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Article by DailyStocks_admin    (10-23-08 07:34 AM)

Filed with the SEC from Oct 9 to Oct 15:

Actel (ACTL)
Private-equity outfit Ramius reported owning 1,689,039 shares (6.6%) of the chip maker, bought from Sept. 3 to Oct. 10 at $10.06 to $14.00 per share.

BUSINESS OVERVIEW

BUSINESS

Actel Corporation is the leading supplier of low-power field-programmable gate arrays (“FPGAs”) and programmable system chips (“PSCs”). Attacking power consumption from both the chip and the system levels, the Company’s innovative programmable logic solutions enable power-efficient design. In support of our nonvolatile Flash- and antifuse-based FPGAs, we offer design and development software and tools to optimize power consumption; power-smart intellectual property (“IP”) cores, including industry-standard processor technologies; small footprint packaging; programming hardware and starter kits; and a variety of design services. We target a wide range of applications in the aerospace, automotive, avionics, communications, consumer, industrial, medical, and military markets that require low power or other attributes of our nonvolatile Flash and antifuse-based technologies that have an inherent competitive advantage.

The Company was founded and incorporated in California in 1985. Actel’s Common Stock trades on the NASDAQ Global Market under the symbol ACTL. Our corporate headquarters are located at 2061 Stierlin Court, Mountain View, Calif., 94043, and our Website address is www.actel.com . We provide access free of charge through a link on our Web site to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as amendments to those reports, as soon as reasonably practicable after the reports are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). The Actel, Actel Fusion, Axcelerator, FlashLock, FuseLock, Libero, ProASIC, and ProASIC Plus names and logos are registered trademarks of Actel. This Annual Report also includes unregistered trademarks of Actel as well as registered and unregistered trademarks of other companies.

Industry Overview

Three principal types of integrated circuits (“ICs”) are used in nearly every electronic system: processors, which are used for control and computing tasks; memory devices, which are used to store program instructions and data; and logic devices, which are used to adapt these processing and storage capabilities to a specific application. The logic market is highly fragmented and includes application-specific integrated circuits (“ASICs”) and programmable logic devices (“PLDs”). FPGAs are one type of PLD. Price, performance, reliability, power consumption, security, density, features, ease of use, and time to market determine the degree to which logic devices compete for specific applications. Unlike ASICs, which are customized for use in a specific application at the time of manufacture, FPGAs and complex PLDs (“CPLDs”) are manufactured as standard components and customized “in the field,” allowing the same device type to be used for many different applications. Using software tools, users program their design into a PLD, resulting in lower development costs and inventory risks, shorter design cycles, and faster time to market.

Designers of portable, battery-powered equipment face consumer demand for smaller, cheaper, feature-rich portable devices with longer battery lives. The longer the battery life, the lower the cost of ownership for consumers. Traditionally, ASICs and CPLDs have addressed the low-power needs of portable consumer applications. However, with long design cycles and little flexibility to address changing standards and late-stage design modifications, ASICs are riskier and often impractical for portable applications with short product-life cycles. Moreover, CPLDs are becoming less attractive in some low-power applications due mainly to increasing demand for high-end features. As a result, FPGAs are becoming the preferred solution as competition intensifies and time to market has an increasing impact on the success of portable, battery-powered products. Of course, these FPGAs must meet the other design requirements, including cost, performance, size, security, and (most importantly) power.

FPGAs based on static access random memory (“SRAM”) technology have inherently high static power consumption. Even “low-power” SRAM-based FPGAs draw on the order of ten times more power than specified for typical battery-operated applications. SRAM-based FPGAs also experience power surges at start-up that drain batteries and can cause system-initialization failures. Compounding the problem, each process node “shrink” increases the static power consumption of transistor-heavy SRAM-based FPGAs. The power problem becomes further complicated with respect to SRAM-based solutions that utilize Flash technology to program the device’s SRAM architecture. Though marketed as Flash-based devices, these solutions add Flash circuitry to the power draining SRAM FPGA fabric, so they have inherently high static power consumption like a standard SRAM-based FPGA.

Looking at the power usage from a system perspective, once a system’s power specifications are met, additional effort is seldom expended to improve the design. Because electronic systems are sold by the hundreds of millions, a few watts of inefficiency in each system translates into a huge waste of power and, ultimately, adverse environmental effects. In addition, there is usually no easy way to track power usage to the individual components or voltage rails, making it difficult to eliminate unnecessary power consumption from systems. There is also rarely a way to measure voltages, currents, and temperatures when the system is in operation, which further complicates the task of recognizing and eliminating inefficiencies in power usage.

The proliferation of new management standards, such as Advanced Telecommunications Computer Architecture (“ATCA”), Micro Telecom Computing Architecture (“MicroTCA”), and Intelligent Platform Management Interface (“IPMI”), confirms the need for system and enterprise-level power management. Systems employing these standards require the capability to measure voltages, currents, and temperature in real time and recognize problems; to log and communicate this data; and to take corrective action when appropriate. System management historically required multi-chip solutions. However, with as many as 15 extra chips, these solutions are expensive, occupy valuable board space, and themselves consume power. Multi-chip solutions also require substantial engineering resources, which are often scarce.

The Actel Solution

FGPAs based on Flash technology have significantly lower static power than SRAM-based solutions, making a Flash-based, single-chip FPGA the preferred approach for creating a simple and inexpensive system management solution. Already available “off the shelf,” these nonvolatile, live-at-power-up solutions enable system power management and reduce component count. Because they are field-programmable, these flexible devices are also adaptable to the unique needs and changing demands of portable applications with high-end features and short product-life cycles, reducing development time and cost as well as engineering resource requirements. By integrating necessary housekeeping functions, such as boot-up and power-supply sequencing, with power-management functionality, total system costs are also reduced. As complete Flash-based solutions, these devices are augmented by software that enables power-conscious design, including power-driven “layout” and advanced power-analysis capabilities, permitting users to minimize the power consumption of their systems. Since each watt that is conserved reduces system operating costs, the deployment of cost-effective power management solutions at the enterprise level saves huge amounts of money as well as energy and generates significant environmental benefits.

The Actel Strategy

To a great extent, the characteristics of an FPGA are dictated by the technology used to make the device programmable. Devices based on nonvolatile Flash or antifuse programming elements offer significant power, single-chip, live-at-power-up, security, our and neutron-immunity advantages over volatile FPGAs based on SRAM technology. Our strategy is to offer our FPGAs to markets in which our nonvolatile Flash- and antifuse-based technologies have an inherent competitive advantage.

• Low Power

Because they don’t use power-draining SRAM configuration bit cells, nonvolatile Flash-based FPGAs have significantly lower static power than SRAM-based solutions, making them optimal for low-power applications. In addition, some of our Flash-based FPGAs have been designed specifically for low-power applications. These FPGAs deliver greater complexity and features, use 200 times less static power, and enable ten times longer battery life in portable applications than competitive “low power” PLD offerings.

• Single Chip

Unlike volatile SRAM-based FPGAs, our nonvolatile FPGAs do not require additional system components, such as configuration serial nonvolatile memory or a Flash-based microcontroller, to configure the device at every system power-up. By eliminating the support devices required by volatile SRAM-based FPGAs, our nonvolatile single-chip FPGAs reduce the direct costs of the bill of materials. In addition, our nonvolatile Flash- and antifuse-based FPGAs lower associated total system costs by reducing design complexity, increasing reliability, and simplifying materials management.

• Live At Power-Up

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

• Security

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

• Firm-Error Immunity

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

Products

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

We offer customers a range of low-power Flash-based solutions to address design challenges in the aerospace, automotive, avionics, communications, consumer, industrial, and medical markets. With densities ranging from 15,000 to 3,000,000 system gates, our reprogrammable product families exploit the inherent benefits of our nonvolatile Flash technology: low power, single chip, LAPU, security, and neutron immunity. Our Flash-based solutions include the Actel IGLOO, ProASIC3/E, ProASIC Plus, and ProASIC FPGA and Fusion PSC families as well as those families optimized for an ARM Cortex-M1 or ARM 7 processor: the M1 IGLOO, M1 ProASIC3/E, and M7 ProASIC3/E FPGA and M1 Fusion and M7 Fusion PSC families.

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

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

The families discussed below are currently being designed by customers into their next-generation applications. Although our more mature product families have been excluded from this discussion, they continue to generate significant revenues.

• Actel IGLOO FPGAs


• The lowest power FPGA solutions

• Density: 15,000 to 3,000,000 system gates

Designers of portable and handheld applications are taking note of our IGLOO family due to its unprecedented low power. Since its introduction in August 2006, the innovative IGLOO FPGA family has won numerous prestigious industry product awards, including the 2007 EDN China Innovation, the 2007 EE Times ACE, the 2007 Portable Design China “Low-power Product of the Year,” and the 2006 EDN “Hot 100 Products” Awards.

Offering 200 times less static power and more than ten times the battery life of competitive “low power” FPGA offerings, our IGLOO family has set a new standard for low power consumption. The family offers quick and easy power control with flexible implementation options, including the Flash*Freeze, low-power active, and sleep modes, and is the only truly low-power FPGA solution to support 1.2V core operation.

• Actel Fusion PSCs


• The world’s first mixed-signal PSC, incorporating analog functions, embedded Flash, and FPGA fabric in a single chip, making it suitable for system management and intelligent power management

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

The Actel Fusion PSC has attracted interest from a broad spectrum of customers for use in a wide range of applications. Fusion has also won multiple prestigious product awards, including the 2005 EDN Innovation, the 2006 IEC DesignVision, the 2005 EDN “Hot 100 Products,” the 2006 EDN China Leading Product, and the 2006 Electron D’Or Awards. In addition, our Fusion design team was a finalist in the 2005 EE Times ACE Awards Design Team of the Year category.

The Actel Fusion PSC’s system management functionality, which includes power and thermal management, data logging, and system diagnostics, gives us the opportunity to win numerous designs in high-volume applications. The Actel Fusion PSC can integrate system and power management functions and provide programmable flexibility in a single chip, resulting in potential cost, power, and space savings of 50% or more relative to current implementations. To provide templates for the customization of system management functions and to speed development time, we also offer the System Management Development Kit, a complete prototyping and development kit.

Supporting Products and Services

In support of our low-power FPGAs and power-efficient PSC products, we offer power-optimized design and development software and tools, power-smart IP cores, programming hardware and starter kits, and a variety of services that enable our customers to implement their designs in our products.

• Design and Development Software and Tools

The Actel Libero integrated design environment (“IDE”) seamlessly integrates best-in-class design tools from Mentor Graphics, SynaptiCAD, and Synplicity with Actel-developed custom tools into a single FPGA development package. Emphasizing power-conscious design, the Actel Libero IDE includes power-driven layout and advanced power-analysis capabilities, allowing users to optimize their systems for low power consumption. Usable with the Actel Libero IDE, our CoreConsole IP Deployment Platform (“IDP”) enables designers to quickly combine IP blocks. We also offer a comprehensive development environment, boards, and reference designs to enable customers to get system-level products to market quickly and reduce cost and risk.

• IP Cores

We offer more than 180 IP cores designed, optimized, and verified to work with our FPGAs for use in automotive, consumer, embedded, high-performance communications, military, and networking applications. When implemented in our devices, these cores allow designers to streamline their designs, which reduces design costs and risks and time to market. For embedded systems designers using our FPGAs, we offer a comprehensive portfolio of optimized processor solutions, including a variety of industry-standard ARM, 8051, and LEON IP cores. We also offer the FPGA-optimized ARM Cortex-M1 processor free of license and royalty fees for use in our ARM-enabled Actel IGLOO, Fusion, and ProASIC3 families.

• Programming Hardware

We offer several programming options, including Silicon Sculptor 3 and the FlashPro series, for designers utilizing our nonvolatile FPGAs. Our Silicon Sculptor 3 is a compact, high-speed, single-device programmer for all Actel devices. Up to 12 Silicon Sculptor 3 programmers can be connected to a single PC using nested USB hubs. FlashPro 3 and FlashPro Lite are compact and cost-effective programmers for our Flash-based devices. With their in-system programming capability, these programmers limit incompatibility problems and expensive redesign costs and offer faster time to market. FlashPro 3 programmers support Fusion, IGLOO, and ProASIC3/E devices and are powered from the USB port. FlashPro Lite programmers support ProASIC Plus devices and are powered from the target board. We also offer programming adapter modules, surface-mount sockets, prototyping adapter boards and mechanical packages, and accessories.

CEO BACKGROUND

Mr. East has been a Director, and served as our President and Chief Executive Officer, since December 1988.

Dr. Fiebiger has been a Director since December 2000. He has been an independent consultant to the semiconductor industry since October 2004. From December 1999 to September 2004, Dr. Fiebiger was Chairman and Chief Executive Officer of Lovoltech Inc., a privately held semiconductor company specializing in low voltage devices. He also serves as a Director of Mentor Graphics Corporation, Pixelworks Inc., Power Integrations Inc., and QLogic Corporation. Dr. Fiebiger was Vice Chairman and Managing Director of Technology Licensing of GateField Corporation, a semiconductor company that we purchased in November 2000, from 1998 to 2000,

and President and Chief Executive Officer and a Director of GateField from 1996 to 1998. He has also held the positions of President and Chief Operating Officer of VLSI Technology, Inc., an ASIC semiconductor company, President and Chief Executive Officer of Thomsom-Mosteck, a semiconductor company, and Senior Corporate Vice President and Assistant General Manager of Motorola Inc.’s worldwide semiconductor sector.

Mr. Jacobsson has been a Director since May 1998. Since March 2006, he has been President and Chief Executive Officer of Blaze, Inc., a privately-held company that offers products for Design For Manufacturability (DFM) products. For the six years before that, he was President and Chief Executive Officer and a Director of Cynapps, Inc., and its successor by merger, Forte Design Systems, a privately-held company that offers products and services for the hierarchical design and verification of large, complex systems and integrated circuits. Mr. Jacobsson also serves as a Director of various other private companies.

Mr. McGrath was appointed as a Director on April 4, 2008. Since November 2001, he as been Vice President and Chief Financial Officer of Network Equipment Technologies, Inc., a provider of voice and data communications equipment for multi-service networks requiring high degrees of versatility, interoperability, security, and performance. Prior to joining N.E.T., Mr. McGrath served in various financial capacities at Aspect Communications, a developer of hardware and software solutions for customer contact centers, beginning in 1997. His positions with Aspect Communications included Vice President of Finance and Director of Finance for Europe, Middle East, and Africa. Prior to that, he was Director of Finance for TCSI Corporation (a former Teknekron Company). From 1986 to 1991, Mr. McGrath worked as a Manager in the High Technology/Manufacturing Group at Ernst & Young. He is a registered CPA in the state of California. Mr. McGrath is a member of the Board of Directors of Endwave Corporation and a member of the Board of Trustees for The Presidio Fund, a publicly-traded mutual fund.

Mr. McCranie has been a Director since April 2004 an independent business consultant since 2001. Mr. McCranie has been Chairman of the Board of Virage Logic Corporation, a provider of application-optimized semiconductor intellectual property platforms based on memory, logic, and design tools, since August 2003; and of ON Semiconductor Corporation, a global supplier of power and data management and standard semiconductor components, since August 2002. He is also a member of the Board of Directors of Cypress Semiconductor Corporation, a diversified, broadline semiconductor supplier with a communications focus located in San Jose, California, where he was employed from 1993 to 2001, most recently as Vice President, Marketing and Sales. From 1986 to 1993, Mr. McCranie was President, Chief Executive Officer, and Chairman of SEEQ Technology, Inc., a manufacturer of semiconductor devices. He was previously Chairman of the Board of Xicor Inc. and has served on the Boards of California Micro Devices and ASAT Holdings Limited.

Mr. Spencer has been a Director since 1986 and principal of The Spencer Group, a consulting firm, for the past five years.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

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

Actel Corporation is the leading supplier of low-power FPGAs and PSCs. Attacking power consumption from both the chip and the system levels, the Company’s innovative programmable logic solutions enable power-efficient design. In support of our nonvolatile Flash- and antifuse-based FPGAs, we offer design and development software and tools to optimize power consumption; power-smart IP cores, including industry-standard processor technologies; small footprint packaging; programming hardware and starter kits; and a variety of design services. We target a wide range of applications in the aerospace, automotive, avionics, communications, consumer, industrial, medical, and military markets that require low power or other attributes of our nonvolatile Flash and antifuse-based technologies that have an inherent competitive advantage.

• Semiconductor Industry

According to the Semiconductor Industry Association (“SIA”), global sales of semiconductors rose to a record $255.6 billion in 2007, an increase of 3.2% from the previous record of $247.7 billion reported for 2006. Sales growth was driven primarily by consumer products such as mobile handsets, PCs, and consumer electronics, which have proliferated as semiconductor technology has improved performance and functionality at lower cost. According to the SIA report, industry growth is expected to be 7.7% in 2008.

• Logic Market

The logic market is highly fragmented and includes ASICs and PLDs. FPGAs are one type of PLD. Price, performance, reliability, power consumption, security, density, features, ease of use, and time to market determine the degree to which PLDs compete for specific applications. Unlike ASICs, which are customized for use in a specific application at the time of manufacture, PLDs are manufactured as standard components and customized “in the field,” allowing the same device type to be used for many different applications. Using software tools, users program their design into a PLD, resulting in lower development costs and inventory risks, shorter design cycles, and faster time to market.

• Technology

To a great extent, the characteristics of an FPGA are dictated by the technology used to make the device programmable. Devices based on nonvolatile Flash or antifuse programming elements offer significant power, single-chip, live-at-power-up, security, and neutron-immunity advantages over volatile FPGAs based on SRAM technology.

• Flash

We believe that our long-term future lies with Flash technology, which permits us to make FPGAs that are both nonvolatile and reprogrammable. Perhaps the single biggest benefit of a nonvolatile Flash-based FPGA array is significantly reduced power consumption. Even though our Flash technology is unique, the process is very similar to the standard embedded Flash memory process, so we are able to share with others most of the burden of developing and proving the process. While we were the first company to sell Flash-based FPGAs, several suppliers of SRAM-based FPGAs claim to offer “single-chip, Flash-based” solutions. However, these “hybrid” solutions are merely combinations of Flash memory components with the underlying SRAM FPGA technology — either integrated with the FPGA die into a single package or, alternatively, stacked or placed side-by-side. The FPGA array is still SRAM, so it is still subject drawbacks associated with that technology. These “hybrid” approaches mitigate some of the limitations of traditional SRAM-based solutions by providing a smaller footprint, a minor reduction in power consumption, and small advances in power-up time and security, but they are only incremental improvements over pure SRAM-based FPGAs. Since the embedded Flash memory controls only the initial configuration of “hybrid” devices during power-up, these solutions cannot offer the full advantages of Flash technology provided by our nonvolatile Flash-based FPGAs: exponentially lower power consumption, faster response times, unparalleled reliability, and uncompromising security.

• Antifuse

The one-time programmability of our antifuse-based FPGAs is desirable in certain system-critical military and aerospace applications, but commercial customers generally prefer reprogrammable solutions, such as SRAM- or Flash-based FPGAs. In addition, we are the only sizeable company that uses antifuse technology, which means we bear the entire burden of developing and proving antifuse processes (including yields and reliability) and products (including switching elements and architectures). It also means that our FPGAs using antifuse technology are typically one or two generations behind competitive SRAM-based solutions manufactured on standard processes.

• Strategy

Our strategy is to offer FPGAs to markets in which our nonvolatile Flash- and antifuse-based technologies have an inherent competitive advantage. Our strategy involves considerable risk as unique technologies and products can take years to develop, if at all, and markets that we target may fail to emerge. However, in addition to single-chip, live-at-power-up, security, and neutron-immunity benefits, we believe that our nonvolatile FPGA solutions offer substantial low-power advantages over volatile devices based on SRAM technology and we plan to exploit those advantages.

• Key Indicators

Although we measure the condition and performance of our business in numerous ways, the key quantitative indicators that we generally use to manage the business are bookings, design wins, margins, yields, and backlog. We also carefully monitor the progress of our product development efforts. Of these, we think that bookings and backlog are the best indicators of short-term performance and that design wins and product development progress are the best indicators of long-term performance. Our bookings (measured as end-customer orders placed on us and our distributors) were higher during 2007 than during 2006, and our backlog (which may be cancelled or rescheduled by the customer on short notice without significant penalty) was significantly higher at the end of 2007 than at the end of 2006.

Results of Operations

• Net Revenues

We derive our revenues primarily from the sale of FPGAs, which accounted for over 95% of net revenues in 2007, 2006 and 2005. Non-FPGA revenues are derived from our Protocol Design Services organization, royalties, and the licensing of software and sale of hardware used to design and program our FPGAs. We believe that we derived at least 47% of our revenues in 2007 from sales of FPGAs to customers serving the military and aerospace and the communications markets, compared with at least 53% in 2006 and 2005. We have experienced, and may again in the future experience, substantial period-to-period fluctuations in operating results due to conditions in each of these markets as well as in the general economy.

Net revenues in 2007 were $197.0 million, an increase of 3% over 2006. This increase was due primarily to a 6% increase in the number of units shipped that was partially off-set by a decrease of 3% in the overall average selling price (“ASP”). The overall ASP decreased primarily due to a change in our product mix: the sales of mature products, which usually have higher ASPs, decreased by approximately 11% from the previous year while sales of new products, particularly our Flash products, which usually have lower ASPs, have increased by approximately 24% from the previous year. Sales of new products comprised approximately 44% of net revenues in 2007 compared with approximately 37% in 2006.

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

We shipped approximately 77% of our net revenues through the distribution sales channel in 2007 compared with 77% in 2006 and 64% in 2005. Since 2003, Memec, Unique had been our primary distributor in North America. During 2005, Avnet, Inc. (“Avnet”) acquired Memec Group Holdings Ltd. (“Memec”). We generally do not recognize revenue on product shipped to a distributor until the distributor resells the product to its customer.

Sales to customers outside the United States accounted for 50% of net revenues in 2007, 49% in 2006 and 44% in 2005 with European customers representing 29% of net revenues in 2007 compared to 27% of net revenues for 2006 and 2005.

• Gross Margin

Gross margin was 58.2% of revenues in 2007 compared with 60.5% in 2006 and 59.0% in 2005. Gross margin in 2007 was unfavorably impacted by a fourth quarter write-down of $2.2 million associated with ProASIC last time buy inventory and higher inventory reserve charges during 2007. The lower gross margin in 2007 was also attributable to the product mix where there were higher sales of lower margin Flash products. Gross margin in 2006 was unfavorably impacted by a fourth quarter write-down of $2.2 million associated with excess radiation tolerant products. Gross margin in 2006 benefited from lower inventory write-downs as compared with fiscal 2005 coupled with a reduction in license costs as a result of consolidation of a number of our license agreements with third parties.

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

• Research and Development (R&D)

R&D expenditures were $63.7 million, or 32% of net revenues, in 2007 compared with $56.9 million, or 30% of net revenues, in 2006 and $48.2 million, or 27% of net revenues, in 2005. R&D spending in 2007 increased due to a $3.7 million charge during the second quarter to reserve for certain wafer prepayments combined with a charge of $0.9 million during the first quarter of fiscal 2007 for re-work of certain products under development. In addition, 2007 included generally higher costs associated with expanded R&D efforts and increased headcount. R&D spending in 2006 increased due to recognition of stock-based compensation expense under SFAS 123(R), along with higher costs associated with expanded R&D efforts and increased headcount. Stock-based compensation expenses under SFAS 123(R) were $4.0 million in 2007 compared with $5.6 million in 2006.

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

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

SG&A expenses in 2007 were $63.1 million, or 32% of net revenues, compared with $68.0 million, or 36% of net revenues, in 2006 and $49.6 million, or 28% of net revenues, in 2005. The decrease in SG&A expenses in 2007 was due to decreased legal costs and settlements, which was partially off-set by increased costs associated with the Company’s stock option investigation. SG&A expenses in 2006 included $10.4 million in legal settlements resulting from the BTR and Zilog patent infringement claims. Costs associated with the Company’s stock option investigation were $5.5 million in 2007 compared with $2.0 million in 2006. Stock-based compensation expense under SFAS 123(R) were $3.3 million in 2007 compared with $4.8 million in 2006.

During fiscal 2006, we incurred costs of $10.0 million and $0.4 million in connection with the settlement of two patent infringement claims brought against us. SG&A expenses also increased $4.8 million in 2006 due to recognition of stock-based compensation expense under SFAS 123(R). SG&A expenses in 2006 included legal and accounting costs of approximately $2.0 million associated with the Company’s stock option investigation. There were no such expenses recorded in 2005. SG&A spending in 2006 increased as a percentage of sales over 2005 levels primarily as a result of the items noted above.

• Amortization of Other Acquisition-Related Intangibles

Amortization of other acquisition-related intangibles was $0 in 2007, $15,000 in 2006 and $1.9 million in 2005. The decrease in 2006 as compared with 2005 was attributable to intangible assets, related to an acquisition completed in the year 2000, being fully amortized during the second quarter of 2006.

• Interest Income and Other, Net of Expense

Interest income and other, net of expense, was $8.6 million, $7.1 million and $3.9 million in 2007, 2006 and 2005, respectively. For 2007, our average investment portfolio return on investment was 4.8% compared with 4.2% in 2006 and 2.8% in 2005, resulting in higher interest income during fiscal 2007 as compared with prior years. Our average investment portfolio balance was $162.9 million in 2007 compared with $157.0 million in 2006 and $144.9 million in 2005. We invest excess liquidity in investment portfolios consisting primarily of corporate bonds, floating rate notes, and federal and municipal obligations. In periods where market interest rates are falling, and for some time after rates stabilize, we typically experience declines in interest income and other as our older debt investments at higher interest rates mature and are replaced by new investments at the lower rates available in the market.

• Tax Provision (Benefit)

Significant components affecting the effective tax rate include pre-tax net income or loss, federal R&D tax credits, non-deductible stock based compensation, the state composite tax rate, and adjustments to income taxes as a result of tax audits and reviews and recognition of certain deferred tax assets subject to valuation allowances.

Our tax benefit for 2007 was $0.6 million representing an effective tax rate of 17%. The difference between the effective tax rate and the statutory tax rate is primarily due to non-deductible stock-based compensation partially offset by research tax credits and state tax benefits. Our tax provision for 2006 was $0.3 million despite a pre-tax loss of $1.9 million. This tax charge is primarily due to non-deductible stock-based compensation. Our tax provision for 2005 was $2.7 million based upon a 28% annual effective tax rate. This rate was calculated based on a statutory tax rate benefited by R&D tax credits and state tax benefits.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Net Revenues
Net revenues were $48.8 million for the second quarter of 2007, up slightly from $48.6 million in first quarter of 2007 and up 3% from the second quarter of 2006. Net revenues remained flat between the second and first quarters of 2007 due to a 4% increase in unit shipments largely offset by a 3% decrease in average selling prices (ASPs). Quarterly net revenues increased from the second quarter a year ago due to a 6% increase in unit shipments partially offset by a 4% decrease in ASPs. Unit volumes and ASP levels fluctuate principally because of changes in the mix of products sold. Our product portfolio includes products ranging from devices with lower ASPs which typically sell in higher volumes, to devices with higher ASPs which typically sell in lower volumes.
Net revenues were $97.4 million for the first six months of 2007, a 4% increase from the first six months of 2006. Net revenues for the six month period increased due to an increase in unit shipments.
Gross Margin
Gross margin was 59% on net revenues for the second quarter of 2007, essentially unchanged as compared with 59% for the first quarter of 2007 and down from 62% for the second quarter of 2006. The decrease in gross margin during the second quarter of 2007 as compared to the second quarter of 2006 was attributable to a change in mix with higher sales of higher margin radiation tolerant and radiation hardened products during the second quarter of 2006 as compared to the second quarter of 2007.
Gross margin was 59% on net revenues for the first six months of 2007 compared with 61% for the first six months of 2006. The decrease in gross margin during the first six months of 2007 as compared to the first six months of 2006 was primarily attributable to a change in mix as noted above.
We strive to reduce costs by improving wafer yields, negotiating price reductions with suppliers, increasing the level and efficiency of our testing and packaging operations, achieving economies of scale by means of higher production levels and increasing the number of die produced per wafer, principally by shrinking the die size of our products. No assurance can be given that these efforts will be successful. Our capability to shrink the die size of our FPGAs is dependent on the availability of more advanced manufacturing processes. Due to the custom steps involved in manufacturing antifuse and (to a lesser extent) Flash FPGAs, we typically obtain access to new manufacturing processes later than our competitors using standard manufacturing processes.

Research & Development (R&D)
R&D expenditures were $18.8 million, or 38% of net revenues, for the second quarter of 2007 compared with $15.7 million, or 32% of net revenues, for the first quarter of 2007 and $14.4 million, or 30% of net revenues, for the second quarter of 2006. During the second quarter of fiscal 2007 Actel recorded a $3.7 million charge to reserve for certain wafer prepayments. Due to changes in the Company’s new product development plans in the second quarter of fiscal 2007, the Company determined that there is only a remote chance to utilize these prepaid amounts and thus an establishment of a reserve was necessary as of July 1, 2007. Stock-based compensation expense was $1.3 million, $1.1 million and $1.6 million for the three months ended July 1, 2007, April 1, 2007, and July 2, 2006, respectively.
R&D expenditures were $34.5 million, or 35% of net revenues, for the first six months of 2007 compared with $28.2 million, or 30% of net revenues, for the first six months of 2006. R&D spending in 2007 has increased due the $3.7 million charge noted above coupled with a charge of $0.9 million during the first quarter of fiscal 2007 for new product re-work. Stock-based compensation expense was $2.4 million and $3.0 million for the six months ended July 1, 2007 and July 2, 2006, respectively.
Selling, General and Administrative (SG&A)
SG&A expenses were $15.4 million, or 32% of net revenues, for the second quarter of 2007 compared with $16.1 million, or 33% of net revenues, for the first quarter of 2007 and $14.2 million, or 30% of net revenues, for the second quarter of 2006. The decrease in SG&A expenses from the first quarter of 2007 to the second quarter of 2007 is due primarily to lower fees associated with the stock option investigation. The stock option investigation charges were $1.8 million during the first quarter of 2007 compared to $1.1 million during the second quarter of 2007. Second quarter 2007 SG&A expenses increased as compared to the quarter ended July 2, 2006 due primarily to the stock option investigation costs. Stock-based compensation expense was $0.9 million, $1.0 million and $1.4 million for the three months ended July 1, 2007, April 1, 2007, and July 2, 2006, respectively.
SG&A expenses were $31.5 million, or 32% of net revenues, for the first six months of 2007 compared with $29.0 million, or 31% of net revenues, for the first six months of 2006. The increase in SG&A expenses for the fiscal 2007 period is due to $2.9 million of costs associated with the stock option investigation. These costs were partially offset by reduced stock-based compensation expenses, which were $1.9 million during the first six months of 2007 compared to $2.7 million during the first six months of 2006.
Tax Provision
For the three and six months ended July 1, 2007, the benefit for income taxes was based on an annual effective tax rate calculated in compliance with SFAS 109 and APB No. 28. The annual effective rate was calculated based on our expected level of profitability and includes the usage of state tax credits. To the extent our level of profitability changes during the year, the effective tax rate will be revised to reflect these changes. The difference between the benefit for income taxes that would be derived by applying the statutory rate to our income before tax and the income tax benefit actually recorded is primarily due to the impact of non-deductible SFAS 123(R) stock-based compensation expenses which is partially offset by tax credits.
Financial Condition, Liquidity, and Capital Resources
Our total assets were $360.8 million as of the end of the second quarter of 2007 compared with $368.9 million as of the end of the fourth quarter of 2006. The following table sets forth certain financial data from the condensed consolidated balance sheets expressed as the percentage change from December 31, 2006 to July 1, 2007.

The $5.3 million increase in net accounts receivable was primarily due to a delay in the timing of collections as of the end of the second quarter of 2007. The overall decrease in collections during the quarter resulted in an increase in days sales

outstanding to 51 days at the end of the second quarter of 2007, compared to days sales outstanding of 42 days at the end of 2006.
Inventories as of July 1, 2007 decreased by $1.4 million compared to December 31, 2006 primarily as a result of increased reserves. Inventory days decreased from 174 days at the end of 2006 to 173 days at the end of the second quarter of 2007.

The difference between net loss of $3.4 million and cash used in operating activities of $1.3 million for the six months ended July 1, 2007 was the result of several non-cash adjustments relating to depreciation and amortization and stock based compensation costs of approximately $9.7 million, a reserve of $3.7 million against certain wafer prepayments, decreases in licenses and other assets of $2.2 million, and increases in deferred income on shipments to distributors of $3.9 million, partially offset by increased accounts receivable of $5.3 million and decreases in other liabilities of $14.2 million.
Net purchases of available-for-sale securities of $0.6 million and capital expenditures of $5.8 million resulted in net cash used in investing activities of approximately $6.4 million for the six months ended July 1, 2007. Net cash used in financing activities of $1.3 million for the six months ended July 1, 2007 relates to payroll tax deposits of $1.6 million associated with the vesting of restricted stock unit awards partially offset by receipt of $0.3 million from certain Company executives representing the price differential for certain stock options that were remeasured as part of the stock option investigation.
Cash provided by operating activities was $19.9 million for the first six months of 2006. The difference between net income of $2.0 million and cash provided by operating activities for the six months ended July 2, 2006 was non-cash adjustments relating to depreciation and amortization of $4.8 million, stock-based compensation of $5.8 million, and primarily favorable changes in working capital balances of approximately $12.0 million. Favorable changes in working capital balances included decreases in net accounts receivable of $2.3 million, inventories of $1.2 million and prepaid and other current assets of $2.7 million accompanied by an increase in current liabilities of $4.7 million and an increase in deferred income on shipments to distributors of $1.3 million. These changes in working capital were partially offset by increases to licenses and other assets of $4.8 million. Net cash used in investing activities was $6.4 million during the first six months of 2006 and included net purchases of available-for-sale securities of $1.8 million and $4.6 million for purchases of property and equipment. Net cash provided by financing activities was $2.9 million for the first six months of fiscal 2006 and consisted of proceeds from the issuance of common stock under employee stock plans.
We currently meet all of our funding needs for ongoing operations with internally generated cash flows from operations and with existing cash and short-term and long-term investment balances. We believe that existing cash, cash equivalents, and short-term and long-term investments, together with cash generated from operations, will be sufficient to meet our cash requirements for the next four quarters. A portion of available cash may be used for investment in or acquisition of complementary businesses, products, or technologies. Wafer manufacturers have at times demanded financial support from customers in the form of equity investments and advance purchase price deposits, which in some cases have been substantial. If we require additional capacity, we may be required to incur significant expenditures to secure such capacity.
Impact of Recently Issued Accounting Standards
In June 2006, the FASB ratified the consensus reached in EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences”. This consensus provides that sabbatical leave or other similar benefits provided to an employee should be considered to accumulate over the service period as described in FASB Statement No. 43. This EITF is effective for fiscal years beginning after December 15, 2006 and was adopted by Actel in the first quarter of fiscal 2007. Actel recorded a $2.5 million cumulative adjustment, net of tax, to decrease the January 1, 2007 balance of retained earnings.

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements of assets and liabilities. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. This Statement will be adopted by Actel in the first quarter of fiscal 2008. Actel is currently evaluating the effect that the adoption of FASB No. 157 will have on its consolidated results of operations and financial condition.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157. The Company expects to adopt SFAS No. 159 in the first quarter of fiscal 2008. The Company is currently evaluating the impact that this pronouncement may have on its consolidated financial statements.

CONF CALL

John East - President and Chief Executive Officer

Thanks, Abigail. Good afternoon. I'm John East, the President and CEO of Actel. With me is Jon Anderson, our Vice President of Finance and CFO. After Jon reviews the results for the quarter, I'll talk briefly about our current business environment and give you an update of our new product offerings.

Thanks. And now I'd like to turn the call over to Jon. Jon?

Jon Anderson - Vice President of Finance and Chief Financial Officer

Thanks, John. Before I talk about the financial details for the first quarter, let me tell you how we'll provide financial information regarding the second quarter. We'll give guidance on the call today. The guidance will be the Company's targets for the second quarter on sales, gross margin, operating spending, other income, tax rate, and share count. Next we expect to provide a financial update in early June. In the absence of a material change, this will be the only financial guidance the Company will give during the quarter. A replay of this call will be made available. Please access the Company website for the replay information.

Now to the financials. First quarter sales were 54.8 million, an increase of 7% sequentially when compared to our reported number in our last conference call and press release, and 6% sequential growth when compared with our final revenue number reported for the fourth quarter on Form 10-K for 2007. The difference between our reported revenue at our last call and the final 10-K revenue for the fourth quarter was an increase of 0.7 million due to the favorable resolution of a terminated distributor that was finalized prior to the filing of the 10-K.

First quarter revenues represented increase of 13% in comparison with the same quarter one year ago. Revenue from Flash technology based products was 23% compared to 22% last quarter. We have broken out our Flash technology revenue by quarter from the first quarter of 2006 to-date. Please refer to the company website for the detailed information in the Investor Relations section under GAAP quarterly analysis. By market segment, 9% of revenue was in communications compared with 14% last quarter. Aerospace and military was 37% flat with the previous quarter. Industry was 39% compared with 36% last quarter. And consumer was 15% of revenue compared with 13% last quarter.

Market segment numbers are based on our estimate of end uses by our customers. Geographically, 47% of the revenue was in North America compared with 50% last quarter. 29% in Europe compared to 27% in the previous quarter. And 24% in Pan-Asia compared with 23% last quarter.

By channel, 79% of the revenue was through distribution compared with 76% last quarter, and 21% through OEM compared with 24% in the previous quarter.

Overall, ASP fell 40% compared with last quarter, and unit shipments increased by 24% sequentially. Net end customer bookings increased compared with the previous quarter. Overall book-to-bill was substantially greater than one. Total backlog is higher entering the second quarter than it was entering the first.

Gross margin in the first quarter was 58.5% compared with 55% in the fourth quarter. Our midst to the guidance of around 61% was due to the timing of some Mil/Aero products that was pushed into the second quarter.

Now I will talk about operating spending, net income and earnings per share on a non-GAAP basis. Non-GAAP calculations exclude stock based compensation charges and other non-recurring items. A reconciliation of non-GAAP to GAAP statement of operations is included in our earnings release which is posted in the press room of the company's website.

Operating spending for the quarter was 29.9 million or 55% of revenue as compared with 29.2 million or 57% of revenue in the fourth quarter. The spending does not include the stock based compensation charge in the first quarter of 2.1 million and stock option restatement cost of 1.6 million.

R&D spending was 15.7 million or 29% of revenue compared with 14.7 million or 28% of revenue in the fourth quarter. SG&A was 14.2 million or 26% of revenue compared with 14.6 million or 28% of revenue in the fourth quarter. Other increment expense was 1.9 million, down from 2.2 million last quarter.

Net income was 2.9 million compared with 2.6 million last quarter. Diluted share count was 26.7 million. This all resulted in earnings per share on a non-GAAP basis of $0.11 compared with $0.10 last quarter.

Cash, cash equivalents and investments were 162.7 million at the end of the quarter, a decrease of 26.5 million from the end of the previous quarter. The company repurchased 1.9 million shares of its own stock during the quarter using 24.8 million in cash.

Accounts receivable increased sequentially by 8.2 million to 26.3 million. DSO increased by 12 days to 44 days. Net inventory increased sequentially by 1.7 million. Net days of inventory increased by 11 days to 150 compared with the fourth quarter. Capital expenditures were 5.4 million during the quarter and we recorded 2.6 million depreciation. Headcount increased sequentially by 3 heads to 587.

Now I will give the financial outlook for the second quarter. Taking into consideration all the information currently known by us, we are projecting revenue to increase sequentially 5 to 9%. Gross margin is expected to be around 58 or 59%. Operating spending is anticipated to come in at about 31.1 million which does not include a non-cash charge for equity compensation of 1.9 million. Other income will be around 1.7 million. The tax rate for the quarter is expected to be approximately 30%. Fully diluted share count is expected to be 25.9 million shares.

Thanks and now I would like to turn the call back to John.

John East - President and Chief Executive Officer

Thanks Jon. Before I get started Abigail there is an echo that comes and goes and so it’s a little disconcerting. So if you could figure any easy way to make that go away that would great. Don't do anything now.

Okay, I am going to get started by talking about Q1. Q1 was a good quarter for us. Comparing Q1 of 2008 to Q3 of 2007, you will see that we grew 14% over the two quarters of about 7% per quarter. Jon also told you that we have a pretty good shot of growing by another 7% this quarter and he told that the bookings had been great last quarter and in fact Q1 bookings were a record high for us eclipsing anything we have ever done including the telecom boom years.

The upside was driven by the products we have been telling you about for quite sometime namely Flash and RT and I don't need to tell you how good that feels.

Profiling the Q1 bookings, January was quite strong, February tailed off to what I term just okay and then March was huge. Overall as I have said it was the best bookings quarter in our history.

Quickly addressing our long time last time buy topic in Q1 about $2 million of our billings were for the last time buy XL and DX products. This quarter we expect it to be pretty close to zero and it will be nice to get that behind us.

Now let's move on to Q2. We'll begin in Q2 with a very solid backlog. April bookings so far have been very, very strong, although a big chunk of the April bookings has come from a single customer. So we're optimistic that Q2 will be a good quarter for us. But neither are we asking are there are any worries and of course there are always worries. Today's worries though are different from the ones we had a year ago but there are always major challenges and here is some of the challenges we are facing today as I see them.

I will give you a quick listing and then I will go back and hit each one in detail. First, capacity, second, inventories, third, product cost, and fourth forecasting. Let's start with capacity. The ASP for the bulk of our incremental units will be relatively low, that means we will be trying to ship many more units than in the past. From the standpoint of fab capacity we don't think we will be limited. However, given that our fab's cycle timings are on the order of four months we could run into mix problems unless our forecasts are exactly correct and unfortunately there is no way our forecasts will be exactly correct.

With respect to assembly, we think the capacity will be there. So we are not particularly worried about assembly. Test however is a concern. Since our products are different from industry norms we will need test equipment that may not be generally available. So we've committed some CapEx to lay in the capacity we need. Obviously if we don't have enough capacity that’s a problem, but if we have too much that’s bad too.

Moving on to inventory. Given the long lead times of fabs and the difficulties in forecasting we are going to lay in a healthy inventory of electrical. There is little doubt that you will see our inventories building particularly in the Q3 timeframe.

Moving on to costs. As you know our new product margins are generally lower than our traditional margins. The Flash products that we see growing rapidly are definitely no exception. This is compounded by the fact that the volume ramp rates on some of these new products are considerably steeper than they have been in the past.

Now I mentioned in our last conference call that we had embarked on an aggressive cost reduction program and there is no doubt in my mind that our product cost a year from now will be substantially lower than they are today. Obviously that’s good news. There are a couple of caveats though.

First, sometimes when you embark on a cost reduction program you can run into start up problems that make cost go down before rather make costs go up before they go down. And second, even though I expect Flash margins to improve dramatically over the next year, I don't expect them to reach the level of our older and if used products for long time. That means there is a possible scenario in which our Flash margins are improving rapidly, but our overall gross margin percentage is trickling down because the fraction of Flash shipments as a percentage of total shipments is growing.

Of course in my view that would be very good news because it would prove that we are right on the mark with respect to our new product strategies.

Finally, let's talk about forecasting. We believe that we are having success across the board with our design win efforts. We are seeing lucrative opportunities and/or wins in all of our target segments, that is to say in industrial, medical, transportation high rail and the consumer. As is typically the case for us the fastest segment to turn opportunities into dollars is the consumer segment and that’s definitely what we are seeing right now big, big interest from the consumer segment particularly in Asia.

Now, forecasting is tough under the best of conditions, but forecasting consumer business is tougher. Consumer customers rarely have a good grasp of what their needs will be. So often they will put a product into the market which might sell million of units or might sell practically none. The only way to know for sure is to put the product into the market, cross their fingers and wait to see what happens. If they happen to hit it big they will need to do a lots of units and they will need them right away. They won't be able to tolerate long lead times. So we think we have a tiger by the tail, but the probability of running under complications because our forecast were off or our inventories were out of mix is significant.

So let me give you a quick summary of what we said so far. We are booking like crazy. The bookings are coming from everywhere, but there is an emphasis towards the consumer market and in particular we are seeing very, very strong bookings from one particular consumer segment customer. There is a potential downside to this and the consumer business is known to be fickle, lumpy and tough to forecast. The upside though is obvious. The backlog we have in place makes us feel very good about Q2 and in fact Q3 is already shaping up to be a very nice quarter and that only makes sense because consumer segment orders typically are very strong in a summer quarter, now you shouldn't take this as being negative about Q4. Q4 is just is just too far away for us to have any visibility.

Now a quick discussion about products. Once again I'll focus on Flash. You probably saw our recent announcement introducing our new IGLOO PLUS family. We've observed that there are often needs for products which have a relatively high I/O count but a relatively low gate count. IGLOO PLUS addresses those needs. It's a very low power, small form factor FPGA family with a very high I/O to gate ratio as well as with some extra features aimed at the low power market. IGLOO PLUS is our seventh family based on Flash technology. The first six families were A500, and that was our original Flash offering which never really sold well, APA, our quarter micron FPGA family, A3P our first 0.13 micron FPGA family, Fusion, our programmable mixed signal family, IGLOO, our super low power family and A3PL which achieves low power without sacrificing speed.

Now, as Jon told you, Flash bookings in Q1 were about $13 million. This quarter we expect very solid growth on that number. In fact, in general we expect growth in our Flash sales over a period of many years. However, at our size, the growth doesn't always come monotonically. Over the long run, there will usually be some down quarters mixed in with good ones and the temptation will be for you to read too much into the local ups and downs, to get too excited about the ups and too worried about the downs. Don't do it. In fact, I'm going to save this statement and re-read it whenever someone asks me if a one quarter fluctuation represents some kind of a sea-change or mega-trend. So the bottom line? We have plenty of challenges ahead of us but they are the kind of challenges we look forward to having and right now we're feeling pretty good about life. So that concludes my formal remarks. Abigail, would you please open the lines for questions?

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