349
   Research and development.................          31,220        26,465        23,934        20,560        14,406
   Selling, general, and administrative.....          41,743        41,194        38,395        27,364        19,699
   In-process R&D (1).......................              --            --            --        16,600            --
                                                ------------  ------------  ------------  ------------  ------------
         Total costs and expenses...........         134,605       131,903       126,749       117,041        67,454
                                                ------------  ------------  ------------  ------------  ------------
Income (loss) from operations...............          19,822        23,955        22,030        (8,525)        8,553
Interest expense............................              --            --           (13)          (93)         (232)
Interest income and other, net..............           2,380         1,842         1,068           846           935
                                                ------------  ------------  ------------  ------------  ------------
Income (loss) before taxes..................          22,202        25,797        23,085        (7,772)        9,256
Tax provision (benefit).....................           7,215         9,029         8,147        (6,640)        1,389
                                                ------------  ------------  ------------  ------------  ------------
Net income (loss)...........................    $     14,987  $     16,768  $     14,938  $     (1,132) $      7,867
                                                ============  ============  ============  ============  ============
Net income (loss) per share:
   Basic (2)................................    $       0.71  $       0.82  $       0.84  $     (0.07)  $       0.46
                                                ============  ============  ============  ============  ============
   Diluted (2)..............................    $       0.68  $       0.76  $       0.70  $     (0.07)  $       0.45
                                                ============  ============  ============  ============  ============
Shares used in computing net income
 (loss) per share:
   Basic....................................          21,251        20,370        17,826        17,367        16,995
                                                ============  ============  ============  ============  ============
   Diluted..................................          21,921        21,968        21,485        17,367        17,579
                                                ============  ============  ============  ============  ============
</TABLE>
<TABLE>
<CAPTION>
                                                                            December 31,
                                                --------------------------------------------------------------------
                                                    1998          1997          1996          1995          1994
                                                ------------  ------------  ------------  ------------  ------------
<S>                                             <C>           <C>           <C>           <C>           <C>         
 Consolidated Balance Sheet Data:
 Working capital............................    $     85,858  $     76,279  $     55,397  $     39,867  $     35,971
 Total assets...............................         179,708       159,994       136,712       107,119        67,855
 Long-term obligations (3)..................              --            --            --            --            72
 Convertible preferred stock (4)............              --            --        18,147        18,147            --
 Total shareholders' equity.................    $    127,054  $    109,010  $     69,357  $     50,920  $     49,311

-----------------------------------------------------------
<FN>
   (1)      Represents a charge for in-process research and development incurred
            in the  first  quarter  of 1995 in  connection  with  the  Company's
            acquisition of the field  programmable  gate array business of Texas
            Instruments Incorporated ("TI").

   (2)      The earnings per share  amounts  prior to 1997 have been restated as
            required to comply with Statement of Financial  Accounting Standards
            No. 128,  "Earnings Per Share." See Note 13 of Notes to Consolidated
            Financial  Statements  for further  discussion of earnings per share
            and the impact of Statement No. 128.

   (3)      Includes  long-term  portion  of notes  payable  and  capital  lease
            obligations.

   (4)      Represents  redeemable,  convertible preferred stock issued to TI in
            connection with the Company's acquisition of TI's field programmable
            gate array  business.  On March 12, 1997,  TI converted the Series A
            Preferred Stock into 2,631,578 shares of Common Stock.

</FN>
</TABLE>
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         Actel  Corporation  ("Actel" or the  "Company") is the world's  leading
supplier  of  antifuse-based   field  programmable  gate  arrays  ("FPGAs")  and
associated   software   development  tools.  FPGAs  are  used  by  designers  of
communication,  computer,  industrial  control,  military/aerospace,  and  other
electronic  systems  to  differentiate  their  products  and get them to  market
faster.

Business Developments

         GateField

         In the  third  quarter  of 1998,  the  Company  entered  into a product
marketing rights agreement with, and purchased  convertible  stock of, GateField
Corporation  ("GateField").  Simultaneously,  the  Company  acquired  the Design
Services  Business  Unit  of  GateField  in a  transaction  accounted  for  as a
purchase.   Consideration  paid  in  these  transactions   totaled  $10,447,000,
consisting entirely of cash.

         In  accordance  with  provisions  of APB Opinion  16, all  identifiable
assets, including identifiable intangible assets, were assigned a portion of the
total  consideration  on the basis of their  respective  fair  values.  Standard
valuation  procedures and techniques were utilized in determining the fair value
of each  acquired  asset.  This  included  consideration  of cost,  income,  and
market-based  valuation approaches,  as appropriate,  based on the nature of the
assets being valued.  An income-based  approach,  which focuses on the cash-flow
generating  capacity  and  associated  risks of an asset,  was  considered  most
appropriate for analyzing the product  marketing rights agreement and backlog of
the Design Services  Business Unit due to their future earnings  potential.  The
value of the assembled  work force was estimated on a replacement  cost basis by
determining the cost to find and interview candidates and to train new employees
in their new positions. Lastly, the convertible preferred stock was valued as if
converted into common stock at the date of the  acquisition,  subject to certain
valuation  adjustments.  The  assumptions  used to  estimate  the  value  of the
identified  intangible  assets  were  developed  by the  Company  and  GateField
management  and were further  supported  through  relevant  industry  data.  The
consideration  was  allocated as follows:  $6,000,000  to the product  marketing
rights agreement;  $1,650,000 to the convertible preferred stock; and $2,797,000
(consisting  of  $447,000  related  to net  assets  and  $2,350,000  related  to
intangible assets) to the Design Services Business Unit.

         The product  marketing  rights  agreement  provides the Company with an
exclusive  right to market and sell  GateField's  standard  ProASIC  products in
process  geometries of 0.35 micron and smaller as part of the Company's  product
line.  Development  of the  underlying  technology  and  products is managed and
executed  exclusively  by  GateField,  and  the  products  are  expected  to  be
production  qualified  by  the  end of  1999.  The  Company  has  agreed  to pay
additional  consideration  of $1,000,000 upon  qualification  of the initial .25
micron product. As of December 31, 1998,  GateField's progress in developing the
technology and products was consistent with the Company's expectations; however,
there  can be no  assurance  that  GateField's  future  technology  and  product
development  efforts  will  result in product  sales  sufficient  to recover the
Company's investment.  The $6,000,000 allocated to product marketing rights will
be amortized over the related products'  currently  estimated  revenue-producing
life of seven years;  the Company will  re-evaluate the expected life if product
sales do not commence as scheduled  or fail to achieve  expected  volumes in the
future.

         The Company's  investment in GateField's  convertible  preferred  stock
consists  of  300,000  shares of  GateField  Series C  Preferred  Stock that are
convertible,  at the  Company's  election,  into  2,000,000  shares of GateField
Common Stock. The Company's  investment in GateField  represents less than 5% of
total common-equivalent  equity of GateField,  determined assuming conversion of
all  GateField  convertible  preferred  stock into  common  stock.  The  Company
accounts for its preferred stock  investment in GateField under the cost method;
therefore,  changes in the value of the  investment  are not  recognized  unless
impairment  in  the  value  of  the  investment  is  deemed  to be  "other  than
temporary." Such an impairment could occur if, among other things, product sales
subject to the product  marketing  rights  agreement  discussed in the preceding
paragraph do not commence as  scheduled or fail to achieve  expected  volumes in
the future.

         The Company also purchased from GateField its Design Services  Business
Unit  located in Mt.  Arlington,  New Jersey.  The Actel Design  Services  Group
provides varying levels of design services,  including:  design  methodology and
tool  consulting;  turnkey  FPGA and  application  specific  integrated  circuit
("ASIC") design; intellectual property ("IP") development and integration; board
and system  design;  software  design and  implementation;  and  development  of
prototypes,  first articles, and production units. The Company is the first FPGA
provider to offer system-level design expertise, expanding the Company's ability
to support a greater portion of customers'  overall design and risk  management.
The Design Services Group is a secure facility  certified to handle  government,
military,  and proprietary designs. The Design Services Group is not involved in
the development  efforts underlying the product marketing rights agreement.  The
net assets of the Design  Services  Group were  valued at  $447,000  and consist
principally  of  fixed  assets,  accounts  receivable,  deposits,  and  accounts
payable.  Intangible  assets were valued at  $2,350,000  and consist of $300,000
related to backlog,  $1,000,000  related to  workforce-in-place,  and $1,050,000
related to goodwill.  Backlog is being amortized over its estimated  useful life
of six months.  The Design  Services  Group  workforce  and  goodwill  are being
amortized over their estimated useful life of five years.

         QuickLogic

         During  the  third  quarter  of  1998,   the  Company  and   QuickLogic
Corporation   ("QuickLogic")  agreed  to  settle  and  dismiss  the  two  patent
infringement  actions between the parties pending before the United States Court
for the Northern  District of California,  San Jose  Division.  The actions were
dismissed  on  September  4, 1998.  As part of the  settlement,  the Company and
QuickLogic  entered  into  a  Patent  Cross  License  Agreement.  Management  is
satisfied with the terms of the settlement, which is immaterial to the Company's
business, financial condition, or operating results.

         Lemelson

         During the third  quarter of 1998,  the Lemelson  Medical,  Education &
Research  Foundation  (the  "Foundation"),  filed a lawsuit in the United States
District  Court for the  District of  Arizona,  against the Company and 25 other
United States  semiconductor  companies  seeking monetary damages and injunctive
relief based on such companies' alleged  infringement of certain patents held by
the Foundation.  The action was dismissed as to the Company on December 8, 1998,
pursuant to the terms of a settlement  agreement  between the Foundation and the
Company.  The  settlement is immaterial  to the  Company's  business,  financial
condition, or operating results.

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>
                                                                                    Year Ended December 31,
                                                                            ----------------------------------------
                                                                                1998          1997          1996
                                                                            ------------  ------------  ------------
<S>                                                                            <C>           <C>           <C>   
Net revenues............................................................       100.0%        100.0%        100.0%
Cost of revenues........................................................        39.9          41.2          43.3
                                                                            ------------  ------------  ------------
Gross margin............................................................        60.1          58.8          56.7
Research and development................................................        20.2          17.0          16.1
Selling, general, and administrative....................................        27.0          26.4          25.8
                                                                            ------------  ------------  ------------
Income from operations..................................................        12.9          15.4          14.8
Interest and other income, net..........................................         1.5           1.2           0.7
                                                                            ------------  ------------  ------------
Income before taxes.....................................................        14.4          16.6          15.5
Tax provision...........................................................         4.7           5.8           5.5
                                                                            ------------  ------------  ------------
Net income..............................................................         9.7%         10.8%         10.0%
                                                                            ============  ============  ============
</TABLE>
Beginning  in 1998,  the  Company's  fiscal  year  ends on the  first  Sunday in
January,  instead  of the Sunday  closest  to  December  31.  Fiscal  1998 was a
fifty-three  week fiscal year,  rather than a normal fifty-two week fiscal year,
but that would also have been the case under the old policy.  Fiscal 1998, 1997,
and 1996 ended on January 3, 1999,  December  28,  1997,  and December 29, 1996,
respectively.  For ease of  presentation,  December 31 has been  utilized as the
fiscal year-end for all years.

         Net Revenues

         Net revenues for fiscal 1998 were $154.4 million, a decrease of 1% from
net revenues for fiscal 1997.  This compares with an increase in net revenues of
5% for fiscal 1997 over fiscal 1996. The Company derives its revenues  primarily
from the sale of  FPGAs,  which  accounted  for 97% of net  revenues  for  1998,
compared with 98% for 1997 and 97% for 1996.  The Company also derives  revenues
from  royalties  and the sale of  software,  hardware,  maintenance,  and design
services.

         Net  revenues  from the sale of FPGAs  for 1998  decreased  2% from net
revenues  from the sale of FPGAs for 1997.  This compares with an increase of 6%
in net revenues  from the sale of FPGAs for 1997 over 1996.  The decrease in net
revenues  from the sale of FPGAs for 1998 from 1997 was  primarily due to an 11%
decrease in the overall average selling price of FPGAs,  which was mostly offset
by an increase of 12% in unit sales. The decrease in the overall average selling
price of FPGAs for 1998 was driven by a higher  percentage  of  shipments  of MX
product,  which has lower average  selling prices than other  families,  coupled
with selling price erosion typical to the semiconductor  industry. The growth in
net revenues from the sale of FPGAs for 1997 over 1996 was due primarily to a 3%
increase in unit sales coupled with a 2% increase in the overall average selling
prices of FPGAs.  The increase in the overall  average selling price in 1997 was
due  principally to  proportionately  greater unit sales of the Company's  newer
(ACT 3, XL, DX, and RH) product families, which generally command higher average
selling prices than the Company's older (ACT 1 and ACT 2) product families.

         As is typical in the semiconductor industry, the average selling prices
of the Company's products generally decline over the lives of such products.  To
increase  revenues,  the  Company  seeks to  increase  unit  sales  of  existing
products,  principally  by  reducing  prices,  and to  introduce  and  sell  new
products. No assurance can be given that these efforts will be successful.

         As is common  in the  semiconductor  industry,  the  Company  generates
significant  revenues from the sales of its products through  distributors.  The
Company's principal  distributors are Unique  Technologies,  Inc. ("Unique") and
Pioneer-Standard  Electronics,  Inc.  ("Pioneer")  in North  America  and  Arrow
Electronics, Inc. and Zeus Electronics (collectively, "Arrow") worldwide. Unique
replaced Wyle  Electronics  Marketing Group ("Wyle") as an Actel  distributor in
the second  half of 1998.  Unique and Wyle are both part of the  worldwide  Veba
Electronics Group. The Company is now strategically  positioned as Unique's only
FPGA supplier. This provides the Company with a partner whose FPGA focus will be
exclusively  on  the  Company's  channel  distribution,   service,  and  support
requirements.  The following table sets forth, for each of the last three years,
the percentage of revenues derived from all customers accounting for 10% or more
of net revenues in any of such years:

<TABLE>
<CAPTION>
                                                                                1998          1997          1996
                                                                            ------------  ------------  ------------
<S>                                                                              <C>           <C>           <C>
Wyle/Unique.............................................................         14%           17%           14%
Arrow...................................................................         14%           17%           14%
Pioneer.................................................................          9%           12%           11%
</TABLE>

The Company does 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 for 1998,  1997, and 1996
accounted for 33%, 31%, and 33% of net revenues,  respectively.  Of these export
sales, the largest portion was derived from European customers.

         Gross Margin

         Gross margin for 1998 was 60% of net revenues, compared with 59% of net
revenues for 1997 and 57% of net revenues for 1996.  The  improvements  in gross
margin  resulted  primarily  from  improved  manufacturing  yields,  wafer price
reductions, and appreciation in the value of the United States dollar versus the
Japanese yen, in which some of the Company's  wafer  purchases are  denominated.
The Company  periodically  enters into  foreign  exchange  contracts to minimize
foreign exchange risk relating to wafer purchases denominated in yen.

         As is typical in the semiconductor  industry,  margins on the Company's
products  generally  decline  as the  average  selling  prices of such  products
decline.  The  Company  seeks to  offset  margin  erosion  by  selling  a higher
percentage of new products,  which  generally  tend to have higher  margins than
more mature  products,  and by reducing costs. The Company seeks to reduce costs
by  improving  wafer  yields,   negotiating  price  reductions  with  suppliers,
increasing  the level and  efficiency of its testing and  packaging  operations,
achieving  economies  of  scale  by  means  of  higher  production  levels,  and
increasing the number of die produced per wafer by shrinking the die size of its
products.  No assurance can be given that these efforts will be successful.  The
capability  of the Company to shrink the die size of its FPGAs is  dependent  on
the  availability of more advanced  manufacturing  processes.  Due to the custom
steps involved in manufacturing  antifuse FPGAs, the Company  typically  obtains
access to new manufacturing  processes later than its competitors using standard
manufacturing processes.

         Research and Development

         Research and development  expenditures for 1998 were $31.2 million,  or
20% of net revenues,  compared with $26.5 million,  or 17% of net revenues,  for
1997  and  $23.9  million,  or 16% of  net  revenues,  for  1996.  Research  and
development  expenditures  for 1998  increased  by 18% compared  with 1997,  and
increased  as a percentage  of net revenues as the Company  boosted the level of
its research and development  expenditures to accelerate the introduction of new
products.  Research  and  development  expenditures  for 1997  increased  by 11%
compared with 1996,  and  increased as a percentage of net revenues  principally
because net revenues for the second half of 1997  decreased  from the first half
of 1997.

         The  Company's  research and  development  consists of circuit  design,
software development,  and process technology  activities.  The Company believes
that continued substantial investment in research and development is critical to
maintaining a strong technological position in the industry. Since the Company's
antifuse  FPGAs are  manufactured  using a  customized  process,  the  Company's
research  and  development  expenditures  will  probably  always  be higher as a
percentage of net revenues than that of its major competitors.

         Selling, General, and Administrative

         Selling,  general,  and  administrative  expenses  for 1998 were  $41.7
million,  or 27% of net  revenues,  compared with $41.2  million,  or 26% of net
revenues, for 1997 and $38.4 million, or 26% of net revenues, for 1996. Selling,
general,  and  administrative  expenses for 1998  increased by 1% compared  with
1997,  while the Company's  net revenues for 1998  decreased by 1% compared with
1997.  Selling,  general,  and  administrative  expenses for 1998 increased as a
percentage of net revenues  principally  because of an increased  level of sales
and  marketing  activities  in support of new products.  Selling,  general,  and
administrative  expenses  for 1997  increased  by 7% compared  with 1996,  while
revenues increased in 1997 by 5% over 1996. This spending increase was primarily
due to increased  sales and  marketing  support for new  products and  increased
legal spending for litigation support.

         Tax Provision

         The Company's  effective tax rates for 1998, 1997, and 1996 were 32.5%,
35.0% and 35.0%,  respectively.  Significant  components affecting the effective
tax rate include  benefits of federal research and development  credits,  income
from tax exempt securities, state composite rate, and the recognition of certain
deferred  tax assets  subject to valuation  allowances  as of December 31, 1997,
December 31, 1996,  and December 31, 1995.  The  effective tax rate for 1998 was
less  than the  effective  tax rate for 1997  due  primarily  to  increased  R&D
spending,  increased  income  from  tax  exempt  securities,  and a lower  state
composite rate.

Financial Condition, Liquidity, and Capital Resources

         The  Company's  total  assets were  $179.7  million at the end of 1998,
compared  with $160.0  million at the end of 1997.  The increase in total assets
was  attributable  principally to increased cash, cash  equivalents,  short-term
investments,  and inventory.  The following  table sets forth certain  financial
data from the  Consolidated  Balance Sheets  expressed as the percentage  change
from the end of fiscal 1997 to the end of fiscal 1998:
<TABLE>
<CAPTION>
                                                                                              Percentage Change
                                                                                              From 1997 to 1998
                                                                                          --------------------------
<S>                                                                                                 <C>  
Cash, cash equivalents, and short-term investments.....................................              19.2%
Accounts receivable, net...............................................................             (17.2)
Inventories............................................................................              25.4
Property and equipment, net............................................................              (3.2)
Other assets (primarily GateField).....................................................             128.5
Total assets...........................................................................              12.3
Total current liabilities..............................................................               3.3
Shareholders' equity...................................................................              16.6
</TABLE>

         Cash, Cash Equivalents, and Short-Term Investments

         The Company's cash, cash equivalents,  and short-term  investments were
$70.4  million at the end of 1998,  compared  with  $59.0  million at the end of
1997. The amount of cash, cash equivalents, and short-term investments increased
as a result of $27.2 million of cash provided by operations  and $1.5 million of
cash  provided  by  financing  activities,  which  were  offset in part by $17.4
million  of  cash  used  in  investing  activities.  These  activities  included
approximately  $10.4 million used in the GateField  transaction and $6.1 million
used in the repurchase of Company Common Stock.

         The Company  currently  has no material  financial  obligations  to its
wafer  suppliers.   However,  wafer  manufacturers  are  increasingly  demanding
financial  support from customers in the form of equity  investments and advance
purchase price deposits, which in some cases are substantial. Should the Company
require   additional   capacity,   it  may  be  required  to  incur  significant
expenditures to secure such capacity.

         The  Company  believes  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 should
they  occur,  it may  become  prudent  or  necessary  for the  Company  to raise
additional capital.  The Company intends to monitor the availability and cost of
potential  capital  resources,  including  equity,  debt, and off-balance  sheet
financing  arrangements,  with a view toward raising additional capital on terms
that are  acceptable to the Company.  No assurance can be given that  additional
capital will become available on acceptable terms.

         Notwithstanding the foregoing, the Company believes that existing cash,
cash equivalents, and short-term investments,  together with cash generated from
operations, will be sufficient to meet its cash requirements for 1999. A portion
of available cash may be used for investment in or acquisition of  complementary
businesses, products, or technologies.

         Accounts Receivable

         The Company's net accounts  receivable were $20.8 million at the end of
1998, compared with $25.1 million at the end of 1997. This decline of 17% in net
accounts  receivable compares favorably with the 1% decrease in net revenues for
1998 compared with 1997. The Company  believes that its net accounts  receivable
for  1998  declined  through  more  focused   collection   efforts  and  process
improvements.

         Inventories

         The  Company's  inventories  were  $25.7  million  at the end of  1998,
compared  with  $20.5  million  at the end of 1997.  This  increase  was  driven
primarily  by  intentional  inventory  builds in the  Company's  newest  product
families,  MX and SX,  driving an increase in days of inventory  from 122 to 148
days.  This build  enables the Company to have MX and SX products  available for
immediate  shipment to  customers.  Since the Company's  FPGAs are  manufactured
using customized steps that are added to the standard manufacturing processes of
its independent wafer suppliers, the Company's manufacturing cycle is longer and
hence more  difficult  to adjust in  response  to  changing  demands or delivery
schedules.

         Property and Equipment

         The  Company's  net property and equipment was $14.6 million at the end
of 1998,  compared with $15.1 million at the end of 1997.  The Company  invested
$7.6 million in property and  equipment in 1998,  compared  with $6.8 million in
1997.  Depreciation of property and equipment was $8.1million for 1998, compared
with $7.5 million for 1997. Capital  expenditures during the past two years have
been primarily for engineering, manufacturing, and office equipment.

         Other Assets

         The  Company's  other assets grew to $15.9  million at the end of 1998,
compared with $7.0 million at the end of 1997.  This  increase was  attributable
primarily to the Company's  transactions with GateField.  See Note 5 of Notes to
Consolidated Financial Statements.

         Current Liabilities

         The Company's total current  liabilities  were $52.7 million at the end
of 1998, compared with $51.0 million at the end of 1997.

         Shareholders' Equity

         Shareholders'  equity was $127.1  million at the end of 1998,  compared
with $109.0 million at the end of 1997.  The increase  included $15.0 million of
net income and  proceeds  of $7.6  million  from the sale of Common  Stock under
employee stock plans.  These  increases were offset by the repurchase of 675,000
shares of Common Stock at a cost of $6.1 million.

Employees

         At the end of 1998, the Company had 457 full-time employees,  including
137 in marketing,  sales, and customer support; 157 in research and development;
115 in operations;  15 in Design Services; and 33 in administration and finance.
This compares  with 380  full-time  employees at the end of 1997, an increase of
20%. Net revenues per  employee was  approximately  $338,000 for 1998,  compared
with approximately $410,000 for 1997.

Impact of Recently Issued Accounting Standards

         As of January 1, 1998,  the  Company  adopted  Statement  of  Financial
Accounting  Standards No. 130,  "Reporting  Comprehensive  Income" ("SFAS 130").
SFAS 130  establishes  new rules for the reporting and display of  comprehensive
income and its  components;  however,  the adoption of SFAS 130 had no impact on
the Company's net income or shareholders'  equity.  SFAS 130 requires unrealized
gains or losses  on the  Company's  available-for-sale  securities  and  foreign
currency  translation  adjustments,   which  prior  to  adoption  were  reported
separately in shareholders' equity to be included in other comprehensive income.
Prior  year  financial  statements  have been  reclassified  to  conform  to the
requirements  of SFAS 130.  Total  comprehensive  income  for 1998 and 1997 were
$15,114,000 and $16,818,000, respectively.

         During 1998,  the Company  adopted  Statement  of Financial  Accounting
Standards No. 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information"  ("SFAS  131"),  which  established  standards  for the way  public
enterprises  report  information  in annual  statements  and  financial  reports
regarding operating segments,  products,  services,  geographic areas, and major
customers. The Company currently has one reportable segment under SFAS 131.

         In June 1998, the Financial Accounting Standards Board issued Statement
of  Financial   Accounting   Standards  No.  133,   "Accounting  for  Derivative
Instruments  and  Hedging  Activities"  ("SFAS  133"),  which is  required to be
adopted  in years  beginning  after June 15,  1999.  The  Company  is  currently
evaluating  the impact  adoption  of SFAS 133 will have on  financial  position,
operating results, and cash flow.

         The American Institute of Certified Public Accountants issued Statement
of Position 98-1,  "Accounting For the Costs of Computer  Software  Developed or
Obtained For Internal  Use" ("SOP  98-1"),  on March 4, 1998.  SOP 98-1 provides
guidelines for accounting for costs of computer software  developed for internal
use. SOP 98-1 is effective for financial  statements for fiscal years  beginning
after  December 15, 1998. The adoption of SOP 98-1 is not expected to materially
impact the Company's results of operations, financial position, or cash flow.

Market Risk

         As of December 31, 1998, the Company's  investment  portfolio consisted
of corporate bonds, floating rate notes, and municipal obligations.  The primary
objectives of the Company's  investment  activities  are to preserve  principal,
meet liquidity needs, and maximize yields. To meet these objectives, the Company
invests in only high credit quality debt securities  with average  maturities of
less than  twelve  months.  The  Company  also  limits 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 the  Company's  investment
portfolio.

         The  Company's  investments  are  subject to  interest  rate  risk.  An
increase in interest rates could subject the Company to a decrease in the market
value of its  investments.  These  risks are  mitigated  by the  ability  of the
Company to hold these  investments to maturity.  A  hypothetical  60 basis point
increase in interest  rates would  result in an  approximate  $156,000  decrease
(less  than  0.3%)  in  the  fair  value  of  the  Company's  available-for-sale
securities.

         The  Company  purchases  a portion of the wafers it uses in  production
from  Japanese  suppliers in purchases  denominated  in Japanese Yen. An adverse
change  in the  foreign  exchange  rate  would  have an  effect on the price the
Company pays for a portion of the wafers used in production  over the long term.
The Company  attempts to mitigate its  exposure to risks from  foreign  currency
fluctuations  by purchasing  forward  foreign  exchange  contracts to hedge firm
purchase  commitments  denominated in foreign currencies.  The Company's forward
contracts  are  subject to  foreign  exchange  risk.  The  Company's  accounting
policies  for these  contracts  are based on the  Company's  designation  of the
contracts as hedging transactions. The criteria the Company uses for designating
a contract as a hedge  includes the contract's  effectiveness  in risk reduction
and one-to-one matching of the derivative financial instrument to the underlying
transaction being hedged.  Forward exchange  contracts are short term and do not
hedge  purchases that will be made for anticipated  longer-term  wafer needs. An
adverse  change of 10% in  exchange  rates  would  result in a decline in income
before taxes of approximately $860,000.

         All of the  potential  changes  noted above are based upon  sensitivity
analysis  performed on the  Company's  financial  position at December 31, 1998.
Actual results may differ materially.

Year 2000 Risks

         The Year 2000 issue is the result of computer  programs  being  written
using two digits  rather  than four to define the  applicable  year.  Any of the
Company's  computer  programs or hardware that have  date-sensitive  software or
embedded  chips may recognize a date using "00" as the year 1900 rather than the
year 2000.

         Based on recent  assessments,  the Company  determined that it would be
required to upgrade,  modify,  and/or replace portions of its internal  software
and certain internal  hardware so that those systems will properly utilize dates
beyond   December  31,  1999.  The  Company   presently   believes  that,   with
modifications  or replacements of existing  software and certain  hardware,  the
impact of the Year 2000 issue can be mitigated.  However,  if the  modifications
and  replacements are not made on a timely basis, no assurance can be given that
the  Company's  internal  networks,   desktops,   and  test  equipment  will  be
operational,  or that third  party  vendors  will be able to meet the  Company's
production needs.

         The  Company's  plan to  resolve  the  Year  2000  issue  involves  the
following    four    phases:    inventory,    assessment,    remediation,    and
testing/implementation.  The Company has completed its inventory and  assessment
of  information  technology  ("IT") and  non-information  technology  ("Non-IT")
systems that could be  significantly  affected by the Year 2000.  The assessment
indicated  that most of the Company's  significant IT systems could be affected,
particularly the order entry,  general ledger,  billing,  and inventory systems.
Non-IT systems that could be affected  include testers and bar-code devices used
in various aspects of the manufacturing and shipping process.

         Based on a review of its product  lines (FPGA  devices and  programming
software  and  hardware),  the Company has  determined  that the majority of its
products it has sold and will continue to sell do not require  remediation to be
Year 2000  compliant.  Accordingly,  the Company  does not believe that the Year
2000 presents a material exposure as it relates to the Company's products.

         With respect to its IT exposure,  to date the Company has completed the
remediation  of its ERP  systems  (systems  for  order  entry,  general  ledger,
billing, production tracking,  inventory and shipping) by upgrading to year 2000
compliant  versions.  Once  software is  reprogrammed  or replaced for a system,
testing and  implementation  are carried out. These phases run  concurrently for
different  systems.  The Company  plans to have most IT systems fully tested and
implemented by June 30, 1999,  with 100%  completion  targeted for September 30,
1999.

         The remediation of Non-IT systems is significantly  more difficult than
remediation of IT systems due to the dependency on manufacturers for information
on the Year 2000 compliance status of the various  components and products.  The
Company is 30% complete with the remediation  phase of its Non-IT  systems.  The
Company  expects to complete its remediation of Non-IT systems by June 30, 1999.
Testing  and  implementation  of  affected  equipment  is  expected  to be fully
completed by September 30, 1999.

         The  Company  has  queried  all  of  its   significant   suppliers  and
subcontractors ("Suppliers").  To date, the Company is not aware of any Supplier
with a Year 2000 issue that would  materially  impact the  Company's  results of
operations,  liquidity, or capital resources.  However, the Company has no means
of  ensuring  that its  Suppliers  will be Year 2000  ready.  The  inability  of
Suppliers to complete  their Year 2000  compliance  process in a timely  fashion
could materially and adversely impact the Company.

         The Company  will  utilize  both  internal  and  external  resources to
reprogram or replace,  test, and implement the software and embedded systems for
Year 2000  modifications.  To date, the Company has incurred  approximately $0.5
million of  expenses on efforts  directed  solely at Year 2000  compliance.  The
total cost of the Year 2000  project is not  expected to exceed $2.0 million and
is being funded through operating cash flows.

         Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner.  As noted above,  the Company
has not yet completed all necessary phases of the Year 2000 program. The Company
believes  that it is more  likely  to  experience  Year 2000  problems  with the
systems  of  Suppliers  rather  than  with the  Company's  internal  systems  or
products.  The Company's Year 2000 program  includes  efforts to assess the Year
2000 compliance of its Suppliers.

         The Company currently has no contingency plans in place in the event it
does not complete all phases of the Year 2000  program.  The Company  intends to
develop a  contingency  plan to deal with Year 2000 issues  that may  materially
adversely  affect  its  business  processes.  The  Company  intends  to  have  a
contingency plan in place no later than June 30, 1999.

Other Risks

         The  Company's  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 the  Company,  any of which  could  cause  the
Company's  operating  results  to differ  materially  from past  results.  For a
discussion of such risks,  see "Risk Factors" in Part I of the Company's  Annual
Report on Form 10-K for 1998, which is incorporated herein by this reference.

Quarterly Information

         The following table presents certain  unaudited  quarterly  results for
each of the eight  quarters in the period ended  January 3, 1999. In the opinion
of  management,  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  the  audited
consolidated  financial  statements  of the  Company  and notes  thereto.  These
quarterly operating results,  however, are not indicative of the results for any
future period.

<PAGE>
<TABLE>
<CAPTION>
                                                                             Three Months Ended
                                         ------------------------------------------------------------------------------------------
                                          Jan. 3,     Oct. 4,    June 28,   Mar. 29,    Dec. 28,   Sept. 28,   June 29,   Mar. 30,
                                            1999       1998        1998       1998        1997       1997        1997       1997
                                         ---------   --------   ----------  ---------  ----------  ---------  ----------  ---------
                                                                  (in thousands, except per share amounts)
<S>                                      <C>         <C>        <C>         <C>        <C>         <C>        <C>         <C>      
Statements of Operations Data:
Net revenues..........................   $  40,174   $ 38,628   $   37,160  $  38,465  $   37,012  $  38,220  $   40,823  $  39,803
Cost of revenues......................      15,797     15,245       14,815     15,785      15,287     15,788      16,731     16,439
                                         ---------   --------   ----------  ---------  ----------  ---------  ----------  ---------
Gross profit..........................      24,377     23,383       22,345     22,680      21,725     22,432      24,092     23,364
Research and development..............       8,483      7,960        7,527      7,250       6,816      6,641       6,461      6,547
Selling, general, and administrative..      10,359     10,411       10,392     10,581      10,313     10,355      10,394     10,131
                                         ---------   --------   ----------  ---------  ----------  ---------  ----------  ---------
Income from operations................       5,535      5,012        4,426      4,849       4,596      5,436       7,237      6,686
Net income............................   $   4,118   $  3,837   $    3,419  $   3,613  $    3,382  $   3,921  $    4,934  $   4,531
Net income per share:
  Basic (1)...........................   $    0.20   $   0.18   $     0.16  $    0.17  $     0.16  $    0.19  $     0.24  $    0.24
                                         =========   ========   ==========  =========  ==========  =========  ==========  =========
  Diluted (1).........................   $    0.19   $   0.18   $     0.16  $    0.17  $     0.16  $    0.18  $     0.23  $    0.21
                                         =========   ========   ==========  =========  ==========  =========  ==========  =========
Shares used in computing net income
  per share:
  Basic...............................      21,091     21,449       21,288     21,163      21,032     20,956      20,834     18,636
                                         =========   ========   ==========  =========  ==========  =========  ==========  =========
  Diluted.............................      22,201     21,724       21,968     21,864      21,623     22,172      21,890     22,082
                                         =========   ========   ==========  =========  ==========  =========  ==========  =========
</TABLE>
<TABLE>
<CAPTION>
                                                                             Three Months Ended
                                         ------------------------------------------------------------------------------------------
                                          Jan. 3,     Oct. 4,    June 28,   Mar. 29,    Dec. 28,   Sept. 28,   June 29,   Mar. 30,
                                            1999       1998        1998       1998        1997       1997        1997       1997
                                         ---------   --------   ----------  ---------  ----------  ---------  ----------  ---------
<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%
Cost of revenues......................      39.3        39.5       39.9        41.0       41.3        41.3       41.0        41.3
                                         ---------   --------   ----------  ---------  ----------  ---------  ----------  ---------
Gross margin..........................      60.7        60.5       60.1        59.0       58.7        58.7       59.0        58.7
Research and development..............      21.1        20.6       20.3        18.9       18.4        17.4       15.8        16.4
Selling, general, and administrative..      25.8        27.0       28.0        27.5       27.9        27.1       25.5        25.5
                                         ---------   --------   ----------  ---------  ----------  ---------  ----------  ---------
Income from operations................      13.8        13.0       11.9        12.6       12.4        14.2       17.7        16.8
Net income............................      10.3         9.9        9.2         9.4        9.1        10.3       12.1        11.4

------------------------------------------------
<FN>
   (1)     The  earnings  per share  amounts  for the first  three  quarters  of 1997 have been
           restated  to comply  with  Statement  of  Financial  Accounting  Standards  No. 128,
           "Earnings Per Share."
</FN>
</TABLE>
<PAGE>

                                ACTEL CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                                 December 31,
                                                                                          --------------------------
                                                                                              1998         1997
                                                                                          ------------  ------------
                                                       ASSETS
<S>                                                                                       <C>           <C>         
Current assets:
   Cash and cash equivalents...........................................................   $     13,947  $      7,763
   Short-term investments..............................................................         56,449        51,272
   Accounts receivable, net............................................................         20,820        25,135
   Inventories, net....................................................................         25,669        20,472
   Deferred income taxes...............................................................         18,169        20,782
   Notes receivable from officers......................................................            356           364
   Other current assets................................................................          3,102         1,475
                                                                                          ------------  ------------
         Total current assets..........................................................        138,512       127,263
Property and equipment, net............................................................         14,592        15,081
Investment in Chartered Semiconductor..................................................         10,680        10,680
Other assets, net......................................................................         15,924         6,970
                                                                                          ------------  ------------
                                                                                          $    179,708  $    159,994
                                                                                          ============  ============

                                        LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable....................................................................   $     11,525  $     12,440
   Accrued salaries and employee benefits..............................................          4,960         4,718
   Other accrued liabilities...........................................................            828         1,391
   Income taxes payable................................................................          3,370         1,507
   Deferred income.....................................................................         31,971        30,928
                                                                                          ------------  ------------
         Total current liabilities.....................................................         52,654        50,984

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;  21,181,930 and
     21,046,894 shares issued and outstanding at December 31, 1998 and 1997,
     respectively......................................................................             21            21
   Additional paid-in capital..........................................................         92,092        85,965
   Retained earnings ..................................................................         34,763        22,973
   Accumulated Other Comprehensive Income .............................................            178            51
                                                                                          ------------  ------------
         Total shareholders' equity....................................................        127,054       109,010
                                                                                          ------------  ------------
                                                                                          $    179,708  $    159,994
                                                                                          ============  ============

</TABLE>

<PAGE>


                                ACTEL CORPORATION

                        CONSOLIDATED STATEMENTS OF INCOME
                    (in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                            ----------------------------------------
                                                                                1998          1997          1996
                                                                            ------------  ------------  ------------
<S>                                                                         <C>           <C>           <C>         
Net revenues............................................................    $    154,427  $    155,858  $    148,779
Costs and expenses:
   Cost of revenues.....................................................          61,642        64,244        64,420
   Research and development.............................................          31,220        26,465        23,934
   Selling, general, and administrative.................................          41,743        41,194        38,395
                                                                            ------------  ------------  ------------
         Total costs and expenses.......................................         134,605       131,903       126,749
                                                                            ------------  ------------  ------------
Income from operations..................................................          19,822        23,955        22,030
Interest expense........................................................              --            --           (13)
Interest income and other, net..........................................           2,380         1,842         1,068
                                                                            ------------  ------------  ------------
Income before taxes.....................................................          22,202        25,797        23,085
Tax provision...........................................................           7,215         9,029         8,147
                                                                            ------------  ------------  ------------
Net income..............................................................    $     14,987  $     16,768  $     14,938
                                                                            ============  ============  ============
Net income per share:
   Basic................................................................    $       0.71  $       0.82  $       0.84
                                                                            ============  ============  ============
   Diluted..............................................................    $       0.68  $       0.76  $       0.70
                                                                            ============  ============  ============
Shares used in computing net income per share:
   Basic................................................................          21,251        20,370        17,826
                                                                            ============  ============  ============
   Diluted..............................................................          21,921        21,968        21,485
                                                                            ============  ============  ============
</TABLE>

<PAGE>


                                ACTEL CORPORATION

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                      (in thousands, except share amounts)


<TABLE>
<CAPTION>
                                                                         Retained    Accumulated 
                                                         Additional     Earnings/       Other         Total
                                             Common       Paid-In     (Accumulated  Comprehensive  Shareholders'
                                             Stock        Capital        Deficit)       Income        Equity
                                          ------------  ------------   ------------  ------------  ------------ 
<S>                                       <C>           <C>            <C>           <C>           <C>         
Balance at December 31, 1995............  $         18  $     59,638   $     (8,733) $         (3) $     50,920
Issuance of 429,745 shares of common
   stock under employee stock plans.....            --         2,955             --            --         2,955
Tax benefit from exercise of stock
   options..............................            --           540             --            --           540
Net income..............................            --            --         14,938            --        14,938
Other comprehensive income:
  Change in unrealized gain on
     investments........................            --            --             --             4             4
                                                                                                   ------------ 
  Comprehensive income..................                                                                 14,942
                                          ------------  ------------   ------------  ------------  ------------ 
Balance at December 31, 1996............  $         18  $     63,133   $      6,205  $          1  $     69,357
                                          ============  ============   ============  ============  ============ 
Conversion of 1,000,000 shares of
   redeemable, convertible preferred
   stock into 2,631,578 shares of                                                                               
   common stock.........................             3        18,144             --            --        18,147
Issuance of 423,813 shares of common
   stock under employee stock plans.....            --         3,970             --            --         3,970
Tax benefit from exercise of stock                  --           718             --            --           718
   options..............................
Net income..............................            --            --         16,768            --        16,768
Other comprehensive income:
  Change in unrealized gain on
     investments........................            --            --             --            50            50
                                                                                                   ------------ 
  Comprehensive income..................                                                                 16,818
                                          ------------  ------------   ------------  ------------  ------------ 
Balance at December 31, 1997............  $         21  $     85,965   $     22,973  $         51  $    109,010
                                          ============  ============   ============  ============  ============ 
Issuance of 785,036 shares of common
   stock under employee stock plans.....             1         7,599             --            --         7,600
Issuance of 25,000 shares of common
   stock for patent acquisition.........            --           366             --            --           366
Tax benefit from exercise of stock                  --         1,097             --            --         1,097
   options..............................
Net income..............................            --            --         14,987            --        14,987
Other comprehensive income:
  Change in unrealized gain on
      investments.......................            --            --             --            127          127
                                                                                                   ------------ 
  Comprehensive income..................                                                                 15,114
Repurchase of common stock..............            (1)       (2,935)        (3,197)           --        (6,133)
                                          ------------  ------------   ------------  ------------  ------------ 
Balance at December 31, 1998............  $         21  $     92,092   $     34,763  $        178  $    127,054
                                          ============  ============   ============  ============  ============ 
</TABLE>

<PAGE>


                                ACTEL CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                            ----------------------------------------
                                                                                1998          1997          1996
                                                                            ------------  ------------  ------------
<S>                                                                         <C>           <C>           <C>         
Operating activities:
   Net income...........................................................    $     14,987  $     16,768  $     14,938
   Adjustments  to  reconcile  net  income  to net cash  
     provided  by  operating activities:
     Depreciation and amortization......................................           9,320         8,358         6,755
     Loss on disposal of fixed assets...................................              --           175            --
     Changes in operating assets and liabilities:
       Accounts receivable..............................................           4,315         4,360       (11,690)
       Inventories......................................................          (5,197)        6,376           878
       Deferred income taxes............................................           2,613        (5,050)       (6,373)
       Other current assets & notes receivable from officers............          (1,619)          577          (319)
       Accounts payable, accrued salaries and employee benefits, and
         other accrued liabilities......................................           1,724        (1,048)        5,140
       Deferred income..................................................           1,043         3,542         8,238
                                                                            ------------  ------------  ------------
   Net cash provided by operating activities............................          27,186        34,058        17,567
Investing activities:
   Purchases of property and equipment..................................          (7,646)       (6,764)       (7,786)
   Purchases of available-for-sale securities...........................        (134,630)     (157,753)      (49,429)
   Sales and maturities of available for sale securities................         129,580       132,156        26,096
   Investment in Chartered Semiconductor................................              --            --        (3,611)
   Investment in GateField including purchase of design center, preferred
     stock and other intangible assets .................................         (10,000)         ----          ----
   Other assets.........................................................             227        (1,447)          126
                                                                            ------------  ------------  ------------
   Net cash used in investing activities................................         (22,469)      (33,808)      (34,604)
Financing activities:
   Sale of common stock.................................................           7,600         3,970         2,955
   Repurchase of common stock...........................................          (6,133)           --            --
   Principal payments under notes payable and capital lease obligations.
                                                                                      --            --           (66)
                                                                             ------------  ------------  ------------
   Net cash provided by financing activities............................           1,467         3,970         2,889
Net increase (decrease) in cash and cash equivalents....................           6,184         4,220       (14,148)
Cash and cash equivalents, beginning of year............................           7,763         3,543        17,691
                                                                            ------------  ------------  ------------
Cash and cash equivalents, end of year..................................    $     13,947  $      7,763  $      3,543
                                                                            ============  ============  ============
Supplemental  disclosures of cash flows  information and non-cash
   investing and financing activities:
   Cash paid during the year for interest...............................    $         --  $         --  $          2
   Cash paid during the year for taxes..................................           2,207        15,398        12,370
   Tax benefits from exercise of stock options..........................           1,097           718           540
   Issuance of common stock for patent acquisition......................             366            --            --
   Conversion of preferred stock into common stock......................              --       (18,147)           --
</TABLE>

<PAGE>


                                ACTEL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       Organization and Summary of Significant Accounting Policies

         Actel  Corporation (the "Company") was  incorporated  under the laws of
California on October 17, 1985. The Company designs, develops, and markets field
programmable  gate arrays ("FPGAs") and associated  development  system software
and programming hardware.  The Company also provides design services,  including
FPGA,  application  specific  integrated  circuit  ("ASIC"),  and system design,
software  development and implementation,  and development of prototypes,  first
articles and production units. Net revenues from the sale of FPGAs accounted for
97% of the Company's  net revenues for 1998,  compared with 98% for 1997 and 97%
for 1996. Design services, which the Company acquired from GateField Corporation
("GateField")  in the third  quarter of 1998,  accounted for 1% of the Company's
net revenues for 1998.

         FPGAs are logic integrated  circuits that adapt the microprocessing and
memory  capabilities  of  electronic  systems  to  specific  applications.   The
Company's  operating  results  are  therefore  subject  to a  variety  of  risks
characteristic  of the  semiconductor  industry,  including booking and shipment
uncertainties,  wafer yield fluctuations,  and price erosion, as well as general
economic  conditions.  FPGAs are used by designers of  communication,  computer,
industrial  control,   military/aerospace,   and  other  electronic  systems  to
differentiate  their products and get them to market faster.  Information on the
Company's sales by geographic area is included in Note 11.

         Advertising and Promotion Costs

         The Company's  policy is to expense  advertising and promotion costs as
they are  incurred.  The  Company's  advertising  and  promotion  expenses  were
approximately $3,454,000,  $4,050,000,  and $3,595,000 for 1998, 1997, and 1996,
respectively.

         Basis of Presentation

         The  consolidated  financial  statements  include  the  accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.

         Beginning in 1998,  the Company's  fiscal year ends on the first Sunday
in  January,  instead of the Sunday  closest to December  31.  Fiscal 1998 was a
fifty-three  week fiscal year,  rather than a normal fifty-two week fiscal year,
but that would also have been the case under the old policy.  Fiscal 1998, 1997,
and 1996 ended on January 3, 1999,  December  28,  1997,  and December 29, 1996,
respectively.  For ease of  presentation,  December 31 has been  utilized as the
fiscal  year-end  for all years in the  consolidated  financial  statements  and
accompanying notes.

         Cash Equivalents and Short-Term Investments

         For  financial  statement  purposes,  the Company  considers all highly
liquid  debt  instruments  with  insignificant  interest  rate  risk  and with 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 state and local municipal obligations.

         The  Company  accounts  for  its  investment  in  accordance  with  the
provisions of Statement of Financial  Accounting  Standards No. 115, "Accounting
for Certain  Investments in Debt and Equity Securities."  Management  determines
the  appropriate  classification  of debt securities at the time of purchase and
re-evaluates  such  designation  as of each balance  sheet date. At December 31,
1998,   all   debt    securities    are   designated   as    available-for-sale.
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 is included in interest and other income.  Realized gains and
losses  and   declines  in  value   judged  to  be  other  than   temporary   on
available-for-sale  securities  are included in interest  income and other.  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.

         Concentration of Credit Risk

         Financial   instruments  that   potentially   subject  the  Company  to
concentrations of credit risk consist  principally of cash investments and trade
receivables.  The  Company  invests  in  securities  of A, A1, or P1 grade.  The
Company  is 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.  The Company  manufactures and sells its products to customers in
diversified  industries.  The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral. The Company
is exposed  to credit  risks in the event of  insolvency  by its  customers  and
limits  its  exposure  to  accounting  losses by  limiting  the amount of credit
extended whenever deemed necessary. Three of the Company's distributors - Unique
(Wyle),  Arrow, and Pioneer -- accounted for  approximately  14%, 14%, and 9% of
the Company's net revenues for 1998,  respectively.  The same three distributors
accounted in the aggregate for  approximately  46% of the Company's net revenues
for 1997 and 39% for 1996.  Unique  replaced Wyle as a distributor in the second
half of 1998.  Unique and Wyle are both part of the worldwide  Veba  Electronics
Group. The loss of any one of these distributors could have a materially adverse
effect on the Company's results of operations and financial position.

         Fair Value of Financial Instruments

         The  following  methods  and  assumptions  were used by the  Company in
estimating its fair value disclosures for financial instruments:

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

                   Investment  Securities.  The fair values for marketable  debt
         securities are based on quoted market prices.

                  Foreign  Currency  Exchange  Contracts.  The fair value of the
         Company's  foreign currency  exchange  forward  contracts are estimated
         based on quoted market prices of comparable contracts.

         Impact of Recently Issued Accounting Standards

         As of January 1, 1998,  the  Company  adopted  Statement  of  Financial
Accounting  Standards No. 130,  "Reporting  Comprehensive  Income" ("SFAS 130").
SFAS 130  establishes  new rules for the reporting and display of  comprehensive
income and its  components;  however,  the adoption of SFAS 130 had no impact on
the Company's net income or shareholders'  equity.  SFAS 130 requires unrealized
gains or losses on the Company's  available-for-sale  securities, which prior to
adoption were  reported  separately  in  shareholders'  equity to be included in
other  comprehensive   income.   Prior  year  financial   statements  have  been
reclassified to conform to the requirements of SFAS 130.

         The following  schedule of other  comprehensive  income shows the gross
current-period gain and the reclassification  adjustment.  Due to the immaterial
components of other  comprehensive  income in 1998,  1997 and 1996,  tax amounts
were nominal.
<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                            ----------------------------------------
                                                                                1998          1997          1996
                                                                            ------------  ------------  ------------
                                                                                        (in thousands)
<S>                                                                         <C>           <C>           <C>         
Unrealized gain on available-for-sale securities........................    $        178  $         51  $          1
Less reclassification adjustment for gain realized in net income........             (51)           (1)            3
Other comprehensive income..............................................    $        127  $         50  $          4
</TABLE>

         During 1998, the Company adopted the Statement of Financial  Accounting
Standards No. 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information"  ("SFAS  131"),  which  established  standards  for the way  public
enterprises  report  information  in annual  statements  and  financial  reports
regarding operating segments,  products,  services,  geographic areas, and major
customers.  The Company currently has one reportable segment under SFAS 131. See
Note 11 of Notes to the Consolidated Financial Statements.

         In June 1998, the Financial Accounting Standards Board issued Statement
of  Financial   Accounting   Standards  No.  133,   "Accounting  for  Derivative
Instruments  and  Hedging  Activities"  ("SFAS  133"),  which is  required to be
adopted  in years  beginning  after June 15,  1999.  The  Company  is  currently
evaluating  the impact  adoption  of SFAS 133 will have on  financial  position,
operating results, and cash flow.

         The American Institute of Certified Public Accountants issued Statement
of Position 98-1,  "Accounting For the Costs of Computer  Software  Developed or
Obtained For Internal  Use" ("SOP  98-1"),  on March 4, 1998.  SOP 98-1 provides
guidelines for accounting for costs of computer software  developed for internal
use. SOP 98-1 is effective for financial  statements for fiscal years  beginning
after  December 15, 1998. The adoption of SOP 98-1 is not expected to materially
impact the Company's results of operations or financial position.

         Income Taxes

         The Company accounts for income taxes in accordance with the provisions
of Statement of Financial  Accounting  Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109").  Under SFAS 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.

         Inventories

         Inventories  are stated at the lower of cost  (first-in,  first-out) or
market  (net  realizable  value).  Given the  volatility  of the  market for the
Company's  products,  the Company makes  inventory  provisions  for  potentially
excess and obsolete  inventory  based on backlog and forecast  demand.  However,
such backlog demand is subject to revisions,  cancellations,  and  rescheduling.
Actual demand will inevitably differ from such backlog and forecast demand,  and
such differences may be material to the financial statements.

         Off-Balance-Sheet Risk

         The  Company  enters  into  foreign  exchange  contracts  to hedge firm
purchase commitments denominated in foreign currencies. The Company does not use
forward  foreign  exchange  contracts for speculative or trading  purposes.  The
Company's  accounting  policies for these instruments are based on the Company's
designation  of such  instruments  as hedging  transactions.  The  criteria  the
Company uses for designating an instrument as a hedge includes its effectiveness
in  exposure  reduction  and  one-to-one  matching of the  derivative  financial
instrument to the underlying transaction being hedged. Gains and losses on these
contracts are recognized upon maturity of the contracts and are included in cost
of sales.  If the  criteria  for  designation  of these  instruments  as hedging
transactions  is not met, then the instruments  would be marked to market,  with
gains and losses  recognized in that period.  At December 31, 1998,  the Company
had foreign exchange contracts maturing in January 1999 to purchase Japanese yen
for approximately $85,000 at an average rate of 137 yen per dollar.

         In addition, the Company had an outstanding standby letter of credit in
the amount of approximately $1,062,000 at December 31, 1998.

         Property and Equipment

         Property   and   equipment   are  carried  at  cost  less   accumulated
depreciation (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

         Revenue Recognition

         Revenue from product shipped to end customers is generally  recorded at
the time of shipment.  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, the Company defers recognition of revenues
and related  cost of revenues  on sales of products to  distributors  until such
products are sold by the distributor. Royalty income is recognized upon the sale
by others of  products  subject  to  royalties.  Design  Services  revenues  are
recognized as the services are performed.

         Stock-Based Compensation

         The Company  accounts for  stock-based  awards to  employees  using the
intrinsic value method in accordance with  Accounting  Principles  Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25").  Accordingly,  no
compensation  cost has been  recognized for its fixed cost stock option plans or
its associated  stock purchase plan. The Company  provides  additional pro forma
disclosures as required under Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" ("SFAS 123").

         Use of Estimates

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

2.       Balance Sheet Detail
<TABLE>
<CAPTION>
                                                                                                 December 31,
                                                                                          --------------------------
                                                                                              1998         1997
                                                                                          ------------  ------------
                                                                                                (in thousands)
<S>                                                                                       <C>           <C>         
 Accounts receivable:
    Trade accounts receivable..........................................................   $     22,374  $     26,767
    Allowance for doubtful accounts....................................................         (1,554)       (1,632)
                                                                                          ------------  ------------
                                                                                          $     20,820  $     25,135
                                                                                          ============  ============

 Inventories:
    Purchased parts and raw materials..................................................   $      1,285  $      3,681
    Work-in-process....................................................................         12,052         8,438
    Finished goods.....................................................................         12,332         8,353
                                                                                          ------------  ------------
                                                                                          $     25,669  $     20,472
                                                                                          ============  ============
 Property and equipment:
    Equipment..........................................................................   $     39,711  $     33,664
    Furniture and fixtures.............................................................          2,267         2,171
    Leasehold improvements.............................................................          4,728         4,476
                                                                                           ------------  ------------
                                                                                                46,706        40,311
    Accumulated depreciation and amortization..........................................        (32,114)      (25,230)
                                                                                          ------------  ------------
                                                                                          $     14,592  $     15,081
                                                                                          ============  ============
</TABLE>

         Depreciation  expense was  approximately  $8,134,563,  $7,481,000,  and
$5,879,000 for 1998, 1997,and 1996, respectively.
<TABLE>
<CAPTION>
                                                                                                 December 31,
                                                                                          --------------------------
                                                                                              1998         1997
                                                                                          ------------  ------------
                                                                                                (in thousands)
<S>                                                                                       <C>           <C>         
Other Assets:
    GateField intangible asset (net of accumulated amortization).......................   $      1,948  $         --
    GateField product marketing agreement..............................................          6,000            --
    GateField preferred stock..........................................................          1,650            --
    Texas instrument intangible asset (net of accumulated amortization)................            668         1,545
    Other..............................................................................          5,658         5,425
                                                                                          ------------  ------------
                                                                                          $     15,924  $      6,970
                                                                                          ============  ============
</TABLE>

         Amortization   expense  was  approximately   $1,185,000   (amortization
attributable to the GateField transaction was $252,000),  $877,000, and $876,000
for 1998, 1997, and 1996,  respectively.  Texas  Instrument  intangible asset is
being  amortized  over its  estimated  useful  life of five  years.  For further
discussion  on  GateField,  see  Note  5  of  Notes  to  Consolidated  Financial
Statements.

3.        Available-for-Sale Securities

         The following is a summary of available-for-sale securities at December
31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                              Gross         Gross
                                                                            Unrealized    Unrealized    Estimated
                                                                 Cost         Gains         Losses     Fair Values
                                                             ------------  ------------  ------------  ------------
                                                                                 (in thousands)
<S>                                                          <C>           <C>           <C>           <C>         
December 31, 1998
   Corporate bonds........................................   $      3,500  $         --  $         --  $      3,500
   Commercial paper.......................................          4,415            --            --         4,415
   Floating rate notes....................................          5,500            --            --         5,500
   Municipal obligations..................................         47,271           180            (2)       47,449
                                                             ------------  ------------  ------------  ------------
   Total available-for-sale securities....................         60,686           180            (2)       60,864
  Less amounts classified as cash equivalents.............         (4,415)           --            --        (4,415)
                                                             ------------  ------------  ------------  ------------
Total short-term investments..............................   $     56,271  $        180  $         (2) $     56,449
                                                             ============  ============  ============  ============


December 31, 1997
   Municipal obligations..................................   $     51,222  $         50  $         --  $     51,272
  Less amounts classified as cash equivalents.............             --            --            --            --
                                                             ------------  ------------  ------------  ------------
Total short-term investments..............................   $     51,222  $         50  $         --  $     51,272
                                                             ============  ============  ============  ============
</TABLE>

         The  adjustments  to net  unrealized  gains and (losses) on investments
included as a separate component of shareholders'  equity totaled  approximately
$127,000,  $50,000,  and $4,000 for the years ended December 31, 1998, 1997, and
1996,  respectively.  Realized gains and losses during 1998, 1997, and 1996 were
not material.

         See Note 1 for  discussion of how fair values were  determined  and the
Company's policy of accounting for investments.

         The expected  maturities of the Company's  investments  at December 31,
1998 are shown below. Expected maturities may differ from contractual maturities
because the issuers of the securities  may have the right to prepay  obligations
without prepayment penalties.

 Available-for-sale (in thousands):
    Due in less than one year....................................   $     30,117
    Due in one year or more......................................         26,332
                                                                    ------------
                                                                    $     56,449
                                                                    ============

         A  significant   proportion  of  the  Company's   securities  represent
investments in floating rate municipal bonds with contractual maturities greater
than ten years.  However,  the interest rates on these debt securities generally
reset every  ninety  days,  at which time the Company has the option to sell the
security or roll-over the  investment at the new interest rate. As it is not the
Company's intention to hold these securities until their contractual maturities,
these amounts have been classified as short-term  investments and are assumed to
have maturities of 90 days for average maturity calculations.

4.       Investment in Chartered Semiconductor

         The Company holds an equity investment of approximately  $10,680,000 in
Chartered  Semiconductor  Manufacturing  Ltd  ("Chartered   Semiconductor"),   a
semiconductor  company  located  in  Singapore.   The  Company's  investment  in
Chartered  Semiconductor  amounts to less than 2% of total  equity in  Chartered
Semiconductor.  The investment in Chartered Semiconductor is accounted for under
the cost  method;  therefore,  changes  in the value of the  investment  are not
recognized  unless  impairment  in the  value of the  investment  is  deemed  by
management to be "other than temporary."

5.       GateField

         In the  third  quarter  of 1998,  the  Company  entered  into a product
marketing rights agreement with, and purchased  convertible stock of, GateField.
Simultaneously,  the  Company  acquired  the Design  Services  Business  Unit of
GateField in a transaction  accounted for as a purchase.  Consideration  paid in
these transactions totaled $10,447,000, consisting entirely of cash.

         In  accordance  with  provisions  of APB Opinion  16, all  identifiable
assets, including identifiable intangible assets, were assigned a portion of the
total  consideration  on the basis of their  respective  fair  values.  Standard
valuation  procedures and techniques were utilized in determining the fair value
of each  acquired  asset.  The  assumptions  used to  estimate  the value of the
identified  intangible  assets  were  developed  by the  Company  and  GateField
management  and were further  supported  through  relevant  industry  data.  The
consideration  was  allocated as follows:  $6,000,000  to the product  marketing
rights agreement;  $1,650,000 to the convertible preferred stock; and $2,797,000
(consisting  of  $447,000  related  to net  assets  and  $2,350,000  related  to
intangible assets) to the Design Services Business Unit.

         The product  marketing  rights  agreement  provides the Company with an
exclusive  right to market and sell  GateField's  standard  ProASIC  products in
process  geometries of 0.35 micron and smaller as part of the Company's  product
line.  Development  of the  underlying  technology  and  products is managed and
executed  exclusively  by  GateField,  and  the  products  are  expected  to  be
production  qualified  by  the  end of  1999.  The  Company  has  agreed  to pay
additional  consideration  of $1,000,000 upon  qualification  of the initial .25
micron product. As of December 31, 1998,  GateField's progress in developing the
technology and products was consistent with the Company's expectations; however,
there  can be no  assurance  that  GateField's  future  technology  and  product
development  efforts  will  result in product  sales  sufficient  to recover the
Company's investment.  The $6,000,000 allocated to product marketing rights will
be amortized over the related products'  currently  estimated  revenue-producing
life of seven years;  the Company will  re-evaluate the expected life if product
sales do not commence as scheduled  or fail to achieve  expected  volumes in the
future.  The amount  allocated  to the product  marketing  rights  agreement  is
included in "Other assets."

         The Company's  investment in GateField's  convertible  preferred  stock
consists  of  300,000  shares of  GateField  Series C  Preferred  Stock that are
convertible,  at the  Company's  election,  into  2,000,000  shares of GateField
Common Stock. The Company's  investment in GateField  represents less than 5% of
total common-equivalent  equity of GateField,  determined assuming conversion of
all  GateField  convertible  preferred  stock into  common  stock.  The  Company
accounts for its preferred stock  investment in GateField under the cost method;
therefore,  changes in the value of the  investment  are not  recognized  unless
impairment  in  the  value  of  the  investment  is  deemed  to be  "other  than
temporary." Such an impairment could occur if, among other things, product sales
subject to the product  marketing  rights  agreement  discussed in the preceding
paragraph do not commence as  scheduled or fail to achieve  expected  volumes in
the future.  The amount  allocated  to the  Company's  investment  in  GateField
convertible preferred stock is included in "Other assets."

         The Company also purchased from GateField its Design Services  Business
Unit  located in Mt.  Arlington,  New Jersey.  The Actel Design  Services  Group
provides varying levels of design services,  including:  design  methodology and
tool consulting;  turnkey FPGA and ASIC design;  IP development and integration;
board and system design; software design and implementation;  and development of
prototypes,  first articles, and production units. The Company is the first FPGA
provider to offer system-level design expertise, expanding the Company's ability
to support a greater portion of customers'  overall design and risk  management.
The Design Services Group is a secure facility  certified to handle  government,
military,  and proprietary designs. The Design Services Group is not involved in
the development  efforts underlying the product marketing rights agreement.  The
net assets of the Design  Services  Group were  valued at  $447,000  and consist
principally  of  fixed  assets,  accounts  receivable,  deposits,  and  accounts
payable.  Intangible  assets were valued at  $2,350,000  and consist of $300,000
related to backlog,  $1,000,000  related to  workforce-in-place,  and $1,050,000
related to goodwill.  Backlog is being amortized over its estimated  useful life
of six months.  The Design  Services  Group  workforce  and  goodwill  are being
amortized  over their  estimated  useful life of five years and are  included in
"Other assets."

6.       Line of Credit

         The  Company  has a  line  of  credit  with a bank  that  provides  for
borrowings  not to exceed  $5,000,000.  The agreement  contains  covenants  that
require  the  Company to  maintain  certain  financial  ratios and levels of net
worth. At December 31, 1998 the Company was in compliance with the covenants for
the line of credit.  Borrowings  against the line of credit bear interest at the
bank's  prime  rate.  There  were no  borrowings  against  the line of credit at
December 31, 1998. The line of credit expires in May 1999.

7.       Commitments

         The  Company  leases  its  facilities  and  certain   equipment   under
non-cancellable  lease agreements.  The principal facility lease expired in June
1998, and provided for two consecutive  five-year  renewal options.  The Company
has  elected to take the first  five-year  renewal  option.  The  current  lease
agreement  expires in June 2003, with one additional  five-year  renewal option.
The  equipment  leases are accounted  for as operating  leases.  The lease terms
expire at various dates through  September 2001. All of these leases require the
Company to pay property taxes,  insurance,  and maintenance and repair costs. At
December 31, 1998, the Company had no capital lease obligations.

         Future minimum lease payments under all  non-cancellable  leases are as
follows:

                                                                     Operating
                                                                       Leases
                                                                    ------------
1999............................................................    $      3,683
2000............................................................           3,548
2001............................................................           3,413
2002............................................................           3,039
2003............................................................           1,227
                                                                    ------------
Total minimum lease payments....................................    $     14,910
                                                                    ============

         Rental expense under  operating  leases was  approximately  $3,282,730,
$2,481,313, and $1,615,000 for 1998, 1997, and 1996, respectively.

8.       Retirement Plan

         Effective December 10, 1987, the Company 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.

         The Company may make contributions to the plan at the discretion of the
Board of Directors. The first contributions to the plan by the Company were made
in March 1998,  based on net  revenues  and net income for the 1997 fiscal year.
The Company also made  distributions  to the plan in January 1999,  based on net
revenues and net income for the 1998 fiscal year.  For 1998,  the plan  provided
for a maximum  contribution of 5.0% of an eligible  employee's gross earnings or
$1,500,  whichever  is less,  if the  Company  achieved  its net revenue and net
income goals.  To be eligible for the  contribution,  an employee must have been
hired on or before  July 15,  1998,  and been an  active,  regular  employee  on
December  31,  1998.  Since the  Company  did not achieve its net revenue or net
income  goals in 1998 for purposes of the plan,  the amount of the  contribution
was reduced to 1.5% of an eligible employee's gross earnings, up to a maximum of
$1,500.  The aggregate amount contributed to the plan for the 1998 plan year was
$387,166.  In the 1997 plan year, the aggregate amount contributed was $340,750.
The contributions vest annually,  retroactively from an eligible employee's date
of hire,  at the rate of 25% per year. In addition,  contributions  become fully
vested upon  retirement  from the Company at age 65. There is no  guarantee  the
Company will make any contributions to the plan in the future, regardless of its
financial  performance.  If the Company,  at its  discretion,  chooses to make a
contribution again in the future, the amount could be higher or lower.

9.       Shareholders' Equity

         Stock Repurchase

         The Company  authorized a stock  repurchase  program in September  1998
whereby up to one million shares of the Company's  common stock may be purchased
from time to time in the open market at the  discretion  of  management.  During
1998, the Company repurchased 675,000 shares of common stock for $6.1 million.
The Company plans to reissue these shares.

         Stock Option Plans

         The Company  has  adopted  stock  option  plans  under which  officers,
employees and consultants may be granted incentive stock options or nonqualified
options to purchase shares of the Company's  common stock. At December 31, 1998,
8,393,454  shares of common stock were reserved for issuance  under these plans,
of which  284,299  were  available  for  grant.  In January  1998,  the Board of
Directors  authorized the Company to exchange stock options  granted under these
plans to all employees  (except  officers with more than one year seniority) and
having an exercise  price greater than $11.75 for options with an exercise price
of $11.75 (the fair market  value of the  Company's  stock on January 26,  1998,
when the exchange was effected). Under the terms of this stock option repricing,
no portion of any  repriced  option was  exercisable  until July 27,  1998,  but
normal vesting  schedules were not impacted.  Options  representing the right to
purchase 1,702,141 shares of common stock were repriced.

         The Company has also  adopted a Directors'  Stock  Option  Plan,  under
which directors who are not employees of the Company may be granted nonqualified
options to purchase shares of the Company's  common stock. At December 31, 1998,
230,000  shares of common stock were  reserved for issuance  under such plan, of
which 92,500 were available for grant.

         The Company  grants stock  options  under its plans at a price equal to
the fair value of the  Company's  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 the Company's stock option activity and
related information for the three years ended December 31, 1998:


<TABLE>
<CAPTION>
                                             1998                        1997                        1996
                                  --------------------------  --------------------------  --------------------------
                                                   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>       
Outstanding at January 1......         4,252,115 $     13.98       3,542,836  $    12.38       2,506,331  $    10.17
Granted.......................         3,626,060       11.44       1,252,895       17.39       2,633,911       14.24
Exercised.....................          (495,997)       9.50        (214,821)       8.29        (204,344)       6.60
Cancelled.....................        (2,330,338)      16.57        (328,795)      13.40      (1,393,062)      12.79
Outstanding at December 31....
                                  --------------              --------------              --------------            
                                       5,051,840       11.41       4,252,115       13.98       3,542,836       12.38
                                  ==============              ==============              ==============            
</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1998:
 <TABLE>
<CAPTION>
                                                                         December 31, 1998
                                                --------------------------------------------------------------------
                                                          Options Outstanding                 Options Exercisable
                                                ----------------------------------------   -------------------------
                                                                 Weighted
                                                                 Average      Weighted                    Weighted
                                                                Remaining     Average                     Average
                                                  Number of      Contract     Exercise      Number of     Exercise
           Range of Exercise Prices                 Shares         Life        Price          Shares       Price
---------------------------------------------    -----------  -----------   ------------   -----------  ------------
<S>                                                <C>        <C>           <C>              <C>        <C>         
$    1.80    -  $   9.40....................         540,009  5.34 years    $       7.51       416,912  $       6.98
     9.50    -     10.00....................          78,300  8.18                  9.84        24,399          9.50
                   10.06....................         919,613  9.57                 10.06         9,311         10.06
    10.25    -     10.50....................          26,043  7.69                 10.28        10,843         10.31
                   10.63....................         633,945  6.65                 10.63       373,470         10.63
    10.88    -     11.13....................         318,517  9.33                 11.09         7,487         11.11
                   11.75....................       1,477,476  8.17                 11.75       351,723         11.75
    11.88    -     14.88....................         611,722  8.35                 13.54        57,643         13.53
    15.00    -     22.38....................         443,215  8.22                 16.45        53,511         17.06
                   22.69....................           3,000  8.67                 22.69         1,125         22.69
                                                 -----------                               -----------              
     1.80    -     22.69....................       5,051,840  8.03                 11.41     1,306,424         10.14
                                                 ===========                               ===========                
</TABLE>

At December  31,  1997,  1,099,059  outstanding  options  were  exercisable;  at
December  31,  1996,   691,944   outstanding   options  were  exercisable.   The
weighted-average  fair value of options granted during 1998, 1997, and 1996 were
$4.69, $7.38, and $4.92 respectively.

         Employee Stock Purchase Plan

         The Company has adopted an Employee  Stock  Purchase Plan (the "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 in any year).  At  December  31,
1998,  3,019,680  shares of common stock were  authorized for issuance under the
ESPP. The ESPP is administered in consecutive,  overlapping  offering periods of
up to 24 months each,  with each offering  period divided into four  consecutive
six-month  purchase  periods  beginning  August 1 and  February  1 of each year.
Pursuant to the terms of the ESPP, all participants were automatically withdrawn
from all offering periods on July 31, 1998, and automatically re-enrolled in the
new offering  period that began on August 1, 1998.  On the last  business day of
each  purchase  period,  shares of common stock are  purchased  with  employees'
payroll deductions  accumulated during the 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.  There were 291,469 and 208,992  shares issued under the ESPP in 1998 and
1997,  respectively,  and 1,965,503  remained available for issuance at December
31, 1998. The  weighted-average  fair value of employee  stock  purchase  rights
granted during 1998, 1997, and 1996 were $5.52, $4.69, and $5.46 respectively.

         Pro Forma Disclosures

         Pro forma information  regarding net income and net income per share is
required by SFAS 123, which also requires that the  information be determined as
if the Company had accounted  for its  stock-based  awards to employees  granted
subsequent to December 31, 1994, under the fair value method. 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
for 1998, 1997, and 1996:  risk-free interest rates of 5.34%,  5.95%, and 5.84%,
respectively;  no dividend yield; volatility factor of the expected market price
of the Company's common stock of 51%, 48%, and 50%, respectively; and a weighted
average expected life for the options and employee stock purchase rights of four
years and two years respectively.

         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  the  Company's   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  management's  opinion  the  existing  models  do not
necessarily  provide  a  reliable  single  measure  of  the  fair  value  of its
stock-based awards to employees.

         For purposes of pro forma disclosures,  the estimated fair value of the
Company's  stock-based  awards to  employees  is  amortized  to expense over the
options' vesting period (for options). The Company's pro forma information is as
follows:
<TABLE>
<CAPTION>

                                                                                   Year Ended December 31,
                                                                            ----------------------------------------
                                                                                1998          1997          1996
                                                                            ------------  ------------  ------------
                                                                            (in thousands, except per share amounts)
<S>                                                                         <C>           <C>           <C>         
Pro forma net income....................................................    $      5,117  $     11,405  $     10,452
Pro forma earnings per share:
   Basic................................................................            0.24          0.56          0.59
   Diluted..............................................................            0.24          0.54          0.50
</TABLE>

Since SFAS 123 is applicable  only to awards granted  subsequent to December 31,
1994,  its pro forma  effect  will not be fully  reflected  until the year ended
December 31, 1999. 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.

10.      Tax Provision

         The tax provision consists of:
<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                            ----------------------------------------
                                                                                1998          1997          1996
                                                                            ------------  ------------  ------------
                                                                                         (in thousands)
<S>                                                                         <C>           <C>           <C>         
Federal - current.......................................................    $      3,565  $     11,585  $     12,150
Federal - deferred......................................................           1,416        (4,544)       (5,571)
State - current.........................................................             592         2,304         2,460
State - deferred........................................................           1,197          (506)       (1,089)
Foreign - current.......................................................             445           190           197
                                                                            ------------  ------------  ------------
                                                                            $      7,215  $      9,029  $      8,147
                                                                            ============  ============  ============
</TABLE>

         The tax  provision  reconciles  to the amount  computed by  multiplying
income before tax by the U.S. statutory rate as follows:
<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                            ----------------------------------------
                                                                                1998          1997          1996
                                                                            ------------  ------------  ------------
                                                                                         (in thousands)
<S>                                                                         <C>           <C>           <C>         
Provision  at statutory rate............................................    $      7,771  $      9,029  $      8,079
Change in valuation allowance...........................................            (440)         (440)         (432)
Federal research credits................................................            (856)         (772)         (425)
State taxes, net of federal benefit.....................................           1,163         1,169           891
Other...................................................................            (423)           43            34
                                                                            ------------  ------------  ------------
Tax provision...........................................................    $      7,215  $      9,029  $      8,147
                                                                            ============  ============  ============
</TABLE>

         Significant  components  of  the  Company's  deferred  tax  assets  and
liabilities for federal and state income taxes are as follows:

<TABLE>
<CAPTION>
                                                                                                 December 31,
                                                                                          --------------------------
                                                                                              1998          1997
                                                                                          ------------  ------------
                                                                                                (in thousands)
<S>                                                                                       <C>           <C>         
Deferred tax assets:
        Depreciation...................................................................   $      1,618  $        219
        Distributor reserve............................................................         12,452        12,350
        Charge for in-process research expenses........................................          4,752         5,450
        Inventories....................................................................          1,455         5,323
        Other, net.....................................................................          3,917         3,905
                                                                                          ------------  ------------
                                                                                                24,194        27,247
        Valuation allowance............................................................         (2,166)       (2,606)
                                                                                          ------------  ------------
                Net deferred tax assets................................................   $     22,028  $     24,641
                                                                                          ============  ============
</TABLE>

The valuation allowance declined by approximately $440,000 during 1997.

11.      Segment Disclosures

         The  Company  operates  in  a  single  industry   segment:   designing,
developing,  and marketing  FPGAs. Net revenue from FPGA sales was 97%, 98%, and
97% for the years ended  December 31, 1998,  1997, and 1996,  respectively.  The
Company also derives  revenues  from the sale of systems  software and hardware,
which is used to program the FPGAs.  The Company also performs design  services,
including   FPGA,   ASIC,   and  system   design;   software   development   and
implementation;  and  development of  prototypes,  first articles and production
units. Design Services,  which the Company acquired from GateField. in the third
quarter of 1998, accounted for 1% of the Company's net revenue in 1998.

         The Chief Executive  Officer has been identified as the Chief Operating
Decision  Maker (CODM) because he has final  authority over resource  allocation
decisions  and  performance  assessment.  The  CODM  does not  receive  discrete
financial   information  about  asset   allocation,   expense   allocation,   or
profitability from its system sales business or Design Services.

         The Company  markets its  products in the United  States and in foreign
countries through its sales personnel,  independent sales  representatives,  and
distributors. The Company's geographic sales are as follows:
<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                  ----------------------------------------------------------------------------------
                                             1998                        1997                        1996
                                  --------------------------  --------------------------  --------------------------
                                                          (in thousands, except percentages)

<S>                               <C>               <C>       <C>               <C>       <C>               <C>
United States.................    $    102,817       67%      $    107,308       69%      $     99,131       67%
Export:
     Europe...................          29,675       19             26,239       17             26,105       18
     Japan....................          10,658        7             13,328        8             15,340       10
     Other international......          11,277        7              8,983        6              8,203        5
                                  ------------  ------------  ------------  ------------  ------------  ------------
                                  $    154,427      100%      $    155,858      100%      $    148,779      100%
                                  ============  ============  ============  ============  ============  ============
</TABLE>

         As is common  in the  semiconductor  industry,  the  Company  generates
significant  revenues from the sales of its products through  distributors.  The
Company's principal  distributors are Unique  Technologies,  Inc. ("Unique") and
Pioneer-Standard  Electronics,  Inc.  ("Pioneer")  in North  America  and  Arrow
Electronics, Inc. and Zeus Electronics (collectively, "Arrow") worldwide. Unique
replaced Wyle  Electronics  Marketing  Group  ("Wyle") as a  distributor  in the
second  half of  1998.  Unique  and Wyle are  both  part of the  worldwide  Veba
Electronics  Group.  The following table sets forth,  for each of the last three
years, the percentage of revenues derived from all customers  accounting for 10%
or more of net revenues in any of such years:
<TABLE>
<CAPTION>
                                                                                1998          1997          1996
                                                                            ------------  ------------  ------------
<S>                                                                              <C>           <C>           <C>
Wyle/Unique.............................................................         14%           17%           14%
Arrow...................................................................         14%           17%           14%
Pioneer.................................................................          9%           12%           11%
</TABLE>

The Company does not recognize revenue on product shipped to a distributor until
the distributor resells the product to its customer.

12.      Patent Infringement

         QuickLogic

         During  the  third  quarter  of  1998,   the  Company  and   QuickLogic
Corporation   ("QuickLogic")  agreed  to  settle  and  dismiss  the  two  patent
infringement  actions between the parties pending before the United States Court
for the Northern  District of California,  San Jose  Division.  The actions were
dismissed  on  September  4, 1998.  As part of the  settlement,  the Company and
QuickLogic  entered  into  a  Patent  Cross  License  Agreement.  Management  is
satisfied with the terms of the settlement, which is immaterial to the Company's
business, financial condition, or operating results.

         Lemelson

         During the third  quarter of 1998,  the Lemelson  Medical,  Education &
Research  Foundation  (the  "Foundation"),  filed a lawsuit in the United States
District  Court for the  District of  Arizona,  against the Company and 25 other
United States  semiconductor  companies  seeking monetary damages and injunctive
relief based on such companies' alleged  infringement of certain patents held by
the Foundation.  The action was dismissed as to the Company on December 8, 1998,
pursuant to the terms of a settlement  agreement  between the Foundation and the
Company.  The  settlement is immaterial  to the  Company's  business,  financial
condition, or operating results.

         Other

         As is typical  in the  semiconductor  industry,  the  Company  has been
notified of claims that it may be infringing patents owned by others. Management
does not believe that any of these claims will have a materially  adverse effect
on the Company's  financial  condition or trends in operating  results.  Were an
unfavorable  outcome  to occur,  however,  there  exists  the  possibility  of a
material adverse impact on the results of operations or cash flows of the period
in which the unfavorable  outcome occurs. As it has in the past, the Company may
obtain  licenses  under  patents that it is alleged to infringe.  The Company is
currently  in  license  negotiations  with  several  companies,   including  two
semiconductor   manufacturers   with   significantly   greater   financial   and
intellectual property resources than the Company.

13.      Earnings Per Share

         The Company adopted the provisions of Statement of Financial Accounting
Standards  No.  128,  "Earnings  per Share"  ("SFAS  128"),  beginning  with the
financial statements for the year ended December 31, 1997, and all share and per
share data for prior  periods have been  adjusted  retroactively  to comply with
SFAS 128.

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

<TABLE>
<CAPTION>
                                                                                   Year Ended December 31,
                                                                            ----------------------------------------
                                                                                1998          1997          1996
                                                                            ------------  ------------  ------------
<S>                                                                         <C>           <C>           <C>         
                                                                            (in thousands, except per share amounts)
Basic:
Average common shares outstanding.......................................          21,251        20,370        17,826
                                                                            ------------  ------------  ------------
Shares used in computing net income per share...........................          21,251        20,370        17,836
                                                                            ============  ============  ============
Net income..............................................................    $     14,987  $     16,768  $     14,938
                                                                            ============  ============  ============
Net income per share....................................................    $       0.71  $       0.82  $       0.84
                                                                            ============  ============  ============

Diluted:
Average common shares outstanding.......................................          21,251        20,370        17,826
Net effect of dilutive stock options,  warrants, and convertible preferred
   stock - based on the treasury stock method...........................             670         1,598         3,659
                                                                            ------------  ------------  ------------
Shares used in computing net income per share...........................          21,921        21,968        21,485
                                                                            ============  ============  ============
Net income..............................................................    $     14,987  $     16,768  $     14,938
                                                                            ============  ============  ============
Net income per share....................................................    $       0.68  $       0.76  $       0.70
                                                                            ============  ============  ============
</TABLE>

         Outstanding options to purchase  approximately  1,096,000,  623,000 and
120,000  shares,  for the years 1998,  1997, and 1996,  respectively,  under the
Company's  Stock  Option  Plan were not  included in the  calculation  to derive
diluted  income per share as their  inclusion  would  have had an  anti-dilutive
effect.

<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, 1998 and 1997,  and the  related  consolidated
statements of income, cash flows, and shareholders' equity for each of the three
years in the period ended December 31, 1998. These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

         In our opinion,  the  financial  statements  referred to above  present
fairly, in all material respects,  the consolidated  financial position of Actel
Corporation  at December 31, 1998 and 1997 and the  consolidated  results of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 1998, in conformity with generally accepted accounting principles.



                                                           /s/ ERNST & YOUNG LLP

San Jose, California
January 21, 1999

<PAGE>
                                  STOCK LISTING

     Actel's common stock has been traded on the  over-the-counter  market since
the Company's  initial public offering (IPO) on August 2, 1993, and is quoted on
the NASDAQ National Market System under the symbol "ACTL." The Company has never
paid cash dividends on its common stock and has no present plans to do so.

     On March 29,  1999,  there  were 315  shareholders  of  record.  Since many
shareholders  have their  shares  held of record in the name of their  brokerage
firm, the actual number of  shareholders is estimated by the Company to be about
9,000.

     During the last two years,  the quarterly  high and low sale prices for the
common stock were:

                       1998                                High          Low
---------------------------------------------------   ------------  ------------
First Quarter......................................   $     16.125  $    10.75
Second Quarter.....................................         15.75        10.75
Third Quarter......................................         13.125        9.00 
Fourth Quarter.....................................         20.75         7.6875

                       1997                                High          Low
---------------------------------------------------   ------------  ------------
First Quarter......................................   $     29.125  $    17.875
Second Quarter.....................................         22.125       15.375
Third Quarter......................................         24.125       15.75
Fourth Quarter.....................................         19.25        11.25