UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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.     þ Yes          o 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 this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     þ Yes          o No

      At March 1, 2005, 131,017,938 shares of the registrant’s common stock were outstanding. The market value of voting stock held by non-affiliates of the registrant, based upon the closing sale price of the common stock on June 27, 2004 as reported on the New York Stock Exchange, was approximately $1,379,036,358. 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 2005 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K.

TABLE OF CONTENTS

PART I

      The discussion in this Annual Report on Form 10-K 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 that involve risks and uncertainties, including, but not limited to, statements as to our future financial results, operating performance and business plans, our prospects and the prospects of our subsidiaries and the semiconductor industry generally, and statements as to the utilization of our Philippines factory, pressure on and trends for average selling prices, entering into licensing arrangements with third parties, capital expenditures, future acquisitions, the impact of SunPower Corporation (“SunPower”) and our other subsidiaries on our future financial results, the general economy and its impact to the market segments we serve, the cycles of the semiconductor industry, expected inventory corrections and levels of demand in 2005, the rate at which new products are introduced, our outlook for fiscal 2005, our expected revenue for fiscal 2005, our expected improvements in gross margin in fiscal 2005, our expectations to generate positive cash flow from operations in fiscal 2005, successful integration and achieving the objectives of the acquired businesses, adequacy of cash and working capital, our research and development investments and project timelines, and other liquidity risks. 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 the “Risk Factors” and elsewhere in this Annual Report on Form 10-K. All forward-looking statements included in this Annual Report on Form 10-K are based upon information available to Cypress as of the date of this Annual Report, which may change. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or trends for future period. In evaluating these forward-looking statements, you should specifically consider the risks described below under “Risk Factors” which follows our discussion on critical accounting policies and in other parts of this Annual Report on Form 10-K. Except as required by law, we assume no obligation to update any such forward-looking statements to reflect events or circumstances that arise after the date of this Annual Report on Form 10-K.

General

      Cypress Semiconductor Corporation (the “Company” or “we”) designs, develops, manufactures and markets a broad line of high-performance digital and mixed-signal integrated circuits for a broad range of markets including networking, wireless infrastructure and handsets, computation, consumer, automotive, and industrial. In addition, we design and manufacture high-performance silicon solar cells through our SunPower subsidiary. We have four product divisions and four subsidiaries organized into three reportable business segments — Memory, Non-Memory and SunPower:

      In addition, we report on our product offerings by market segments in order to sharpen our focus on serving end markets. These four market segments are: Wide Area Networks and Storage Area Networks (“WAN/ SAN”), which focus on networking and telecommunications applications; Wireless Infrastructure and Wireless Terminals (“WIN/ WIT”), which focus on wireless base stations and handsets; Computation and Consumer, which focus on video games, personal computers, and other consumer applications; and Cypress Subsidiaries, which focus on emerging technologies and related market developments.

      We were 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 were reincorporated in Delaware and in October 1988, we listed our common stock on the New York Stock Exchange. Our corporate headquarters are located in 3901 North First Street, San Jose, California 95134, and our main telephone number is (408) 943-2600.

Business Segments and Product Overview

      We design, manufacture and sell higher-margin, proprietary products with advanced features and functions, which tend to be more resistant to market volatility and trends than commodity type products. We develop proprietary and higher-value products both in our Memory and Non-Memory businesses. We also design, manufacture and sell commodity-type products. We sell wireless, wireline and other products to manufacturers in networking, wireless infrastructure and handsets, computation, consumer, automotive, industrial and other business segments. Our SunPower business designs and manufactures high-performance silicon solar cells based on an inter-digitated all-back-contact design.

      A significant number of the wafers we produce for the Memory products are manufactured at our eight-inch wafer fabrication facility in Bloomington, Minnesota. A majority of the wafers we produce for Non-Memory products are manufactured at our six-inch production facility in Round Rock, Texas. For non-core technologies, we purchase wafers from outside facilities, or foundries. This practice enables us to quickly bring to market products manufactured with processes that are different than the high-volume processes needed to maximize the profitability of our fabrication facilities. These products generally target markets where fast time-to-market and leading-edge feature sets are the primary criteria for success. In addition, our SunPower business manufactures its solar cell products in a facility in the Philippines.

      Please refer to Note 22 of Notes to Consolidated Financial Statements included under Item 8 of this Annual Report on Form 10-K for detailed information about our reportable business segments.

      Our Memory business — driven by our Memory Products Division — designs and produces static random access memories (“SRAMs”). These memories are used to store and retrieve data in networking, wireless infrastructure and handsets, computation, consumer, automotive, industrial and other electronic systems. Manufacturing of many of our SRAMs are transitioning to the leading-edge 90 nm process technology. Migrating to advanced processes and reducing manufacturing costs continue to be important criteria for success in the memory business, particularly in commodity products.

      The SRAM market is characterized by the need for many different combinations of density (number of bits per memory circuit), organization (number of bits available to the user in a single access of the RAM), performance characteristics (number of bits transferred per cycle) and levels of power consumption (low-power and ultra-low-power devices required for portable, battery-operated equipment). We are the world’s second largest manufacturer of SRAMs, offers a broad selection of SRAM products, including high-speed synchronous SRAMs, high-performance MicroPower^tm SRAMs and fast asynchronous SRAMs. Our memory portfolio primarily includes the following devices:

      Double Data Rate (“DDR”) SRAMs. DDR SRAMs target network applications and servers that operate at data rates up to 400 MHz. We offer a variety of input/output (“I/ O”) voltages, bus widths and package options with product densities up to 72 Mbits, delivering up to 50 percent more system-level bandwidth than competing products.

      Fast Asynchronous SRAMs. We market a wide selection of fast asynchronous SRAMs with densities ranging from 16 Kbits to 16 Mbits. Our fast asynchronous portfolio includes the high-performance 16-bit-wide and 24-bit-wide families, which are optimized for the latest generation of fast digital signal processors. These memories are available in many combinations of bus widths, packages and temperature ranges.

      More Battery Life^tm (“MoBL”®) and MicroPower SRAMs. Our More Battery Life SRAMs, the flagship of our low-power memory product line, significantly increase battery life and talk time in wireless products such as cellular phones. MoBL and other MicroPower devices rank among the industry’s lowest-power devices. An increasing share of our MicroPower business comes from pseudo-SRAM (“PSRAM”)

products with a one-transistor (“1T”) architecture. These products offer higher density than standard six-transistor cells at a lower cost. The demand for 1T products is being driven by next-generation wireless devices with more robust features. Since acquiring Cascade Semiconductor Corporation (“Cascade”) during fiscal 2004, we have enhanced our 1T product portfolio to include devices ranging from 2 to 16 Mbits.

      No Bus Latency^tm (“NoBL”^tm) and Synchronous Burst SRAMs. NoBL synchronous SRAMs are optimized for high-speed applications that require maximum bus bandwidth, including those in the networking, instrumentation, video and simulation businesses. Synchronous Burst SRAMs are ideally suited for processor cache applications. Both types of devices come in a variety of densities and I/ O configurations. Our 72-Mbit NoBL SRAM, the industry’s largest, manufactured on our proprietary 90-nanometer technology.

      Quad Data Rate^tm (“QDR”^tm) SRAMs. QDR products are targeted toward next-generation networking applications, particularly switches and routers that operate at data rates beyond 300 MHz.

      Image Sensors. We acquired FillFactory NV (“FillFactory”) during fiscal 2004, gaining an entry into the image sensor business. Complimentary Metal Oxide Semiconductor (“CMOS”) image sensors will become the primary imaging technology for high megapixel digital cameras by 2006. FillFactory image sensors provide a high “fill factor,” enabling images with greater resolution and field depth. In addition to digital still cameras, the technology is also being used in machine vision, metrology, surveillance and satellite systems.

      Our Non-Memory business targets the networking, wireless infrastructure and handsets, computation, consumer, automotive, industrial and other markets. The category includes products from our Timing Technology Division, Personal Communications Division, Data Communications Division, along with products from our subsidiaries (excluding SunPower). Our Non-Memory products portfolio primarily includes the following:

      Dual-Port Memories. Dual-ports, which can be accessed by two different processors or buses simultaneously, target shared-memory and switching applications, including networking switches and routers, cellular base stations, mass storage devices and telecommunications equipment. Our family of synchronous and asynchronous Dual-Port RAMs range in density from 8 Kbits to 18 Mbits in x8, x9, x16, x18 and x36 configurations.

      First-In, First-Out (“FIFO”) Memories. FIFOs are used as a 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.

      Framers. Our high-performance Synchronous Optical Network/ Synchronous Digital Hierarchy (“SONET/ SDH”) framers transport SONET or SDH frames at the data rates of 2.488 Gbps and 9.952 Gbps. This family includes our POSIC2GVC^tm framer, one of the industry’s first devices to offer both generic framing procedures and virtual concatenation. These innovations enable the efficient transport of multiple data protocols over existing SONET/ SDH networks. POSIC^tm framers are compatible with protocols including Ethernet, Fibre Channel, Enterprise System Connection, Digital Video Broadcast and a commercial video standard for the Society for Motion Pictures and Television Engineers. We are developing the next generation of framers to include enhanced features such as Link Capacity Adjustment Scheme and Low-Order Virtual Concatenation, which will enable dynamic bandwidth changes and the ability to provide scalable data services from 1.5 Mbps to 1 Gbps.

      Grating Light Valve^tm (“GLV”^tm). The GLV was designed by Silicon Light Machines. GLV technology switches, modulates and attenuates light in a variety of applications. The GLV is used for applications in the communications, digital imaging, simulation, display and direct-to-print markets.

      High-Speed Optical Transceiver Link (“HOTLink”®) Physical Layer Devices (“PHYs”). Our HOTLink and HOTLink II^tm family of PHYs are physical-layer products for moving serial data at rates from 50 Mbps to 1.5 Gbps. These products support a variety of applications and industrial protocols including

Gigabit Ethernet, 10-Gbps Ethernet, Fibre Channel, Enterprise System Connection, Asynchronous Transfer Mode, Digital Video Broadcast, Advanced Micro Devices Inc.’s TAXI^tm protocol, and generic backplane and point-to-point applications. The newest HOTLink PHYs, including the HOTLink II PHY, move up to four channels of serial data at up to 1.5 Gbps. The newest addition to this family is a single-chip solution for professional-quality video.

      Network Search Engines (“NSE’s”). We offer a variety of ternary content addressable memory (“TCAM”) solutions for packet processing in network applications. The Ayama^tm family of NSE’s is compatible with the Network Processing Forum-approved LA-1 specification supporting commercial network processors, and can be combined with our Sahasra^tm NSE to create TCAM and algorithmic solutions for large-scale IPV6 applications. We also offer a line of NSE’s optimized for ASIC applications.

      Physical Layer Devices. Our family of high-performance SONET/ SDH and Serializer/ Deserializer (“SERDES”) devices move SONET or SDH frames between equipment at 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 OC-48 products meet the requirements of wide area network switches and routers with stringent, Bellcore-compliant jitter specifications.

      QuadPort® Datapath Switching Elements (“DSEs”). QuadPort DSEs are non-blocking switch devices that allow four independent buses, processors or backplanes to access the DSE simultaneously in separate time domains. Applications for these devices include 4 x 4 switching, packet-header manipulation, and datapath transport that can reduce the need for large field-programmable gate array devices. QuadPort DSEs are used in redundant arrays of independent disks and storage switches, metropolitan area network/ wide area network switches and routers, and wireless base station applications.

      Programmable Clocks. Programmable timing solutions combine the flexibility and fast time to market of field-programmable devices with high performance at a cost that is competitive against custom clocks at equivalent volumes. Working with our easy-to-use CyClocks^tm and CyberClocks^tm software, designers can select custom frequencies for a variety of applications. We are the only supplier offering true field-programmable clocks. All our clocks have the desired characteristics of high drive, low jitter, low electromagnetic interference (“EMI”) and low skew. During fiscal 2004, we began sampling the industry’s first programmable spread-spectrum clock generator with an onboard crystal oscillator. The device enables designers to accelerate time-to-market while reducing cost, board space and EMI.

      Programmable Logic Devices (“PLDs”). System logic performs non-memory functions such as floating-point mathematics or the organization and routing of signals throughout a computer system. We manufacture several types of PLDs, which facilitate the replacement of multiple standard logic devices with a single programmable device, increasing flexibility and reducing time to market. Our flagship product is the Delta39K^tm Complex Programmable Logic Device, which operates at high speed (233 MHz) and has more than 3,000 macrocells. All our products are supported by the Warp® software toolset, which enables designers to work in either very high-speed integrated circuit hardware description language, an industry standard developed by us, or in Verilog, another industry standard.

      Programmable System-on-Chip^tm (“PsoC”^tm). Reconfigurable Mixed-Signal Arrays. PSoC products are reconfigurable mixed-signal arrays with an on-board controller, providing a low-cost, single-chip solution for a variety of consumer, industrial and control applications, and taking the place of multiple custom controllers. The PSoC family integrates programmable blocks of analog and digital logic, a fast 8-bit processor, 8 to 16 Kbytes of flash memory and 256 bytes of SRAM. PSoC provides designers with a flexible architecture that can be configured for a broad range of embedded applications and dynamically reconfigured to extend the capabilities and value of designers’ product.

      Registered Buffers. As processor and signal speeds in systems increase, buffers are required to move data to and from memory more quickly. To meet the demands of high-capacity memory modules in servers and workstations, our registered buffers operate at clock frequencies up to 280 MHz, exceeding the standards for chip-to-chip communication established by the Joint Electronic Device Engineering Council organization.

      RoboClock® Clock Buffers. Our RoboClock family of high-performance programmable-skew clock buffers, the flagship product of our Timing Technology Division, offers features including zero propagation delay, 50/50 duty cycle, multiply/divide functions and programmable skew. These features allow customers to compensate for timing differences caused by different circuit board trace lengths and device set-up and hold times. The RoboClock II^tm programmable clock skew buffer family operates at speeds up to 200 MHz, supports 18 outputs, and adds more multiply, divide and programmable-skew options.

      USB Controllers. USB is a four-wire connection between a PC and peripherals, including keyboards, mice, printers, joysticks, scanners and modems and among various non-PC systems. The USB standard facilitates a “plug-and-play” architecture that enables instant recognition and interoperability when a USB-compatible peripheral is hooked into a system. Cypress offers a full range of USB solutions, including low-speed (1.5 Mbps), full-speed (12 Mbps) and high-speed (480 Mbps) USB products. We also offer a variety of USB hubs, transceivers, serial interface engines and embedded-host products for a broad range of applications.

      WirelessUSB^tm (“WUSB”). WirelessUSB is a wireless, radio-system-on-a-chip solution developed by us and second-sourced by Atmel, that enables designers of PC mice, keyboards, video games and other systems to go cordless while minimizing development time, cost, and power requirements, and without sacrificing performance. Operating at 2.4 GHz, WirelessUSB can connect multiple devices to a single receiver at ranges of up to 50 meters apart or more with superior resistance to interference. The technology is also an appealing solution for designers of building automation and sensor network applications.

      Our SunPower subsidiary designs and manufactures high-performance silicon solar cells based on an inter-digitated backside contact design, leaving the entire front surface uniformly dark and free of grid lines that normally block light entry.

      Solar Cells. SunPower recently began shipping the A-300 cell, an efficient, commercial low-cost silicon solar cell which is based on a rear-contact design that maximizes the working cell area, hides unsightly wires and makes automated production easier.

Cypress, the Cypress logo, MoBL, QuadPort, HOTLink, Warp and RoboClock are registered trademarks of Cypress Semiconductor Corporation. HOTLink II, MicroPower, More Battery Life, NoBL, No Bus Latency, MetroLink, POSIC, POSIC2GVC, RoboClock II, WirelessUSB, CyClocks, CyberClocks and Delta39K are trademarks of Cypress Semiconductor Corporation.

Programmable System-on-Chip and PSoC are trademarks of Cypress MicroSystems, a subsidiary of Cypress.

Silicon Light Machines, Grating Light Valve and GLV are trademarks of Silicon Light Machines, a subsidiary of Cypress.

Quad Data Rate^tm SRAM and QDR^tm SRAM comprise a family of products developed by Cypress, IDT, Micron Technology, NEC and Samsung Electronics.

Neuron and LONWORKS are registered trademarks of Echelon Corporation in the US and other countries.

CellularRAM is a trademark of Micron Technology Inc. in the United States and is a trademark of Infineon Technology outside the United States.

TAXI is a trademark of Advanced Micro Devices Inc.

All other trademarks or registered trademarks are the property of their respective owners.

Acquisitions

      The markets in which we compete require a wide variety of technologies, products and capabilities. We are committed to the ongoing evaluation of strategic opportunities and, where appropriate, to the acquisition of additional products, technologies or businesses that are complementary to, or broaden the markets for our products. During fiscal 2004, we completed the following three acquisitions:

      Prior to November 2004, SunPower was a majority-owned subsidiary of Cypress. In November 2004, we acquired all of the minority interests held in SunPower. SunPower designs and manufactures silicon solar cells based on an inter-digitated all-back-contact design. The acquisition of SunPower will enable us to expand and diversify our product offerings and continue to build SunPower into a provider of high-performance, cost-efficient solar cells for a broad range of applications in the solar electric power field.

      We acquired 100% of the outstanding capital stock of FillFactory in August 2004. FillFactory is a Belgium-based company specializing in active pixel CMOS image sensor technology. FillFactory offers a variety of high-performance custom and standard products for some of the industry’s most advanced digital photography, high-speed imaging, machine vision and automotive applications. Through this acquisition, our goals are to increase sales into the mobile phone markets and to augment our penetration of additional market segments, including digital still cameras and automotive sensors.

      We acquired 100% of the outstanding capital stock of Cascade in January 2004. Cascade specializes in one-transistor pseudo-static random access memory (“1T PSRAM”) products for wireless applications. 1T PSRAM devices offer higher density than conventional SRAMs at a lower cost, enabling new features in next-generation wireless applications. Through this acquisition, our goals are to enhance our product development capabilities for the mobile phone markets and help broaden our memory portfolio.

      For a detailed discussion of these acquisitions, please refer to Note 3 of Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K.

      During the first quarter of fiscal 2005, we acquired 100% of the outstanding capital stock of SCT. SCT specializes in digital imaging solutions for a variety of business and consumer applications, such as digital still cameras, automotive vision systems, and mobile phone cameras. Through this acquisition, our goals are to accelerate our entry into the high-volume CMOS image sensor business and SCT’s product line will complement new mobile phone products introduced by FillFactory. The result could position us with the broadest line of image sensors currently available for the mobile phone markets.

Research and Development

      Research and development expenses are primarily focused on the development of new manufacturing process technologies and the design of new products. We spent $261.6 million, $251.4 million and $287.9 million on research and development expenses in fiscal 2004, 2003 and 2002, respectively.

      Our process technology research focuses primarily on the continuous migration to smaller geometries. Our 90-nanometer technology is now in production at our Minnesota facility. We are currently developing our 65-nanometer technology in our eight-inch research and development facility in San Jose, California. In addition, we are developing derivatives of our ..13 micron and 90-nanometer technologies for use in new products including image sensors.

      We continued magnetic random access memories (“MRAM”) process development for memory products and embedded non-volatile applications in our San Jose, California facility during fiscal 2004. MRAM technology offers customers an improvement in read-write times, endurance and data retention over currently available non-volatile memory products. In January 2005, we announced our plan to sell our MRAM technology and products.

      We have both central and division-specific design groups that focus on new product creation and improvement of design methodologies. This group conducts 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 39 design teams in place working on new product designs. Design and related software development work primarily occurs at design centers located in the United States, Europe, India and Turkey.

      During fiscal 2004, SunPower continued its research and development efforts on the A-300 solar cell, transferred the development to its Philippines manufacturing plant and brought it to commercial production. SunPower’s high efficiency silicon solar cell technology is based on an inter-digitated backside contact design that leaves the entire front surface uniformly dark and free of grid lines that normally block light entry. The A-300 is well-suited for applications where high performance is desired, or where aesthetic value is important.

Manufacturing

      During fiscal 2004, we manufactured approximately 71% of our products at our two sub-micron wafer fabrication facilities in Round Rock, Texas and Bloomington, Minnesota. These fabrication facilities utilize our proprietary 90-nanometer and 0.13 through 0.8-micron CMOS, 0.25 and 0.8-micron BiCMOS, and 0.35-micron Silicon Nitride Oxide Silicon (“SONOS”) processes. Wafer foundries manufactured the balance of our products.

      During fiscal 2004, we continued our transition to more advanced process technologies in our facility in Bloomington, Minnesota including our 90-nanometer and 0.13-micron CMOS process technologies. This transition to processes with smaller line widths results in more die per wafer thereby reducing die costs.

      We conduct assembly and test operations, excluding SunPower products, at our highly automated assembly and test facility in the Philippines. This facility accounted for approximately 55% of our total assembly output and approximately 83% of our total test output in fiscal 2004. Various offshore subcontractors performed the balance of the assembly and test operations.

      Our Philippines facility manufactures primarily volume products and packages where our ability to leverage manufacturing costs is high. This facility has four fully integrated, automated manufacturing lines enabling complete assembly and test operations with minimal human intervention. These autolines have shorter manufacturing cycle times than conventional assembly/test operations, which enable us to respond more rapidly to changes in demand.

      Our SunPower subsidiary manufactures its solar cell products in a separate facility in the Philippines. In fiscal 2004, SunPower opened this manufacturing plant and shipped its first commercial solar cells. SunPower currently has a single 25 MW manufacturing line capable of producing eight million solar cells a year. The overall building footprint is designed to allow future capacity expansion to more than 100 MW.

Environmental Regulations

      Federal, state and local regulations, in addition to those of other countries in which we operate, impose various environmental controls on the use and discharge of certain hazardous substances used in semiconductor and solar cell processing. Our facilities have been designed to comply with these regulations through the implementation of environmental management systems. We believe that our activities conform to current environmental regulations. While to date we have not experienced any material adverse impact on our business from environmental regulations, we cannot provide assurance that environmental laws will not be

amended so as to impose expensive obligations on us in the future. In addition, violations of environmental laws by us or impermissible discharges of hazardous substances could result in the following actions:

Marketing and Sales

      We sell our Memory and Non-Memory products through several channels: sales to direct original equipment manufacturers by our sales force; sales by manufacturing representative firms; sales through global domestically-based distributors; and sales through international distributors and trading companies and representative firms. SunPower products are sold to direct original equipment manufacturers by our sales force. Our marketing and sales efforts are organized around four regions: North America, Europe, Japan and Asia/ Pacific. We also have a global 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, specialists in our products, technologies and services who work with customers to design our products into their systems. Field application engineers also help us to identify emerging markets and new products.

      Sales to U.S. and non-U.S. based distributors accounted for 50% of our total revenues in fiscal 2004, compared with 48% in fiscal 2003 and 46% in fiscal 2002.

      International revenues accounted for 66% of our total revenues in fiscal 2004, compared with 63% in fiscal 2003 and 57% in fiscal 2002.

      Sales to Arrow Electronics, a distributor, accounted for 14.6% of total revenues in fiscal 2004. No individual customer accounted for greater than 10% of total revenues in fiscal 2003. Sales to Motorola accounted for 10.2% of total revenues in fiscal 2002. 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 or a replacement part. For SunPower products, we provide warranties of 12 to 25 years for performance and 10 years for workmanship.

Backlog

      Our sales typically rely upon standard purchase orders for delivery of catalog products. Customer relationships are generally not subject to long-term contracts. However, Cypress has entered into long-term supply agreements with certain customers. These long-term supply agreements generally do not contain minimum purchase commitments. 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.

Competition

      We face competition from 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, computation and consumer markets. Competitors, including Altera, Applied Micro Circuits, Atmel, Integrated Device Technology, Integrated Circuit Systems, Microchip, Motorola, NEC, Opti, PMC-Sierra, Samsung Electronics, STMicroelectronics, Standard Microsystems, Texas Instruments, Vitesse Semiconductor and Xilinx, target certain markets and compete directly with some of our products. Competition is based on factors that can vary among products and markets, including product design and quality, product performance, price and service. In addition, our SunPower subsidiary faces competition from

large solar power product manufacturers, including Sharp Solar, Kyocera, Mitsubishi, BP Solar, Q-Cells, Shell Solar, RWE Schott, and Sanyo.

      The semiconductor and the solar cell industries are intensely competitive. This intense competition results in a challenging operating environment for most companies in the industries, including Cypress. This environment is characterized by potential erosion of product sale prices over the life 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 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, Licenses and Trademarks

      We rely on a combination of patents, copyrights, trade secrets, trademarks and proprietary information to maintain and enhance our competitive position. We currently have over 1,200 patents and approximately 700 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 fiscal 2005. In addition to factors such as innovation, technological expertise and experienced personnel, we believe that patents are increasingly important to remain competitive in our industry. We have an active program to obtain 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. Historically, these arrangements have not been a material source of revenues to us.

      In addition, we vigorously defend our product and service marks. For a list of our trademarks and registered trademarks, please visit the “Terms and Conditions” section of our website at www.cypress.com.

Employees

      As of January 2, 2005, we had approximately 4,500 employees. None of our employees is represented by a collective bargaining agreement, nor have we ever experienced organized work stoppages.

Available Information

      We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 free of charge on our website at www.cypress.com, as soon as reasonably practicable after they are electronically filed or furnished to the Securities and Exchange Commission. The contents of our website are not incorporated into, or otherwise to be regarded as a part of, this Annual Report on Form 10-K.

Risk Factors

      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. During the second half of fiscal 2004, we experienced a rapid softening of demand for our products that may represent the beginning of such a period of over-supply. 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 our operations, resulting in significant restructuring charges, may become necessary if an industry downturn persists. In response to the downturn that began in early 2001, we restructured our manufacturing operations and administrative areas in third quarter of fiscal 2001 and fourth quarter of fiscal 2002 to increase cost efficiency with the goal of maintaining an infrastructure that will enable us to grow when sustainable economic recovery begins. In addition, in response to the softening in market condition, management announced a plan to restructure our organization in the first quarter of fiscal 2005. When these cycles occur, 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 continued success depends in large part on the continued growth of various electronics industries that use our semiconductors, including the following industries:

      Many of our products are incorporated into data communications and telecommunications 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 results of operations. In addition, certain of our products, including USB microcontrollers and high-frequency clocks, are incorporated into computer and computer-related products, which have historically experienced, 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.

      The semiconductor industry is intensely competitive. This intense competition results in a difficult operating environment that is marked by erosion of average selling prices over the lives of each product, rapid technological change resulting in limited product life cycles. 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. 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.

      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.

      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. If we are unable to compete successfully in this environment, our business, financial condition and results of operations will be seriously harmed.

      In addition, our failure to further refine our technology and develop and introduce new products could cause our products to become obsolete, which could reduce our market share and cause our sales to decline. The industry is rapidly evolving and competitive. We will need to invest significant financial resources in research and development to keep pace with technological advances in the industry and to effectively compete in the future. We believe that there is a variety of competing technologies under development by other companies that could result in lower manufacturing costs than those expected for our products. Our development efforts may be rendered obsolete by the technological advances of others, and other technologies may prove more advantageous for the commercialization of solar power products.

      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 important sources 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 our products, or market demand for our new products does not exist as anticipated, our business, financial condition and results of operations could be seriously harmed.

      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.

      In order to remain competitive, semiconductor manufacturers generally make significant investments in capital equipment to maintain or increase technology and design development and manufacturing capacity and capability. This is particularly true as companies develop technologies that would allow for fabrication of products using smaller geometries in order to increase performance of those products and also to reduce cost. In addition, certain technology breakthroughs may only be supported by 300mm equipment. This technology change would most likely necessitate migrating our production into 300mm wafers versus our existing 200mm capability, which could be prohibitively expensive for us and could cause us to change our business model. We anticipate significant continuing capital expenditures in subsequent years. In the past, we have reinvested a substantial portion of our cash flows from operations in technology, design development and 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 flows 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 flows 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 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 as a principal means 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, particularly when supply is abundant. 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-downs.

      Our ability to meet our cash requirements (including our debt service obligations) is dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. We cannot guarantee that our business will generate sufficient cash flows from operations to fund our cash requirements. If we were unable to meet our cash requirements from operations, we would be required to fund these cash requirements by alternative financing. The degree to which we may be leveraged could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes, could make us more vulnerable to industry downturns and competitive pressures or could limit our flexibility in planning for, or reacting to, changes and opportunities in our industry, which may place us at a competitive disadvantage. There can be no assurance that we would be able to obtain alternative financing, that any such financing would be on acceptable terms or that we will be permitted to do so under the terms of our existing financing arrangements. In the absence of such financing, our ability to respond to changing business and economic conditions, make future acquisitions, react to adverse operating results, meet our debt service obligations, or fund required capital expenditures may be adversely affected.

      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 non-functional. 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.

      A high percentage of our products are fabricated in our manufacturing facilities located in Texas, Minnesota and the Philippines. However, we also rely on independent contractors to manufacture some of our products. If market demand for our products exceeds our internal manufacturing capacity, we may seek additional foundry manufacturing arrangements. A shortage in foundry manufacturing capacity, which is more likely to occur at times of increasing demand, could hinder our ability to meet demand for our products and therefore adversely affect our operating results.

      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 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 on acceptable economic and quality terms or at all and it might be difficult for us to find alternatives if they do not do so.

      We have in the past spent, and will 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 a variety of reasons, such as 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 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, financial condition and results of operations. For example, in response to various downturns and changes in our business, we have not been able to use all of our existing equipment and we have restructured our operations. These restructurings have resulted in material charges, which have negatively affected our business.

      Our semiconductor manufacturing and solar cell operations require raw materials that must meet exacting standards. We generally have more than one source available for these materials, but for certain of our products there are only a limited number of suppliers capable of delivering the 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 certain of our products could become

scarcer as worldwide demand for semiconductors and solar cells increases. Interruption of our sources of raw materials could seriously harm our business, financial condition and results of operations.

      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, terrorism, natural disasters and accidents could seriously harm our business, financial condition and results of operations and ultimately impact our relationship with our customers.

      The market for solar power products manufactured by SunPower is emerging and rapidly evolving. If solar power technology proves unsuitable for widespread commercial deployment or if demand for solar power products fails to develop sufficiently, our revenues and profitability could be affected adversely. In addition, demand for solar power products in the markets and geographic regions we target may not develop or may develop more slowly than we anticipate. Many factors will influence the adoption of solar power technology and demand for solar power products, including:

      From time to time we have shared our views in press releases or SEC filings, on public conference calls and in other contexts about current business conditions and our expectations as to potential future results. Identifying correctly the key factors affecting business conditions and predicting future events is inherently an uncertain process. Our analyses and forecasts have in the past and, given the complexity and volatility of our business, will likely in the future, prove to be incorrect. We offer no assurance that such predictions or analysis will ultimately be accurate, and investors should treat any such predictions or analyses with appropriate caution.

      In addition, because we recognize revenues from sales to certain 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 and we can fail to meet expectations if we are not accurate in our estimates.

      Any analysis or forecast that we make which ultimately proves to be inaccurate may adversely affect our stock price.

      Protection of our intellectual property rights is essential to keeping 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. We are also from time to time involved in litigation relating to alleged infringement by us of others’ patents or other intellectual property rights.

      Intellectual property 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 find that our intellectual property rights are invalid, enabling our competitors to use our technology, or 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/or give us the right to use patents and other technology developed by them. Historically, these arrangements have not been a material source of revenue to the Company. 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 are able to prevent competitors from copying our innovations. Therefore, we intend to continue to seek intellectual property protection for our 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.

      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.

      International revenues accounted for 66%, 63% and 57% of our total revenues in fiscal 2004, 2003 and 2002, respectively. At the end of fiscal 2004, our long-lived assets were held primarily in the United States with approximately 9% held in the Philippines and 1% in other foreign countries. Our Philippine fabrication, assembly and test operations, as well as our international sales offices, 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.

      Although all of our products sold in the automotive market are covered by our standard warranty, we could incur costs not covered by our warranties including, but not limited to, labor and other costs of replacing defective parts, lost profits and other damages. These costs could be disproportionately higher than the revenue and profits we receive from the products involved. If we are required to pay for damages resulting from quality or performance issues of our automotive products, our business, financial condition and results of operations could be adversely affected.

      To a greater degree than most non-technology companies, we depend on the efforts and abilities of certain key members of management and other 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.

      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 insurance 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.

      Technology companies like ours have a history of using broad-based employee stock option programs to hire, incentivize and retain our workforce in a competitive marketplace. Currently, Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” allows companies the choice of either using a fair value method of accounting for options, which would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” with a pro forma disclosure of the impact on net income of using the fair value recognition method. We have elected to apply APB 25 and accordingly, we generally do not recognize any expense with respect to employee stock options as long as such options are granted at exercise prices equal to the fair value of our common stock on the date of grant.

      In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), “Share-Based Payment,” which replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R), companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Public companies will be required to apply SFAS No. 123(R) as of the first interim or annual reporting period beginning after June 15, 2005.

      The implementation of SFAS No. 123(R) beginning in the third quarter of fiscal 2005 will have a significant adverse impact on our Consolidated Statement of Operations as we will be required to expense the fair value of our stock options rather than disclosing the impact on results of operations within our footnotes in accordance with the disclosure provisions of SFAS No. 123. This will result in lower reported earnings per share, which could negatively impact our future stock price. In addition, this could impact our ability to utilize broad-based employee stock plans to reward employees and could result in a competitive disadvantage to us in the employee marketplace.

      We completed three acquisitions during fiscal 2004, none in fiscal 2003 and one in fiscal 2002. In addition, we have completed one acquisition in February 2005, and we 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 have outstanding loans, consisting of principal and cumulative accrued interest, of $54.1 million as of January 2, 2005, to employees and former employees under the shareholder-approved 2001 Employee Stock Purchase Assistance Plan. We made the loans to employees for the purpose of purchasing our common stock. Each loan is evidenced by a full recourse promissory note executed by the employee in favor of Cypress and is secured by a pledge of the shares of our common stock purchased with the proceeds of the loan. The primary benefit to us from this program is increased employee retention. In accordance with the plan, the Chief Executive Officer and the Board of Directors do not participate in this program. To date, there have been immaterial bad debt write-offs. As of January 2, 2005, we had an allowance for uncollectible accounts against these loans of $8.5 million. In determining the allowance for uncollectible accounts, management considered various factors, including a review of borrower demographics (including geographic location and job grade), loan quality and an independent fair value analysis of the loans and the underlying collateral. 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.

      Our results of operations may 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 and we would have increased risk to our results of operations. However, we are willing to pursue every available avenue, including those covered under the Uniform Commercial Code, to recover these loans by pursuing employees’ personal assets should the employees not repay these loans.

      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, financial condition and results of operations could be seriously harmed.

Executive Officers of the Registrant

      Certain information as of January 2, 2005 regarding each of our executive officers is set forth below:

      T.J. Rodgers is a co-founder of Cypress and has been a Director and its President and Chief Executive Officer since 1982. Mr. Rodgers serves as a director of SolarFlare Communications Inc., Infinera, and ION America.

      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 1998, Mr. Alvarez became responsible for the Memory Products Division. Mr. Alvarez was named Executive Vice President in April 1997. Mr. Alvarez has been an executive officer since 1993.

      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 was named Executive Vice President in May 1997. Mr. Hernandez has been an executive officer since 1993. Mr. Hernandez serves as a board member of ON Semiconductor and Integration Associates.

      Ralph H. Schmitt joined Cypress in 1987 as our first account manager. In 1991, Mr. Schmitt became responsible for the Mid-Atlantic sales region. In 1993, Mr. Schmitt was named Director of Worldwide Strategic Accounts. In 1995, Mr. Schmitt left Cypress to found GroupTec LLC and was a Partner and President of this firm. 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, Segment Sales and Marketing in September 1999 and named Vice President, Sales and Marketing in June 2000. Mr. Schmitt was named an Executive Vice President in July 2000 and has served as an executive officer since that time. He serves as a board member of Azanda Network Devices and StarGen, Inc.

      Christopher Seams joined Cypress in 1990 and held a variety of positions in process and assembly technology research and development and manufacturing operations. In 2001, Mr. Seams became responsible for Research and Development. Mr. Seams was appointed Executive Vice President, Worldwide Manufacturing and Research and Development in November 2001 and has served as an executive officer since 2002. Mr. Seams serves as a board member of 1^st Silicon and Ronal Systems Corporation.

      Christopher Norris joined Cypress in 1988 as a senior design engineer. Mr. Norris has held a number of positions within Cypress including design manager, director of new product development, and general manager of the programmable logic division. In 1996, Mr. Norris was promoted to Vice President, Programmable Logic Division and in 2000 became responsible for the Data Communications Division where he is responsible for developing Cypress’s products for the wide area networking, storage networking, and wireless infrastructure markets. Mr. Norris became an executive officer in 2003.

      Cathal Phelan joined Cypress in 1991 as a senior design engineer. Mr. Phelan has held a number of positions within Cypress including design director, new products director, and business unit manager. In 1999, Mr. Phelan was promoted to Vice President, Personal Communications Division where he is responsible for developing products for the USB, WirelessUSB and High Speed Serial Interconnect markets. Mr. Phelan became an executive officer in 2003.

      Ilhan Refioglu joined Cypress in February 2001 as Vice President of the Timing Technology Division. Prior to joining Cypress, Mr. Refioglu was President and Chief Executive Officer of International Microcircuits, Inc., which Cypress acquired in 2001, for five years. Mr. Refioglu served as Vice President at Exar Corp from 1984 to 1995, where he was responsible for all business divisions of the company. Mr. Refioglu became an executive officer in 2003. Mr. Refioglu left Cypress in January 2005.

      There are no family relationships between any of our directors or executive officers.

      Our executive offices are located in an owned building in San Jose, California. The table below sets out our major owned and leased properties as of January 2, 2005:

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

      As of the end of fiscal 2004, we believe that our current properties are suitable for our foreseeable needs.

      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 the United States District Court, District of Nevada, on the same 14 patents. On January 23, 2004, the Nevada Court held in favor of plaintiffs that all asserted claims of the 14 patents are unenforceable, invalid, and not infringed. The Nevada ruling is now being appealed, and the 14 patents remain stayed as to Cypress during the appeal. In October 2001, the Lemelson Partnership amended its Arizona complaint to add allegations that two more patents were infringed. Therefore, there are currently four patents that are not stayed in this litigation. The case is in the “claim construction” (i.e., patent claim interpretation) phase on the four non-stayed patents. The claim construction hearing concluded on December 10, 2004, and we are awaiting the Judge’s order. We have reviewed and investigated the allegations in both Lemelson’s original and amended complaints. We believe that we have meritorious defenses to these allegations and will vigorously defend ourselves in this matter. 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 or cash flows could be materially and adversely affected.

      We are currently a party to various other legal proceedings, claims, disputes and litigation arising in the ordinary course of business, including those noted above. We currently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, results of operation or cash flows. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, our business, financial condition, results of operations or cash flows could be materially and adversely affected.

      No matters were submitted to a vote of the security holders during the fiscal quarter ended January 2, 2005.

PART II

      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 and high sales prices per share for the common stock.

      As of March 1, 2005, there were 69,991 holders of record of our common stock. We have not paid cash dividends and have no present plans to do so.

      The following table provides information with respect to our repurchases of the common stock during the fourth quarter of fiscal 2004:

      During the fourth quarter of fiscal 2004, we issued approximately 319,000 unregistered shares of our common stock in connection with the acquisition of Cascade Semiconductor Corporation. The issuances were exempt from registration under the Securities Act of 1933, as amended, by virtue of Section 3(a)(10) thereof. No underwriters were used in connection with the transaction.

      The following selected consolidated financial data is not necessarily indicative of results of future operations, and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7, and the Consolidated Financial Statements and Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K:

      The discussion in this Annual Report on Form 10-K 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 that involve risks and uncertainties, including, but not limited to, statements as to our future financial results, operating performance and business plans, our prospects and the prospects of our subsidiaries and the semiconductor industry generally, and statements as to the utilization of our Philippines factory, pressure on and trends for average selling prices, entering into licensing arrangements with third parties, capital expenditures, future acquisitions, the impact of SunPower Corporation (“SunPower”) and our other subsidiaries on the Company’s future financial results, the general economy and its impact to the market segments we serve, the cycles of the semiconductor industry, expected inventory corrections and levels of demand in 2005, the rate at which new products are introduced, our outlook for fiscal 2005, our expected revenue for fiscal 2005, our expected improvements in gross margin in fiscal 2005, our expectations to generate positive cash flow from operations in fiscal 2005, successful integration and achieving the objectives of the acquired businesses, adequacy of cash and working capital, our research and development investments and project timelines, and other liquidity risks. 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 the “Risk Factors” and elsewhere in this Annual Report on Form 10-K. All forward-looking statements included in this Annual Report on Form 10-K are based upon information available to Cypress as of the date of this Annual Report, which may change. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or trends for future period. In evaluating these forward-looking statements, you should specifically consider the risks described below under “Risk Factors” which follows our discussion on critical accounting policies and in other parts of this Annual Report on Form 10-K. Except as required by law, we assume no obligation to update any such forward-looking statements to reflect events or circumstances that arise after the date of this Annual Report on Form 10-K.

Executive Summary

      We design, develop, manufacture and market a broad line of high-performance digital and mixed-signal integrated circuits for a broad range of markets including networking, wireless infrastructure and handsets, computation, consumer, automotive, and industrial. In addition, we design and manufacture high-performance silicon solar cells. We have four product divisions and four subsidiaries, organized into three reportable business segments: Memory, Non-Memory and SunPower. In addition, in order to enhance our focus on the communications market and our end customers, we report information by the following market segments: Wide Area Networks and Storage Area Networks (“WAN/ SAN”); Wireless Infrastructure and Wireless Terminal (“WIN/ WIT”); Computation and Consumer; and our Cypress Subsidiaries. (See Note 22 of Notes to Consolidated Financial Statements for further information).

      Our revenues for fiscal 2004 were $948.4 million, an increase of $111.7 million or 13.3% compared to revenues for fiscal 2003, and an increase of $173.7 million or 22.4% compared to revenues for fiscal 2002. The revenue increase in fiscal 2004 was attributable primarily to an increase in unit shipments. Average Selling Prices (“ASPs”) remained stable in the first half of fiscal 2004, increased 10.3% in the third quarter of fiscal 2004 before decreasing 20.5% in the fourth quarter of fiscal 2004. In addition, our revenues improved across all of our market segments except for Computation and Consumer, which remained flat to the prior year.

      In general, as we look ahead to fiscal 2005, we believe that inventory corrections and soft demand in certain segments will continue in the first quarter of the year, resulting in revenues that are similar to the fourth quarter of fiscal 2004. We believe revenues will show sequential improvement during fiscal 2005, with

significant contributions from SunPower and acquisitions we made in fiscal 2004, resulting in a slight increase in fiscal 2005 compared to fiscal 2004. During fiscal 2004, we completed the acquisitions of FillFactory NV (“FillFactory”) and Cascade Semiconductor Corporation (“Cascade”), which contributed $59.6 million to our total revenues. SunPower contributed $10.7 million to our total revenues in fiscal 2004. Our gross margins improved to 48.1% in fiscal 2004 compared to 47.9% in fiscal 2003 as changes in product mix and increased manufacturing efficiencies more than offset the small overall ASP decline. However, we experienced a drop in gross margin in the fourth quarter of fiscal 2004 to 37.6% due to under-utilization of our manufacturing facilities and decreasing ASPs. We expect gross margin in the first quarter of fiscal 2005 to remain relatively flat to the fourth quarter of fiscal 2004 and then increase sequentially during the remainder of fiscal 2005 such that the overall fiscal 2005 gross margin percentage will be between 38% to 42%.

      One of the growth drivers we expect in fiscal 2005 is our entry into the solar cell market through SunPower. SunPower’s business model is different from the other businesses, such that we expect the gross margins on these products to be lower than our historical average gross margin, thus effectively diluting our aggregate gross margin percentage. However, the SunPower business model targets lower operating expenses, such that their operating margin contribution should be in line with the rest of our businesses and not detrimental to our overall financial performance.

      Research and development and selling, general and administrative expenses for fiscal 2004 were $403.4 million, which were $21.6 million or 5.4% higher than fiscal 2003 primarily as a result of higher sales commissions driven by higher sales, a modest company-wide salary increase in April 2004, increase in professional fees and an increase in research and development supply and facilities costs driven by the ramp up of our SunPower manufacturing facility.

      From a liquidity and capital resources standpoint, management has emphasized generating a positive cash flow from operations. Our long-term strategy is to maintain a minimum amount of cash and cash equivalents for operational purposes and to invest the remaining amount of our cash in interest bearing and highly liquid cash equivalents and marketable debt securities. As of the end of fiscal 2004, total cash, cash equivalents, short-term investments and restricted cash were $307.6 million, a $72.2 million reduction from the end of fiscal 2003. This decrease was primarily due to cash used for acquisitions, capital investment and retirement of debt, partially offset by a positive cash flow from operations.

Results of Operations

Business Segment Net Revenues

Memory:

      The semiconductor industry utilizes several types of metrics to analyze price performance and industry trends. We use two measurements of pricing for memory products: ASP per unit and ASP per megabit (“Mbit”).

      These metrics indicate the price and technology trends that impact memory revenues. As the memory capacity (Mbit density) of units sold increases, the ASP of each unit tends to increase (i.e., a 16 Mbit part will sell at a higher price than an 8 Mbit part). However, unit pricing does not scale linearly by Mbit, which usually means increasing the unit sales of higher priced, higher density units typically yields a lower ASP per

Mbit. Therefore, if we sell an increasing number of higher priced, higher density units, ASP per unit will most likely increase while the ASP per Mbit will most likely decrease.

      We use the metrics ASP per unit and ASP per Mbit in conjunction with one another as indicators of market trends and our operational performance.

      The metric ASP per unit utilizes total product revenues and total units sold as the basis for the calculation. An increasing ASP per unit metric here indicates that we are selling units at a higher average price, which usually indicates that either more units are being sold at higher densities or that average prices are going up, both positive trends for us.

      The metric ASP per Mbit utilizes product revenues and the aggregate volume of megabits sold. ASP per Mbit shows the average selling price for 1 million bits (1 Mbit) of memory capacity. ASP per Mbit is calculated by dividing the ASP per unit by the average size of the memory products sold. Since unit pricing does not scale linearly by Mbit, increasing the unit sales of higher priced, higher density units typically yields a lower ASP per Mbit, but is a positive indicator of our performance as it implies sales of higher density units which typically indicates sales into newer and higher value-added technology applications, both positive trends for us.

      In reviewing these two metrics (ASP and ASP per Mbit) in combination with one another, we would expect the two metrics to move in opposition to one another. Increasing ASP per unit and decreasing ASP per Mbit at the same relative rate should be construed as a favorable situation. Conversely, decreasing ASP per unit and increasing ASP per Mbit could indicate an unfavorable market trend for us. We routinely receive questions regarding these metrics from industry analysts familiar with the dynamics of these metrics in public forums.

      Revenues for the sales of Memory products for fiscal 2004 increased $66.0 million or 19.7% compared with revenues for fiscal 2003. The increase was primarily due to a 71.5% increase in Mbits sold, offset partially by a 30.0% decrease in ASP per Mbit. This was indicative of selling more units at higher density, given that price per Mbit does not scale linearly as density increases. This revenue increase was also indicative of Mbits per unit sales increasing faster than the decrease in ASP per Mbit.

      Revenues for the sales of Memory products for fiscal 2003 increased $31.4 million or 10.3% compared with revenues for fiscal 2002. A 45.8% increase in Mbits sold was partially offset by a 33.3% decrease in ASP per Mbit. This revenue increase was also indicative of Mbits per unit sales increasing faster than the decrease in ASP per Mbit.

Non-Memory:

      Revenues in fiscal 2004 from the sales of Non-Memory products increased $39.6 million or 8.0% compared with revenues for fiscal 2003. The increase in Non-Memory product revenues was primarily driven by $26.1 million revenue growth from our network search engine products and $24.1 million revenue growth from our universal serial bus family of products. A $12.9 million decrease in our timing product revenues in fiscal 2004 partially offset the revenue increases. In fiscal 2004, overall ASPs remained flat compared to fiscal 2003 for Non-Memory products.

      Revenues in fiscal 2003 from the sales of Non-Memory products increased $25.9 million or 5.5% compared with revenues for fiscal 2002. The increase in Non-Memory product revenues, as compared to fiscal 2002, was driven by revenue growth from our network search engines, programmable logic devices, physical layer devices, multi-ports devices and universal serial bus family of products. Our subsidiaries Silicon Light Machine (“SLM”) and Cypress MicroSystems (“CMS”) also contributed to the revenue growth. In fiscal 2003, ASPs decreased 6.0% as compared to fiscal 2002 for Non-Memory products.

SunPower:

      Revenues in fiscal 2004 from the sales of SunPower products increased $6.0 million or 129.1% compared with revenues for fiscal 2003. The increase was primarily due to the initial sales of solar cell A-300 products in the second half of fiscal 2004.

Market Segment Net Revenues

WAN/SAN:

      Revenues from the sale of WAN/ SAN products for fiscal 2004 increased $35.4 million or 13.2% compared to fiscal 2003. Our growing network search engine business contributed approximately $26.1 million of this increase. Other products contributing to the segment growth included our Micropower synchronous static random access memory (“SRAM”) and high-speed synchronous SRAM products.

      Revenues from the sale of WAN/ SAN products for fiscal 2003 increased $15.8 million or 6.2% compared to fiscal 2002. Improvement in the overall enterprise networking market has been followed by increases in broader-based networking sales. WAN/ SAN product revenues increased as compared to fiscal 2002 due to increased demand for our network search engines. This segment also experienced growth due to our acquisition of Micron Technology’s high-performance communications orientated SRAM product portfolio inventory in the second quarter of fiscal 2003.

WIN/WIT:

      Revenues from the sale of WIN/ WIT products for fiscal 2004 increased $64.1 million or 25.7% compared to fiscal 2003. Approximately $28.2 million of this growth was contributed by our Micropower SRAMs, which was driven by the adoption of our one-transistor pseudo SRAM products. This segment has also benefited from a slight increase in our timing products.

      Revenues from the sale of WIN/ WIT products for fiscal 2003 increased $2.4 million or 1.0% compared to fiscal 2002. The revenue increase was attributable in part to strength in the handset business and a continued shift to a higher-density SRAM product mix. Revenue in this segment is dominated by our MoBL and Micropower SRAMs product families.

Computation and Consumer:

      Revenues from the sale of Computation and Consumer products for fiscal 2004 decreased $1.4 million or 0.5% compared to fiscal 2003. The decrease in revenue was primarily due to a reduction in sales of our frequency timing products compared to 2003. The fiscal 2004 revenue decrease was partially offset by the inclusion of image sensor revenue from our acquisition of FillFactory in the third quarter of fiscal 2004.

      Revenues from the sale of Computation and Consumer products for fiscal 2003 increased $30.0 million or 11.8% compared to fiscal 2002. In the computation sector, PC-related demand grew due to the increase in the adoption rate of USB 2.0 technology, a serial plug-and-play connection standard for PCs and peripherals. Growth in the consumer sector was driven by sales of our programmable clocks.

Cypress Subsidiaries:

      Revenues from the Cypress Subsidiaries for fiscal 2004 increased $13.6 million or 40.0% compared to fiscal 2003. This increase was driven primarily by the continued production ramp of PSoC products from CMS, and the late 2004 market introduction of SunPower solar cells.

      Revenues from the Cypress Subsidiaries for fiscal 2003 increased $13.9 million or 69.2% compared to fiscal 2002. The growth was driven by increased PSoC product revenue from CMS, and increased non-recurring engineering revenue, product revenue, and license revenue from SLM. In addition, revenue increased as a result of the consolidation of SunPower, effective at the beginning of fiscal 2003.

Cost of Revenues/ Gross Margin

      Cost of revenues was $492.1 million, $435.7 million and $443.4 million in fiscal 2004, fiscal 2003 and fiscal 2002, respectively.

      Although our overall ASPs declined 1.3% during fiscal 2004, we were generally able to offset this effect and increase our gross margin percentage by 0.2% as compared with fiscal 2003. This increase in gross margin was attributable to the continued reduction of manufacturing cycle times, reduced die size, improved labor productivity, more efficient use of capital resources, improved defect densities, improved yields and ultimately lower manufacturing cost, partially offset by the decline in the favorable impact of inventory adjustments, as discussed below.

      Although our overall ASPs declined 2.8% during fiscal 2003, we were generally able to offset this effect and increase our gross margin percentage by 5.1% as compared with fiscal 2002. This increase in gross margin is attributable to the continued reduction of manufacturing cycle times, reduced die size, improved labor productivity, more efficient use of capital resources, improved defect densities, improved yields and ultimately lower manufacturing costs.

Inventory Reserves:

      Our gross margin has been impacted by the timing of inventory adjustments related to inventory write-downs and the subsequent sale of these written-down products caused by the general state of our business including our inventory profile. The table below sets forth the gross margin and the impact of inventory adjustments on gross margin.

      The amount of reserved inventory on hand was $29.4 million, $64.1 million and $100.3 million at the end of fiscal 2004, 2003 and 2002, respectively.

      We record inventory write-downs as a result of our normal analysis of demand forecasts and the aging profile of the inventory. We record charges to cost of goods sold in accordance with generally accepted accounting principles to write down the carrying values of our inventories when their estimated market values are less than their carrying values. The inventory write-downs reflect estimates of future market pricing relative to the costs of production and inventory carrying values and projected timing of product sales. The semiconductor industry has historically been highly cyclical and volatile. In recent years, a combination of global economic conditions and a slowing growth rate in the demand for semiconductors, coupled with worldwide increases in semiconductor production capacity, caused significant declines in demand and average selling prices for semiconductor components. These trends could continue in the future and could cause us to re-evaluate our inventory costs, which could result in additional inventory reserves.

      In reviewing our inventory reserves, we follow methodologies that are consistent with those used by other companies within the semiconductor industry. At the time of an inventory write-down, we make a determination, based on demand forecasts and the aging profile of the inventory, that there is a very high

probability that the inventory that was reserved would not be sold. Once the inventory is written down, a new cost basis is effectively established through the use of a contra asset account (i.e. a reserve). In accordance with Staff Accounting Bulletin No. 100, the contra asset account is relieved at the time the inventory is either sold or scrapped. We have formal programs to periodically scrap reserved inventory. At January 2, 2005, the remaining reserve represented excess and obsolete inventories that have not been scrapped or sold.

Segment Cost of Revenues/ Gross Margin

      Our gross margin improved 0.2% to 48.1% in fiscal 2004 compared to 47.9% in fiscal 2003. Our gross margin improved 5.1% to 47.9% in fiscal 2003 compared to 42.8% in fiscal 2002. Following is gross margin discussion by our segments:

      Business segments — Small increases in our fiscal 2004 Memory segment gross margin percentage were offset by small decreases in our fiscal 2004 Non-Memory segment gross margin percentage. As SunPower began shipments of solar cells in the fourth quarter of fiscal 2004, the impact of its margin to the business segments in fiscal 2004 compared to fiscal 2003 was not significant. Our gross margin improvement in fiscal 2003 compared to fiscal 2002 was primarily attributable to the improvement in the Non-Memory segment. In fiscal 2002, SunPower had no gross margin impact on business segment margins as we had not begun consolidating its results.

      Market segments — Small increases in gross margin percentage of our WIN/ WIT and Computation and Consumer segments were offset by small decreases in gross margin percentage of our WAN/ SAN market segment. Our gross margin improvement in fiscal 2003 compared to fiscal 2002 was primarily attributable to improvements in the Computation and Consumer segment.

Research and Development

      Research and development (“R&D”) expenditures in fiscal 2004 increased from fiscal 2003 primarily due to a $3.9 million increase in salaries and other compensation due to a moderate pay increase, and a $6.8 million increase in expenses related to SunPower consisting primarily of costs of test operations and facility expenses in the Philippines manufacturing site. SunPower began shipments of solar cell products in the fourth quarter of fiscal 2004, and prior to this period, expenses were primarily R&D and selling, general and administrative. The increase in R&D expenses was partially offset by $3.0 million in depreciation. R&D expenses in fiscal 2003 decreased from fiscal 2002 due to closing down of design centers, headcount reductions in existing locations and a reduction in non-cash deferred stock compensation. To keep pace with changing business conditions and with our customers’ needs, we have scaled back on some of our process and design engineering projects and refocused our attention on fewer projects that are critical to our success.

Selling, General and Administrative

      Selling, general and administrative (“SG&A”) expenses in fiscal 2004 increased from fiscal 2003 primarily due to an approximately $6.2 million increase in salaries and other compensation due to a moderate pay increase, a $2.9 million increase in professional fees primarily associated with new requirements under the Sarbanes-Oxley Act, a $2.1 million increase in sales commissions driven by increased revenues, a $2.0 million increase in travel expenses and a $2.0 million charge for a damage claim settlement. The increase in SG&A expenses was partially offset by a $7.8 million credit primarily associated with the release of the allowance for uncollectible accounts relating to outstanding loans to employees under the employee stock purchase assistance plan.

      SG&A expenses in fiscal 2003 decreased from fiscal 2002 primarily due to continuing cost cutting measures including our efforts to utilize tight control on outside services and discretionary spending, and a decrease in non-cash deferred compensation and contingent compensation charges related to our acquisitions of $3.4 million. SG&A also benefited in fiscal 2003 compared with fiscal 2002 due to an increase in our allowance for uncollectible accounts of $14.8 million in fiscal 2002 for loans outstanding to employees under our employee stock purchase assistance plan.

Amortization and Impairment of Intangible Assets

      The following table summarizes the components:

Amortization of Intangible Assets:

      Intangible assets with finite useful lives are amortized using the straight-line method over their useful lives ranging from 2 to 6 years.

Impairment of Intangible Assets:

      During the third quarter of fiscal 2002, SLM, a subsidiary of Cypress, continued to experience a severe economic downturn in the optical market in which SLM participates. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we performed an impairment review on all of SLM’s intangible assets and recorded an impairment charge of $20.3 million related to purchased technology. No impairment existed in other intangible assets. The fair value of purchased technology was determined using the income approach method, which was based on a discounted forecast of the estimated net future cash flows to be generated from the intangible assets using a discount rate of 25%. The carrying amount of purchased technology was $25.5 million and the fair value was determined to be $5.2 million, resulting in an impairment loss of $20.3 million. We noted no impairment indicators related to our intangible assets in fiscal 2004 and 2003.

Impairment of Goodwill

      During the fourth quarter of fiscal 2002, as part of our annual impairment review of the carrying value of our goodwill under SFAS No. 142, “Goodwill and Other Intangible Assets,” we recorded a goodwill impairment charge of $14.4 million related to SLM. No impairment existed in goodwill associated with other reporting units. The fair value of goodwill associated with SLM was determined based on the income approach method, which estimated the fair value based on the future discounted cash flows using a discount rate of 20%. The carrying amount of goodwill was $14.4 million and the fair value was deemed to be zero, resulting in an impairment charge of $14.4 million.

      We performed our annual goodwill impairment assessment in the fourth quarters of fiscal 2004 and 2003 and determined that there was no impairment related to our goodwill.

In-Process Research and Development Charges

      In connection with our acquisitions, we identified in-process research and development projects in areas for which technological feasibility have not been established and no alternative future use existed. The in-process research and development charge of $15.6 million in fiscal 2004 was related to the acquisition of FillFactory and the $2.2 million charge in fiscal 2002 was related to our equity-method investment in SunPower.

      For the acquisition of FillFactory, in-process research and development projects include the development of new image sensors in FillFactory’s custom and standard product applications. Specifically, the custom products include industrial, automotive, medical and high-end photography, and the standard products include high-end photography, digital still cameras and wireless terminal cameras. In assessing the projects, we considered key characteristics of the technology as well as its future prospects, the rate of technology changes in the industry, product life cycles, and various projects’ stage of development. We allocated $15.6 million of the purchase price to the in-process research and development projects and wrote off the amount in the third quarter of fiscal 2004 as technology feasibility has not been established and no alternative future uses existed.

      The value of in-process research and development was determined using the income approach method, which calculated the sum of the discounted future cash flows attributable to the projects once commercially viable using discount rates ranging from 28% to 50%, which was derived from a weighted-average cost of capital analysis and adjusted to reflect the stage of completion of the projects and the level of risks associated with the projects. The percentage of completion for each project was determined by identifying the research and development expenses invested in the project as a ratio of the total estimated development costs required to bring the project to technical and commercial feasibility. The following table summarizes certain information of each significant project as of the acquisition date:

      To date, there have been no significant differences between the actual and estimated results of the in-process research and development projects. As of January 2, 2005, we have incurred total costs of approximately $10.7 million to date related to the in-process research and development projects and estimate that an additional investment of approximately $4.0 million will be required to complete the projects. We expect to complete the remaining projects within the timeframe as originally estimated.

      The development of these technologies remains a significant risk due to factors including the remaining efforts to achieve technical viability, rapidly changing customer markets, uncertain standards for new products, and competitive threats. The nature of the efforts to develop these technologies into commercially viable products consists primarily of planning, designing, experimenting, and testing activities necessary to determine that the technologies can meet market expectations, including functionality and technical requirements. Failure to bring these products to market in a timely manner could result in a loss of market share or a lost opportunity to capitalize on emerging markets and could have a material adverse impact on our business and operating results.

Other Charges (Credits)

2003:

      During fiscal 1995, in connection with the construction of a facility, we entered into a tax abatement agreement with a development agency, which called for job creation and capital investment by us in return for a reduction in certain local taxes payable. We were not able to fulfill certain terms of the agreement. Accordingly, at the time it became probable that certain terms of the agreement would not be met, we recorded an accrual of $1.5 million, representing amounts payable under the agreement. We never received any claim for repayment from the development agency. At the end of fiscal 2003, we determined that given the passage of time, there was a remote likelihood that the development agency would seek reimbursement of the amounts payable. As a result, we reversed the accrual of $1.5 million and recorded the amount as a credit in the Consolidated Statement of Operations.

      During fiscal 1999, we decided to halt the construction of our facility and recorded an accrual of $2.0 million, representing primarily the cancellation penalties payable to suppliers. Subsequently, no claims were made against us by the suppliers. During fiscal 2003, we determined that the passage of time had made the likelihood of us being obligated to make these payments remote. As a result, we reversed the accrual of $2.0 million and recorded the amount as a credit in the Consolidated Statement of Operations.

2002:

      Other charges of $6.1 million were related to certain abandoned fixed assets.

Restructuring

      The semiconductor industry has historically been characterized by wide fluctuations in demand for, and supply of, semiconductors. In some cases, industry downturns have lasted more than a year. Prior experience has shown that restructuring of operations, resulting in significant restructuring charges, may become necessary if an industry downturn persists. As of January 2, 2005, we had two active restructuring plans — one initiated in the fourth quarter of fiscal 2002 (“Fiscal 2002 Restructuring Plan”) and one initiated in the third quarter of fiscal 2001 (“Fiscal 2001 Restructuring Plan”).

      We recorded initial restructuring charges under the Fiscal 2002 Restructuring Plan and the Fiscal 2001 Restructuring Plan based on assumptions that we deemed appropriate for the economic environment that existed at the time these estimates were made. As the semiconductor industry we operate in is subject to rapid change, cyclical patterns and high volatility, we have taken additional actions and made appropriate adjustments for property and equipment, leased facilities and personnel costs under both the Fiscal 2002 Restructuring Plan and the Fiscal 2001 Restructuring Plan. The restructuring actions were aimed to reduce our future operating expenses and improve our cash flows primarily as a result of reduced employee expenses and reduced depreciation due to the removal of equipment.

      As of December 28, 2003, both restructuring events have been substantially completed with reserves remaining only for restructured leased facilities and employee benefits. As of January 2, 2005, reserves remained for restructured leased facilities, which will decrease over time as we continue to make lease payments.

      See Note 11 of Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for a detailed discussion of the two restructuring events.

Other Income and Expense

      The following table summarizes the components of other income and expense:

Interest Income:

      Interest income consisted primarily of interest earned on cash equivalents, short-term investments and restricted investments. In addition, interest income included interest income related to our loans to employees under the employee stock purchase assistance plan. The decrease in interest income in fiscal 2004 compared with fiscal 2003 was primarily attributable to a decrease of $3.7 million in interest income related to our employee stock purchase assistance plan due to lower loan balances, partially offset by an $1.8 million increase in interest income due to an increase in average cash and investment balances. The decrease in interest income in fiscal 2003 compared with fiscal 2002 was primarily due to lower loan balances related to our employee stock purchase assistance plan, coupled with lower average cash and investment balances and lower interest rates.

Interest Expense:

      Interest expense was primarily associated with our convertible subordinated notes. The decrease in interest expense in fiscal 2004 compared with fiscal 2003 was primarily attributable to a decrease of approximately $8.2 million in interest expense associated with our 3.75% convertible subordinated notes (“3.75% Notes”) and 4.0% convertible subordinated notes (“4.0% Notes”). We redeemed a portion of our 3.75% Notes and all of our 4.0% Notes in June and July 2003, resulting in a decrease in interest expense in fiscal 2004 compared with fiscal 2003. The decrease in interest expense associated with our 3.75% Notes and 4.0% Notes in fiscal 2004 was partially offset by an increase of approximately $3.8 million in interest expense associated with our 1.25% convertible subordinated notes (“1.25% Notes”). We issued our 1.25% Notes in June 2003.

      During the fourth quarter of fiscal 2004, we redeemed all of the outstanding 3.75% Notes. There was no gain or loss upon redemption.

      Interest expense decreased in fiscal 2003 compared with fiscal 2002 primarily due to the redemption of our 3.75% Notes and 4.0% Notes in June and July 2003, partially offset by additional interest expense associated with our 1.25% Notes issued in June 2003.

Other Income and (Expense), Net:

      The following table summarizes the components of other income and (expenses), net:

      Other expense, net for fiscal 2004 consisted primarily of amortization of deferred financing costs and impairment charges related to certain development stage companies, offset by our equity earnings in a partnership investment and foreign exchange gains. Other income, net for fiscal 2003 consisted primarily of our gain on the sale of an investment in NVE Corporation, offset by our loss on the repurchase of our 4.0% Notes and 3.75% Notes and amortization of deferred financing costs. Other expense, net for fiscal 2002 consisted primarily of write-downs of investments in certain development stage companies and the amortization of deferred financing costs. These expenses were partially offset by gains recognized on the repurchase of our 3.75% Notes.

      During fiscal 2003, we sold our investment in NVE Corporation, a publicly-traded company, and recognized total gains of $17.1 million from the transactions. The sales consisted of 0.7 million shares of NVE Corporation’s common stock in the open market. The fair market value of the investment was based on the market prices of NVE Corporation’s common stock on the dates of sales, ranging from $31.5 to $34.7 per share. Gains on the sales were determined as the difference between the total proceeds of $23.3 million less the carrying value of our investment of $6.2 million.

      As of January 2, 2005, we held warrants to purchase 400,000 shares of NVE Corporation’s common stock at $15.00 per share, which do not allow for net exercise. If we exercise the warrants, we will not be allowed to sell the underlying shares in a public market transaction for 12 months. The warrants will expire in April 2005 if not exercised.

      Investment impairment and other charges for fiscal 2002 were primarily attributable to the $18.1 million write-downs of our investments in privately-held development stage companies. Our ability to recover our investments is primarily dependent on how successfully these companies are able to execute to their business plans and how well their products are ultimately accepted, as well as their ability to obtain venture capital funding to continue operations. We periodically review our investments for impairment and in the event the carrying value of an investment exceeds its fair value and the decline is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. This impairment analysis includes assessment of each investee’s financial condition, the business prospects for its products and technology, its projected results and cash flows, the likelihood of obtaining subsequent rounds of financing, and the impact of any relevant contractual equity preferences held by us or other investors.

      During the periods from fiscal 1999 to 2001, we made investments in several privately-held development stage companies whose valuations subsequently proved to be high. As the equity markets continued to decline

significantly, these development stage companies were either unable to raise additional funding and therefore forced to cease operations, or were able to obtain additional funding but at a valuation lower than the carrying amount of our investments. As the carrying amount of these investments exceeded their fair value and we determined that the decline in values was other-than-temporary, we recorded impairment charges of $18.1 million, which represented the total amount of the write-downs to the fair value of our remaining investment in each respective investee. For those investees who ceased operations, the fair value of our investment was zero, and for those investees who have obtained additional funding at a lower valuation than the carrying amount of our investments, the fair value was based on the new share price of the additional funding.

Benefit from (Provision for) Income Taxes

      A tax benefit of $26.6 million was recognized in fiscal 2004, compared to tax expense of $2.8 million in fiscal 2003 and tax expense of $2.8 million in fiscal 2002. The tax benefit in fiscal 2004 was primarily attributable to a release of $29.9 million of previously accrued taxes as discussed below, offset by foreign income taxes in certain jurisdictions. The expense in fiscal 2003 and 2002 was largely attributable to foreign income taxes in certain jurisdictions. No tax benefit was recognized in fiscal 2003 and 2002 for the future tax benefit of operating losses, as management believed it was more likely than not that the benefit would not be realized. Our effective tax rate varies from the U.S. statutory rate primarily due to our assessment of the utilization of loss carryovers and earnings of foreign subsidiaries taxed at different rates. The net deferred tax assets of $194.7 million at January 2, 2005 were fully reserved due to uncertainty of realization in accordance with SFAS No. 109, “Accounting for Income Taxes.”

      The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We regularly assess our tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the many countries in which we and our affiliates do business.

      We and our affiliates file tax returns in each jurisdiction in which we are registered to do business. In the U.S. and many of the state jurisdictions, and in many foreign countries in which we file tax returns, a statute of limitations period exists. After a statute of limitations period expires, the respective tax authorities may no longer assess additional income tax for the expired period. Similarly, we are no longer eligible to file claims for refund for any tax that we may have overpaid.

      During the third quarter of fiscal 2004, the statute of limitations expired for several tax jurisdictions. The expiration of the statute of limitations led to management’s assessment that the previously accrued income taxes were no longer necessary. Accordingly, during the third quarter of fiscal 2004, we recorded a benefit of $29.9 million for the reversal of previously accrued income taxes.

Liquidity and Capital Resources

      The following table summarizes our cash and investments, working capital and long-term debt:

Key Components of Cash Flow:

      During fiscal 2004, cash generated from operations was $155.8 million, compared with $99.2 million in fiscal 2003. This $56.6 million increase was primarily due to net income generated in fiscal 2004 compared with a net loss in fiscal 2003, adjusted for certain non-cash items and changes in operating assets and liabilities.

      In fiscal 2004, purchases of investments, net of sales and maturities, used cash of $13.2 million, acquisition of property, plant, and equipment used an additional $132.3 million in cash, and we spent a total of $89.9 million in our acquisitions, net of cash received, of both Cascade and FillFactory. These uses of cash were partially offset by the collection of loans from employees under the stock purchase assistance plan of $28.4 million.

      During fiscal 2004, we used $68.7 million to redeem the remaining 3.75% Notes. This was partially offset by $36.4 million from the issuance of shares upon exercise of stock options by employees.

      During fiscal 2003, cash generated from operations was $99.2 million, compared with $23.5 million in fiscal 2002. This $75.7 million increase was primarily due to a smaller net loss in fiscal 2003, adjusted for certain non-cash items and changes in operating assets and liabilities. Cash generated from operations included an increase in working capital of $51.0 million. Inventory reductions due to increased sales were more than offset by a significant increase in accounts receivable and a significant decrease in accounts payable.

      Purchases of investments, net of sales and maturities, used cash of $101.1 million in fiscal 2003, as we made additional investments due to our improved cash position. Acquisition of property, plant, and equipment used an additional $78.5 million in cash. These reductions in cash were partially offset by an increase from sale of our investment in NVE Corporation of $23.4 million and the collection of loans from employees under the stock purchase assistance plan of $29.9 million.

      During fiscal 2003, we issued $600.0 million in aggregate principal amount of our 1.25% Notes. Of the proceeds received, we used $400.2 million to retire all of our 4.0% Notes and a portion of our 3.75% Notes, $98.5 million to repurchase 9.3 million shares of our common stock, $18.5 million for debt issuance costs and $49.3 million to purchase a call spread option on our common stock to mitigate the potential dilution of the 1.25% Notes.

      During fiscal 2002, cash generated from operations was $23.5 million, which resulted from our net loss adjusted for certain non-cash items and changes in operating assets and liabilities. Cash generated from operations included an increase in working capital of $33.3 million. With continued weak sales, manufacturing capacity was reduced to avoid additional inventory builds. Accounts payable declined as we significantly slowed purchases of capital equipment in the latter part of fiscal 2002. These changes were partially offset by a decline in net accounts receivable commensurate with the change in revenues.

      Net of purchases, sales and maturities of investments generated $143.5 million in cash in fiscal 2002, as we liquidated investments to fund capital expenditures and business acquisitions. This was offset by the acquisition of $158.5 million in property, plant and equipment and $24.8 million in investments in other companies.

      In fiscal 2002, the issuance of common shares upon exercise of stock options by employees, net of repurchases, generated $20.0 million while the purchase of our 3.75% Notes consumed $48.8 million.

Liquidity:

      Based on our current plan, we expect to generate positive cash flow from operations in the fiscal year ending January 1, 2006. Our expected significant investment and financing cash outlays for fiscal 2005 includes capital expenditures of approximately $145 million for investment in our product development and technology initiatives. The Board of Directors has approved programs authorizing the repurchase of our common stock or convertible subordinated notes in the open market or in privately negotiated transactions at anytime. The actual total amount of common shares that can be repurchased is limited to $15.0 million and is subject to cash flow restrictions.

      We have $600.0 million of aggregate principal amount in the 1.25% Notes that are due in June 2008. The 1.25% Notes are subject to compliance with certain covenants that do not contain financial ratios. As of January 2, 2005, we were in compliance with these covenants. If we failed to be in compliance with these covenants beyond any applicable grace period, the trustee of the 1.25% Notes, or the holders of a specific percentage thereof, would have the ability to demand immediate payment of all amounts outstanding.

      During the fourth quarter of fiscal 2004, we called for redemption all of our outstanding 3.75% Notes at total costs of $69.8 million, which included outstanding principal of $68.7 million and accrued interest of $1.1 million.

      In conjunction with our 1.25% Notes offering, we purchased a call spread option on 32.0 million of our common shares expiring in July 2004 for $49.3 million in cash. The call spread option was designed to mitigate stock dilution from conversion of the 1.25% Notes. The call spread option was restructured in May 2004 into a single contract of two equal parts maturing on August 16 and September 30, 2004. As of each of the maturity dates, the call spread option was out of the money and expired. The expiration of the call spread option had no impact on our cash balances or statement of operations in fiscal 2004.

      On June 27, 2003, we entered into a synthetic operating lease agreement for U.S. manufacturing and office facilities. The lease agreement requires us to purchase the properties or to arrange for the properties to be acquired by a third party at lease expiration. If we had exercised our right to purchase all the properties subject to these leases at January 2, 2005, we would have been required to make a payment and record assets totaling $62.7 million. We are required to maintain restricted cash or investments to serve as collateral for these leases. As of January 2, 2005, the amount of restricted cash was $62.7 million, which was classified as a non-current asset in the Consolidated Balance Sheets.

      In September 2003, we entered into a $50.0 million, 24-month revolving line of credit with a major financial institution. In December 2004, this line of credit was extended to December 2006 and the total amount was increased to $70.0 million. As of January 2, 2005, $4.0 million was outstanding. Loans made under the line of credit bear interest based upon the Wall Street Journal Prime Rate or LIBOR plus a spread at our election. The line of credit agreement includes a variety of covenants including restrictions on the incurrence of indebtedness, incurrence of loans, the payment of dividends or distribution on our capital stock, and transfers of assets and financial covenants with respects to tangible net worth and a quick ratio. As of January 2, 2005, we were in compliance with all of the covenants. Our obligations under the line of credit are guaranteed and secured by the common stock of certain of our subsidiaries. We intend to use the line of credit on an as-needed basis to fund working capital and capital expenditures.

      At January 2005, we had long-term loan agreements primarily with two lenders with an aggregate principal amount equal to $24.7 million. These agreements are collateralized by specific equipment located at our U.S. manufacturing facilities. Principal amounts are to be repaid in monthly installments inclusive of accrued interest, over a three- to four-year period. The applicable interest rates are variable based on changes to LIBOR rates. Both loans are subject to financial and non-financial covenants. As of January 2, 2005, the aggregate principal outstanding was $13.9 million and we were in compliance with the covenants.

      On August 4, 2004, we completed the acquisition of 100% of the outstanding capital stock of FillFactory. We acquired FillFactory for a total cash consideration of $91.7 million, net of cash received.

      Several of our acquisitions obligate us to pay certain contingent cash compensation based on continued employment and meeting certain revenue project milestones. As of January 2, 2005, total contingent compensation that could be paid in cash under our acquisition agreements assuming all contingencies are met was $8.6 million.

Capital Resources and Financial Condition:

      Our long-term strategy is to maintain a minimum amount of cash and cash equivalents for operational purposes and to invest the remaining amount of our cash in interest-bearing and highly liquid cash equivalents and marketable debt securities. Accordingly, at the end of fiscal 2004, in addition to the $66.6 million in cash and cash equivalents, we had $178.3 million invested in short-term investments that are available for current operating, financing and investing activities, for a total liquid cash and investment position of $244.9 million. We had an additional $62.7 million of restricted cash related to our synthetic lease for a total cash, investment and restricted cash position of $307.6 million. As of January 2, 2005, we had outstanding $600 million in principal amount of our 1.25% Notes. We also maintain the ability to issue an aggregate of approximately $112.5 million in debt, equity and other securities under a shelf registration statement we filed with the Securities and Exchange Commission in fiscal 2000.

      We believe that liquidity provided by existing cash, cash equivalents, investments, and our borrowing arrangements described above and cash generated from operations, will provide sufficient capital to meet our requirements for at least the next twelve months. However, should prevailing economic conditions and/or financial, business and other factors beyond our control adversely affect our estimates of our future cash requirements (including our debt obligations), we would be required to fund our cash requirements by alternative financing. There can be no assurance that additional financing, if needed, would be available on terms acceptable to us or at all.

      We may choose at any time to raise additional capital to strengthen our financial position, facilitate growth, and provide us with additional flexibility to take advantage of business opportunities that arise.

Contractual Obligations:

      The following table summarizes the fixed payments related to certain contractual obligations:

Off-Balance Sheet Arrangements:

      On June 27, 2003, we entered into a synthetic operating lease agreement for manufacturing and office facilities located in Minnesota and California. The synthetic lease enables us to lease rather than acquire the facilities. This results in improved cash flow through lower lease payments compared to expending much more cash in a direct acquisition of the properties. The synthetic lease requires us to purchase the properties or to arrange for the properties to be acquired by a third party at lease expiration, which is in June 2008. If we had exercised our right to purchase all the properties subject to the synthetic lease at January 2, 2005, we would have been required to make a payment and record assets totaling $62.7 million (the “Termination Value”). If we had exercised our option to sell the properties to a third party, the proceeds from such a sale could be less than the properties’ Termination Value, and we would be required to pay the difference up to the guaranteed residual value of $54.5 million (the “Guaranteed Residual Value”).

      We are required to evaluate periodically the expected fair value of the properties at the end of the lease term. In the event we determine that it is estimable and probable that the expected fair value of the properties at the end of the lease term will be less than the Termination Value, we will ratably accrue the loss over the remaining lease term. During fiscal 2004, we performed the analysis and recorded a loss contingency of approximately $1.8 million in other long-term liabilities on the Consolidated Balance Sheet relating to the potential decline in the fair value of the facilities in California. The loss accrual was determined by management with the assistance of a market analysis performed by an independent appraisal firm.

      The synthetic lease agreements require periodic payments that vary based on the LIBOR rate, plus a spread. The total amount of such payments (which reflect payments under the existing synthetic lease and prior synthetic leases which have been terminated) were $1.3 million, $1.7 million and $2.2 million in fiscal 2004, 2003 and 2002, respectively.

      We are required to maintain restricted cash or investments to serve as collateral for this lease. As of January 2, 2005, the amount of restricted cash recorded was $62.7 million and was classified in other assets on the Consolidated Balance Sheet. As of January 2, 2005, we were in compliance with the financial covenants.

      As of January 2, 2005, we had outstanding a series of equity options on our common stock with an initial cost of $26.0 million that were originally entered into in fiscal 2001. These options were included in stockholders’ equity in the Consolidated Balance Sheets (see Note 18 of Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form  10-K). We entered into the equity options as part of our 2001 stock repurchase program. Depending upon our common stock price at the maturity date of the

equity options, we either take delivery of our common stock resulting in a reduction to our outstanding common stock or receive cash resulting in a return on the cash expended.

      In conjunction with the issuance of the 1.25% Notes, we purchased a call spread option on our common stock (the “Call Spread Option”) maturing on July 15, 2004 for $49.3 million in cash. The Call Spread Option has been accounted for as an equity transaction in accordance with Emerging Issues Task Force (“EITF”) No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. The Call Spread Option covered 32.0 million shares of our common stock. The Call Spread Option was designed to mitigate dilution from conversion of the 1.25% Notes. The Call Spread Option was restructured in May 2004 into a single contract of two equal parts maturing on August 16, 2004 and September 30, 2004, respectively. As of each of the maturity dates, the Call Spread Option was out of the money and expired. The expiration of the Call Spread Option had no impact on our cash balances or operating results.

Critical Accounting Policies and Estimates

      Our discussion and analysis of our financial condition and the results of our operations are based upon our Consolidated Financial Statements included in this Annual Report on Form 10-K and the data used to prepare them. Our Consolidated 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. Note 1 of Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. On an ongoing basis, we re-evaluate our judgments and estimates including those related to revenue recognition, product returns, allowances for doubtful accounts receivable and employee loans, inventories, valuation of long-lived assets including intangibles, goodwill impairments, investment impairments, restructuring charges, litigation and settlement costs, and income taxes. 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. We believe the following are our critical accounting policies that are affected by significant estimates, assumptions and judgments used in the preparation of our Consolidated Financial Statements.

Revenue Recognition:

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

      We offer price protection and similar rights to certain U.S.-based distributors. In addition, we provide limited stock rotation rights to these distributors. Given the uncertainties associated with the levels of returns and other price protection credits to these distributors, revenues and costs relating to the distributor sales are deferred, on a gross basis, until such rights lapse, which is generally upon receiving notifications from the distributors that they have resold the products. Our method of deferral is based on certain assumptions. Reserves are provided for estimated returns relating to rights of return and other credits for price protection. If actual results differ from our estimates, operating results could be adversely affected.

      Sales to certain other primarily non-U.S. based distributors carry no price adjustments or rights of return. We have historically recognized revenue from sales to these distributors on shipment, with a related allowance for potential returns established at the time of sale. We must make estimates of potential future product returns and revenue adjustments related to current period product revenue. In that regard, 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 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 January 2, 2005 and December 28, 2003, our reserves for sales returns were $2.7 million and $2.4 million, respectively.

      Our principal post-shipment obligations to our customers are: (1) rights to limited stock rotation to our U.S.-based distributors as discussed above, and (2) quality-related issues for which a warranty reserve is provided by us. In addition, we provide a volume-pricing discount to certain contract manufacturers, which is recorded as a reduction in revenue. Such volume discounts have not been significant historically.

Allowance for Doubtful Accounts and Employee Loans:

      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 collectibility of our accounts receivable by analyzing historical bad debts, specific customer creditworthiness and current economic trends. The allowance for doubtful accounts was $0.9 million as of both January 2, 2005 and December 28, 2003.

      As of January 2, 2005 and December 28, 2003, we had outstanding loans, consisting of principal and cumulative accrued interest, of $54.1 million and $80.5 million, respectively, to employees and former employees under the shareholder-approved 2001 employee stock purchase assistance plan. Each loan is evidenced by a full recourse promissory note executed by the employee in favor of Cypress and is secured by a pledge of the shares of our common stock purchased with the proceeds of the loan. As of January 2, 2005 and December 28, 2003, we had an allowance for uncollectible accounts against these accounts of $8.5 million and $16.2 million, respectively. In determining the allowance for uncollectible accounts, management considered various factors, including a review of borrower demographics (including geographic location and job grade), loan quality and an independent fair value analysis of the loans and the underlying collateral. As of January 2, 2005 and December 28, 2003, the carrying value of the loans exceeded the underlying common stock collateral by $28.2 million and $6.4 million, respectively. If the underlying assumptions supporting our reserve requirements, including the value of our stock price, change, future operating results could be adversely affected.

Valuation of Inventory:

      We write down our inventory for “lower of cost or market” reserves, aged inventory reserves and obsolescence reserves. Inventory reserves are generally recorded when the inventory for a device exceeds nine months of demand for that device and/or when individual parts have been in inventory for greater than six months. Inventory reserves are not relieved until the related inventory has been sold or scrapped. 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. Conversely, if demand grows for items that have been fully reserved, our future margins may be higher.

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. In addition, we have recorded intangible assets with finite lives related to our acquisitions.

      We evaluate our long-lived assets, including property and equipment and purchased intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors considered important that could result in an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets or the strategy for our business, significant negative industry or economic trends, and a significant decline in our stock price for a sustained period of time. Impairments are recognized based on the difference between the fair value of the asset and its carrying value,

and fair value is generally measured based on discounted cash flow analyses. We recorded $20.3 million of impairment charges related to certain intangible assets in fiscal 2002 and no impairment charges in fiscal 2004 and 2003. If there is a significant decrease in our business in the future, we may be required to record impairment charges in the future.

Goodwill Impairment:

      We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances for each reporting unit. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. In estimating the fair value of the businesses with recognized goodwill, we made estimates and judgments about the future cash flows of these businesses. Our cash flow forecasts were based on assumptions that are consistent with the plans and estimates we are using to manage the underlying businesses. In addition, we made certain judgments about allocating shared assets such as accounts receivable and inventory to the estimated balance sheet for those businesses. We also considered our market capitalization on the dates of our impairment tests in determining the fair value of the respective businesses.

      In connection with the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” effective in the beginning of fiscal 2002, we completed the required transitional analysis in the first quarter of fiscal 2002 with no impairment charge required. In addition, as required by SFAS No. 142, we performed our annual goodwill impairment test and determined that no goodwill impairment existed for fiscal 2004 and 2003, and recorded goodwill impairment charges of $14.4 million for fiscal 2002. However, changes in these estimates, including projected cash flows of our market capitalization, could cause one or more of the businesses to be valued differently, which could result in a future impairment of our remaining goodwill.

Investments in Privately-Held Companies:

      As of January 2, 2005, the carrying value of our portfolio of strategic investments in non-marketable equity securities (privately-held companies) totaled $8.8 million. Our ability to recover our investments in private, non-marketable equity securities and to earn a return on these investments is primarily dependent on how successfully these companies are able to execute to their business plans and how well their products are ultimately accepted, as well as their ability to obtain venture capital funding to continue operations and to grow. In the current equity market environment, their ability to obtain additional funding as well as to take advantage of liquidity events, such as initial public offerings, mergers and private sales, is significantly constrained.

      Under our accounting policy, the carrying value of a non-marketable investment is the amount paid for the investment unless it has been determined to be other than temporarily impaired, in which case we write the investment down to its impaired value. We review all of our investments periodically for impairment; however, for non-marketable equity securities, the impairment analysis requires significant judgment. This analysis includes assessment of each investee’s financial condition, the business outlook for its products and technology, its projected results and cash flows, the likelihood of obtaining subsequent rounds of financing and the impact of any relevant contractual equity preferences held by us or others. If an investee obtains additional funding at a valuation lower than our carrying amount, we presume that the investment is other than temporarily impaired, unless specific facts and circumstances indicate otherwise, for example, when we hold contractual rights that give us a preference over the rights of other investors. As the equity markets have declined significantly over the past few years, we have experienced substantial impairments in our portfolio of non-marketable equity securities. If equity market conditions do not improve, as companies within our portfolio attempt to raise additional funds, the funds may not be available to them, or they may receive lower valuations, with more onerous investment terms than in previous financings, and the investments will likely become impaired. However, we are not able to determine at the present time which specific investments are likely to be impaired in the future, or the extent or timing of individual impairments. We recorded impairments of non-marketable equity investments of $1.1 million in fiscal 2004, $1.8 million in fiscal 2003 and $18.1 million in fiscal 2002.

Restructuring Expenses:

      We currently have two active restructuring plans — one initiated in the third quarter of fiscal 2001 and the other initiated in the fourth quarter of fiscal 2002. In addition, we have announced a restructuring plan in the first quarter of fiscal 2005. These plans were designed to reduce costs and expenses in order to return the company to profitability. In connection with these plans, we have recorded, and will record, estimated expenses for severance and outplacement costs, lease cancellations, asset write-offs and other restructuring costs. Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.

Litigation and Settlement Costs:

      From time to time, we are involved in legal actions arising in the ordinary course of business. We are aggressively defending our current litigation matters. However, there are many uncertainties associated with any litigation, and we cannot be certain that these actions or other third-party claims against us will be resolved without costly litigation and/or substantial settlement payments. If that occurs, our business, financial condition and results of operations could be materially and adversely affected. If information becomes available that causes us to determine that a loss in any of our pending litigation is probable, and we can reasonably estimate the loss associated with such litigation, we will record the loss in accordance with accounting principles generally accepted in the United States. However, the actual liability in any such litigation may be materially different from our estimates, which could result in the need to record additional costs.

Accounting for Income Taxes:

      Our global operations involve manufacturing, research and development and selling activities. Profit from non-U.S. activities are subject to local country taxes but are not subject to U.S. tax until repatriated to the U.S. It is our intention to permanently reinvest these earnings outside the U.S. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. 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 assessing the need for the valuation allowance. Should 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 is made.

      The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate tax assessment, a further charge to expense would result.

Recent Accounting Pronouncements

      In December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” The American Jobs Creation Act introduces a special one-time dividends received deduction on the repatriation of certain foreign earnings to U.S. companies, provided certain criteria are met. FSP No. 109-2 provides accounting and disclosure guidance on the impact of the repatriation provision on a company’s income tax expense and deferred tax liability. We are currently studying the impact of the one-time favorable foreign dividend provision and intend to complete the analysis by the end

of fiscal 2005. Accordingly, we have not adjusted our income tax expense or deferred tax liability to reflect the tax impact of any repatriation of non-U.S. earnings we may make.

      In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R), companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. Public companies will be required to apply SFAS No. 123(R) as of the first interim or annual reporting period beginning after June 15, 2005. The Company expects to adopt SFAS No. 123(R) beginning the third quarter of fiscal 2005. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods. We are currently evaluating which method to adopt. The adoption of SFAS No. 123(R)’s fair value method will have a significant adverse impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 of Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were zero in fiscal 2004, 2003 and 2002, respectively.

      In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an Amendment of APB Opinion No. 29,” which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We are currently evaluating SFAS No. 153 and do not expect the adoption will have a material impact on our consolidated statements of operations or financial condition.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an Amendment of ARB No. 43, Chapter 4,” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred in fiscal periods beginning after June 15, 2005. We are currently evaluating SFAS No. 151 and do not expect the adoption will have a material impact on our results of operations or financial condition.

      In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF Issue No. 03-01 provides guidance on recording other-than-temporary impairments of cost method investments and requires additional disclosures for those investments. In September 2004, the FASB delayed the accounting provisions of EITF Issue No. 03-01; however, the disclosure requirements remain effective for annual periods ended after June 15, 2005. We will evaluate the impact of EITF Issue No. 03-01 once final guidance is issued.

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest and Foreign Currency Exchange Rates

      We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. To mitigate these risks, we utilize derivative financial instruments. We do not use derivative financial instruments for speculative or trading purposes.

      The fair value of our investment portfolio 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 our investment portfolio. An increase in interest rates would not significantly increase interest expense due to the fixed nature of our debt obligations.

      The majority of our revenues, expenses and capital spending is transacted in U.S. dollars. However, we do enter into transactions in other currencies, primarily Euro and Japanese Yen. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we have established cash flow and balance sheet hedging programs. Our hedging programs reduce, but do not always eliminate, the impact of foreign currency exchange rate movements. During fiscal 2004, we entered into a series of Euro forward contracts to hedge expected cash flow from one of our subsidiaries. The total notional amount of the contracts was $34.0 million. If the forecasted cash flow fails to materialize, we will have to close out the contracts at the then prevailing market rates, resulting in gains or losses. A 10% unfavorable currency movement would result in approximately a $3.4 million loss on these contracts.

      All of the potential changes noted above were based on sensitivity analyses performed on our balances as of January 2, 2005.

Equity Options

      At January 2, 2005, we had outstanding a series of equity options on our common stock with an initial cost of $26.0 million which was classified in stockholders’ equity in the Consolidated Balance Sheets. The contracts require physical settlement and the expiration date will be April 2005. Upon expiration of the options, if our stock price is above the threshold price of $21.0 per share, we will receive a settlement value totaling $30.3 million. If our stock price is below the threshold price of $21.0 per share, we will receive 1.4 million shares of our common stock. Alternatively, the contracts may be renewed and extended. During fiscal 2004 and 2003, we received total premiums of $1.8 million and $0.7 million, respectively, upon extensions of the contracts. The amounts were recorded as a credit to additional paid-in capital in the Consolidated Balance Sheets.

      In conjunction with the issuance of our 1.25% convertible subordinated notes (“1.25% Notes”) in June 2003, we purchased a call spread option (the Call Spread “Option”) on 32.0 million of our common shares expiring in July 2004 for $49.3 million. The Call Spread Option was designed to mitigate stock dilution from conversion of the 1.25% Notes. The Call Spread Option was restructured in May 2004 into a single contract of two equal parts maturing on August 16 and September 30, 2004. As of each of the maturity dates, the Call Spread Option was out of the money and expired. The expiration of the Call Spread Option had no impact on our cash balances or operating results in fiscal 2004.

Investments in Privately-Held Companies

      We have 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. As of January 2, 2005, the carrying value of our investments in development stage companies was $8.8 million.

      As our equity investments generally do not permit us to exert significant influence or control over the entity in which we are investing, these amounts generally represent our cost of the investment, less any adjustments we make when we determine that an investment’s net realizable value is less than its carrying cost.

      The process of assessing whether a particular equity investment’s net realizable value is less than its carrying cost requires a significant amount of judgment. In making this judgment, we carefully consider the investee’s cash position, projected cash flows (both short- and long-term), financing needs, most recent valuation data, the current investing environment, management/ownership changes, and competition. This evaluation process is based on information that we request from these privately-held companies. This information is not subject to the same disclosure and audit requirements as the reports required of U.S. public companies, and as such, the reliability and accuracy of the data may vary. Based on our evaluation, we recorded impairment charges of $1.1 million in fiscal 2004, $1.8 million in fiscal 2003 and $18.1 million in fiscal 2002, as we deemed the decline in values was other-than-temporary.

      Estimating the net realizable value of investments in privately-held early-stage technology companies is inherently subjective and may contribute to volatility in our reported results of operations and we may in the future incur additional impairments to our equity investments in privately-held companies.

Stock Purchase Assistance Plan

      At the end of fiscal 2004, other current assets included $54.1 million of principal and cumulative accrued interest relating to employees and former employees under the shareholder-approved 2001 employee stock purchase assistance plan. We made the loans to employees for the purpose of purchasing our common stock. Each loan is evidenced by a full recourse promissory note executed by the employee in favor of Cypress and is secured by a pledge of the shares of our common stock purchased with the proceeds of the loan. The primary benefit to us from this program is increased employee retention. In accordance with the plan, the chief executive officer and the Board of Directors do not participate in this program. To date, there have been immaterial write-offs. As of January 2, 2005, we had an allowance for uncollectible accounts against these loans of $8.5 million. In determining the allowance for uncollectible accounts, management considered various factors, including a review of borrower demographics (including geographic location and job grade), loan quality and an independent fair value analysis of the loans and the underlying collateral. As of January 2, 2005, the carrying value of the loans exceeded the underlying common stock collateral by $28.2 million.

      In the first quarter of fiscal 2004, we instituted a program directed at minimizing losses as a result of our common stock price fluctuations. Under this program, either a limit sale order or a stop loss order is placed on the common stock purchased by each employee with the loan proceeds once the common stock price exceeds that employee’s break-even point. If the common stock price reaches the sale limit order or declines to the stop loss price, the common stock purchased by the employee under the plan will be automatically sold and the proceeds utilized to repay the employee’s outstanding loan to us.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CYPRESS SEMICONDUCTOR CORPORATION

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

CYPRESS SEMICONDUCTOR CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial statements.

CYPRESS SEMICONDUCTOR CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY