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Hi Keith,
Adding a translator in between the 5V signals and the Cyclone III is a must, you wouldn't want a DC signal at the CIII input pins above 3.6V. For AC transitions you can go over that, but only for very brief periods of time, but still nowhere near 5.0V.
The 500 ohm series resistor sounds a bit excessive though, usually something more in the range of 25 to 50 ohms does the trick. 500 ohms would likely give more of a saw tooth waveform with slow rising and falling edges, 50 ohms will give much sharper edges and still dampen the reflections.
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Usually Terasic puts protective diodes on their boards to make the I/O 5V tolerant. I know my DE2 has them, and I believe the DE1 has them as well. (BAT54S) I looked up the manual for the DE0, and it appears they forgot to include the schematic for the protective circuits, but they do mention that they exist. Might be worth a follow-up email with Terasic to verify - or just check the board for a whole bunch of 3-terminal diodes near the connectors.