UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

Or

Commission File Number: 1-10079

Cypress Semiconductor Corporation
(Exact name of registrant as specified in its charter)

3901 North First Street, San Jose, California 95134-1599
(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (408) 943-2600

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X]     No

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this form 10-K. [X]

     At February 24, 2002, registrant had outstanding 122,140,000 shares of Common Stock.

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     The market value of voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on February 24, 2002 on the New York Stock Exchange, was approximately $2,321,000,000. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from the foregoing calculation in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Proxy Statement for registrant’s 2002 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12 and 13 of Part III of this Annual Report on Form 10-K.

INDEX

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PART I

ITEM I. BUSINESS

     This Item contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, statements as to future operating results and business plans, that involve risks and uncertainties. We use words such as “anticipates,” “believes,” “expects,” “future,” “intends,” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” and elsewhere in this Report.

General

     Cypress Semiconductor Corporation (“Cypress”) designs, develops, manufactures and markets a broad line of high-performance digital and mixed-signal integrated circuits for a range of markets, including data communications, telecommunications, computing, consumer and instrumentation systems. We currently offer approximately 465 products through a network of sales offices, distributors and sales representative firms. In fiscal 2001, international sales accounted for 50% of our total sales. Our products are sold to a wide range of customers, including Alcatel Alsthom S.A., Cisco Systems, Inc., Ericsson AG, International Business Machines Corporation, Intel Corporation, Lucent Technologies, Inc., Motorola, Inc., NEC Corporation, Nortel Networks Corporation, Philips Corporation, 3Com Corporation and Sony Corporation.

     Cypress was founded in 1982 and our initial strategy was to provide innovative high-performance complementary metal-oxide silicon (“CMOS”) integrated circuits to niche markets that were believed to be too small to be targeted by the established semiconductor manufacturers. In 1992, we modified our strategy to focus on selected high-volume commodity memory products, which could be brought to market quickly and cost-effectively. This strategy was successful until 1996 when the average selling prices of memory products began to decline. To offset the effects of declining selling prices and its impact on revenues from commodity products, we modified our strategy by diversifying our product mix to focus on more value added products. We directed our sales and marketing efforts and new product development resources, toward differentiated and proprietary products primarily in the data communication and telecommunication end markets.

     In fiscal 2000, Cypress formed four new divisions designed to enhance our focus on serving end markets. The Wide Area Networks (“WAN”) and Storage Area Networks (“SAN”) divisions are helping to provide product definition in the networking arena. Similarly, the Wireless Infrastructure (“WIN”) and Wireless Terminals (“WIT”) divisions help focus our efforts in the wireless space. We capture the balance of products in a computation and other category. Our current product lines — Memory, Datacom, Timing Technology and Personal Communication — continue to operate as they have in the past and are still the core internal reporting entities. This new market focus is expected to provide systems knowledge, cross-product-line product portfolio definition, early engagement with strategic accounts and added management of research and new product development resources.

     Because of the highly competitive nature of the semiconductor industry, its cyclicality and the anticipated pressure on average selling prices over the life of any particular product, our ability to successfully implement this strategy and achieve our revenue, earnings and gross margin goals will depend upon a number of factors. These factors include, but are not limited to, our ability to:

     Cypress was incorporated in California in December 1982. The initial public offering of our common stock occurred in May 1986, at which time our common stock commenced trading on the NASDAQ National Market. In February 1987, we reincorporated in Delaware and on October 17, 1988 listed our common stock on the New York Stock Exchange.

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Products

     We have traditionally organized our product offerings in two business segments, memory products and non-memory products. Our memory product segment includes integrated circuits on silicon wafers manufactured using leading edge process technology. A significant portion of the wafers we produce for memory products are manufactured at our technologically advanced, eight-inch wafer production facility located in Bloomington, Minnesota, which we refer to as Fab 4. Some of our products have high unit sales volume and experience significant shifts in supply and demand, which in turn results in a potentially greater exposure to fluctuations in average selling price and gross margin. Sales of memory products are generally driven by higher volumes, and results of operations are improved through advancements in technology and attainment of lower manufacturing costs. With our focused communications strategy, we have reduced our dependency on commodity memories.

     A majority of the wafers we produce for non-memory products are manufactured at our six-inch production facility located in Texas, which we refer to as Fab 2. For non-core technologies, we purchase wafers fabricated from outside foundries in limited quantities. Unit sales volumes of non-memory products are generally lower than memory products, but gross margins are typically higher. Future sales and results of operations of non-memory products are driven primarily by the introduction of new products, design wins and improvements in technology. Because the semiconductor industry is characterized by rapid technological change, resulting in products with greater speed, densities and performance capabilities and by the continuing evolution of process technologies, our success will continue to depend upon the timely development, introduction and market acceptance of new products in the non-memory products business segment.

     Please refer to Note 17 of the Consolidated Financial Statements included in this report for detailed information about the composition of revenues from our memory and non-memory product business segments.

Memory Products

     Static RAMs (“SRAM”) are used for storage and retrieval of data in data communication, telecommunication, computers and other electronic systems. The overall SRAM market is characterized by the need for many different densities (number of bits per memory circuit), organizations (number of bits available to the user in a single access of the RAM), performance (number of bits transferred per cycle) and levels of power consumption (low power and ultra-low-power devices are required for portable battery operated equipment). We offer one of the industry’s broadest selections of SRAM products, including high-speed synchronous SRAMs, high-performance micropower SRAMs and fast asynchronous SRAMs. Cypress’s portfolio offerings include the following:

     QDR™ (Quad Data Rate™) SRAMs represent a new architecture for emerging, high-performance communications applications. These SRAMs target switches and routers that operate at data rates beyond 200-MHz. Cypress, Micron Technology Inc., Samsung, Hitachi, IDT and NEC worked closely together to create the QDR standard to ensure that customers will have multiple pin- and function-compatible sources for these next generation SRAMs.

     NoBL™ (No Bus Latency™) and Synchronous Burst SRAMs. NoBL™ synchronous SRAMs have an architecture optimized for high-speed applications requiring maximum bus bandwidth, such as networking, instrumentation, video and simulation. Synchronous Burst SRAMs also have a broad selection of varying densities and input/output configurations well suited for processor cache applications.

     Fast Asynchronous SRAM. Cypress markets a wide selection of fast asynchronous SRAMs with densities ranging from 16Kb to 4Mb and a wide array of bus widths, packages and temperature ranges. This portfolio includes the high-performance x16 and x24 wide families that are optimized for the latest generation of fast digital signal processors (DSPs).

     Micropower SRAM. Cypress’s MoBL™ (More Battery Life™) SRAMs have one of the industry’s lowest rates of power consumption, using up to 90% less power than current standard, low-power SRAMs. They significantly increase battery life in wireless products such as cellular phones, pagers and personal digital assistants (“PDAs”).

Non-memory Products

     Non-memory products include a variety of products that serve the data communications, telecommunications, personal computer, PC peripheral, military and consumer markets. Non-memory products include physical layer (“PHY”), data communication, clock and universal serial bus (“USB”) products. Key products in the portfolio include our HOTLink optical transceivers, PACKET OVER Synchronous Optical Network/Synchronous Digital Hierarchy (“POSIC SONET/SDH”) framers, the Roboclock family of clock buffers, our low skew and low jitter programmable clocks, our broad portfolio of specialty multi-port memories and our plug and play USB devices.

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     PHY. Our family of high-performance Synchronous Optical Network/Synchronous Digital Hierarchy (“SONET/SDH”) Serializer/Deserializer (“SERDES”) move SONET or SDH frames between equipment at the SONET/SDH data rates of 51.85 Mbps (OC-1), 155.52 Mbps (OC-3/STM-1), and 2.488 Gbps (OC-48/STM-16). Our latest addition to this family was the world’s most integrated, lowest power OC-48 SERDES in its class, which meets the stringent requirements of WAN switches and routers by having Bellcore-compliant jitter specifications.

      Framer. Our high-performance SONET/SDH framers transport SONET or SDH frames at the data rates of 2.488 Gbps (OC-48/STM-16) and 9.952 Gbps (OC192/STM-64). This family includes our POSIC25GVC, one of the first devices on the market to offer virtual concatenation, which enables WAN switches and routers to allocate dynamic bandwidth for the transport of Ethernet, Fibre-Channel, ESCON and/or slower SONET/STM frames on a single OC-48/STM-16 stream. The additional engineering resources obtained through our recent acquisition of Silicon Packets, Inc. (“Silicon Packets”) is expected to accelerate the introduction of our future 10 Gbps and 40 Gbps framing solutions.

      HOTLink (High-speed Optical Transceiver Link) PHYs. Our HOTLink serial transceivers are the industry standard products for moving serial data at rates from 50 Mbps to 3.2 Gbps. These products support a variety of applications and industrial protocols including Gigabit Ethernet (GBE), 10 Gbps Ethernet (XAUI), Fibre-Channel (FC), Enterprise System Connection (ESCON), Asynchronous Transfer Mode (ATM), Digital Video Broadcast (DVB), Advanced Micro Devices, Inc.‘s TAXI™ protocol, generic backplane and point-to-point applications. In the past several years we have introduced three new families of HOTLink PHYs, including the HOTLink II, HOTLink III and the Programmable Serial Interface (“PSI”) family to our portfolio. The HOTLink II and HOTLink III can each move up to four channels of serial data at up to 1.5 Gbps and 3.2 Gbps, respectively. The PSI family is one of the world’s first programmable PHYs, and integrates our serial link technology with our Delta39K programmable logic technology.

      QuadPort Datapath Switching Elements (“DSEs”). QuadPort DSEs are non-blocking switch devices that allow four (4) independent busses, processors, or backplanes to access the DSE simultaneously. The applications for the devices include 4x4 switching, packet header manipulation, datapath transport that can reduce the need for large field programmable gate array (“FPGA”) devices. QuadPort DSEs are used in redundant array of independent disks (“RAID”) and storage switch, Metropolitan Area Network/Wide Area Network (“MAN/WAN”) switch and router and wireless base station applications. We have recently expanded our product offering to include 16 Kbits x 18 and 32 Kbits x 18 versions of these devices.

      Network Search Engines (“NSEs”). NSEs are used in high-performance routers and switches to provide deterministic wire-speed table lookups. Cypress recently acquired Lara Networks, Inc. an industry leader in high-performance, silicon-based packet-processing solutions for WAN infrastructure equipment. These solutions target switches, routers and multiservice gateways handling multiple high-speed protocols up to OC-768 and including 10-Gigabit Ethernet. The Cypress family of NSEs and network coprocessors are widely used by leading networking original equipment manufacturers, referred to as OEMs.

      RoboClock. Our RoboClock family of high-performance programmable clock buffers offers very high-performance specifications (such as zero propagation delay and 50/50 duty cycle) and programmable features (such as programmable skew and multiply/divide functions) allowing customers to compensate for clock skews arising from varying circuit board trace lengths and device set-up and hold times. We recently added the next generation of RoboClock devices by introducing the RoboClock II™ programmable clock skew buffer, which doubles the performance of the original family by operating up to 200 MHz, supporting 18 outputs, and adding more multiply, divide, and skew options.

      Dual-port Memories. Dual-port are memories that can be accessed by two different processors or busses simultaneously. Dual-ports are designed to be memory solutions for shared-memory and switching applications, including networking switches and routers, cellular base stations, mass storage devices and telecommunication equipment. Our family of synchronous and asynchronous multi-port RAMs range in density from 8 Kbit to 9 Mbit in x8, x9, x16, x18 and x36 configurations. We further enhanced our leadership position in multi-ports by introducing the world’s first true 9 Mbit Dual-port.

     First-in, First-out (“FIFOs”). FIFOs are used as an elasticity buffer between systems operating at different frequencies. We offer FIFO memories in a variety of high-bandwidth synchronous and asynchronous architectures with industry-standard pinouts. We have recently added 32 new x36 FIFOs and the world’s highest bandwidth FIFO (The Beast™ FIFO) to our portfolio.

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     Programmable Clocks. We are a leader in the timing technology device market primarily due to our clocks and clock distribution circuits. Clocks, or Phase-Locked Loop (“PLL”) based frequency synthesizers, integrate essentially all frequency generation and timing control functions of a communications and/or microprocessor based system, thus reducing size, power consumption and cost. These devices are widely used in personal computers, disk drives, modems, small office/home office (“SOHO”) network routers and hubs, digital video disks and home video games. We are the only supplier offering true field-programmable clocks, and all our clock outputs have the desired characteristics of high drive, low jitter, low electro-magnetic interference and low skew.

     USB (Universal Serial Bus). USB is a four-wire connection between a PC and its peripherals (such as keyboards, mice, printers, joysticks, scanners and modems), facilitating an easy-to-use architecture known as “plug and play.” This new standard has been supported by Microsoft Corporation (“Microsoft”), Intel Corporation and other large OEMs. In 1997, we entered into a strategic alliance with Microsoft to produce our first USB product, an 8-bit, RISC-based microcontroller for Microsoft’s new Internet mouse. In 1999 we acquired Anchor Chips, Inc. to expand our high-performance USB product line. In 2001 we acquired ScanLogic Corporation to increase our presence in the USB embedded host-controller market. In 2001 we also acquired In-System Design, Inc. (“ISD”) to accelerate our emergence into the fastest growing area of the USB market, High Speed USB (USB 2.0). We now make USB microcontrollers for a broad range of peripherals from personal computers, mice and keyboards to high-performance devices such as DSL modems, digital cameras and mass storage devices, giving us the broadest USB product portfolio in the industry.

     PLDs (Programmable Logic Devices). The logic in an electrical system performs the non-memory functions, such as floating-point mathematics or the organization and routing of signals throughout a computer system. Logic constitutes a significant portion of the circuitry in most systems. We manufacture several families of programmable logic circuits, which are programmable by the user. PLDs facilitate the replacement of many standard logic devices with a single device, thus reducing package count and cost, improving performance and allowing miniaturization. Our PLD portfolio consists of a wide variety of devices ranging from simple PLDs such as the Flash 22V10, to the very-high-density complex PLDs such as the Cypress Ultra37000™, Quantum38K™ and Delta39K™ CPLD families. We have recently added the Programmable Serial Interface (“PSI”) family to our portfolio, which integrates our serial link technology with our Delta39K CPLD products. All our products are supported by the Warp™ software tool set, which enables design description in either VHDL (very high-speed integrated circuit hardware description language), an industry standard developed by Cypress or in Verilog, another industry standard.

     Bluetooth. We have announced our entry into the fast–growing wireless PHY market by developing Bluetooth chips. Bluetooth is an industry standard technology that allows short range (3 to 100 meters) communication to take place without wires. Cell phones, PDA’s and PC’s are adopting this standard as a way to exchange data and to connect to the Internet. The technology is also appropriate for printers, scanners, digital cameras as well as mice, keyboards, joysticks, headsets and many other products. Our first Bluetooth chips are expected to be available in 2002. We are evaluating a number of wireless markets where our low cost development can best be leveraged.

     PSoC (Programmable System-on-Chip) Microcontrollers. PSoC Microcontrollers are microprocessors used in a wide variety of embedded applications such as communications, industrial control and consumer products. The entire microprocessor system is implemented on a single chip, but most applications require additional components. The trend is toward increasing the amount of the application that can be placed on a single chip. The Cypress PSoC Microcontroller is the first entry in the marketplace to support both the addition of analog (non-digital) capability and the ability to configure each device to fit each application’s specific device requirements.

     GLV™ (Grating Light Valve™). Our Silicon Light Machines (“SLM”) subsidiary’s GLV™ technology is a proven means to switch, modulate and attenuate light. The GLV™ device is a dynamic diffraction grating that can serve as a simple mirror in the static state, or a variable grating in the dynamic state. Its unique combination of speed, accuracy, reliability and manufacturability has been field proven in demanding applications in the simulation, display and direct-to-print markets. Silicon Light Machines is leveraging its experience and expertise in optical microelectromechanical systems (“MEMS”) to create optical communications products for large telecommunications systems developers and subsystem OEMs. SLM expects to launch its new product lines in 2002.

Research and Development

     We place great emphasis on research and development (“R&D”). This is partially reflected by our commitment of significant management resources to continuously improve process and product design development cycle time. Our current product strategy requires rapid development of new products using emerging process technologies while minimizing R&D costs. We perform R&D for both process technology and for new product design.

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     Our process technology research focuses primarily on the continuous migration to smaller geometries. Currently, we are ramping our latest 0.15-micron technology in manufacturing. We are simultaneously transferring our 0.12-micron technology from our eight-inch R&D facility in San Jose, California (“Fab 1”) to our eight-inch manufacturing Fab 4 in Minnesota and initiating development of our 0.10-micron technology at Fab 1. The Fab 1, which was converted from six-inch wafer to eight-inch wafer capability in fiscal 2000, is now compatible with Fab 4.

     In addition to continuously reducing our platform technology geometry, we develop value added derivatives for analog and embedded non-volatile memory applications. In 2001, we completed the development and initiated the manufacturing ramp of our 0.35-micron embedded non-volatile memory SONOS (Silicon Oxide Nitride Oxide Silicon) technology in Texas (Fab 2). We also qualified and ramped our 0.25-micron BiCMOS technology for analog applications in Minnesota (Fab 4). We launched the development of the next analog technology, a 0.2-micron SiGe BiCMOS technology in 2001 as well. Finally, we equipped a wafer fab in our San Jose site to produce lithium tantalate wafers for optical communication applications.

     In July 2000, we entered into an agreement with Mosel Vitelic (“Mosel”) to jointly develop a 0.12-micron process technology, to be deployed initially in Fab 1. Under the agreement, Mosel engineers will work with our existing Fab 1 R&D team on defining 0.12-micron and below manufacturing processes. We agreed with Mosel to share some of the costs of purchasing new equipment to facilitate tighter process geometries. The agreement will allow Mosel and us to continue to offer cutting-edge process technology, which we expect will produce new high-performance, market-leading products more economically and quickly.

     We have a central design group that focuses on new product design and improvement of design methodologies. This group has ongoing efforts to reduce design cycle time and increase first pass yield through structured re-use of intellectual property (“IP”) blocks from a controlled IP library, development of computer-aided design tools and improved design business processes. We currently have 60 design teams in place working on new product designs. Design and related software development work primarily occurs at centers located in the United States, the United Kingdom, Ireland and India.

Manufacturing

     In fiscal 2001, we continued to manufacture our products at two sub-micron wafer fabrication facilities located in Minnesota (Fab 4) and Texas (Fab 2). These fabrication facilities utilize our proprietary 0.15 through 0.8-micron CMOS, 0.25 and 0.8-micron BiCMOS, and 0.35-micron and 0.65-micron Flash technologies. To enhance our competitive position, we emphasize programs to reduce manufacturing cycle times, reduce die size, improve labor productivity, improve efficient use of capital resources, improve defect densities, improve yields and ultimately lower manufacturing costs.

     Specifically in 2001, we invested in capacity and workflow modeling software aimed at reducing our fab cycle times and improving on time delivery to customers. We expect to realize the primary benefits of this investment in 2002. We also made significant progress with our Total Productive Maintenance and Statistical Process Control programs. These programs fully engage our entire manufacturing workforce making this workforce more productive.

     In 2001, we reduced die size by introducing our RAM 7 manufacturing process in Fab 4 and our SONOS manufacturing process in Fab 2. The RAM 7 process reduced our leading edge line widths from .20-micron to .15-micron, resulting in more die per wafer manufactured. The SONOS process reduced our Fab 2 line width from .5-micron to .35-micron enabling new embedded non-volative programmable products and increased die per wafer manufactured.

     A significant portion of our assembly and test operations is performed by our highly automated assembly and test facility in the Philippines, which accounted for over 40% of our fiscal 2001 output, with the balance being performed by various offshore subcontractors. Our Philippines facility primarily manufactures volume products and packages where our ability to leverage manufacturing costs is high. The Philippines plant currently has capability for assembling and testing 27 major package outlines, nine of which were added in 2001.

     One of our initiatives in 2001, was to improve the overall quality and cost of our backend manufacturing process through increasing the number of parts built in our Philippines factory and consolidating the devices built at subcontractors to a few key suppliers. This included moving the manufacture of more clock, USB and memory products to the Philippines. By the close of fiscal 2001, this strategy had increased the proportion of parts tested in the Philippines factory to 50%. Due to our acquisitions the number of subcontractors did not shrink in 2001, but the consolidation of our core devices to key suppliers did take place with 90% of our subcontract volume being manufactured by four identified manufacturing partners in 2001 compared to 81% in fiscal 2000.

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     In fiscal 2001 we invested $13 million, in two additional fully integrated autolines allowing parts to complete all assembly and test manufacturing steps from start to finish with minimal human intervention. Currently less than 5% of our output is processed on these autolines; however, when fully ramped we expect the autolines will provide approximately 25% of our factory output, with no additional labor requirement. In addition, we invested $3 million in facility improvements, including an earthquake retrofit.

     During fiscal 2001, we substantially completed work on enterprise-wide order management, manufacturing planning and distribution information systems, in order to improve manufacturing cycle times, reduce inventory and improve customer responsiveness and delivery. Logistics costs were also reduced by focusing finished goods customer shipments into a single carrier network. We expect that significant cost savings and productivity improvements will result going forward, as the full impact of enterprise planing systems and further logistics consolidation come to bare on increasing volumes. We expect that the enterprise planning systems and logistics programs investments initiated in 2001 will provide a scaleable, state-of-the-art supply chain management system for our future growth.

     During the third quarter of 2001, we announced and implemented a restructuring plan that involved resizing manufacturing facilities, reducing workforce and combining facilities. The effect of the restructuring plan was to resize our manufacturing operations to meet future demand and reduce expenses in all operations areas. We took out of service and are holding for sale manufacturing assets with a net book value of $122.1 million. The restructuring affected assets at our facilities in Minnesota, Texas, California and the Philippines. (See further discussion on Restructuring included in Management’s Discussion and Analysis and Note 6 of the Consolidated Financial Statements)

Marketing and Sales

     We use four channels to sell our products: direct OEM sales by our sales force; sales by manufacturing representative firms; sales through domestic distributors; and sales through international trading companies and representative firms. Our marketing and sales efforts are organized around four regions: North America, Europe, Japan and Asia/Pacific. We also have a strategic accounts group and a contract manufacturing group, which are responsible for specific customers with worldwide operations. We augment our sales effort with field application engineers, who are specialists in our product portfolio and work with customers to “design in” our products for their systems. Field application engineers and customer design center engineers also help us identify emerging markets and new products. We typically warrant our products against defects in materials and workmanship for a period of one year and that product warranty is generally limited to a refund of the original purchase price of the product.

     Domestic revenues accounted for 50% of our total revenues in fiscal 2001, compared to 51% in 2000 and 51% in 1999. International revenues accounted for 50% of our total revenues in fiscal 2001 compared to 49% in 2000 and 49% in 1999. Please refer to Note 17 of the Consolidated Financial Statements included with this Report for additional information on geographic distribution of our revenues. No individual customer accounted for greater than 10% of total revenues in 2001. Sales to Motorola, Inc. accounted for 10.9% of total revenues in fiscal 2000. In fiscal 1999 no individual customer accounted for greater than 10% of total revenues. No individual distributor accounted for greater than 10% of total revenues in either fiscal 2001 or fiscal 2000. Sales to Arrow Electronics, Inc., a distributor, accounted for 10% of total revenues in fiscal 1999.

     One of our strategic initiatives in fiscal 2001 was to empirically measure customer satisfaction. We engaged with leading edge consultants to derive this methodology. The methodology involves quarterly face-to-face interviews as well as web based surveys. The data gathered is being used to formulate strategic initiatives to increase customer satisfaction.

     In 2001 we invested in customer relationship management tools in order to better service our customers. These tools include software that enables salesforce efficiency. The software allows salespeople to track the customer engagements and offer faster service and information. We also invested in Business-to-Business (B2B) systems to facilitate efficiency in order transactions. This involves software that allows Cypress to manage order flows and material fulfillment with key customers. This is critical as more of our transactions are done electronically.

Backlog

     Our sales are typically made using standard purchase orders for delivery of catalog products, which are cancelable until product delivery takes place. Customer relationships are generally not subject to long-term contracts. Products to be delivered and the related delivery schedules are frequently revised to reflect changes in customer needs. For these reasons, our backlog at any particular date is not representative of actual sales for any succeeding period, and we believe that our backlog is not a meaningful indicator of future revenues.

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Competition

     We face competition from other domestic and foreign high-performance integrated circuit manufacturers, many of which have advanced technological capabilities and have increased their participation in the markets in which we operate. We compete with a large number of companies primarily in the telecommunications, data communications, personal computer, personal computer peripheral and military markets. Our competitors, including Altera Corporation, Applied Micro Circuits Corporation, Hitachi Ltd., Integrated Device Technology, Inc., Integrated Circuit Systems, Inc., Motorola, Inc., National Semiconductor Corporation, PMC-Sierra, Inc., Samsung Corporation, Texas Instruments Incorporated, Vitesse Semiconductor Corporation, and Xilinx, Inc., target certain markets in which we operate and compete directly with our products. Competition is based on various factors that can vary among products and markets. These factors include product function and feature quality of the products, product availability, price and service.

     The semiconductor industry is intensely competitive. This intense competition results in a difficult operating environment for most companies in the industry, including us. This environment is characterized by frequent erosion of product sale prices over the lives of each product, rapid technological change, limited product life cycles and strong domestic and foreign competition in many markets. Our ability to compete successfully in a rapidly evolving high-performance end of the semiconductor technology spectrum depends on many factors, including:

     We believe that we currently compete effectively in the above areas to the extent they are within our control; however, given the pace at which events change in the industry, our current abilities are not a guarantee of future success. If we are not able to compete successfully in this environment, our business, operating results and financial condition will be harmed.

Patents and Licenses

     We currently have over 600 patents and approximately 525 additional patent applications on file with the United States Patent and Trademark Office. We are preparing to file more than 150 new patent applications. In addition to factors such as innovation, technological expertise and experienced personnel, we believe that patents are increasingly important to remaining competitive in our industry. We have an active program to acquire additional patent and other intellectual property protection.

     We have entered into, and in the future may continue to enter into, technology license agreements with third parties that give those parties the right to use patents and other technology developed by us. Some of these agreements also give us the right to use patents and other technologies developed by such other parties, some of which involve payment of royalties.

     The patents owned by us may be invalidated, circumvented or challenged, and the rights granted under these patents may in any case not provide competitive advantage to us. We are, and may in the future be, involved in litigation with respect to alleged infringement or involved in litigation to enforce our intellectual property rights. To the extent we rely on technology developed by other companies in our products, we cannot be certain that license agreements will continue to be available to us on commercially reasonable terms in the future.

Acquisitions

     During fiscal 2001 we completed acquisitions of six companies: Silicon Packets, Inc., In-System Design, Inc., Lara Networks, Inc., ScanLogic Corporation, HiBand Semiconductors, Inc. and International Microcircuits, Inc.

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We face risks in integrating these acquired businesses into our business. See “Risk Factors—We may fail to integrate our business and technologies with those of companies we have recently acquired and that we may acquires in the future.”

Employees

     As of December 30, 2001, we and our subsidiaries had 4,160 employees, compared to 4,435 at the end of fiscal 2000. The decrease in number of employees is primarily due to a reduction in force that occurred in the third quarter of fiscal 2001 in conjunction with a restructuring plan that included resizing our manufacturing facilities. These decreases affected all disciplines, although manufacturing and administrative disciplines experienced greater headcount reductions. The decrease was partially offset by increased headcount from companies acquired during the year. None of our employees is represented by a collective bargaining agreement, nor have we ever experienced work stoppages.

Risk Factors

     The discussion in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, statements as to the future operating results and business plans, that involve risks and uncertainties. We use such words as “anticipates,” “believes,” “expects,” “future,” “intends,” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for any reason, including the risks described below and elsewhere in this report. If any of the following risks actually occur, our business, financial condition and operating results could be seriously harmed.

We are exposed to the risks associated with the slowdown in the U.S. and world-wide economy.

     Among other factors, concerns about inflation, decreased consumer confidence and spending and reduced corporate profits and capital spending have resulted in a downturn in the U.S. economy generally and in the semiconductor industry in particular. As a result of these unfavorable economic conditions, we have experienced a significant slowdown in customer orders including large order cancellations across nearly all of our product lines especially during the first six months of fiscal 2001, which resulted in historically low net bookings during this period. In addition, we experienced corresponding decreases in revenues and average selling prices during fiscal 2001 and expect continued pressure on average selling prices in the future. As a consequence of the economic downturn in 2001, we announced a restructuring plan that involved resizing our manufacturing facilities, reducing our workforce and combining facilities. In addition, we recorded a provision for excess inventory and related purchase commitments. If the adverse economic conditions continue or worsen, additional restructuring of operations may be required, and our business, financial condition and results of operations may be seriously harmed.

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We face periods of industry-wide semiconductor over-supply that harm our results.

     The semiconductor industry has historically been characterized by wide fluctuations in the demand for, and supply of, semiconductors. These fluctuations have helped produce many occasions when supply and demand for semiconductors have not been in balance. In the past, these industry-wide fluctuations in demand, which have resulted in under-utilization of our manufacturing capacity, have seriously harmed our operating results. In some cases, industry downturns with these characteristics have lasted more than a year. Prior experience has shown that restructuring of the operations, resulting in significant restructuring charges, may become necessary if an industry downturn persists. In response to the current significant downturn, we restructured our manufacturing operations in the third quarter of fiscal 2001 to increase cost efficiency while still maintaining an infrastructure that will enable us to grow when sustainable economic recovery begins. When these cycles occur, however, they will likely seriously harm our business, financial condition and results of operations and we may need to take further action to respond to them.

Our future operating results are likely to fluctuate and therefore may fail to meet expectations.

     Our operating results have varied widely in the past and may continue to fluctuate in the future. In addition, our operating results may not follow any past trends. Our future operating results will depend on many factors and may fluctuate and fail to meet our expectations or those of others for a variety of reasons, including the following:

     As a result of these or other factors, we could fail to achieve our expectations as to future revenues, gross profit and income from operations. Any downward fluctuation or failure to meet expectations will likely adversely affect the value of your investment in Cypress.

     In addition, because we recognize revenues from sales to our domestic distributors only when these distributors make a sale to customers, we are highly dependent on the accuracy of their resale estimates. The occurrence of inaccurate estimates also contributes to the difficulty in predicting our quarterly revenue and results of operations.

Our financial results could be seriously harmed if the markets in which we sell our products do not grow.

     Our continued success depends in large part on the continued growth of various electronics industries that use our semiconductors, including the following industries:

     Significant portions of our products are incorporated into data communications and telecommunications end products. Any reduction in the growth of, or decline in the demand for, networking applications, mass storage, telecommunications, cellular base stations, cellular handsets and other personal communication devices that incorporate our products could seriously harm our business, financial condition and operating results. In addition, certain of our products, including USB microcontrollers and high-frequency clocks, are incorporated into computer and computer-related products, which have historically and may in the future experience significant fluctuations in demand. We may also be seriously harmed by slower growth in the other markets in which we sell our products.

We are affected by a general pattern of product price decline and fluctuations, which can harm our business.

     Even in the absence of an industry downturn, the average selling prices of our products have historically decreased during the products’ lives, and we expect this trend to continue. In order to offset selling price decreases, we attempt to decrease the manufacturing costs of our products, and to introduce new, higher priced products that incorporate advanced features. If these efforts are not successful or do not occur in a timely manner, or if our newly introduced products do not gain market acceptance, our business, financial condition and results of operations could be seriously harmed.

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     In addition to following the general pattern of decreasing average selling prices, the selling prices for certain products, particularly commodity products, fluctuate significantly with real and perceived changes in the balance of supply and demand for these products. In the event we are unable to decrease per unit manufacturing costs at a rate equal to or faster than the rate at which selling prices continue to decline, our business, financial condition and results of operations will be seriously harmed. Furthermore, we expect our competitors to invest in new manufacturing capacity and achieve significant manufacturing yield improvements in the future. These developments could dramatically increase the worldwide supply of competitive products and result in further downward pressure on prices.

We may be unable to protect our intellectual property rights adequately, and may face significant expenses as a result of ongoing or future litigation.

     Protection of our intellectual property rights is essential to keep others from copying the innovations that are central to our existing and future products. Consequently, we may become involved in litigation to enforce our patents or other intellectual property rights, to protect our trade secrets and know-how, to determine the validity or scope of the proprietary rights of others, or to defend against claims of invalidity. This type of litigation can be expensive, regardless of whether we win or lose.

     We are now and may again become involved in litigation relating to alleged infringement by us of others’ patents or other intellectual property rights. This type of litigation is frequently expensive to both the winning party and the losing party and could take up significant amounts of management’s time and attention. In addition, if we lose such a lawsuit, a court could require us to pay substantial damages and/or royalties or prohibit us from using essential technologies. For these and other reasons, this type of litigation could seriously harm our business, financial condition and results of operations. Also, although in certain instances we may seek to obtain a license under a third party’s intellectual property rights in order to bring an end to certain claims or actions asserted against us, we may not be able to obtain such a license on reasonable terms or at all.

     For a variety of reasons, we have entered into technology license agreements with third parties that give those parties the right to use patents and other technology developed by us, and that give us the right to use patents and other technology developed by them. We anticipate that we will continue to enter into these kinds of licensing arrangements in the future. It is possible however, that licenses we want will not be available to us on commercially reasonable terms or at all. If we lose existing licenses to key technology, or are unable to enter into new licenses that we deem important, our business, financial condition and results of operations could be seriously harmed.

     It is critical to our success that we be able to prevent competitors from copying our innovations. We therefore intend to continue to seek patent, trade secret and mask work protection for our semiconductor manufacturing technologies. The process of seeking patent protection can be long and expensive, and we cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. Furthermore, others may develop technologies that are similar or superior to our technology or design around the patents we own.

     We also rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants and third parties. However, these parties may breach these agreements, and we may not have adequate remedies for any breach. Also, others may come to know about or determine our trade secrets through a variety of methods. In addition, the laws of certain countries in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as the laws of the United States.

Our financial results could be adversely impacted if we fail to develop, introduce and sell new products or fail to develop and implement new manufacturing technologies.

     Like many semiconductor companies, which frequently operate in a highly competitive, quickly changing environment marked by rapid obsolescence of existing products, our future success depends on our ability to develop and introduce new products that customers choose to buy. We introduce significant numbers of products each year, which are an important source of revenue for us. If we fail to introduce new product designs in a timely manner or are unable to manufacture products according to the requirements of these designs, or if our customers do not successfully introduce new systems or products incorporating ours, or market demand for our new products does not exist as anticipated, our business, financial condition and results of operations could be seriously harmed.

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     For us and many other semiconductor companies, introduction of new products is a major manufacturing challenge. The new products the market requires tend to be increasingly complex, incorporating more functions and operating at faster speeds than prior products. Increasing complexity generally requires smaller features on a chip. This makes manufacturing new generations of products substantially more difficult than prior generations. Ultimately, whether we can successfully introduce these and other new products depends on our ability to develop and implement new ways of manufacturing semiconductors. If we are unable to design, develop, manufacture, market and sell new products successfully, our business, financial condition and results of operations would be seriously harmed.

Interruptions in the availability of raw materials can seriously harm our financial performance.

     Our semiconductor manufacturing operations require raw materials that must meet exacting standards. We generally have more than one source available for these materials, but there are only a limited number of suppliers capable of delivering certain raw materials that meet our standards. If we need to use other companies as suppliers, they must go through a qualification process, which can be difficult and lengthy. In addition, the raw materials we need for our business could become more scarce as worldwide demand for semiconductors increases. Interruption of our sources of raw materials could seriously harm our business, financial condition and results of operations.

Problems in the performance of other companies we hire to perform certain manufacturing tasks can seriously harm our financial performance.

     A high percentage of our products are assembled, packaged and tested at our manufacturing facility located in the Philippines. We rely on independent subcontractors to assemble, package and test the balance of our products. This reliance involves certain risks, because we have less control over manufacturing quality and delivery schedules, whether these companies have adequate capacity to meet our needs and whether or not they discontinue or phase-out assembly processes we require. We cannot be certain that these subcontractors will continue to assemble, package and test products for us, and it might be difficult for us to find alternatives if they do not do so.

The complex nature of our manufacturing activities makes us highly susceptible to manufacturing problems and these problems can have substantial negative impact on us when they occur.

     Making semiconductors is a highly complex and precise process, requiring production in a tightly controlled, clean environment. Even very small impurities in our manufacturing materials, difficulties in the wafer fabrication process, defects in the masks used to print circuits on a wafer or other factors can cause a substantial percentage of wafers to be rejected or numerous chips on each wafer to be nonfunctional. We may experience problems in achieving an acceptable success rate in the manufacture of wafers, and the likelihood of facing such difficulties is higher in connection with the transition to new manufacturing methods. The interruption of wafer fabrication or the failure to achieve acceptable manufacturing yields at any of our facilities would seriously harm our business, financial condition and results of operations. We may also experience manufacturing problems in our assembly and test operations and in the introduction of new packaging materials.

We may not be able to use all of our existing or future manufacturing capacity, which can negatively impact our business.

     We have spent, and expect to continue to spend, significant amounts of money to upgrade and increase our wafer fabrication, assembly and test manufacturing capability and capacity. If we do not need some of this capacity and capability for any of a variety of reasons, including inadequate demand or a significant shift in the mix of product orders that makes our existing capacity and capability inadequate or in excess of our actual needs, our fixed costs per semiconductor produced will increase, which will harm our business, financial condition and results of operations. In response to the current economic downturn, we implemented a restructuring plan that included the resizing of our manufacturing facilities. In addition, if the need for more advanced products requires accelerated conversion to technologies capable of manufacturing semiconductors having smaller features, or requires the use of larger wafers, we are likely to face higher operating expenses and may need to write-off capital equipment made obsolete by the technology conversion, either of which could seriously harm our business and results of operations.

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Our operations and financial results could be severely harmed by certain natural disasters.

     Our headquarters, some manufacturing facilities and some of our major vendors’ facilities are located near major earthquake faults. We have not been able to maintain earthquake coverage at reasonable costs. Instead, we rely on self-insurance and preventative/safety measures. If a major earthquake or other natural disaster occurs, we may need to spend significant amounts to repair or replace our facilities and equipment and we could suffer damages that could seriously harm our business, financial condition and results of operations.

Prolonged electrical power outages or shortages, or increased costs of energy could harm our business.

     Our process R&D facility and our corporate offices are located in California, which has recently experienced power outages and shortages as well as increased energy costs. To limit downtime exposure, we use back-up generators and power supplies in our main California facilities. While the majority of our production and design R&D facilities are not located in California, more extensive power shortages in the state could delay the process of our research and development as well as impinge upon our existing cost structure.

Our business, results of operations and financial condition will be seriously harmed if we fail to compete successfully in our highly competitive industry and markets.

     The semiconductor industry is intensely competitive. This intense competition results in a difficult operating environment for us and most other semiconductor companies that is marked by erosion of average selling prices over the lives of each product, rapid technological change, limited product life cycles and strong domestic and foreign competition in many markets. A primary cause of this highly competitive environment is the strength of our competitors. The industry consists of major domestic and international semiconductor companies, many of which have substantially greater financial, technical, marketing, distribution and other resources than we do. We face competition from other domestic and foreign high-performance integrated circuit manufacturers, many of which have advanced technological capabilities and have increased their participation in markets that are important to us. If we are unable to compete successfully in this environment, our business, operating results and financial condition will be seriously harmed.

     Our ability to compete successfully in the rapidly evolving high performance portion of the semiconductor technology industry depends on many factors, including:

     Although we believe we currently compete effectively in the above areas to the extent they are within our control, given the pace of change in the industry, our current abilities are not a guarantee of future success.

We must build semiconductors based on our forecasts of demand, and if our forecasts are inaccurate, we may have large amounts of unsold products or we may not be able to fill all orders.

     We order materials and build semiconductors based primarily on our internal forecasts, and secondarily on existing orders, which may be cancelled under many circumstances. Consequently, we depend on our forecasts to determine inventory levels for our products and the amount of manufacturing capacity that we need. Because our markets are volatile and subject to rapid technological and price changes, our forecasts may be wrong, and we may make too many or too few of certain products or have too much or too little manufacturing capacity. Also, our customers frequently place orders requesting product delivery almost immediately after the order is made, which makes forecasting customer demand even more difficult. These factors also make it difficult to forecast quarterly operating results. If we are unable to predict accurately the appropriate amount of product required to meet customer demand, our business, financial condition and results of operations could be seriously harmed, either through missed revenue opportunities because inventory for sale was insufficient or through excessive inventory that would require write-offs.

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We must spend heavily on equipment to stay competitive, and will be adversely impacted if we are unable to secure financing for such investments.

     In order to remain competitive, semiconductor manufacturers generally must spend heavily on equipment to maintain or increase manufacturing capacity and capability. We have budgeted for approximately $165 million in expenditures on equipment in fiscal 2002 and anticipate significant continuing capital expenditures in subsequent years. In the past, we have reinvested a substantial portion of our cash flow from operations in capacity expansion and improvement programs.

     If we are unable to decrease costs for our products at a rate at least as fast as the rate of the decline in selling prices for such products, we may not be able to generate enough cash flow from operations to maintain or increase manufacturing capability and capacity as necessary. In such a situation, we would need to seek financing from external sources to satisfy our needs for manufacturing equipment and, if cash flow from operations declines too much, for operational cash needs as well. Such financing, however, may not be available on terms that are satisfactory to us or at all, in which case our business, financial condition and results of operations would be seriously harmed.

We compete with others to attract and retain key personnel, and any loss of, or inability to attract, such personnel would harm us.

     To a greater degree than most non-technology companies, we depend on the efforts and abilities of certain key management and technical personnel. Our future success depends, in part, upon our ability to retain such personnel, and to attract and retain other highly qualified personnel, particularly product and process engineers. We compete for these individuals with other companies, academic institutions, government entities and other organizations. Competition for such personnel is intense and we may not be successful in hiring or retaining new or existing qualified personnel. If we lose existing qualified personnel or are unable to hire new qualified personnel as needed, our business, financial condition and results of operations could be seriously harmed.

We face additional problems and uncertainties associated with international operations that could seriously harm us.

     International sales represented approximately 50% our revenues during fiscal 2001 and 49% in both fiscal 2000 and fiscal 1999. Long-lived assets are held primarily in the United States with 11% held in the Philippines and 1% in other foreign countries at the end of 2001 and 2000 (see Note 17 of the Consolidated Financial Statements). Our Philippine assembly and test operations, as well as our international sales, face risks frequently associated with foreign operations, including:

     To the extent any such risks materialize, our business, financial condition and results of operations could be seriously harmed.

We are subject to many different environmental regulations, and compliance with them may be costly.

     We are subject to many different governmental regulations related to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process. Compliance with these regulations can be costly. In addition, over the last several years, the public has paid a great deal of attention to the potentially negative environmental impact of semiconductor manufacturing operations. This attention and other factors may lead to changes in environmental regulations that could force us to purchase additional equipment or comply with other potentially costly requirements. If we fail to control the use of, or to adequately restrict the discharge of, hazardous substances under present or future regulations, we could face substantial liability or suspension of our manufacturing operations, which could seriously harm our business, financial condition and results of operations.

We depend on third parties to transport our products.

     We rely on independent carriers and freight haulers to move our products between manufacturing plants and our customers. Any transport or delivery problems because of their errors, or because of unforeseen interruptions in their activities due to factors such as strikes, political instability, natural disasters and accidents, could seriously harm our business, financial condition and results of operations and ultimately impact our relationship with our customers.

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We may fail to integrate our business and technologies with those of companies that we have recently acquired and that we may acquire in the future.

     We completed six acquisitions in fiscal 2001, four acquisitions in fiscal 2000 and four acquisitions in fiscal 1999 and may pursue additional acquisitions in the future. If we fail to integrate these businesses successfully or properly, our quarterly and annual results may be seriously harmed. Integrating these businesses, people, products and services with our existing business could be expensive, time-consuming and a strain on our resources. Specific issues that we face with regard to prior and future acquisitions include:

We may incur losses in connection with loans made under our stock purchase assistance plan.

     In May 2001, we implemented our stockholder-approved 2001 Employee Stock Purchase Assistance Plan through which we make loans to our employees to purchase shares of our common stock through a broker on the open market (see Note 11 to our Consolidated Financial Statements included in this report for a further description of this plan). As of December 30, 2001, the principal amount of loans outstanding under the plan was $117.2 million. While the loans are secured by the shares of our stock purchased with the loan proceeds, the value of this collateral would be adversely affected if our stock price declined significantly. Further, the note is full recourse to the employee, and is secured by all of the assets of the employee. Our liquidity and results of operations would be adversely affected if a significant amount of these loans were not repaid. Similarly, if our stock price were to decrease, our employees bear greater repayment risk.

We maintain self-insurance for certain liabilities of our officers and directors.

     Our certificate of incorporation, by-laws and indemnification agreements require us to indemnify our officers and directors for certain liabilities that may arise in the course of their service to us. We self-insure with respect to potential indemnifiable claims. If we were required to pay a significant amount on account of these liabilities for which we self-insure, our business operating results and financial condition could be seriously harmed.

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Executive Officers of the Registrant

     Certain information regarding each of our current executive officers is set forth below:

     Except as set forth below, each of our executive officers has been engaged in his principal occupation described above during the past five years. There is no family relationship between any of our directors or executive officers.

     T.J. Rodgers is a co-founder of Cypress Semiconductor Corporation and has been a Director and its President and Chief Executive Officer since 1982. Mr. Rodgers serves as a director of Zepton Networks and SolarFlare Communications.

     Antonio R. Alvarez joined Cypress in May 1987 as a senior technical engineer. Mr. Alvarez was transferred to our former subsidiary, Aspen Semiconductor Corporation, in April 1988 as the manager of BiCMOS technology. In October 1989, Mr. Alvarez returned to the corporate office as Vice President, Research and Development. In February 1993, Mr. Alvarez became responsible for Fab 1 when it was merged with the research and development department. In 1998, Mr. Alvarez also became responsible for the Memory Products Division. In 2001 responsibilities for Research and Development were transferred to Mr. Christopher Seams.

     Emmanuel T. Hernandez joined Cypress in June 1993 as Corporate Controller. In January 1994, Mr. Hernandez was promoted to Senior Vice President, Finance and Administration, and Chief Financial Officer. Prior to joining Cypress, Mr. Hernandez held various financial positions with National Semiconductor Corporation from 1976 through 1993. Mr. Hernandez serves as a board member of Xicor, Inc.

     Ralph A. Schmitt joined Cypress in 1987 and held a variety of sales and marketing positions. In 1995 Mr. Schmitt left Cypress to found GroupTec LLC, an organization that sold silicon-based solutions. Mr. Schmitt rejoined Cypress in January 1998 as Sales Director with responsibility for transitioning the sales and marketing organization to align with Cypress’s shift to a market-based strategy. He was appointed Vice President of Strategic Accounts in September 1999 and named Vice President, Sales and Marketing in June 2000.

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ITEM 2. PROPERTIES

     Our executive offices are located in an approximately 60,000 square-foot building at 195 Champion Court, San Jose, California, under a lease that will expire in 2004. Located immediately adjacent to our executive offices is one of our wafer fabrication facilities (Fab 1), which is primarily utilized for R&D operations. This facility is located in an approximately 61,000 square-foot leased building at 3901 North First Street, San Jose, California. The current lease expires in 2004. The lease rates for these facilities are subject to variations based on the London interbank offering rate (“LIBOR”) and a requirement to sell, extend the lease, or acquire the property at the end of the lease term (see Note 15 of the Consolidated Financial Statements included in this report).

     Research and development and other Cypress staff functions are also located at the San Jose building complex. This office space is composed of approximately 150,000 square feet in buildings located at 3939 North First Street and 4001 North First Street, San Jose, California under leases which expire in May 2006. As described above, the lease rates for these facilities are subject to variations based on LIBOR, and we are required to sell, extend the lease or acquire the property at the end of the lease term (see Note 15 of the Consolidated Financial Statements included in this report). We plan to continue leasing these properties.

     An additional 18,000 square foot facility located at 385 Moffet Park Drive, Sunnyvale, California is leased by Silicon Light Machines, a subsidiary of Cypress for office, research and development, and manufacturing activities with a lease term that will expire in 2006.

     In December 1988, we purchased the two undeveloped industrial lots on either side of our headquarters building. These similarly sized lots, comprising a total of approximately 8.5 acres, were purchased for future expansion of the San Jose building complex. In 2001, we began construction of an 111,000 square foot building on one of the two lots to absorb the impact of recent acquisitions, achieve a consolidation of facilities onto the San Jose Campus and to provide additional space to support planned growth. The building, at 198 Champion Court, was occupied in the first quarter of fiscal 2002 and at that time our executive offices were relocated there. The construction is financed under a build-to-suit arrangement and will be subject to a five year lease at lease rates subject to variations based on the LIBOR and a requirement to sell, extend the lease, or acquire the property at the end of the lease term (see Note 15 of the Consolidated Financial Statements included in this report). The remaining undeveloped industrial lot at our headquarters is available for future expansion.

     In the third quarter of 1996, we began operations in a new 162,000 square foot highly automated assembly and test manufacturing plant in Cavite, the Philippines. We own an approximately 100,000 square foot wafer fabrication facility, referred to as Fab 2 in Round Rock, Texas. In addition, we also own an approximately 170,000 square foot wafer fabrication facility, and we lease an additional approximately 100,000 square foot wafer fabrication facility, together these two facilities are referred to as Fab 4, on 18 acres of land in Bloomington, Minnesota. The lease rate for the leased portion of Fab 4 is subject to variations based on LIBOR and a requirement to sell, extend the lease, or acquire the property at the end of the lease term in December 2004 (see Note 15 of the Consolidated Financial Statements included in this report).

     In November 1997, we purchased real estate comprised of approximately 3.5 acres of land and 58,000 square feet of building in Woodinville, Washington. The property is a supporting location of our Personal Communication and Timing Technology divisions, which are part of our Non-memory business segment previously located in a leased facility in Kirkland, Washington.

     We lease additional space for sales and design centers in the United States, Belgium, Canada, China, Finland, France, Germany, India, Ireland, Israel, Italy, Japan, Korea, Singapore, Sweden, Taiwan, Turkey and the United Kingdom.

     As of the end of fiscal year 2001, we believe that our current properties are suitable for immediate foreseeable needs.

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ITEM 3. LEGAL PROCEEDINGS

     The semiconductor industry has experienced a substantial amount of litigation regarding patent and other intellectual property rights. From time to time, we have received, and may receive in the future, communications alleging that our products or our processes may infringe on product or process technology rights held by others. We are currently, and may in the future be, involved in litigation with respect to alleged infringement by us of another party’s patents. In the future, we may be involved with litigation to:

     Such litigation has in the past and could in the future result in substantial costs and diversion of management resources. Such litigation could also result in payment of substantial damages and/or royalties or prohibitions against utilization of essential technologies, and could have a material adverse effect on our business, financial condition, results of operations and cash flows.

     In July 2001, we filed a complaint in the United States International Trade Commission (“ITC”) against Integrated Circuit Systems, Inc. (“ICS”) and Pericom Semiconductor Corporation (“Pericom”) for infringement of a U.S. patent. The ITC subsequently instituted an investigation based upon our complaint. In December 2001, we agreed to settle this dispute with Pericom. Trial in the ITC against ICS is scheduled for July 2002. We will vigorously pursue and/or protect our rights in this matter. In November 2001, ICS filed a complaint in the ITC against us for infringement of two U.S. patents, one of which is also asserted against us in an earlier-filed action in California (see below). We have investigated the allegations in ICS’ complaint. We believe that we have meritorious defenses to these allegations. While no assurance can be given regarding the outcome of this action, we believe that the final outcome of the matter will not have a material effect on our consolidated financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of this action be unfavorable, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

     In March 2001, we filed a complaint in the United States District Court for the District of Delaware against ICS, for infringement of three U.S. patents. One of these patents is the basis for our complaint in the ITC (see above), and proceedings on this patent in Delaware have been stayed pending resolution of the ITC action. In April 2001, ICS filed a complaint in the United States District Court for the Northern District of California against us. We have investigated the allegations in ICS’ complaint. We believe that we have meritorious defenses to these allegations. We will vigorously pursue and/or protect our rights in this matter. While no assurance can be given regarding the outcome of this action, we believe that the final outcome of the matter will not have a material effect on our consolidated financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of this action be unfavorable, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

     On November 16, 2000, Momentum, Inc. filed a complaint in the Santa Clara County Superior Court against us for breach of warranty and deceit, in which it seeks consequential, indirect and punitive damages and costs. In February 2001, the Momentum complaint was dismissed, but they were given thirty days to refile. Momentum filed its amended complaint on April 16, 2001. We have reviewed and are investigating the allegations in the amended complaint. We believe that we have meritorious defenses to these allegations. We will continue to defend ourselves vigorously in this matter. While no assurance can be given regarding the outcome of this action, we believe that the final outcome of the matter will not have a material effect on our consolidated financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of this action be unfavorable, we may be required to pay damages and other expenses, which could have a material adverse effect on our financial position, results of operations and cash flows.

     On October 3, 2000, U.S. Philips Corp. filed a complaint in the United States District Court for the Southern District of New York against us and five codefendants for infringement of a U.S. patent. In March 2001, we filed a complaint in the United States District Court for the District of Delaware against Philips Semiconductors, Inc., for infringement of four U.S. patents. We have agreed with Philips on a resolution of the disputes, and the suits were dismissed with prejudice in December 2001.

     On June 12, 2000, we filed a complaint in the Superior Court of California against Altera Corporation for tortious interference with existing contractual relations, tortious interference with prospective economic relations, misappropriation of trade secrets and unfair competition. The complaint arises from Altera’s interference with a multi-year agreement to collaborate on research and development between Right Track CAD Corporation and Cypress. In February 2001, we amended our complaint to add a cause of action based on fraud. While no assurance can be given regarding the outcome of this action, we believe that the final outcome of the matter will not have a material effect on our consolidated financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of this action be unfavorable, we may be required to pay legal fees and other expenses that are not expected to have a material adverse effect on our financial position, results of operations, and cash flows.

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     During 1998, EMI Group of North America, Inc. (“EMI”) filed suit against us in the Federal Court in Delaware, claiming that we infringed on four patents owned by EMI. We entered into a license agreement with EMI in February 1999, for one of the four patents in the lawsuit. EMI withdrew two of the four patents from the lawsuit, including the patent related to the licensing agreement. The case involving the two remaining patents went to trial in October 1999. The jury ruled in our favor, finding that we infringed none of the patents and that each asserted claim was invalid due to prior art and physical impossibility (i.e., the patents require a step that is physically impossible to perform). EMI’s motion for judgment notwithstanding the verdict was denied in part and granted in part, leaving the verdicts on noninfringement and invalidity due to physical impossibility intact, but reversing the prior art invalidity verdicts. EMI filed an appeal, and the Court of Appeals for the Federal Circuit (“CAFC”) recently ruled in our favor, upholding the noninfringement and invalidity due to physical impossibility verdicts and reversing the District Court on the prior art invalidity verdicts, thereby reinstating the jury’s finding that the patents are invalid in view of the prior art. We therefore believe that our defenses are meritorious, and we intend to continue to defend ourselves vigorously, should it be necessary to do so. The deadline for EMI to file an appeal to the U.S. Supreme Court has passed, and we understand that EMI has not filed or petitioned for such an appeal. However, should the outcome of this action ultimately be unfavorable, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

     In January 1998, an attorney representing the estate of Mr. Jerome Lemelson contacted us and charged that we infringed certain patents owned by Mr. Lemelson and/or a partnership controlled by Mr. Lemelson’s estate. On February 26, 1999, the Lemelson Partnership sued us and 87 other companies in the United States District Court for the District of Arizona for infringement of 16 patents. In May 2000, the Court stayed litigation on 14 of the 16 patents in view of concurrent litigation in Nevada on the same 14 patents, brought against the Lemelson Partnership by manufacturers of machine vision and bar coding equipment. In October 2001, the Lemelson Partnership amended its complaint to add allegations that two more patents were infringed. The two new patents are related to one of the two patents in the litigation that were not stayed. We have reviewed and investigated the allegations in both the original and amended complaints. We believe that we have meritorious defenses to these allegations. We will vigorously defend ourselves in this matter. While no assurance can be given regarding the outcome of this action, we believe that the final outcome of the matter will not have a material effect on our consolidated financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of this action be unfavorable, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

On October 2, 1997, we filed an action against Kevin Yourman, Joseph Weiss, and their associated law offices in the Superior Court of California (“Superior Court”) in Santa Clara County for malicious civil prosecution in the underlying securities fraud actions initiated by Messrs. Yourman and Weiss in 1992. The underlying securities fraud actions were dismissed because the court found that none of our officers made any actionable false or misleading statements or omissions. An appeal affirmed the lower court’s finding that Messrs. Yourman and Weiss failed to put forth evidence showing a genuine issue of fact with regard to any statements by our officers. On May 4, 1999, the Superior Court granted a summary judgment motion by Messrs. Yourman and Weiss, holding that Messrs. Yourman and Weiss had probable cause to bring the underlying litigation. Our appeal of this decision has been denied. This action has had little, if any, effect on our consolidated financial position, results of operations and cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of the security holders during the quarter ended December 30, 2001.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     Our common stock is listed on the New York Stock Exchange under the trading symbol “CY”. The following table sets forth, for the periods indicated, the low, high and closing price for the common stock. We have not paid cash dividends and have no present plans to do so. At February 28, 2002, there were approximately 74,000 holders of record of our Common Stock.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This report may contain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties that could cause our results to differ materially from those expressed or implied in the forward-looking statements. These forward-looking statements relate to future events or our future financial performance and may include statements about our prospects as well as the prospects of the semiconductor industry more generally, including without limitation, statements about the general economy and its impact to the market segments we serve, changing environment and the cycles of the semiconductor industry, competitive pricing and the rate at which new products are introduced, successful integration and achieving the objectives of the acquired businesses, cost goals emanating from manufacturing efficiencies, adequacy of cash and working capital and other liquidity risks. Actual results could differ materially from those described in the forward-looking statements as a result of various factors including, but not limited to, the factors identified in Risk Factors.

Overview

     We recorded revenues of $819.2 million for fiscal year 2001, a decrease of 36.0% from fiscal 2000 record revenues of $1,287.8 million. Fiscal 2001 was a challenging year characterized by a fundamental slowdown in end customer demand in all the markets we serve. The first half of fiscal 2001 was characterized by inventory reduction efforts by customers that led to order cancellations and a large drop in volume. During the latter half of 2001, order cancellations returned to historical average levels with a book to bill ratio of close to 1.0. However order levels remained below 2000 levels and the levels that we were forecasting earlier in 2001. In addition, we saw some stabilization of customer inventories along with a continued shift by customers to the practice of placing orders for shipment in the same quarter. This practice of “turns” orders reduces our visibility into future sales. Throughout the year, there was continued pressure on gross margins from further declines in average selling prices (“ASP”), under utilization of factories and large provision for inventory reserves.

     On December 27, 2001, Cypress completed its acquisition of Silicon Packets, Inc. (“Silicon Packets”), a company that specializes in designing 10 Gigabit-per-second framers for OC-192/STM-64 SONET/SDH and 10G Ethernet transport solutions. Silicon Packets is part of the Non-memory business segment and the WAN/SAN market segment. The acquisition is expected to accelerate Cypress’s current schedule to develop 10 Gigabit-per-second solutions for MAN/WAN infrastructure equipment such as switches and routers. Cypress acquired Silicon Packets for total consideration of $27.3 million, including 0.7 million shares of Cypress common stock valued at $14.2 million, $7.1 million in cash, options to purchase 0.2 million shares of Cypress common stock valued at $3.2 million and direct acquisition costs of $2.8 million for underwriting, legal, valuation, accounting and regulatory fees. We may be required to make additional payments of up to $5.0 million based on the achievement of defined performance milestones. The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141 and, accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of December 27, 2001, the effective date of the purchase. Other than the charge for in-process research and development, Silicon Packet’s results of operations from the date of purchase to the end of the fiscal year were not significant because the acquisition was completed during the last week of the fiscal year and are therefore not included in Cypress’s consolidated results of operations for the year ended December 30, 2001.

     On September 14, 2001, Cypress completed its acquisition of In-System Design, Inc. (“ISD”), a system-on-chip design company specializing in personal communications solutions. Cypress acquired ISD for total consideration of $43.0 million, including $36.7 million in cash, options to purchase 0.3 million shares of Cypress common stock valued at $5.4 million and direct acquisition costs of $0.9 million for legal and accounting fees. We may be required to make additional payments of up to $27.5 million based on the achievement of defined performance milestones. The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of September 14, 2001, the effective date of the purchase. ISD revenues of $8.8 million were included in Cypress’s consolidated results of operations for fiscal 2001. The ISD acquisition reduced net income by $6.8 million during the year, due primarily to charges of $0.8 million for in-process research and development, $2.7 million for amortization of intangibles and $2.8 million in non-cash deferred compensation charges, as well as net operating losses of $0.5 million.

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     On July 3, 2001, Cypress completed its acquisition of Lara Networks, Inc. (“Lara”), a provider of high-performance, silicon-based packet processing solutions for wide area network infrastructure equipment. Cypress acquired Lara for total consideration of $200.1 million, including $185.3 million in cash, options to purchase 0.4 million shares of Cypress common stock valued at $8.1 million and direct acquisition costs of $6.7 million for underwriting, legal, valuation, accounting and regulatory fees. We may be required to pay additional compensation based on the achievement of defined performance milestones. The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of July 3, 2001, the effective date of the purchase. Lara revenues of $7.5 million were included in Cypress’s consolidated results of operations during fiscal 2001. The Lara acquisition reduced net income by $18.6 million during the year, due primarily to charges of $4.6 million for in-process research and development, $2.1 million for amortization of intangibles and $8.1 million in non-cash deferred compensation charges, as well as net operating losses of $3.8 million.

     On May 29, 2001, Cypress completed its acquisition of ScanLogic Corporation (“ScanLogic”), a provider of USB controllers for embedded and PC applications. Cypress acquired ScanLogic for total consideration of $30.1 million, including $15.6 million in cash, options to purchase 0.5 million shares of Cypress common stock valued at $11.7 million, notes payable to shareholders of $1.9 million and direct acquisition costs of $0.9 million for legal and accounting fees and broker commissions. The acquisition was accounted for using the purchase method of accounting. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of May 29, 2001, the effective date of the purchase. ScanLogic revenues of $7.4 million were included in Cypress’s consolidated results of operations during fiscal 2001. The ScanLogic acquisition reduced net income by $5.8 million during the year, due primarily to charges of $1.5 million for in-process research and development, $3.4 million for amortization of intangibles and goodwill and $2.6 million in non-cash deferred compensation charges and contingent cash compensation charges, which were partially offset by net operating results of $1.7 million.

     On March 27, 2001, Cypress acquired all of the outstanding capital stock of HiBand Semiconductors, Inc. (“HiBand”). HiBand is a provider of mixed-signal integrated circuits for high-speed communications markets. Cypress acquired HiBand for total consideration of $34.0 million, including 1.4 million shares of Cypress common stock valued at $28.2 million, options to purchase 0.2 million shares of Cypress common stock valued at $4.0 million, an existing $1.3 million cash advance and direct acquisition costs of $0.5 million for legal and accounting fees. The acquisition was accounted for using the purchase method of accounting. In-process research and development of $6.5 million was included in the results of operations for fiscal 2001. The acquisition reduced net income by $21.6 million during the year, due primarily to charges of $6.5 million for in process research and development, $3.8 million for the amortization of intangibles and goodwill and $6.6 million in non-cash deferred compensation charges and contingent cash compensation charges, as well as net operating losses of $4.7 million.

     On February 23, 2001, Cypress completed its acquisition of International Microcircuits, Inc. (“IMI”), a company specializing in timing technology integrated circuits for network applications. IMI’s product portfolio includes programmable clocks, electromagnetic interference suppression devices, clock distribution products and application-specific products. IMI has clock products for applications in communications, cable and DSL modems, office automation, digital cameras, DVDs and video games. Cypress acquired IMI for total consideration of $150.3 million, including $111.2 million in cash, options to purchase 1.3 million shares of Cypress common stock valued at $32.8 million, notes payable to shareholders of $3.3 million, and direct acquisition costs of $3.0 million for investment banking, legal and accounting fees. The acquisition was accounted for using the purchase method of accounting. IMI was fully integrated into Cypress’s existing timing technology business in the third quarter of fiscal 2001 and its results are no longer separately tracked. Prior to integration IMI revenues were $20.6 million and the IMI acquisition reduced net income by $42.7 million, due primarily to charges of $4.9 million for in-process research and development, $26.8 million for amortization of intangibles and goodwill and $13.9 million in non-cash deferred compensation charges, which were offset by net operating results of $2.9 million.

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Results of Operations

Revenues

     Revenues for fiscal 2001 were $819.2 million, a decrease of $468.6 million or 36.4% compared to revenues for fiscal 2000. We derive our revenues from the sale of Memory products and Non-memory products, which are targeted primarily to the data communications and computation markets. During fiscal 2001, all market segments that we sold our product into were adversely impacted by the severe economic downturn that was characterized by a significant drop in end-user demand and exacerbated by excess inventory in most, if not all, of the channels. The networking markets suffered the greatest decrease in demand, followed by wireless and to a lesser extent the computing and consumer markets.

Business Segment Net Revenues

     Revenues from the sale of Memory products for fiscal 2001 decreased $287.2 million or 45.0% versus revenues from the sale of these products for fiscal 2000. The decrease in Memory product revenues, as compared to fiscal 2000, resulted from a 52.1% decrease in unit demand for semiconductor products particularly in the wireless and networking markets. In 2001 ASPs increased as a result of a continuing increase in the average density (Mbits/unit) of static random access memories (“RAMs”) products sold. This increase was driven by new product revenues, particularly the 4 and 8 Meg More Battery Life (“MoBL”) family of parts and the 9 Meg and 18 Meg synchronous family of static RAMs. Adjusted for this mix change, ASPs declined by 5.0% from 1999 to 2000 and by 26% from 2000 to 2001 on a same product basis.

     Revenues from the sale of Memory Products for fiscal 2000 increased $329.1 million or 106.5% over revenues from the sale of these products for fiscal 1999. The increase in Memory Product revenues, as compared to fiscal 1999, resulted from both higher ASP and an increase in unit sales. ASP grew 47.9% from fiscal 1999 to fiscal 2000 and unit sa1es increased 39.6% over the same period. The increase in unit sales in fiscal 2000 can be attributed primarily to new product revenues, particularly in the 4 Meg synchronous family, which includes the No Bus Latency (“NoBL”) static RAM, the 2 and 4 Meg MoBL and the 1 Meg micro-power family of products. The synchronous demand was driven by the surge in the networking market, while sales for MoBL and other micro-power devices were driven by growth in the cellular phone market. High ASPs resulted from strong demand for static RAMs and the continuing increase in the average density (Mbits/unit) of static RAM products sold.

     Revenues in 2001 from the sale of Non-memory products decreased $181.4 million or 27.9% when compared to revenues from the sale of these products for fiscal 2000. The decrease in Non-memory product revenues, as compared to fiscal 2000, resulted primarily from a 26.7% decrease in unit sales. The decrease in unit sales resulted from decreases in unit demand in all aspects of the networking end markets, and reduced end customer demand in the personal computer market in the first half of fiscal 2001. Demand for PC-related clock chips and USB related products recovered in the second half of the year.

     Revenues in 2000 from the sale of Non-memory products increased $213.6 million or 49.0% from 1999. The growth was predominantly unit related and can be attributed to the market acceptance of Cypress’s Physical Layer (“PHY”), data communication, clock and USB products. Key products in the portfolio include our HOTLink optical transceivers, the Roboclock family of clock buffers, our low skew and low jitter programmable clocks, our broad portfolio of specialty multi-port memories and our plug and play USB devices.

     As is typical in the semiconductor industry, ASP of products generally declines over the lifetime of the products. To increase revenues, Cypress seeks to expand its market share in the markets it currently serves and to introduce and sell new products with higher ASP. Cypress will seek to remain competitive with respect to its pricing to prevent a further decline in sales.

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Cost of Revenues

     Cost of revenue as a percent of revenues for fiscal 2001 was 67.0% compared to 44.0% for fiscal 2000. The increase in cost of revenues as a percentage of revenues was caused by increased inventory reserves, under-utilization in our factories and continued declines in the ASP of memory, USB and clock devices. Cost of revenue as a percent of revenues decreased to 44.0% in fiscal 2000 from 55.0% for fiscal 1999 due to a significant increase in unit sales in 2000, resulting in a lower fixed cost per unit sold, and to the introduction of new products with higher margins.

     During the third quarter of fiscal 2001, Cypress received feedback from our customers that indicated that the downturn in sales would last longer than previously anticipated. Accordingly, we increased inventory reserves during the quarter for inventory that we did not expect to sell. Cost of revenues in the third quarter of fiscal 2001 included an unusual charge of $93.1 million for inventory reserves; during fiscal 2001, including the $93.1 million unusual charge, total net charges for inventory reserves were $125.4 million. Additional charges to cost of revenues to increase inventory reserves may be necessary in the future if demand continues to decline.

     Cost of revenues for fiscal 2000 were 43.9% of revenues, compared to 54.9% of revenues for fiscal 1999. The decrease in cost of revenues as a percent of revenues was primarily due to a significant increase in unit sales, resulting in a lower fixed cost per unit sold and to the introduction of new products with higher margins.

     Assembly and test factory utilization decreased from 75% in 2000 to 50% in 2001. Wafer fabrication factory utilization did not change significantly as we built inventory in the first half of the year anticipating a shorter downturn. When the severity and length of the downturn became clear, we restructured Cypress and took capital equipment out of service and are now holding this equipment for sale.

     ASP, on a same device basis, decreased in 2001 compared to 2000 (see Business Segment Net Revenues section above). Cypress is continuing its strong emphasis on new product development and improvements in manufacturing technologies and yields, which Cypress expects will reduce manufacturing costs and help offset some of the impact of near term margin declines.

     Property, plant and equipment with a net book value of $3.1 million were also written off to cost of revenues as one-time charges as a result of a periodic physical count of property, plant and equipment completed during the third quarter of fiscal 2001.

Research and Development

     Research and development (“R&D”) expenditures in fiscal 2001 increased from fiscal 2000 and fiscal 1999 as Cypress continued its effort to accelerate the development of new products and migrate to more advanced process technologies. In fiscal 2001, spending in Cypress’s design centers grew due to increased headcount and capital spending. R&D efforts associated with the acquisitions of Lara, ISD, ScanLogic, HiBand, IMI, Alation, RadioCom and Silicon Light Machines (“SLM”) also contributed to the increase in R&D expenditures in fiscal 2001. Cypress believes that its future success will depend on its ability to develop and introduce new products that will compete effectively on the basis of price, performance, and ability to address customer needs. The major focus of process technology research is the continuous migration to smaller geometries. During 2001, we were ramping our latest 0.15-micron technology in manufacturing and simultaneously transferring our 0.12-micron technology from our eight-inch R&D Fab in San Jose, California to our eight-inch manufacturing fab in Minnesota and initiating development of our 0.10-micron technology at the San Jose R&D Fab. The R&D Fab, which was converted from six-inch wafer to eight-inch wafer capability in fiscal 2000, is now compatible with our manufacturing fab in Minnesota.

     During fiscal 2001, we recorded $25.4 million in non-cash deferred stock compensation and contingent cash compensation related to acquisitions. Acquisition related compensation charged in fiscal 2001 is primarily attributed to the SLM, IMI, HiBand and Lara acquisitions.

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     We recorded charges of $5.5 million in the third quarter of fiscal 2001 upon reaching an agreement to settle a patent infringement suit for $8.0 million, of which $5.5 million pertained to prior periods. The remainder relates to future product shipments and has been recorded as a prepaid asset that will be expensed over the next three years.

     Property, plant and equipment with a net book value of $1.5 million in R&D expense were also written off to R&D as one-time charges as a result of a periodic physical count of property, plant and equipment completed during the third quarter of fiscal 2001.

Selling, General and Administrative

     Selling, general and administrative (“SG&A”) expenses in fiscal 2001 increased from fiscal 2000 due primarily to increased sales and marketing headcount from our acquisitions during the year, acquisition related compensation charges and several major customer support initiatives, including expanded e-business capabilities and improvements to the web infrastructure and site. Expenses for legal and professional services related to patent infringement litigation, patent filing and tax services have also contributed to an increase in administrative costs in the periods under comparison. Lower sales commission expenses and employee bonus expenses partially offset these increases.

     SG&A expenses in fiscal 2000 increased from 1999 due primarily to increased selling and marketing expenses. The increase in selling expenses was primarily due to commission expenses, which have risen in proportion to our revenue growth. In addition, the marketing area has increased expenditures due to building a worldwide infrastructure. Legal and professional costs related to patent infringement litigation, patent filing and tax services have contributed to increases in administrative costs over the two-year period.

     During fiscal 2001, we recorded $11.1 million in non-cash deferred compensation and contingent cash compensation related to acquisitions. Acquisition-related compensation charged in fiscal 2001 is primarily attributed to the SLM, IMI, and ScanLogic acquisitions.

     Property, plant and equipment with a net book value of $1.0 million were also written off to SG&A as one-time charges as a result of a periodic physical count of property, plant and equipment completed during the third quarter of fiscal 2001.

Acquisition and Other Non-Recurring Costs

     We completed six acquisitions during fiscal 2001: IMI, HiBand, ScanLogic, Lara, ISD and Silicon Packets. Acquisition costs in 2001 consisted of in-process research and development from these acquisitions and amortization of intangibles related to current and prior acquisitions. The increase in amortization from fiscal 2000 to fiscal 2001 relates primarily to the acquisitions of SLM, IMI, HiBand, ScanLogic, and Lara.

     In-process research and development charges during fiscal 2001 relate to the acquisitions of IMI, HiBand, ScanLogic, Lara, ISD and Silicon Packets, which were completed during fiscal 2001. The valuation method used to value in-process technology is a form of discounted cash flow method commonly known as the “percentage of completion” approach. This approach is a widely recognized appraisal method and is commonly used to value technology assets. The value of the in-process technology is the sum of the discounted expected future cash flows attributable to the in-process technology, taking into consideration the percentage of completion of products utilizing this technology, utilization of pre-existing technology, the risks related to the characteristics and applications of the technology, existing and future markets and the technological risk associated with completing the development of the technology. The cash flows derived from the in-process technology projects were discounted at rates ranging from 25% to 30%. Cypress believes these rates were appropriate given the risks associated with the technologies for which commercial feasibility had not been established. The percentage of completion for each in-process project was determined by identifying the elapsed time invested in the project as a ratio of the total time required to bring the project to technical and commercial feasibility. The percentage of completion for in-process projects acquired ranged from 10% to 90% for IMI, 5% to 75% for HiBand, 28% to 79% for ScanLogic, 1% to 89% for Lara, 10% to 70% for ISD and 9% to 87% for Silicon Packets. Schedules were based on management’s estimate of tasks completed and the tasks to be completed to bring the project to technical and commercial feasibility. As of December 30, 2001, the actual development timelines and costs are in line with management’s estimates.

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     Non-recurring charges recorded during fiscal 2001 were $66.6 million. These charges relate primarily to an impairment loss of $65.9 million. Based on a review of the intangibles related to our acquisitions and other long-lived assets, we recognized an impairment loss of $65.9 million, the amount by which the carrying value of the acquired existing technology and pro-rata portion of the related goodwill exceeded the present value of the estimated future cash flows of the existing technology of SLM, a part of the Non-memory business segment. During 2001, the optical market in which SLM participates has experienced a severe economic downturn. Reduced demand for SLM’s products places increased risk on the future revenue streams anticipated from the existing display and monitor technology. Other non-recurring charges recorded during fiscal 2001 included a $0.7 million charge related to the settlement of an intellectual property dispute.

     During fiscal 2000, Cypress recorded acquisition and merger-related costs of $54.2 million. Costs of $39.9 million were incurred in relation to the acquisition of SLM, which was completed on August 30, 2000. SLM acquisition costs consisted of $30.5 million for in-process research and development, and $9.4 million for the amortization of intangible assets. Additional costs related to the amortization of intangible assets from the acquisitions of Anchor Chips, Inc. (“Anchor”), Arcus Technology (USA) and Arcus Technology (India) Limited (referred to as “Arcus” on a combined basis), the MAX 5000 Programmable Logic Device (“PLD”) product line from Altera, and RadioCom were $8.9 million. Acquisition costs of $3.4 million were incurred in relation to the acquisitions of Galvantech, Alation, and RadioCom, which consist primarily of non-cash deferred compensation charges, legal, accounting and investment banking fees. In addition, Cypress recorded $2.0 million for in-process research and development due to the acquisition of RadioCom. Cypress incurred a one-time charge of $2.0 million in the second quarter of fiscal 2000 due to the acceleration of contractual obligations related to the Arcus acquisition.

     During fiscal 1999, Cypress recorded $37.9 million in merger and acquisition and other non-recurring costs. One-time, non-recurring costs were $24.2 million, which included a $12.3 million write-off of a manufacturing asset that was not being used and was subsequently scrapped, and an $11.9 million one-time compensation charge associated with retention and performance payments to key employees in December 1999. Acquisition related costs incurred during fiscal 1999 were $13.7 million. In the first quarter of fiscal 1999, Cypress recorded one-time charges of $3.8 million associated with the merger with IC WORKS. These charges were for investment banking fees and other professional fees. Cypress also recorded $8.8 million in costs associated with the purchase of Anchor and Arcus consisting of $4.0 million for in-process technology, $1.6 million for transaction costs and $3.2 million in amortization of intangible assets. During the fourth quarter of fiscal 1999, Cypress acquired Altera’s MAX 5000 Programmable Logic Device product line and its equity interest in Cypress’s wafer fabrication facility in Round Rock, Texas. As part of the transaction, Cypress recorded intangible assets associated with the product rights and incurred a charge of $0.3 million for the amortization of these intangibles. Transaction costs and non-cash compensation costs incurred for other acquisitions were $0.8 million.

Restructuring

     On July 16, 2001, Cypress announced a restructuring plan that involved resizing its manufacturing facilities, reducing its workforce, and combining facilities. The restructuring was precipitated by the worldwide economic slowdown, particularly in the business areas in which Cypress operates. The intended effect of the plan was to size the manufacturing operations and facilities to meet future demand and reduce expenses in all operations areas. During the third quarter of 2001, Cypress recorded restructuring charges of $132.1 million related to property, plant and equipment, leased facilities and personnel. Cypress expects to recognize a benefit of up to $12.0 million per quarter from lower depreciation and payroll costs in future periods. However, the net benefit to the Statement of Operations will be much less since we are operating at lower output rates and not building inventory that would have otherwise improved the operating results through greater absorption of costs.

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The following table summarizes the restructuring reserve and charges for the year ended December 30, 2001.

The following paragraphs describe in more detail the components of the restructuring charges.

     Restructuring costs related to property, plant and equipment amounted to $113.4 million. In sizing Cypress to meet future demand, Cypress has taken out of service and is holding for sale manufacturing assets with a net book value of $122.1 million. The charge represents the difference between the net book value of the assets less the estimated amount to be realized upon sale of the equipment, net of the estimated cost to dispose of the equipment. This amount has been recorded as a reduction in the carrying amount of the assets. The restructuring affects our facilities in Minnesota, Texas, California and the Philippines. If the actual amount realized upon the sale of equipment is less than estimated, we would incur an additional charge to earnings. Property, plant and equipment sales and/or dispositions are expected to be completed within one year. In each case, the asset was removed from service prior to September 30, 2001.

     During the quarter ended September 30, 2001, Cypress incurred a $4.1 million restructuring charge for three excess leased facilities. The costs to terminate or sublease these facilities are estimated to be approximately $4.1 million, which is included in other current liabilities. This estimate is based on current comparable rates for leases in the respective markets. If facilities rental rates continue to decrease in these markets or if it takes longer than expected to sublease these facilities, the actual loss could exceed this estimate. Costs will be incurred over the remaining terms of the leases, the longest of which is three years.

     Cypress implemented a reduction in force that affected employees at all significant locations. Under the restructuring plan, Cypress announced in July 2001 that it would terminate the employment of several hundred persons. Those individuals were notified in July that their employment would cease on September 30, 2001. Cypress has terminated the employment of 714 persons, of whom 709 employees had left Cypress as of December 30, 2001. The remainder will be leaving during the next six months after the completion of certain projects in which they are involved.

     Personnel costs related to the reduction in force amounted to $14.7 million. Severance and related employee benefit costs amounted to $5.8 million. For those persons whose employment ended on September 30, 2001, severance costs were paid at that time. For persons leaving subsequent to September 30, 2001, severance costs will be paid at the time of their separation. In addition, effective August 14, 2001, the Cypress Board of Directors made a one-time decision to extend for those terminated employees the stock option exercise period from one month to twelve months after termination. Cypress recorded non-cash stock compensation expense of $8.9 million for this modification during the quarter ended September 30, 2001.

     During fiscal 2000, we reversed $0.5 million of previously provided restructuring costs related to the decision to close down our wafer fab located in San Jose, California. We determined in the second quarter of fiscal 2000 that no outstanding commitments related to this restructuring remained.

     During fiscal 1999, we recorded restructuring credits of $3.8 million, which included a reversal of $3.1 million of the 1998 restructuring reserve. The reversed charges of $2.5 million primarily related to excess accruals for severance and other employee related charges. We also reversed $0.6 million of excess fixed asset write-downs from the 1998 restructuring. In addition, during fiscal 1999, Cypress reversed $0.7 million of excess fixed assets write-downs of the 1996 restructuring.

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Interest Income, Interest Expense and Other Income and (Expense), Net

     Interest income, interest expense and other income and (expense), net, was $15.2 million for fiscal 2001 compared to $41.3 million for fiscal 2000 and $43.6 million for fiscal 1999. Interest income and other, net, includes interest income, amortization of bond issuance costs, foreign exchange gains and losses and other non-operating items.

     Interest income decreased $10.9 million or 18.5% when comparing fiscal 2000 to 2001. This decrease in interest income in 2001 compared to 2000 is primarily due to lower average cash and investment balances in fiscal 2001. Interest income increased $29.9 million or 163.6% when comparing fiscal 1999 to 2001. This increase is primarily due to higher average cash and investment balances in fiscal 2001 than in fiscal 1999.

     Interest expense was $22.4 million for fiscal 2001, compared to $23.6 million for fiscal 2000 and $9.6 million for fiscal 1999. Interest expense in fiscal 2001 is primarily associated with the 4.0% Convertible Subordinated Notes (“4.0% Notes”), issued in January 2000, due in 2005, and the 3.75% Convertible Subordinated Notes (“3.75% Notes”), issued in June 2000, due in 2005. The decrease in interest expense in fiscal 2001 compared to fiscal 2000 is primarily associated with a reduction in interest expense due to the conversion on October 2, 2000 of substantially all of the then outstanding 6.0% Convertible Subordinated Notes (“6.0% Notes”), issued in September 1997, due in 2002. The increase in interest expense from fiscal 1999 to fiscal 2001 is due to interest expense associated with the 4.0% Notes and 3.75% Notes which were issued in January and June of fiscal 2000, respectively. The increase in interest expense was partially offset by a reduction in interest expense due to the conversion on October 2, 2000 of substantially all of the then outstanding 6.0% Notes.

     Other income (expense), net of $(10.6) million, for fiscal 2001 primarily reflects a $8.9 million write-down of long-term investments, and $3.3 million related to the amortization of bond issuance costs. Cypress took a charge in the third quarter of fiscal 2001 to reduce the carrying value of two long-term investments including startup, development stage and technology companies to their estimated net realizable values. These investments were reduced by $1.5 million and $7.4 million to $1.5 million and $4.2 million, respectively. Other income and (expense), net, for fiscal 2000 primarily reflects a $5.0 million gain on the sale of the Fast CMOS Technology (“FCT”) product line and a $4.5 million gain on the disposal of assets partially offset by other items. Other income and (expense), net, for fiscal 1999 included a $36.2 million gain from the sale of a certain investment. Other components of other income and (expense), net include $1.0 million related to the amortization of bond issuance costs, and $0.2 million in foreign exchange gains in 1999.

Taxes

     Cypress’s effective tax rates for fiscal years 2001, 2000 and 1999 were (6.8%), 25.0%, and 7.4%, respectively. A tax benefit of ($29.8) million was realized during fiscal 2001 compared to expenses of $92.9 million and $7.0 million during fiscal 2000 and fiscal 1999, respectively. The fiscal 2001 tax benefit was attributable primarily to current year net operating losses; however, the tax benefit of these losses was limited, under generally accepted accounting principles, since there is uncertainty as to whether the full benefit of these losses may be realized. Accordingly, the valuation allowance against the net deferred tax assets increased from zero to $60.3 million from fiscal 2000 to 2001, as Cypress believes it is more likely than not that the net deferred tax asset will not be realized. Management’s assessment was based on the losses incurred in 2001 and Cypress’s projections for future periods. The valuation allowance against net deferred tax assets decreased from $42.6 million to $0.0 million from fiscal 1999 to fiscal 2000, as Cypress believed it would realize the tax benefit of all of its deferred tax assets. Management’s assessment was based on Cypress’s profitability and forecasts for future periods.

     As compared to the effective tax rate in fiscal 2000, the fiscal year 2001 effective tax rate was also affected by non-deductible in-process research and development charges and acquisition charges offset by research and development tax credits. Cypress’s effective tax rate varies from the U.S. statutory rate primarily due to utilization of loss carryovers, earnings of foreign subsidiaries taxed at different rates, and tax credits. Cypress’s global operations involve manufacturing, research and development, and selling activities outside the U.S. Cypress’s operations outside the U.S. are in certain countries that impose a statutory tax rate higher than the U.S., as well as countries that impose a lower statutory tax rate than the U.S. U.S. tax has not been provided on profits from certain non-U.S. sales, until such profits are repatriated back to the U.S. Overall, we expect our foreign earnings to be taxed at a rate lower than the statutory tax rate in the U.S.

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Extraordinary Gain

     In the fourth quarter of fiscal 2001, we retired a total of $52.8 million principal of our $287.5 million 3.75% Notes, for $44.6 million, resulting in a pre-tax net gain of $7.2 million. The net after-tax gain of $4.3 million was recorded as an extraordinary gain.

Pro Forma Earnings (Loss) (previously referred to as Earnings Before Goodwill)

     In addition to our financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”), we provide our stockholders with pro forma financial information. We believe that our presentation of pro forma results is a useful addition to information provided to our investors. Our presentation of pro forma information excludes non-cash expenses resulting from acquisition or issuance of stock options, cash charges for payments based on the achievement of certain performance milestones under acquisition agreements, as well as unusual or infrequent expenses or credits that are not directly attributable to our ongoing operations and are expected to be incurred over a limited period of time. Because of these exclusions, our pro forma presentation is not in accordance with GAAP. Additionally, our presentation of pro forma information may not be consistent with that of other companies. PRO FORMA INFORMATION IS NOT, AND SHOULD NOT BE CONSIDERED, A SUBSTITUTE FOR FINANCIAL INFORMATION PREPARED IN ACCORDANCE WITH GAAP. We recognize that we must be consistent in our identification of unusual or infrequent items including both favorable and unfavorable items that meet these criteria.

     We continuously review our pro forma practices to improve the presentation of our pro forma results. We have historically referred to our pro forma net income (loss) as “earnings before goodwill” or “EBG.” Pursuant to our on-going review, we will now refer to this information as pro forma net income or loss. This change will make us more consistent with other companies that provide pro forma financial results.

     Also, as a result of our on-going review, we decided not to adjust earnings or losses for any inventory adjustments in determining pro forma earnings. This change will be reflected currently and in all future periods and is reflected in the 2001 information included below. Previously, we added back to our net (loss) a $93.1 million (before tax) charge for inventory reserves in calculating our pro forma net loss for the third quarter of 2001 as reported in both our third quarter 2001 press release and in our quarterly report on form 10-Q for that quarter and in calculating our pro forma net income presentation in our 2001 annual earnings press release issued in January 2002. We have not added this charge back to our earnings in the calculation below. As a result, our reported 2001 pro forma net income of $2.2 million (as reported in our press release) has been reduced to a pro forma net loss of $77.4 million.

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This information should be read in conjunction with our audited financial statements prepared in accordance with GAAP included in Item 8 of this report.

Liquidity and Capital Resources

     Cypress’s cash, cash equivalents and short-term investments totaled $205.4 million at December 30, 2001, a $679.2 million decrease from the end of fiscal 2000. Working capital decreased $611.0 million during the same period. These decreases are attributed primarily to net cash flows from our investing and financing activities.

     During fiscal 2001, cash provided by operating activities of $95.1 million was primarily attributed to changes in working capital of $70.0 million and earnings less non-cash items.

     Net cash flows used in investing activities of $322.5 million, for fiscal 2001 related primarily to the use of $352.1 million in cash for the acquisitions of IMI, ScanLogic, Lara, ISD and Silicon Packets, net of cash acquired, $176.8 million for the purchases of property, plant and equipment and $117.2 million for loans made by Cypress to employees under the stockholder-approved Stock Purchase Assistance Plan (“SPAP”). Purchases of investments totaled $183.2 million during fiscal 2001, while investments, which were sold or matured, totaled $502.7 million.

     Net cash flows used for financing activities were $213.6 million during fiscal 2001. Repurchases of common stock were $190.5 million, redemption of convertible debt was $45.4 million and purchases of private placement equity options, net were $13.9 million. These cash outflows were offset primarily by cash inflows of $10.6 million related to the premiums received from the writing of stock put options and $30.8 million related to the issuance of common shares from the exercise of options or purchases through the Employee Stock Purchase Program (“ESPP”).

     During fiscal 2001, Cypress purchased $176.8 million in capital equipment, a $161.9 million decrease from the $338.7 million purchased in 2000, and a $62.4 million increase from the $114.4 million purchased in 1999. Cypress purchased equipment for its domestic wafer fabrication plants, its assembly and test facility in the Philippines, its back-end manufacturing subcontractors and its design and technology groups. Capital expenditures in 2002 are expected to be slightly lower when compared to 2001 and will primarily be on projects which increase wafer manufacturing, assembly and test, and research and design capabilities. In fiscal 2002, Cypress expects to purchase approximately $165 million in capital equipment.

     For the year ended December 31, 2000, cash provided by operating activities of $521.1 million was primarily attributable to earnings of $277.3 million, tax benefits from stock options of $56.7 million, acquired in-process research and development of $32.4 million, depreciation and amortization of $150.7 million and changes in working capital of $2.0 million.

     Net cash flows used in investing activities of $642.8 million, for fiscal 2000 related primarily to purchases of investments, which totaled $492.9 million and purchases of property, plant and equipment of $338.7 million. Investments, which were sold or matured totaled $181.0 million in fiscal 2000.

     For the year ended January 2, 2000, cash provided by operating activities of $157.7 million was primarily attributable to earnings of $88.1 million, depreciation and amortization of $109.9 million, gain on sale of investment of $36.2 million, loss on write down of assets of $11.0 million, tax benefits from stock options of $13.7 million and changes in working capital of $15.2 million.

     On January 31, 2000, Cypress filed a registration statement on Form S-3 with the Securities and Exchange Commission. Under this shelf registration statement, which was effective February 8, 2000, as amended by a post-effective amendment thereto effective March 7, 2000, Cypress can sell any combination of debt securities, preferred stock and common stock in one or more offerings up to a total amount of $400.0 million. The shelf registration statement allows Cypress flexibility to raise funds from the offering of debt securities, common stock, preferred stock or a combination thereof, subject to market conditions and Cypress’s capital needs. At December 30, 2001, the balance remaining related to the shelf registration statement was $112.5 million.

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     On June 26, 2000, Cypress completed a $287.5 million registered-placement of 5-year convertible subordinated notes. The notes are due in 2005, with a coupon rate of 3.75% and an initial conversion premium of 27.0%. The notes are convertible into approximately 4.6 million shares of common stock and are callable by Cypress no earlier than July 5, 2003.

     On January 19, 2000, Cypress completed a $283.0 million registered-placement of 5-year convertible subordinated notes. The notes are due in 2005, with a coupon rate of 4.00% and an initial conversion premium of 28.5%. The notes are convertible into approximately 6.1 million shares of common stock and are callable by Cypress no earlier than February 5, 2003.

     Cypress has entered into several synthetic operating lease agreements for manufacturing and office facilities. Synthetic leases are leases that qualify as capital leases for tax purposes, but qualify as operating leases for financial reporting. As such, synthetic leases represent a form of “off balance sheet” financing. The synthetic leases to which Cypress is a party require periodic payments that vary based on the London Interbank Offering Rate (“LIBOR”), plus a spread. Each of these leases provide Cypress with an option for renewal at mutually agreed upon terms, to acquire the property at the lessor’s cost or to arrange for the property to be acquired by a third party at market value. If Cypress had exercised its right to purchase all the off balance sheet leases at December 30, 2001, it would have been required to make a payment and record assets totaling $76.3 million. Cypress is required to maintain restricted cash or investments to serve as collateral for these leases. As of December 30, 2001, the amount of restricted cash recorded was $75.0 million, which was classified as a non-current asset on the consolidated balance sheet. The leases also contain financial covenants. Cypress was not in compliance with the financial covenants of one of the agreements at December 30, 2001. In February 2002, Cypress obtained a waiver for this default and renegotiated the covenants for future periods. While Cypress expects to maintain compliance with the covenants, our ability to meet these financial covenants can be effected by events beyond its control and we cannot assure you that we will meet these covenants in the future.

     At December 30, 2001, Cypress had purchase commitments aggregating $33.4 million, principally for manufacturing equipment, and facilities and bulk gas and nitrogen. These commitments relate to purchases to be made in 2002 of $29.9 million and the remainder is committed through 2008.

     In June 1997, Cypress borrowed 700 million yen at 2.1% from Sumitomo Bank — Japan in order to set up and fund our Japanese business operations. Borrowing under this arrangement, which aggregated $5.8 million at December 30, 2001, are due in fiscal 2003.

     In the next twelve months the current economic downturn may negatively impact cash and cash equivalent balances and cash flow from operations; however, Cypress believes that existing cash, cash equivalents and investments, and cash from operations will be sufficient to meet present and anticipated working capital requirements and other cash needs for at least the next twelve months. Beyond twelve months, a continuation of the economic downturn, changes in market demand and the possible need to change manufacturing capacity and capability, may cause Cypress to raise additional capital through debt or equity financing. Although additional financing may be required, there can be no assurance that it would be available to Cypress or available at terms Cypress deems satisfactory.

Below is a summary of fixed payments related to certain contractual obligations, including off balance sheet arrangements. Payment timing may be subject to change.

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Critical Accounting Policies

     Our discussion and analysis of our financial condition and the results of our operations are based upon our consolidated financial statements included in this report and the data used to prepare them. Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States and we are required to make estimates, judgments and assumptions in the course of such preparation. On an ongoing basis, we re-evaluate our judgments and estimates including those related to revenue recognition, product returns, reserves for doubtful accounts receivable and employee loans, inventories, long-lived assets, investments, restructuring charges, income taxes, litigation and contingencies. We base our estimates and judgments on our historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. Actual results may differ from these estimates under different assumptions or conditions. Our estimates are guided by observing the following critical accounting policies.

Revenue Recognition

     We generate revenue by selling our products to original equipment manufacturers and distributors. Our policy is to recognize revenue from sales to customers when title and the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable and collection of the resulting receivable is reasonably assured.

     We allow certain distributors, primarily based in the United States, extensive rights of return and other credits for price protection. Given the uncertainties associated with the levels of returns and other credits issuable to these distributors, we defer recognition of revenue from sales to these distributors until they have resold our products. Our method of deferral is based on certain assumptions, including average gross margins. If actual results differ from our estimates, future operating results could be adversely affected.

Sales to certain other primarily non-US based distributors carry either no or very limited rights of return. We have historically been able to estimate returns and other credits from these distributors and accordingly have historically recognized revenue from sales to these distributors on shipment, with a related allowance for potential returns established at the time of our sale. We must make estimates of potential future product returns and revenue adjustments related to current period product revenue. Management analyzes historical returns, current economic trends in the semiconductor industry, changes in customer demand and acceptance of our products when evaluating the adequacy of our allowance for sales returns. If management made different judgments or utilized different estimates, material differences in the amount of our reported revenue may result. We provide for these situations based on our experience with specific customers and our expectations for revenue adjustments based on economic conditions within the semiconductor industry. At December 30, 2001 and December 31, 2000 our reserves for sales returns were $3.6 million and $4.2 million, respectively.

     We maintain an allowance for doubtful accounts for losses that we estimate will arise from our customers’ inability to make required payments. We make our estimates of the uncollectibility of our accounts receivable by analyzing historical bad debts, specific customer creditworthiness and current economic trends. At December 30, 2001 the allowance for doubtful accounts was $3.7 million and at December 31, 2000 it was $2.0 million.

Accounting for income taxes

     We record a valuation allowance to reduce our net deferred tax asset to the amount that is more likely than not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies. In the event we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, we would record an adjustment to the deferred tax asset valuation allowance. This adjustment would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to increase the deferred tax asset valuation allowance would be charged to income in the period such determination would be made. We have recorded a valuation allowance against our net deferred tax asset of $60.3 million at December 30, 2001 and $0.0 million at December 31, 2000.

Valuation of Inventory

     We write down our inventory for “lower of cost or market” reserves, aged inventory reserves, obsolescence reserves and research and development reserves. Inventory reserves are generally recorded when the inventory for a device exceeds nine months of demand for that device and when individual parts have been in inventory for greater than six months. Our inventories represent high-technology parts that may be subject to rapid technological obsolescence and which are sold in a highly competitive industry. If actual product demand or selling prices are less favorable than we estimate, we may be required to take additional inventory write-downs. Likewise, if we sell more inventory, or at more favorable prices than we have forecasted, our future margins may be higher.

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Valuation of Long-Lived Assets

     Our business requires heavy investment in manufacturing facilities that are technologically advanced but can quickly become significantly under-utilized or rendered obsolete by rapid changes in demand for semiconductors produced in those facilities.

     We estimate the useful life of our manufacturing equipment, which is the largest component of our long-lived assets, to be five years. We base our estimate on our experience with acquiring, using and disposing of equipment over time. Depreciation expense is a major element of our manufacturing cost structure. We begin depreciation on new equipment when it is put into use for production. The aggregate amount of fixed assets under construction for which depreciation was not being recorded amounted to $94 million at December 30, 2001 and $119 million at December 31, 2000.

     Our other long-lived assets are principally comprised of intangible assets from acquisitions accounted for under the purchase method.

     We assess the impairment in value to our company of long-lived assets whenever events or circumstances indicate that their carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

     If our review determines the future undiscounted cash flows related to these assets will not be sufficient to recover their carrying value we will reduce the carrying values of these assets down to our estimate of fair market value and continue depreciating them over their remaining useful lives. Our estimates of fair market value are generally based on discounted cash flow analyses or outside appraisals.

Subsequent Events

     In January 2002 the Department of Commerce revoked a 1998 antidumping order that had been imposed on SRAMs fabricated in Taiwan and imported into the United States. The Customs Service was ordered to refund, with interest, all duties deposited under the 1998 antidumping order. Between 1998 and 2001 Cypress incurred $10.3 million to costs of revenues for such duties. As of February 28, 2002, Cypress has received $4.0 million of the refund and expects $8.0 million during the remainder of 2002. The refunds will be recorded as an offset to cost of revenues and the interest will be recorded as interest income as received.

     During 2001, the Board of Directors authorized the repurchase of up to $143.8 million of 3.75% Convertible Subordinated Notes. In January 2002, we repurchased a total principal amount of $30.0 million for $25.4 million, resulting in a pre-tax net gain of $3.9 million. The net after-tax gain will be recorded as an extraordinary item in the 2002 consolidated statements of operations. Cumulatively we have repurchased $82.8 million in principal.

Recent Accounting Pronouncements

     In July 2001, the FASB issued SFAS Nos. 141 and 142, “Business Combinations” and “Goodwill and Other Intangible Assets,” respectively. SFAS No. 141 replaces APB Opinion No. 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under SFAS No. 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. In connection with the adoption of SFAS No. 142, Cypress will be required to perform a transitional goodwill impairment assessment. Cypress will adopt SFAS No. 142 in fiscal 2002. Cypress has not yet determined what impact SFAS No. 142 will have on our results of operations and financial position. In accordance with FAS No. 142, Cypress has not amortized goodwill on acquisitions completed after July 1, 2001. Cypress will stop amortizing goodwill for all other acquisitions on December 31, 2001 (the first day of fiscal 2002). Goodwill amortization was $34.4 million in 2001.

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     In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which Cypress will adopt in fiscal 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Cypress does not expect the adoption of SFAS No. 143 to have a significant impact on our financial position or results of operations.

     In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and portions of APB Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. While SFAS No. 144 carries forward many of the provisions of SFAS No. 121 and APB Opinion No. 30, some of the key differences in the new standard are that goodwill is excluded from its scope, assets to be abandoned will be viewed as held for use and amortized over their remaining service period, and the standard broadens the presentation of discontinued operations. Cypress will adopt SFAS No. 144 in fiscal 2002. Cypress does not expect the adoption of FAS No. 144 will have a significant effect on its results of operations or financial condition.

     In December 2001, the Emerging Issues Task Force (“EITF”) released Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” EITF Issue No. 01-09 generally requires companies to present consideration given to a customer as a reduction of revenue. EITF Issue No. 01-09 will be adopted in the first quarter of 2002 and will not have a material impact on our financial statements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest and Foreign Currency Exchange Rates

     Cypress is exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. To mitigate these risks, Cypress utilizes derivative financial instruments. Cypress does not use derivative financial instruments for speculative or trading purposes.

     The fair value of Cypress’s investment portfolio, which is primarily invested in commercial paper and other similar instruments would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due mainly to the short-term nature of the major portion of Cypress’s investment portfolio. An increase in interest rates would not significantly increase interest expense due to the fixed nature of Cypress’s debt obligations.

     A majority of Cypress’s revenue and capital spending is transacted in U.S. dollars. However, Cypress does enter into these transactions in other currencies, primarily Japanese yen and EURO. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, Cypress has established revenue and balance sheet hedging programs. Cypress’s hedging programs reduce, but do not always eliminate, the impact of foreign currency exchange rate movements. Based on Cypress’s overall currency rate exposure at December 30, 2001, a near-term 10% appreciation or depreciation in the U.S. dollar, relative to the Japanese Yen or the Euro, would have an immaterial effect on Cypress’s financial position, results of operations and cash flows over the next fiscal year.

     All of the potential changes noted above are based on sensitivity analyses performed on Cypress’s balances as of December 30, 2001.

Equity Options

     At December 30, 2001, Cypress had outstanding a series of equity options (on Cypress common stock) in the amount of $26.0 million. The options require physical settlement and expire in March and June 2002. Upon expiration of the options, if Cypress’s stock price is above the trigger price, Cypress will have its capital returned with a premium. If below the trigger price, Cypress will receive a specified number of shares of Cypress common stock instead of a return of capital. The range of the trigger prices is $20.60 – $23.42. The transaction is recorded in stockholders’ equity in the accompanying consolidated balance sheet.

     At December 30, 2001, Cypress had outstanding 250,000 put options (on Cypress common stock) with a $14.58 strike price. Upon expiration of the options, if Cypress’s stock price is below the strike price, Cypress could take delivery of the underlying shares and be required to pay $3.6 million. If above the strike price, Cypress will have no further obligations. The transaction is recorded in stockholders’ equity in the accompanying consolidated balance sheet.

Investments in Development Stage Companies

     Cypress has also invested in several privately held companies, all of which can be considered in the startup or development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. At December 30, 2001, Cypress had invested $15.2 million, directly or indirectly, in development stage companies, all of which could be lost if the companies are not successful.

Stock Purchase Assistance Plan

     Cypress has loaned $117.2 million to employees under the shareholder-approved Stock Purchase Assistance Plan for the purpose of purchasing Cypress common stock (see Note 11 to the Consolidated Financial Statements). Each loan was evidenced by a full recourse promissory note executed by the employee in favor of Cypress and was secured by all of the employee’s assets, as well as, a pledge of the shares of our common stock purchased with the proceeds of the loan. Cypress maintains an allowance for doubtful accounts. For the period ending December 30, 2001, Cypress has written off $6 thousand of such loans. If the price of Cypress common stock declined from its year end level of $20.62 by 10%, Cypress’s exposure to loans with the underlying common stock collateral worth less than the face value of the notes would be $6.8 million.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share amounts)

ASSETS

The accompanying notes are an integral part of these Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)

The accompanying notes are an integral part of these Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)

The accompanying notes are an integral part of these Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)