================================================================================

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

                               ------------------

                                    FORM 10-Q

                               ------------------

           |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 29, 2003

                                       OR

          |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                               ------------------

                         Commission file number 1-10079

                        CYPRESS SEMICONDUCTOR CORPORATION
             (Exact name of registrant as specified in its charter)

           Delaware                                          94-2885898
(State or other jurisdiction of                           (I.R.S. Employer
incorporation or organization)                           Identification No.)

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

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

                               ------------------

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

Indicate by check mark whether the registrant is an accelerated filer (as
outlined in Rule 12b-2 of the Exchange Act): Yes |X| No |_|

The total number of shares of the registrant's common stock outstanding as of
August 5, 2003 was 118,320,440.

================================================================================



                                      INDEX

                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements ..............................................    3

Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations .........................................   20

Item 3. Quantitative and Qualitative Disclosures about Market Risk ........   36

Item 4. Controls and Procedures ...........................................   38

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings .................................................   38

Item 2. Changes in Securities and Use of Proceeds .........................   38

Item 3. Defaults Upon Senior Securities ...................................   38

Item 4. Submission of Matters to a Vote of Security Holders ...............   38

Item 5. Other Information .................................................   39

Item 6. Exhibits and Reports on Form 8-K ..................................   39

Signatures ................................................................   40

Certifications of Quarterly Report ........................................   41


                                       2


ITEM 1. FINANCIAL STATEMENTS

                        CYPRESS SEMICONDUCTOR CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                    (In thousands, except per share amounts)
                                   (Unaudited)



                                                                            June 29,      December 29,
                                                                              2003            2002
                                                                            --------      ------------
                                                                                    
                                     ASSETS
Current assets:
  Cash and cash equivalents ............................................   $   481,908    $    87,200
  Short-term investments ...............................................        29,385         40,737
                                                                           -----------    -----------
          Total cash, cash equivalents and short-term investments ......       511,293        127,937
  Accounts receivable, net .............................................        92,996         83,054
  Inventories, net .....................................................        81,100         92,721
  Other current assets .................................................       207,270        210,235
                                                                           -----------    -----------
          Total current assets .........................................       892,659        513,947
                                                                           -----------    -----------
Property, plant and equipment, net .....................................       464,618        496,566
Goodwill ...............................................................       321,981        321,669
Other intangible assets ................................................        72,149         89,615
Other assets ...........................................................       173,999        150,851
                                                                           -----------    -----------
Total assets ...........................................................   $ 1,925,406    $ 1,572,648
                                                                           ===========    ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable .....................................................   $    64,466    $    59,431
  Accrued compensation and employee benefits ...........................        39,313         39,151
  Other current liabilities ............................................       103,418         84,112
  Current portion of long-term debt ....................................       332,416              0
  Deferred income on sales to distributors .............................         6,448         15,774
  Income taxes payable .................................................         1,585          1,292
                                                                           -----------    -----------
          Total current liabilities ....................................       547,646        199,760
                                                                           -----------    -----------
Convertible subordinated notes .........................................       668,652        468,900
Deferred income taxes and other tax liabilities ........................       172,576        177,404
Other long-term liabilities ............................................        33,993         52,961
                                                                           -----------    -----------
          Total liabilities ............................................     1,422,867        899,025
                                                                           -----------    -----------
Commitments and contingencies (See Note 6) Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized; none
     issued and outstanding ............................................            --             --
Common stock, $.01 par value, 650,000 and 650,000 shares authorized;
   139,164 and 139,164 issued; 116,716 and 123,743 outstanding at June
   29, 2003 and December 29, 2002 ......................................         1,391          1,391
Additional paid-in-capital .............................................     1,115,522      1,172,654
Deferred stock compensation ............................................        (9,506)       (25,283)
Accumulated other comprehensive income .................................         5,943          2,376
Accumulated deficit ....................................................      (242,286)      (155,916)
                                                                           -----------    -----------
                                                                               871,064        995,222
Less: shares of common stock held in treasury, at cost;  22,448 shares
and 15,421 shares at June 29, 2003 and December 29, 2002 ...............      (368,525)      (321,599)
                                                                           -----------    -----------
          Total stockholders' equity ...................................       502,539        673,623
                                                                           -----------    -----------
  Total liabilities and stockholders' equity ...........................   $ 1,925,406    $ 1,572,648
                                                                           ===========    ===========


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


                                       3


                        CYPRESS SEMICONDUCTOR CORPORATION

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



                                                                      Three months ended        Six months ended
                                                                    ----------------------    ----------------------
                                                                    June 29,     June 30,     June 29,     June 30,
                                                                      2003         2002         2003         2002
                                                                    ---------    ---------    ---------    ---------
                                                                                               
Revenues ........................................................   $ 203,116    $ 202,121    $ 384,083    $ 395,276
Cost of revenues ................................................     106,448      110,852      209,021      229,118
                                                                    ---------    ---------    ---------    ---------
Gross margin ....................................................      96,668       91,269      175,062      166,158

Operating expenses:
     Research and development ...................................      64,208       80,119      128,614      153,601
     Selling, general and administrative ........................      31,811       35,362       62,940       70,745
     Restructuring ..............................................        (185)     (10,305)       3,175       (8,710)
     Acquisition-related costs ..................................       9,346        9,795       18,830       21,487
                                                                    ---------    ---------    ---------    ---------
         Total operating expenses ...............................     105,180      114,971      213,559      237,123
                                                                    ---------    ---------    ---------    ---------
Operating loss ..................................................      (8,512)     (23,702)     (38,497)     (70,965)
Interest income .................................................       5,131        3,835        8,324       12,359
Interest expense ................................................      (5,130)      (4,684)      (9,806)      (9,629)
Other income and (expense), net .................................      (3,721)      (1,527)      (4,080)       1,177
                                                                    ---------    ---------    ---------    ---------
Loss before income taxes ........................................     (12,232)     (26,078)     (44,059)     (67,058)
Provision for income taxes ......................................        (206)      (1,983)      (1,702)        (794)
                                                                    ---------    ---------    ---------    ---------
         Net loss ...............................................   $ (12,438)   $ (28,061)   $ (45,761)   $ (67,852)
                                                                    =========    =========    =========    =========

Basic and diluted net loss per share ............................   $   (0.10)   $   (0.23)   $   (0.37)   $   (0.55)

Weighted average common and common equivalent shares outstanding:
         Basic and diluted ......................................     122,941      122,964      123,973      122,543


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


                                       4


                        CYPRESS SEMICONDUCTOR CORPORATION

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)



                                                                              Six Months Ended
                                                                           ----------------------
                                                                            June 29,    June 30,
                                                                              2003        2002
                                                                           ---------    ---------
                                                                                  
Cash flow from operating activities:
     Net loss ..........................................................   $ (45,761)   $ (67,852)
     Adjustments to reconcile net loss to net cash
         generated from (used for) operating activities:
     Depreciation and amortization .....................................      84,097       84,797
     Amortization of deferred stock compensation .......................       9,100       20,421
     (Gain) loss on sales of property, plant and equipment, net ........         138         (368)
     Employee stock purchase assistance plan interest ..................      (1,566)      (2,612)
     Acquired in-process research and development ......................          --          500
     Net (gain) loss on early retirement of debt .......................         802       (5,946)
     Unrealized (gain) loss on foreign currency derivatives ............       1,558         (503)
     Asset impairment and other ........................................       1,269        2,101
     Restructuring .....................................................        (185)     (10,650)
     Minority interest .................................................      (1,045)          --
     Deferred income taxes .............................................         422       (4,761)
     Changes in operating assets and liabilities, net of effects of
         acquisitions:
         Accounts receivable ...........................................      (9,600)     (15,463)
         Inventories ...................................................      11,621       (6,062)
         Other assets ..................................................       4,010       (3,420)
         Accounts payable, accrued liabilities and other liabilities ...      (9,161)      (6,149)
         Deferred income ...............................................      (9,326)       7,032
         Income taxes payable ..........................................         293          102
                                                                           ---------    ---------
             Net cash  generated from (used for) operating activities ..      36,666       (8,833)
                                                                           ---------    ---------
Cash flow from investing activities:
     Purchase of investments ...........................................     (35,092)     (31,443)
     Sale or maturities of investments .................................      36,275      123,886
     Cash refunded  from (used for) acquisitions, net ..................       1,474         (582)
     Acquisition of property, plant and equipment ......................     (36,726)     (89,387)
     (Issuance) repayment of notes to employees, net ...................         152       16,569
     Proceeds from the sale of equipment ...............................       1,775          203
     Other investment ..................................................      (2,253)     (24,832)
                                                                           ---------    ---------
             Net cash generated from (used for) investing activities ...     (34,395)      (5,586)
                                                                           ---------    ---------
Cash flow from financing activities:
     Proceeds from borrowings, net of issuance costs ...................      24,678           --
     Proceeds from issuance of convertible debt, net of issuance costs .     581,550           --
     Redemption of convertible debt ....................................     (75,058)     (42,124)
     Issuance (repurchase) of common shares, net .......................     (87,519)      15,354
     Purchase  of call spread on common stock ..........................     (49,300)          --
     Premiums received from stock put options ..........................          --          198
     Maturity of structured options, net ...............................          --        1,574
     Issuance (repayment) of stockholder notes receivable, net .........          60         (257)
     Other long-term liabilities .......................................      (1,974)      (1,548)
                                                                           ---------    ---------
             Net cash generated from (used for) financing activities ...     392,437      (26,803)
                                                                           ---------    ---------

Net increase (decrease) in cash and cash equivalents ...................     394,708      (41,222)
                                                                           ---------    ---------
Cash and cash equivalents, beginning of period .........................      87,200      109,999
                                                                           ---------    ---------
Cash and cash equivalents, end of period ...............................   $ 481,908    $  68,777
                                                                           =========    =========

Supplemental Disclosure of Non-Cash Information

Common stock issued for acquisitions ...................................   $      --    $   2,318
Customer prior advances used for equipment sale ........................   $   5,500    $      --


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


                                       5


                        CYPRESS SEMICONDUCTOR CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                       For the Quarter Ended June 29, 2003
                                   (Unaudited)

Note 1 - Summary of Significant Accounting Policies

Fiscal Year

Cypress Semiconductor Corporation ("Cypress") reports on a fiscal year basis and
ends its quarters on the Sunday closest to the end of the applicable calendar
quarter. The three month periods ended June 29, 2003 ("Q2 2003"), March 30, 2003
("Q1 2003"), June 30, 2002 ("Q2 2002") and March 31, 2002 ("Q1 2002") all
included thirteen weeks.

Basis of Presentation

In the opinion of the management of Cypress, the accompanying unaudited
condensed consolidated financial statements contain all adjustments (consisting
solely of normal recurring adjustments) necessary to present fairly the
financial information included therein. Certain prior year amounts have been
reclassified to conform to current year presentation. Cypress believes that the
disclosures are adequate to make the information not misleading. However, this
financial data should be read in conjunction with the audited consolidated
financial statements and related notes thereto included in Cypress's Annual
Report on Form 10-K for the fiscal year ended December 29, 2002.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates, although such differences are
not expected to be material to the financial statements.

The results of operations for the three and six months ended June 29, 2003 are
not necessarily indicative of the results to be expected for the full year.

Recent Accounting Pronouncements

Financial Accounting Standards Board ("FASB") Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), was issued in January
2003. FIN 46 requires that if an entity is the primary beneficiary of a variable
interest entity, the assets, liabilities and results of operations of the
variable interest entity should be included in the consolidated financial
statements of the entity. The provisions of FIN 46 are effective immediately for
all arrangements entered into after January 31, 2003. Cypress has not invested
in any variable interest entities after January 31, 2003. For those arrangements
entered into prior to January 31, 2003, the provisions of FIN 46 are required to
be adopted at the beginning of the first interim or annual period beginning
after June 15, 2003. On June 27, 2003, Cypress entered into a new operating
lease to refinance the old ones (see Note 6). The company refinanced these
leases in a manner that best met its financing strategy. The new operating
leases are not subject to the consolidation provisions of FIN 46. Cypress is
evaluating the effect on its condensed consolidated financial statements of
arrangements created prior to February 1, 2003. Cypress does not expect to
identify any significant variable interest entities that would be consolidated.

In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). The new guidance
amends SFAS 133 for decisions made: (a) as part of the Derivatives
Implementation Group process that effectively required amendments to SFAS 133,
(b) in connection with other Board projects dealing with financial instruments,
and (c) regarding implementation issues raised in relation to the application of
the definition of a derivative, particularly regarding the meaning of
"underlying" and the characteristics of a derivative that contains financing
components. The amendments set forth in SFAS 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. SFAS 149 is generally effective for contracts entered into or
modified after June 30, 2003 (with a few exceptions) and for hedging
relationships designated after June 30, 2003. Cypress will apply the provisions
of SFAS 149 prospectively to transactions entered into and or modified after
June 30, 2003.


                                       6


In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in certain circumstances). Many of these instruments
were previously classified as equity. Although some of the provisions of this
statement are consistent with the current definition of liabilities in FASB
Concepts Statement No. 6, "Elements of Financial Statements", the remainder are
consistent with FASB's intention to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own
shares. This statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. There was no impact to the
condensed consolidated financial statements related to SFAS 150 for the six
months ended June 29, 2003. Cypress does not expect the application of SFAS 150
to have a material effect on its condensed consolidated financial statements.

Accounting for Stock-Based Compensation

Cypress has a number of stock-based employee compensation plans. Cypress
accounts for those plans under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related Interpretation. In certain instances,
Cypress reflects stock-based employee compensation cost in net income (loss). If
there is any compensation under the rules of APB 25, the expense is amortized
using an accelerated method prescribed under the rules of FASB Interpretation
No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans" ("FIN 28"). The following table illustrates the effect on
net loss and loss per share if Cypress had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), to stock-based employee compensation.



                                                           Three months ended               Six months ended
-------------------------------------------------------------------------------------------------------------------
                                                         June 29,        June 30,        June 29,        June 30,
(In thousands, except per share amounts)                   2003            2002            2003            2002
-------------------------------------------------------------------------------------------------------------------
                                                                                           
Net loss, as reported                                  $    (12,438)   $    (28,061)   $    (45,761)   $    (67,852)
Deduct:  Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effect of zero                18,493          28,367          25,604          57,139
                                                       ------------    ------------    ------------    ------------
Pro forma net loss                                     $    (30,931)   $    (56,428)   $    (71,365)   $   (124,991)
                                                       ============    ============    ============    ============

Loss per share:
Basic and diluted--as reported                         $      (0.10)   $      (0.23)   $      (0.37)   $      (0.55)
Basic and diluted--pro forma                           $      (0.25)   $      (0.46)   $      (0.58)   $      (1.02)
-------------------------------------------------------------------------------------------------------------------


Note 2 - Consolidation of SunPower Corporation ("SunPower")

Cypress gained effective control over SunPower in Q1 2003. As a result,
effective the beginning of fiscal 2003, Cypress consolidated the results of
SunPower, which was previously accounted for under the equity method in fiscal
2002 due to the existence of substantive participating rights of the minority
shareholders. Cypress and its Chief Executive Officer ("CEO") own preferred
stock of SunPower which is convertible into common stock. As of June 29, 2003,
Cypress and its CEO own approximately 57% and 6%, respectively, of SunPower on
an as converted basis.

Minority interest in the losses of SunPower are included in other income and
(expense), net. In Q2 2003, the minority shareholders' share of losses in
SunPower was limited to their investment balance in SunPower and Cypress
absorbed a higher proportion of SunPower losses in the amount of $1.0 million.
As the minority shareholder's investment in SunPower, which was included in
other long-term liabilities, has been reduced to zero at the end of Q2 2003, any
future losses attributable to the minority shareholders' of SunPower will be
born solely by Cypress. The minority interest in losses of SunPower was $0.1
million and $1.0 million for the three and six-month periods ended Q2 2003,
respectively. Pro forma statement of operations information has not been
presented because the effect of the SunPower consolidation was not material.

Cypress owns a warrant to purchase an additional $16.0 million in convertible
preferred stock ("Preferred Stock Warrant") of SunPower. Since Cypress did not
exercise the warrant by April 1, 2003, it is obligated to fund SunPower up to
$5.6 million through May 2004 at a rate of up to $0.4 million per month. As of
June 29, 2003,


                                       7


Cypress had loaned SunPower $1.2 million bearing interest at the applicable
federal rate in accordance with this obligation. Subject to certain product
qualification tests, Cypress intends to exercise the Preferred Stock Warrant in
the second half of fiscal 2003.

In Q1 2003, Cypress loaned SunPower $2.5 million. SunPower will be repaying the
loan monthly through 2008. In addition, Cypress intends to secure financing for
a loan of up to $30.0 million on behalf of SunPower in the third quarter of
fiscal 2003 ("Q3 2003"). As of June 29, 2003, Cypress had advanced $3.5 million
against this future facility. Subsequent to June 29, 2003, Cypress advanced an
additional $8.2 million.

Note 3 - Goodwill and Intangibles

Goodwill

Cypress's goodwill is reported in the Non-memory business segment. The following
is a rollforward for the goodwill balance in this segment in fiscal 2003:

                     Balance at                                    Balance at
                    December 29,                                    June 29,
(in thousands)         2002        Reclassified       Other          2003
                    ---------------------------------------------------------
Non-memory           $321,669          $2,683        $(2,371)       $321,981

As a result of Cypress's consolidation of SunPower during Q1 2003, a total of
$2.7 million was reclassified from Other assets to Goodwill. Other represents
other miscellaneous adjustments to goodwill primarily as a result of Cypress's
prior acquisition escrow closings.

Purchased Intangibles

The following tables present details of Cypress's total purchased intangible
assets:



As of June 29, 2003
----------------------------------------------------------------------------------------------------------------------
                                                                                 Accumulated
(In thousands)                                              Gross                Amortization                  Net
----------------------------------------------------------------------------------------------------------------------
                                                                                                 
Purchased technology                                    $      192,656           $   (133,667)            $     58,989
Non-compete agreements                                          18,650                (11,307)                   7,343
Patents, licenses and trademarks                                 6,703                 (3,010)                   3,693
Other                                                            4,600                 (2,476)                   2,124
----------------------------------------------------------------------------------------------------------------------
    Total                                               $      222,609           $   (150,460)            $     72,149
----------------------------------------------------------------------------------------------------------------------




As of December 29, 2002
----------------------------------------------------------------------------------------------------------------------
                                                                                 Accumulated
(In thousands)                                              Gross                Amortization                  Net
----------------------------------------------------------------------------------------------------------------------
                                                                                                 
Purchased technology                                    $      191,700           $   (119,133)            $     72,567
Non-compete agreements                                          18,650                 (8,243)                  10,407
Patents, licenses and trademarks                                 6,350                 (2,233)                   4,117
Under market leases                                              1,850                 (1,850)                      --
Other                                                            4,600                 (2,076)                   2,524
----------------------------------------------------------------------------------------------------------------------
    Total                                               $      223,150           $   (133,535)            $     89,615
----------------------------------------------------------------------------------------------------------------------


Amortization expense for Q2 2003 and the six months ended June 29, 2003 of $9.3
million and $18.8 million, respectively, associated with these acquired
intangibles is included in acquisition-related costs in the condensed
consolidated statement of operations. The estimated annual amortization expense
of purchased intangible assets is as follows:

----------------------------------------------------------------------
(In thousands)                                               Amount
----------------------------------------------------------------------
2003 (remaining six months)                            $        19,132
2004                                                            32,924
2005                                                            14,833
2006                                                             2,667
2007                                                               471
2008 and beyond                                                  2,122
----------------------------------------------------------------------
Total                                                  $        72,149
----------------------------------------------------------------------


                                       8


Note 4 - 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 the operations, resulting in significant restructuring charges,
may become necessary if an industry downturn persists. Cypress currently has two
active restructuring plans - one initiated in the third quarter of fiscal 2001
("Fiscal 2001 Restructuring Plan") and the other initiated in the fourth quarter
of fiscal 2002 ("Fiscal 2002 Restructuring Plan"). Cypress recorded initial
restructuring charges in fiscal 2002 and fiscal 2001 based on assumptions that
it deemed appropriate for the economic environment that existed at the time
these estimates were made. However, due to continued changes in the
semiconductor industry and in specific business conditions, Cypress took
additional actions and made appropriate adjustments to both the Fiscal 2001
Restructuring Plan for property, plant and equipment, leased facilities and
personnel costs and the Fiscal 2002 Restructuring Plan for personnel costs.

Fiscal 2002 Restructuring Plan:

On October 17, 2002, Cypress announced a restructuring plan that included the
resizing of Cypress's manufacturing facilities and the reduction of operating
expenses, including research and development and selling, general and
administrative. In the fourth quarter of fiscal 2002 ("Q4 2002"), Cypress
recorded a charge of $45.4 million which consisted of $36.0 million related to
equipment removed from service and held for sale, $8.2 million for workforce
reductions for approximately 380 employees, including severance and benefits
costs, and $1.2 million for leased facilities. To date, Cypress has disposed of
equipment with a net book value of $7.3 million. The net book value of the
remaining unsold equipment as of June 29, 2003 was $30.7 million. The proceeds
from the sales of the assets approximated their carrying values. The majority of
the workforce reduction affected the United States, with some reductions in
Europe and the Philippines and sales offices that were closed in Europe and the
United States. As of the end of Q2 2003, all of these employees had left
Cypress.

A restructuring charge of $3.4 million was recorded in Q1 2003 for additional
opportunities identified as part of the personnel portion of the Fiscal 2002
Restructuring Plan. The charge relates to the severance and related employee
benefit costs for the termination of approximately 150 additional employees, the
majority of whom were located in the United States at Cypress's facilities in
San Jose, Texas and Minnesota. As of the end of Q2 2003, all of these employees
had left Cypress.

In Q2 2003, Cypress placed back into service certain of these assets previously
recorded as held for sale. The assets were needed to meet increased production
requirements resulting from a substantial increase in unit demand versus
Cypress's initial assumptions at the time of the restructuring in Q4 2002. When
the assets were put back into service, they were recorded at their fair value in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), and the related impairment reserve of $3.2
million was reversed. This resulted in an excess recovery of the reserves
initially established for these assets. This amount was not material.

The following table summarizes the activity associated with the restructuring
liabilities and asset write-downs since the inception of the restructuring plan
in Q4 2002:



---------------------------------------------------------------------------------------------------
                                 Property, plant       Leased
(In thousands)                     & equipment       Facilities         Personnel             Total
---------------------------------------------------------------------------------------------------
                                                                             
Q4 2002 Provision                  $   35,959        $    1,211        $    8,188        $   45,358
Non-cash charges                          (39)               --               (40)              (79)
Cash charges                              (50)             (524)           (5,276)           (5,850)
---------------------------------------------------------------------------------------------------
Balance at December 29, 2002           35,870               687             2,872            39,429
Q1 2003 Provision                          --                --             3,360             3,360
Non-cash charges                       (2,413)               --                --            (2,413)
Cash charges                              (98)               (2)           (2,263)           (2,363)
---------------------------------------------------------------------------------------------------
Balance at March 30, 2003              33,359               685             3,969            38,013
Non-cash charges                       (3,161)               --                --            (3,161)
Cash charges                             (225)              (51)           (3,224)           (3,500)
Other adjustments                      (3,191)               --                --            (3,191)
---------------------------------------------------------------------------------------------------
Balance at June 29, 2003           $   26,782        $      634        $      745        $   28,161
---------------------------------------------------------------------------------------------------



                                       9


Fiscal 2001 Restructuring Plan:

On July 16, 2001, Cypress announced a restructuring plan that involved resizing
its manufacturing facilities, reducing its workforce and combining facilities.
The restructuring was precipitated by the worldwide economic slowdown,
particularly in the business areas in which Cypress operates. The intended
effect of the plan was to size the manufacturing operations and facilities to
meet future demand and reduce expenses in all operations areas. During the third
quarter of fiscal 2001, Cypress recorded restructuring charges of $132.1 million
related to property, plant and equipment, leased facilities and personnel.

In connection with the July 16, 2001 announcement, in the third quarter of
fiscal 2001, Cypress removed from service and held for sale equipment with a net
book value of $116.9 million, resulting in a charge of $113.4 million. Cypress
has actively marketed the equipment. Through June 29, 2003, Cypress has disposed
of equipment with a net book value of $55.4 million. The proceeds from the sales
of the assets generally approximated their carrying values. In the second and
third quarters of fiscal 2002 ("Q2 2002" and "Q3 2002," respectively), Cypress
placed back into service certain of these assets previously recorded as held for
sale. The assets were needed to meet increased production requirements resulting
from a substantial increase in unit demand versus Cypress's initial assumptions
at the time of the restructuring in the third quarter of fiscal 2001 ("Q3
2001"). When the assets were put back into service, they were written up to
their prior cost basis (an adjustment of $13.2 million and $9.6 million in Q2
2002 and Q3 2002, respectively), reduced for depreciation expense that would
have been recorded during the period the asset was removed from service (an
adjustment of $2.9 million and $2.6 million in Q2 2002 and Q3 2002,
respectively), as required by SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of" ("SFAS 121"). The
net effect of the asset adjustment was a credit to the restructuring line on the
Statement of Operations of $10.3 million and $7.0 million in Q2 2002 and Q3
2003, respectively. In Q1 2002, Cypress also sold and then leased back certain
other pieces of equipment classified as held for sale. The proceeds from the
sales of the assets approximated their net carrying values. Cypress continues to
actively market the remaining assets held for sale.

In Q1 2002, Cypress recorded an additional charge of $1.6 million for additional
cost reductions identified as part of the personnel portion of the Fiscal 2001
Restructuring Plan. The charge related to severance and related employee benefit
costs for the termination of employees, the majority of whom were located in the
Philippines facility.

In Q3 2002, as a result of the continued drive to lower Cypress's cost structure
and break-even sales, Cypress further expanded the scope of the restructuring
and recorded net restructuring costs of $2.4 million, which was comprised of a
charge of $9.4 million offset by a $7.0 million reversal for previously
written-down equipment put back into service discussed above. The charge of $9.4
million consisted of $3.3 million for work force reductions, and included
severance, benefit costs and stock compensation, $3.4 million for capital
equipment removed from service and held for sale and $2.7 million for the
exiting of facility leases.

In Q4 2002, Cypress recorded a credit of $0.7 million related to the revised
estimate of personnel costs. All the personnel related charges and actions taken
by Cypress in Q3 2001, Q1 2002, and Q3 2002 resulted in the termination of
approximately 890 employees, all of whom had left Cypress as of the end of Q2
2003.


                                       10


The remaining net book value of unsold equipment as of June 29, 2003 was
$26.7 million. The following table summarizes the activity associated with the
restructuring liabilities and asset write-downs since the inception of the
Fiscal 2001 Restructuring Plan in Q3 2001:



-----------------------------------------------------------------------------------------------------------
                                           Property, plant &     Leased
(In thousands)                                 equipment       Facilities       Personnel           Total
-----------------------------------------------------------------------------------------------------------
                                                                                      
Initial provision in September 30, 2001        $ 113,350        $   4,079        $  14,684        $ 132,113
Non-cash charges                                  (5,145)              --           (8,970)         (14,115)
Cash charges                                        (380)             (53)          (3,836)          (4,269)
-----------------------------------------------------------------------------------------------------------
Balance at  September 30, 2001                   107,825            4,026            1,878          113,729
Non-cash charges                                  (2,124)              --              (86)          (2,210)
Cash charges                                      (1,239)            (160)            (407)          (1,806)
-----------------------------------------------------------------------------------------------------------
Balance at  December 30, 2001                    104,462            3,866            1,385          109,713
Provision                                             --               --            1,595            1,595
Non-cash charges                                  (5,096)              --               --           (5,096)
Cash charges                                        (147)            (375)          (1,581)          (2,103)
-----------------------------------------------------------------------------------------------------------
Balance at  March 31, 2002                        99,219            3,491            1,399          104,109
Cash charges                                        (151)            (503)            (553)          (1,207)
Other adjustments                                (13,217)              --               --          (13,217)
-----------------------------------------------------------------------------------------------------------
Balance at  June 30, 2002                         85,851            2,988              846           89,685
Provision                                          3,378            2,761            3,251            9,390
Non-cash charges                                 (12,316)              --             (924)         (13,240)
Cash charges                                        (484)            (502)          (1,039)          (2,025)
Other adjustments                                 (9,545)              --               --           (9,545)
-----------------------------------------------------------------------------------------------------------
Balance at  September 29, 2002                    66,884            5,247            2,134           74,265
Provision                                             --               --             (701)            (701)
Non-cash charges                                 (12,786)              --               --          (12,786)
Cash charges                                        (419)            (582)            (799)          (1,800)
-----------------------------------------------------------------------------------------------------------
Balance at  December 29, 2002                     53,679            4,665              634           58,978
Provision                                             --               --               --               --
Non-cash charges                                 (16,046)              --               --          (16,046)
Cash charges                                        (862)            (674)            (540)          (2,076)
-----------------------------------------------------------------------------------------------------------
Balance at  March 30, 2003                        36,771            3,991               94           40,856
Provision                                             --               --               --               --
Non-cash charges                                  (1,206)              --               --           (1,206)
Cash charges                                        (471)            (739)            (115)          (1,325)
Other adjustments                                    (64)              --               21              (43)
-----------------------------------------------------------------------------------------------------------
Balance at June 29, 2003                       $  35,030        $   3,252        $       0        $  38,282
-----------------------------------------------------------------------------------------------------------


Note 5 - Balance Sheet Components

Inventories, Net

--------------------------------------------------------------------------------
                                                       June 29,     December 29,
(In thousands)                                           2003           2002
--------------------------------------------------------------------------------
Raw materials                                        $      2,886   $      3,185
Work-in-process                                            50,279         54,668
Finished goods                                             27,935         34,868
--------------------------------------------------------------------------------
Inventories, net                                     $     81,100   $     92,721
--------------------------------------------------------------------------------

Other Current Assets

--------------------------------------------------------------------------------
                                                       June 29,     December 29,
(In thousands)                                           2003           2002
--------------------------------------------------------------------------------
Employee stock purchase assistance plan, net         $     91,793   $     90,636
Deferred tax assets                                        77,450         85,041
Prepaid assets                                             25,372         24,962
Other current assets                                       12,655          9,596
--------------------------------------------------------------------------------
Other current assets                                 $    207,270   $    210,235
--------------------------------------------------------------------------------


                                       11


Other Assets

--------------------------------------------------------------------------------
                                                       June 29,     December 29,
(In thousands)                                           2003           2002
--------------------------------------------------------------------------------
Long-term investments                                $     25,761   $     16,574
Key employee deferred compensation plan                    16,463         15,574
Restricted cash                                            62,728         62,380
Deferred tax asset                                         25,724         26,037
Other                                                      43,323         30,286
--------------------------------------------------------------------------------
Other assets                                         $    173,999   $    150,851
--------------------------------------------------------------------------------

Other Current Liabilities

--------------------------------------------------------------------------------
                                                       June 29,     December 29,
(In thousands)                                           2003           2002
--------------------------------------------------------------------------------
Customer advances                                    $     26,984   $      3,950
Interest payable                                            7,634          8,216
Key employee deferred compensation plan                    19,421         16,785
Accrued royalties                                           3,078          4,098
Accrued rep commissions                                     4,701          4,291
Other                                                      41,600         46,772
--------------------------------------------------------------------------------
Other current liabilities                            $    103,418   $     84,112
--------------------------------------------------------------------------------

Note 6 - Commitments and Contingencies

Guarantees and Product Warranties

Cypress applies the disclosure provisions of FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45") to its agreements that
contain guarantee or indemnification clauses. These disclosure provisions expand
those required by SFAS No. 5, "Accounting for Contingencies," by requiring that
guarantors disclose certain types of guarantees, even if the likelihood of
requiring the guarantor's performance is remote. As of June 29, 2003, Cypress
has accrued its estimate of liability incurred under these indemnification
arrangements and guarantees, as applicable. Cypress maintains self-insurance for
certain liabilities of its officers and directors. The following is a
description of significant arrangements in which Cypress is a guarantor.

Indemnification Obligations

Cypress is a party to a variety of agreements pursuant to which it may be
obligated to indemnify the other party with respect to certain matters.
Typically, these obligations arise in the context of contracts entered into by
Cypress, under which Cypress customarily agrees to hold the other party harmless
against losses arising from a breach of representations and covenants related to
such matters as title to assets sold, certain intellectual property rights,
specified environmental matters and certain income taxes. In each of these
circumstances, payment by Cypress is conditioned on the other party making a
claim pursuant to the procedures specified in the particular contract, which
procedures typically allow Cypress to challenge the other party's claims.
Further, Cypress's obligations under these agreements may be limited in terms of
time and/or amount, and in some instances, Cypress may have recourse against
third parties for certain payments made by it under these agreements.

It is not possible to predict the maximum potential amount of future payments
under these or similar agreements due to the conditional nature of Cypress's
obligations and the unique facts and circumstances involved in each particular
agreement. Historically, payments made by Cypress under these agreements did not
have a material effect on its business, financial condition or results of
operations. Cypress believes that if it were to incur a loss in any of these
matters, such loss would not have a material effect on its business, financial
condition, cash flows or results of operations.

Product Warranties

Cypress estimates its warranty costs based on historical warranty claim
experience and applies this estimate to the revenue stream for products under
warranty. Included in Cypress's warranty accrual are costs for limited
warranties and extended warranty coverage. Future costs for warranties
applicable to revenue recognized in the


                                       12


current period are charged to cost of revenues. The warranty accrual is reviewed
quarterly to verify that it properly reflects the remaining obligations based on
the anticipated expenditures over the balance of the obligation period.
Adjustments are made when actual warranty claim experience differs from
estimates. As of the end of Q2 2003, warranty reserve was $1.9 million. Warranty
costs have historically been insignificant.

SunPower Corporation

See Note 2 for discussion of Cypress's funding obligations to SunPower.

Synthetic Lease Transactions

On June 27, 2003, Cypress entered into a synthetic operating lease agreement
with a new lessor for manufacturing and office facilities located in Minnesota
and California. This transaction, which qualifies for operating lease accounting
treatment, replaced the three existing synthetic leases associated with these
two facilities. There was no impact to our results of operations for the three
and six month period ended Q2 2003 as a result of terminating the former leases
and entering into the new lease. Lease obligations related to the replaced
synthetic leases, totaling $61.4 million, were extinguished with existing
restricted cash collateral and a new synthetic lease obligation of $62.7 million
was established as of the end of Q2 2003. The new synthetic lease requires
Cypress to purchase the property or to arrange for the property to be acquired
by a third party at lease expiration. If Cypress had exercised its right to
purchase all the properties subject to the new synthetic lease at June 29, 2003,
Cypress would have been required to make a payment and record assets totaling
$62.7 million. Cypress's management believes that proceeds from the sale of
properties under the new synthetic lease would equal or exceed the payment
obligation and therefore no liability to Cypress currently exists. Cypress is
required to maintain restricted cash or investments to serve as collateral for
this lease. As of June 29, 2003, the amount of restricted cash recorded was
$62.7 million and was classified within other assets in the condensed
consolidated balance sheet. As of June 29, 2003, Cypress was in compliance with
the financial covenant required by the new lessor. As of June 29, 2003, the
maximum potential exposure to residual value guarantees was approximately $54.5
million and Cypress does not not expect to have a loss on such guarantees.

Legal Matters

In January 2002, Cypress was contacted by Syndia Corporation ("Syndia"), which
alleged that Cypress infringed two patents on which Jerome Lemelson was named as
the inventor (see the Lemelson Partnership discussion below). These two patents
are related to three of the non-stayed patents in the Lemelson Partnership
litigation in Arizona, described below. In Q1 2003, Cypress was informed that
the United States Patent and Trademark Office had commenced reexamination of
these two patents. Furthermore, Cypress was informed in Q2 2003 that Syndia had
been sued by Taiwan Semiconductor Manufacturing Corporation in the United States
District Court of the Northern District of California, in a declaratory judgment
action alleging these two Syndia patents are invalid, unenforceable and not
infringed. Cypress has reviewed and investigated the allegations by Syndia.
Cypress believes that it has meritorious defenses to these allegations and will
vigorously defend itself in this matter. However, because of the nature and
inherent uncertainties of litigation, should Syndia sue Cypress and should the
outcome of the action be unfavorable, Cypress's business, financial condition,
results of operations and cash flows could be materially and adversely affected.

In January 1998, an attorney representing the estate of Mr. Jerome Lemelson
contacted Cypress and charged that Cypress 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 Cypress 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, in which the plaintiffs allege that the
patents are invalid, unenforceable and not infringed. The Nevada trial
proceedings concluded in January 2003, post-trial briefing has concluded and the
matter is under submission with the judge. In October 2001, the Lemelson
Partnership amended its Arizona complaint to add allegations that two more
patents were infringed. Thus, there are currently four patents that are not
stayed in this litigation. A bench trial (i.e. a trial with no jury) on only the
defenses relating to Lemelson's alleged inequitable conduct in obtaining the
four non-stayed patents was held on February 4, 2003, post-trial briefing has
concluded and the matter is under submission with the judge. A ruling is not
expected until the third or fourth quarter of fiscal 2003. The case is
proceeding in the claim construction phase on the four non-stayed patents and
the parties have submitted their opening claim construction briefs. Claim
construction briefing is expected to be completed in the third quarter of fiscal
2003, after which the judge may request a claim construction hearing or may take
the matter under submission on the briefs. Cypress has reviewed and investigated
the allegations in both Lemelson's original and amended complaints. Cypress
believes that it has meritorious defenses to these allegations and will
vigorously defend


                                       13


itself in this matter. However, because of the nature and inherent uncertainties
of litigation, should the outcome of this action be unfavorable, Cypress's
business, financial condition, results of operations and cash flows could be
materially and adversely affected.

In February 2002, Cypress was contacted by an attorney representing Mr. Peng
Tan, alleging that Cypress infringed a patent owned by Mr. Tan. Cypress was
informed in Q2 2003 that Mr. Tan was sued by Ramtron International Corporation
in the United States District Court of the District of Colorado, in a
declaratory judgment action alleging that Mr. Tan's patent is invalid and not
infringed. Cypress has reviewed and investigated Mr. Tan's allegations. Cypress
believes it has meritorious defenses to these allegations, and will vigorously
defend itself in this matter. However, because of the nature and inherent
uncertainties of litigation, should Mr. Tan sue Cypress and should the outcome
of the action be unfavorable, Cypress's business, financial condition, results
of operations and cash flows could be materially and adversely affected.

Cypress is currently a party to various other legal proceedings, claims,
disputes and litigation arising in the ordinary course of business, including
those noted above. Cypress currently believes that the ultimate outcome of these
proceedings, individually and in the aggregate, will not have a material adverse
affect on Cypress's 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, Cypress's business, financial
condition, results of operations and cash flows could be materially and
adversely affected.

Note 7 - Debt and Equity Transactions

Option Contracts

At June 29, 2003, Cypress had outstanding a series of equity options on Cypress
common stock with an initial cost of $26.0 million, which is classified in
stockholders' equity. The contracts, which were extended during Q2 2003, require
physical settlement and expire in December 2003. Upon expiration of the options,
if Cypress's stock price is above the threshold price of $20.00 per share,
Cypress will receive a settlement value totaling $28.9 million. If Cypress's
stock price is below the threshold price of $20.00 per share, Cypress will
receive 1.4 million shares of its common stock. Alternatively, the contract may
be renewed and extended. The transaction is recorded in stockholders' equity in
the accompanying condensed consolidated balance sheet.

In conjunction with the 1.25% convertible subordinated notes offering in June
2003, Cypress purchased a call spread option on Cypress' common stock ("Call
Spread Option") maturing in July 2004 for $49.3 million. The Call Spread Option,
including fees and costs, has been accounted for as an equity transaction in
accordance with Emerging Issues Task Force No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock." The Call Spread Option covers approximately 32 million shares of Cypress
common stock. The Call Spread Option is designed to mitigate dilution from
conversion of the 1.25% convertible subordinated notes in the event that the
market price per share of the Company's common stock upon exercise of the call
spread options is greater than $15 per share and is less than or equal to $24.50
per share. The call spread option may be settled at the Company's option in
either net shares or in cash. Settlement of the Call Spread Option in net shares
on the expiration date would result in the Company receiving a number of shares,
not to exceed 12.4 million shares, of our common stock with a value equal to the
amount otherwise receivable on cash settlement. Should there be an early unwind
of the Call Spread Option, the amount of cash or net shares potentially received
by the Company will be dependent upon then existing overall market conditions,
and on the Company's stock price, the volatility of the Company's stock and the
amount of time remaining on the Call Spread Option.

Deferred stock-based compensation

Cypress records provisions for deferred stock compensation related to
acquisitions. There was no such provision recorded in either Q2 2003 or the
first six months of fiscal 2003. This amount is being amortized over the vesting
period of the individual stock options or restricted stock, generally a period
of four to five years. Deferred stock compensation expense, included in cost of
revenues, selling, general and administrative expense and research and
development expense in the condensed consolidated statements of operations,
totaled approximately $2.4 million and $7.4 million for the three and six months
ended June 29, 2003, respectively, and approximately $10.2 million and $20.4
million for the three and six months ended June 30, 2002, respectively.

Convertible Subordinated Notes

During Q2 2003, Cypress issued $600.0 million of five-year convertible
subordinated notes with a coupon of 1.25% ("1.25% notes") payable on June 15 and
December 15 beginning December 15, 2003. Each note, which


                                       14


may be converted at anytime by the holders prior to maturity, is convertible
into 55.172 shares of Cypress stock plus a cash payment of $300. Cypress, at its
option, may satisfy the $300 cash payment by issuing common stock. The 1.25%
notes are callable at anytime on or after June 20, 2006. At anytime prior to
maturity, Cypress may, at its option, elect to terminate the holders' conversion
rights if the closing price of Cypress's common stock exceeds $21.75 (subject to
certain adjustments) for 20 days out of a 30 consecutive trading day period. If
Cypress issues a notice of termination of conversion rights prior to June 20,
2006, Cypress will pay additional interest in an amount equal to three years of
interest, less any interest actually paid prior to the conversion date, to
holders who convert their 1.25% notes.

Of the $600.0 million of 1.25% note proceeds, as of the end of Q2 2003, Cypress
used approximately $75.1 million to retire portions of its existing 4.0% and
3.75% convertible notes, $95.3 million to repurchase 9.0 million shares of
Cypress common stock, $49.3 million to purchase an issuer call spread and $18.0
million for transaction costs. The issuer call spread was recorded in
stockholders' equity.

After the $75.1 million of the 1.25% notes proceeds were used to retire portions
of its existing 4.0% and 3.75% convertible notes, a total of $255.2 million and
$138.7 million of the 4% and 3.75% convertible notes, respectively, were
outstanding at the end of Q2 2003. In addition, as of the end of Q2 2003,
Cypress had called for the full redemption of its remaining 4.0% convertible
subordinated notes due February 2005, and also for the redemption of $70.0
million in principle amount of its remaining 3.75% convertible subordinated
notes due July 2005. A total of $325.2 million was therefore classified as a
current liability as at the end of Q2 2003, leaving approximately $68.7 million
of the 3.75% notes outstanding and classified within long term debt. As of July
8, 2003, the $325.2 million had been paid to the note holders. Cypress will
record a loss on redemption related to the $325.2 million repurchase of
approximately $6.3 million in Q3 2003 consisting of premiums paid and the
write-off of a proportionate share of the bond issuance costs.

On June 30, 2003, Cypress filed a resale shelf registration statement on Form
S-3 for the registration of the shares underlying the 1.25% notes. The
registration statement will become effective upon approval by the Securities and
Exchange Commission.

Collateralized Debt Instruments

During Q1 2003, Cypress entered into long-term loan agreements with two lenders
with an aggregate principal amount equal to $24.8 million. These agreements are
collateralized by specific equipment located at Cypress's U.S. manufacturing
facilities. Principal amounts are to be repaid in monthly installments inclusive
of accrued interest, over a 3 to 4 year period. The applicable interest rates
are variable based on changes to LIBOR rates. Both loans are subject to a
financial covenant. As of June 29, 2003, the aggregate principal outstanding was
$23.7 million and Cypress was in compliance with the financial covenants.

Stock Option Plans

Cypress has two stock option plans: the 1999 non-stockholder approved Stock
Option Plan ("1999 Plan") and the 1994 stockholder approved Stock Option Plan
("1994 Plan"). The 1999 Plan does not allow for the issuance of options to
officers and directors while the 1994 Plan does. The 1994 Plan expires in May
2004.

Cypress believes that stock option grants are critical to its ability to attract
and retain personnel. As a result, in order to secure sufficient options for
issuance to non-officers and directors, Cypress's Board of Directors, in Q2
2003, approved an increase of 20 million shares for issuance under the 1999
Plan. While Cypress continues to evaluate its overall compensation structure,
Cypress will submit for stockholder approval, in its 2003 Proxy statement, a new
stock option plan that will cover employees, officers and directors.

Note 8 - Comprehensive Income (Loss) and Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, net of tax, were as
follows:

--------------------------------------------------------------------------------
                                                       June 29,     December 29,
(In thousands)                                           2003           2002
--------------------------------------------------------------------------------
Accumulated net unrealized gain on available for
 sale investments                                    $      4,281   $      1,033
Accumulated net unrealized gain on derivatives              1,662          1,343
--------------------------------------------------------------------------------
Total accumulated other comprehensive income         $      5,943   $      2,376
--------------------------------------------------------------------------------


                                       15


The components of comprehensive loss are as follows:



                                                                 Three months ended                     Six months ended
--------------------------------------------------------------------------------------------------------------------------------
                                                             June 29,           June 30,           June 29,           June 30,
(In thousands)                                                 2003               2002               2003               2002
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                        
Net loss                                                   $    (12,438)      $    (28,061)      $    (45,761)      $    (67,852)
Unrealized gain (loss) on available for sale
securities                                                        4,539                946              3,248                946
Unrealized gain (loss) on derivatives                               556               (317)               319             (1,608)
--------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss                                         $     (7,343)      $    (27,432)      $    (42,194)      $    (68,514)
--------------------------------------------------------------------------------------------------------------------------------


Note 9 - Foreign Currency Derivatives

Cypress purchases capital equipment using foreign currencies and has foreign
subsidiaries that operate and sell Cypress's products in various global markets.
As a result, Cypress is exposed to risks associated with changes in foreign
currency exchange rates. At any point in time, Cypress might use various hedge
instruments, primarily forward contracts, to manage the exposures associated
with forecasted purchases of equipment and net asset or liability positions.
Cypress does not enter into derivative financial instruments for speculative or
trading purposes.

Cypress estimates the fair value of its forward contracts based on changes in
forward rates from published sources. Cypress accounts for its hedges of
committed purchases of equipment as cash flow hedges, such that changes in fair
value of the effective portion of hedge contracts, if material, are recorded in
accumulated other comprehensive income in stockholders' equity. Amounts deferred
in accumulated other comprehensive income will be recorded in the condensed
consolidated statement of operations in the period in which the underlying
transactions impact earnings. At June 29, 2003, the effective portion of
unrealized gains on cash flow hedges recorded in other comprehensive income was
$1.7 million net of tax. Ineffective hedges are recorded in other income and
(expense), net and were $0.0 and $(0.3) million for the three and six months
ended June 29, 2003 and $0.5 and $0.5 for the three and six months ended June
30, 2002. As of June 29, 2003, Cypress had forward contracts for Euro exposures
with an aggregate notional value of $15.1 million.

Cypress records its hedges of foreign currency denominated assets and
liabilities at fair value with the related gains or losses recorded in other
income and (expense), net. The gains and losses on these contracts are
substantially offset by transaction gains and losses on the underlying balances
being hedged. As of June 29, 2003, Cypress held forward contracts with an
aggregate notional value of $0.9 million to hedge the risks associated with Yen
foreign currency denominated assets and liabilities. Aggregate net foreign
exchange gains (losses) on these hedging transactions and foreign currency
remeasurement gains (losses) were $(0.6) and $(0.6) million for the three and
six month period ended June 29, 2003 compared to $(0.5) and $(1.9) million for
the three and six month period ended June 30, 2002. The amounts are included in
other income and (expense), net in the condensed consolidated statements of
operations.

Note 10 - Income Taxes

Cypress's effective rates of income tax expense for Q2 2003 and Q2 2002 were
1.7% and 7.6%, respectively. For the six months ended June 29, 2003 and June 30,
2002, Cypress's effective rates of income tax expense were 3.9% and 1.2%,
respectively. A tax provision of $0.2 million was recorded during Q2 2003
compared to a tax provision of $2.0 million during Q2 2002. The tax provision
for each fiscal year is attributable to foreign withholding tax on royalty
income and income earned in certain countries that is not offset by current year
net operating losses in other countries. The future tax benefit of certain
losses is not currently recognized due to Cypress's assessment of the likelihood
of realization of these benefits. Cypress's effective tax rate may vary from the
U.S. statutory rate primarily due to utilization of future benefits, the
earnings of foreign subsidiaries taxed at different rates, tax credits, and
other business factors.

Note 11 - 2001 Employee Stock Purchase Assistance Plan

On May 3, 2001, Cypress stockholders approved the adoption of the 2001 Employee
Stock Purchase Assistance Plan (the "Plan"). The Plan allowed for loans to
employees to purchase shares of Cypress common stock on the open market.
Employees of Cypress and its subsidiaries, including executive officers but
excluding the CEO and the Board of Directors of Cypress, were allowed to
participate in the Plan. Each loan was evidenced by a full recourse, promissory
note executed by the employee in favor of Cypress and was secured by a pledge of
the shares of Cypress's common stock purchased with the proceeds of the loan. If
a participant sells the shares of Cypress common stock purchased with the
proceeds from the loan(s), the proceeds of the sale must first be used


                                       16


to repay the interest and then the principal on the loan(s) before being
received by the Plan participant. The loans are callable and currently bear
interest at a minimum rate of 4.0% per annum compounded annually, except for
loans to executive officers, who are also named corporate officers, whose loans
bear interest at the rate of 5.0% per annum, compounded annually. As the loans
are at interest rates below the estimated market rate, Cypress recorded
compensation expense of $1.3 million in Q2 2003 and $0.9 million in Q2 2002 to
reflect the difference between the rate charged and an estimated market rate for
each loan outstanding. In addition, Cypress is recording interest income on the
outstanding loan balances. Accrued interest outstanding at June 29, 2003 totaled
$7.9 million. The Plan became effective on May 3, 2001 and will terminate on the
earlier of May 3, 2011, or such time as determined by the Board of Directors. As
of June 29, 2003, loans (including accrued interest) outstanding under the Plan
net of loss reserve were $91.8 million, as compared to $90.6 million at December
29, 2002. This balance is classified on the condensed consolidated balance sheet
within other current assets. Cypress has established a loss reserve, which
represents an amount for estimated uncollectible balances, with changes in the
loss reserve recognized in selling, general and administrative expense. In
determining this loss reserve, Cypress considered various factors, including an
independent fair value analysis of the loans and the underlying collateral. To
date, there have been immaterial write-offs. At June 29, 2003 and December 29,
2002, the loss reserve was $16.2 million and $16.0 million, respectively.
Cypress is 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.

Note 12 - Segment Reporting

Historically, Cypress has disclosed two reportable business segments, Memory
Products and Non-memory Products. The Memory Products business segment includes
Static Random Access Memories ("SRAMs") and is characterized by high unit sales
volume and generally subject to greater pricing pressures. The Non-memory
Products business segment includes data communication devices, programmable
logic products, specialty memories, timing and interface products.

In October 2000, Cypress announced the formation of new divisions in order to
enhance its focus on communications market segments. The Wide Area Networks
("WAN") and Storage Area Networks ("SAN") divisions help to provide product
definition in the networking arena. Similarly, the Wireless Terminals ("WIT")
and Wireless Infrastructure ("WIN") divisions help focus Cypress's efforts in
the wireless space. The Computation and consumer market segment includes
products used in computers, peripherals and other applications. Cypress
periodically reviews its customer and product portfolio and makes corresponding
changes to its segment data alignment as appropriate. Based on that review,
during Q1 2003, Cypress began disclosing its subsidiaries Silicon Light
Machines, Silicon Magnetic Systems, Cypress Microsystems and SunPower
Corporation as a separate segment called Cypress Subsidiaries. The prior year
market segment data has been restated to conform with current presentation. The
market focus is expected to provide systems knowledge, cross-product-line
product portfolio definition, early engagement with strategic accounts and added
management of research and development ("R&D") spending.

Cypress evaluates the performance of its segments based on profit or loss from
operations before income taxes, excluding acquisition-related costs,
restructuring costs, interest income, interest expense and other income and
(expense), net.

Business Segment Information

Cypress's reportable business segments are business units that offer different
products. Products that fall under the two business segments differ in nature,
are manufactured utilizing different technologies and have a different
end-purpose. As such, they are managed separately. Memory Products are
characterized by high unit sales volume and generally subject to greater pricing
pressures. These products are manufactured using more advanced technology. A
significant portion of the wafers produced for Memory Products are manufactured
at Cypress's technologically advanced, eight-inch wafer production facility
located in Minnesota ("Fab 4"). Memory Products are used by a variety of
end-users generally for the storage and retrieval of information. In contrast to
Memory Products, unit sales of Non-memory Products are generally lower than
Memory Products, but sell at higher gross margins. Some Non-memory Products are
manufactured utilizing less technologically advanced processes. A majority of
wafers for Non-memory Products are manufactured at Cypress's six-inch wafer
production facility located in Texas ("Fab 2"), while some wafers are procured
from foundries. Products in the Non-memory segment perform functions such as
timing management, data transfer and routing in computer, communications and
storage systems. Products range from high volume Universal Serial Bus ("USB")
interfaces for personal computers to high value products such as Cypress's OC-48
Serializer/Deserializer ("SERDES") device for optical communications systems.


                                       17


The tables below set forth information about the reportable business segments
for the three and six months ended June 29, 2003 and June 30, 2002,
respectively. Cypress does not allocate interest income and expense, income
taxes, acquisition-related costs or restructuring charges to its segments.
Cypress does not allocate assets to segments. In addition, business segments do
not have significant non-cash items other than depreciation and amortization in
reported profit or loss.

Business Segment Net Revenues



                                                                 Three months ended                     Six months ended
--------------------------------------------------------------------------------------------------------------------------------
                                                             June 29,           June 30,           June 29,           June 30,
(In thousands)                                                 2003               2002               2003               2002
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                        
Memory                                                     $     80,780       $     84,117       $    148,590       $    157,154
Non-memory                                                      122,336            118,004            235,493            238,122
--------------------------------------------------------------------------------------------------------------------------------
  Total consolidated revenues                              $    203,116       $    202,121       $    384,083       $    395,276
--------------------------------------------------------------------------------------------------------------------------------


Business Segment Income (Loss) before Provision for Income Taxes



                                                                 Three months ended                     Six months ended
--------------------------------------------------------------------------------------------------------------------------------
                                                             June 29,           June 30,           June 29,           June 30,
(In thousands)                                                 2003               2002               2003               2002
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                        
Memory                                                     $     (4,364)      $     (4,945)      $    (11,618)      $    (13,576)
Non-memory                                                        5,013            (19,267)            (4,874)           (44,612)
Restructuring and acquisition costs                               9,161               (510)            22,005             12,777
Interest income                                                   5,131              3,835              8,324             12,359
Interest expense                                                 (5,130)            (4,684)            (9,806)            (9,629)
Other income and (expense), net                                  (3,721)            (1,527)            (4,080)             1,177
--------------------------------------------------------------------------------------------------------------------------------
   Loss before provision for income taxes                  $    (12,232)      $    (26,078)      $    (44,059)      $    (67,058)
--------------------------------------------------------------------------------------------------------------------------------


Market Segment Information

Cypress does not allocate interest income and expense, income taxes,
acquisition-related costs or restructuring charges to segments. Cypress does not
allocate assets to segments. In addition, market segments do not have
significant non-cash items other than depreciation and amortization in reported
profit or loss.

Market Segment Net Revenues



                                                                 Three months ended                     Six months ended
--------------------------------------------------------------------------------------------------------------------------------
                                                             June 29,           June 30,           June 29,           June 30,
(In thousands)                                                 2003               2002               2003               2002
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                        
Wide area networks/storage area networks                   $     65,017       $     64,300       $    120,634       $    125,312
Wireless terminals/wireless infrastructure                       58,701             67,249            116,192            126,375
Computation and consumer                                         71,440             65,470            131,805            134,638
Cypress subsidiaries                                              7,958              5,102             15,452              8,951
--------------------------------------------------------------------------------------------------------------------------------
   Total consolidated revenues                             $    203,116       $    202,121       $    384,083       $    395,276
--------------------------------------------------------------------------------------------------------------------------------


Market Segment Income (Loss) Before Provision for Income Taxes



                                                                 Three months ended                     Six months ended
--------------------------------------------------------------------------------------------------------------------------------
                                                             June 29,           June 30,           June 29,           June 30,
(In thousands)                                                 2003               2002               2003               2002
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                        
Wide area networks/storage area networks                   $     (2,336)      $    (10,973)      $    (13,045)      $    (27,812)
Wireless terminals/wireless infrastructure                          191             (4,376)            (1,955)           (14,636)
Computation and consumer                                         10,523             (2,094)            12,952             (2,143)
Cypress subsidiaries                                             (7,729)            (6,769)           (14,444)           (13,597)
Restructuring and acquisition costs                               9,161               (510)            22,005             12,777
Interest income                                                   5,131              3,835              8,324             12,359
Interest expense                                                 (5,130)            (4,684)            (9,806)            (9,629)
Other income and (expense), net                                  (3,721)            (1,527)            (4,080)             1,177
--------------------------------------------------------------------------------------------------------------------------------
   Loss before provision for income taxes                  $    (12,232)      $    (26,078)      $    (44,059)      $    (67,058)
--------------------------------------------------------------------------------------------------------------------------------


Note 13 - Earnings (Loss) Per Share

Basic net income (loss) per common share is computed using the weighted-average
common shares outstanding for the period. Diluted net income (loss) per common
share is computed as though all potential dilutive common shares were
outstanding during the period. Dilutive securities include stock options and
shares issuable upon the conversion of convertible debt.

For the three and six months ended June 29, 2003 and June 30, 2002, common stock
issuable upon the assumed conversion of convertible subordinated notes were
excluded from the calculation of diluted net loss per share as the effect would
be anti-dilutive. In addition, at June 29, 2003 and June 30, 2002, total
outstanding options to


                                       18


purchase 42.5 million shares of common stock with a weighted-average exercise
price of $13.19, and 37.2 million shares of common stock with a weighted-average
exercise price of $15.36, respectively, were excluded from the calculation of
diluted net loss per share, as the effect would be anti-dilutive.

Of each of Cypress's $1,000 principal value 1.25% convertible notes issued in
June 2003, $700 principle value (70%) is convertible at any time prior to
maturity into 55.172 shares of common stock, subject to certain adjustments,
plus $300 of cash. Cypress, at its option may pay the $300 in shares of common
stock, subject to certain conditions. For purposes of determining Cypress's
diluted earnings per share calculation, it is presumed that the $300 payment
will be settled in cash. Therefore, earnings in the diluted earnings per share
calculation, which assumes conversion of the convertible notes into 55.172
shares of common stock at the beginning of the period (or at time of issuance,
if later), will be adjusted by 70% of the interest expense and bond issuance
costs.

Note 14 - Micron Technology Inc.

In Q2 2003, Cypress entered into a sale and purchase agreement pursuant to which
Micron transferred its high-performance communications oriented synchronous SRAM
product inventory to Cypress.


                                       19


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

                        CYPRESS SEMICONDUCTOR CORPORATION

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             For the Three and Six Month Periods Ended June 29, 2003

The discussion in this report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that involve risks and uncertainties, including,
but not limited to, statements as to future operating results and business
plans, our prospects and the prospects of the semiconductor industry generally,
the impact of new product development and improvements in manufacturing
technologies and yields on variances, pressure on and trends for average selling
prices, our intention to seek intellectual property protection for our
manufacturing processes, expected capital expenditures, future acquisitions, the
financing of SunPower Corporation, the repayment of loans by SunPower, the
dependence of future success on our ability to develop and introduce new
products, the general economy and its impact to the market segments we serve,
changing environment and the cycles of the semiconductor industry, competitive
pricing and the rate at which new products are introduced, successful
integration and achieving the objectives of the acquired businesses, cost goals
emanating from manufacturing efficiencies, expected financing and investment
cash outlays, adequacy of cash and working capital, when we expect to generate
positive cash flow from operations, risks related to investing in development
stage companies, 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 "Risk Factors" below and elsewhere in this report.

Results of Operations

Business Segment Net Revenues

Revenues for the three and six months ended June 29, 2003 ("Q2 2003") were
$203.1 and $384.1 million, respectively, an increase of $1.0 million or 0.5% and
a decrease of $11.2 million or 2.8%, respectively, compared to revenues for the
three and six months ended June 30, 2002 ("Q2 2002") of $202.1 and $395.3
million. We derive our revenues from the sale of Memory products and Non-memory
products, which are targeted primarily to the data communications, wireless,
computation and consumer markets.



                                                                 Three months ended                     Six months ended
--------------------------------------------------------------------------------------------------------------------------------
                                                             June 29,           June 30,           June 29,           June 30,
(In thousands)                                                 2003               2002               2003               2002
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                        
Memory                                                     $     80,780       $     84,117       $    148,590       $    157,154
Non-memory                                                      122,336            118,004            235,493            238,122
--------------------------------------------------------------------------------------------------------------------------------
  Total consolidated revenues                              $    203,116       $    202,121       $    384,083       $    395,276
--------------------------------------------------------------------------------------------------------------------------------


Revenues from the sale of Memory products for the three and six months ended Q2
2003 decreased $3.3 million and $8.6 million or 4.0% and 5.4% versus revenues
from the sale of these products for the three and six months ended Q2 2002. In
Q2 2003, we acquired Micron's Synchronous Static Random Access Memory ("SRAM")
product portfolio, which contributed $9.6 million of revenue to the Memory
product group for Q2 2003 and the first half of fiscal 2003. The decline in
revenue for both the three and six months ended Q2 2003 were driven by declines
in the Fast and Micropower families compared to the three and six months ended
June 30, 2002.

Memory product units decreased 7.4% for the six months ended Q2 2003 versus the
comparable fiscal 2002 period, with declines in the Fast and Micropower family
products being partially offset by increases in the Sync family of products.
Average selling prices ("ASPs") for the first half of fiscal 2003 decreased from
the first half of fiscal 2002 although the average density (Mbits/Unit) of SRAM
products sold continued to increase. We use ASP/Mbit as an indication of the
magnitude of price change for Memory Products. This metric reflects changes in
product mix and density as well as market price. ASP/Mbit declined 27.0% in the
six months ended Q2 2003 from the six months ended Q2 2002.

For the fiscal quarter ended Q2 2003, revenue from the sale of Non-memory
products increased $4.3 million or 3.7% versus the second quarter of fiscal
2002. The increase was driven by Universal Serial Bus ("USB") 2.0, Neuron,
adoption of our multi-PORT ("MPORT"), Network Search Engines ("NSEs"),
Programmable Logic


                                       20


Devices ("PLDs") and Programmable System on a Chip ("PSoC") products offset by
reduced demand for our Frequency Timing Generators ("FTG") and Programmable
Clocks. Non-memory revenue for the first half of fiscal 2003 declined by $2.6
million or 1.1% versus the comparable fiscal 2002 period. The decrease resulted
from lower Programmable Read Only Memory ("PROM") and PLD revenue.

Non-memory product unit sales increased for the three and six months ended Q2
2003 by 1.4% and 0.5% compared to the three and six months ended Q2 2002. This
reflects an increase in unit sales from our USB family of products, Neuron, FTG,
MPORT, NSEs and PSoC products offset by reduced unit demand for Programmable
Clocks, First-In, First-Out ("FIFO") Memories and PLDs.

As is typical in the semiconductor industry, ASPs of products generally decline
over the lifetime of the products. To increase revenues, we seek to expand our
market share in the markets we currently serve and to introduce and sell new
products with higher ASPs.

Cost of Revenues/Gross Margin

Costs of revenues for the three and six months ended Q2 2003 were $106.4 million
and $209.0 million, respectively, compared to $110.9 and $229.1 million,
respectively, for the three and six months ended Q2 2002. This equates to gross
margins for the three and six months ended Q2 2003 of 47.6% and 45.6%,
respectively, compared to 45.2% and 42.0%, respectively, for the three and six
months ended Q2 2002.

The gross margin of Memory products for the three and six months ended Q2 2003
were 24.9% and 24.8%, respectively, compared to 24.0% and 22.8%, respectively,
for the three and six months ended Q2 2002. The gross margin of Non-memory
products for the three and six months ended Q2 2003 were 62.6% and 58.7%,
respectively, compared to 60.2% and 54.8%, respectively, for the three and six
months ended Q2 2002.

For Memory products, revenue from the sale of products manufactured on our 0.15
micron technology increased to 42% and 45%, respectively, of revenue for the
three and six months ended Q2 2003 from 31% and 20%, respectively, for the
comparable fiscal 2002 periods. Gross margins increased as cost reduction
programs and the shift to more advanced technologies offset the decline in ASPs.

The Non-memory products gross margin improved due to a shift to higher margin
MPORT, NSE, physical layer ("PHY") and PLD product sales as well as a transition
to USB 2.0 for the three and six months ended Q2 2003 as compared to the same
periods in fiscal 2002.

In the three and six months ended Q2 2003 compared to Q2 2002, although our ASPs
declined significantly, we were able to offset the impact of declining prices on
our gross margin by implementing cost cutting measures including reducing
manufacturing capacity and related headcount. In addition, we continued to
reduce manufacturing cycle times, reduce die size, improve labor productivity,
improve efficient use of capital resources, improve defect densities, improve
yields and ultimately lower manufacturing costs.

During the three and six months ended Q2 2003, our gross margin benefited as a
result of the sale of previously reserved inventory in an amount representing
the reserves previously recognized. The incremental gross profit benefit
recognized was 3% and 2% for the three and six months ended Q2 2003, and 3% and
2% for the three and six months ended Q2 2002.

In January 2002, the Department of Commerce revoked a 1998 antidumping order
that had been imposed on SRAMs fabricated in Taiwan and imported into the United
States. The United States Customs Service was ordered to refund, with interest,
all duties deposited under the 1998 antidumping order. Between 1998 and 2001, we
charged $10.3 million to Cost of revenues for such duties. During Q1 2002, we
received $11.8 million in refunds, of which $9.9 million was recorded as an
offset to Cost of revenues for Memory products and $1.9 million was recorded in
Interest income. This benefit to our gross margin was substantially offset by
certain other items, including a change in estimate for deferred income on sales
to distributors.

Research and Development



                                            Three months ended                             Six months ended
----------------------------------------------------------------------------------------------------------------------
                                   June 29,       June 30,         %             June 29,       June 30,         %
(In thousands)                       2003           2002         Change            2003           2002         Change
----------------------------------------------------------------------------------------------------------------------
                                                                                             
Revenues                           $203,116       $202,121         0.5%          $384,083       $395,276        (2.8)%
Research and development             64,208         80,119       (19.9)%          128,614        153,601       (16.3)%
R&D as a percent of revenues           31.6%          39.6%       (8.0)%             33.5%          38.9%       (5.4)%
----------------------------------------------------------------------------------------------------------------------



                                       21


Research and development ("R&D") expenditures in the three month and six month
periods ended Q2 2003 decreased from the same periods in 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 up with changing
business conditions and with our customer needs, we have scaled back on some of
our process and design projects and refocused our attention on fewer projects
that are critical to our success. At the end of Q2 2003, we had 65 active design
projects compared to 72 at the end of Q2 2002. The design center closures and
headcount reductions contributed a reduction of $5.8 million and $10.7 million
for the three month and six month periods ended Q2 2003 compared to the
equivalent periods in fiscal 2002. During Q2 2003 and the first six months of
fiscal 2003, we recorded $3.8 million and $9.8 million, respectively, in
non-cash deferred stock compensation and cash compensation related to
milestone/revenue-based compensation from acquisitions as compared to $16.6
million and $28.5 million, respectively, for the comparable fiscal 2002 periods.
The decrease in these acquisition-related compensation charges is attributed to
the reduction in non-cash deferred compensation amortization (headcount
reduction) and milestones not being achieved in the second quarter and the first
six months of fiscal 2003.

We believe that our future success will depend on our ability to develop and
introduce new products that will compete effectively on the basis of price,
performance and ability to address customer needs. Our process technology
research focuses primarily on the continuous migration to smaller geometries.
During Q2 2003, we continued ramping our latest 0.13-micron technology in
manufacturing. We are simultaneously transferring our 90 nanometer technology
from our eight-inch R&D facility in San Jose, California ("Fab 1") to our
eight-inch manufacturing facility in Minnesota ("Fab 4"). We successfully
introduced our first 72M SRAM samples on our 90 nanometer technology in June
2003.

Selling, General and Administrative



                                            Three months ended                             Six months ended
----------------------------------------------------------------------------------------------------------------------
                                   June 29,       June 30,         %             June 29,       June 30,         %
(In thousands)                       2003           2002         Change            2003           2002         Change
----------------------------------------------------------------------------------------------------------------------
                                                                                             
Revenues                           $203,116       $202,121         0.5%          $384,083       $395,276        (2.8)%
Selling, general and administrative  31,811         35,362       (10.0)%           62,940         70,745       (11.0)%
SG&A as a percent of revenues          15.7%          17.5%       (1.8)%             16.4%          17.9%       (1.5)%
----------------------------------------------------------------------------------------------------------------------


Selling, general and administrative ("SG&A") expenses for the three and six
months ending in Q2 2003 decreased $3.6 million and $7.8 million, respectively,
compared to the three and six months ended Q2 2002. The reduction is the result
of the restructuring/reduction efforts in fiscal 2002 and fiscal 2001. These
efforts have led to reduced labor charges, lower commission and travel expenses
and decreases in general spending levels. Legal spending in fiscal 2003 has also
declined due to the settlement of litigation with Integrated Circuit Systems,
Inc. which was settled in the third quarter of fiscal 2002.

For the three and six months ended Q2 2003, we recorded $0.1 million and $0.3
million, respectively, in non-cash deferred compensation from acquisitions and
cash compensation related to milestone/revenue-based compensation from
acquisitions compared to $0.6 million and $2.6 million, respectively, for the
comparable fiscal 2002 periods.

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 the operations, resulting in significant restructuring charges,
may become necessary if an industry downturn persists. We currently have two
active restructuring plans - one initiated in the third quarter of fiscal 2001
("Fiscal 2001 Restructuring Plan") and the other initiated in the fourth quarter
of fiscal 2002 ("Fiscal 2002 Restructuring Plan"). We recorded initial
restructuring charges in fiscal 2002 and fiscal 2001 based on assumptions that
we deemed appropriate for the economic environment that existed at the time
these estimates were made. However, due to continued changes in the
semiconductor industry and in specific business conditions, we took additional
actions and made appropriate adjustments to both the Fiscal 2001 Restructuring
Plan for property, plant and equipment, leased facilities and personnel costs
and the Fiscal 2002 Restructuring Plan for personnel costs.

Fiscal 2002 Restructuring Plan:

On October 17, 2002, we announced a restructuring plan that included the
resizing of our manufacturing facilities and the reduction of operating
expenses, including research and development and selling, general and
administrative. In the fourth quarter of fiscal 2002 ("Q4 2002"), we recorded a
charge of $45.4 million which


                                       22


consisted of $36.0 million related to equipment removed from service and held
for sale, $8.2 million for workforce reductions for approximately 380 employees,
including severance and benefits costs, and $1.2 million for leased facilities.
To date, we have disposed of equipment with a net book value of $7.3 million.
The net book value of the remaining unsold equipment as of June 29, 2003 was
$30.7 million. The proceeds from the sales of the assets approximated their
carrying values. The majority of the workforce reduction affected the United
States, with some reductions in Europe and the Philippines and sales offices
that were closed in Europe and the United States. As of the end of Q2 2003, all
of these employees had left Cypress.

A restructuring charge of $3.4 million was recorded in the first quarter of 2003
("Q1 2003") for additional opportunities identified as part of the personnel
portion of the Fiscal 2002 Restructuring Plan. The charge relates to the
severance and related employee benefit costs for the termination of
approximately 150 additional employees, the majority of whom were located in the
United States at our facilities in San Jose, Texas and Minnesota. As of the end
of Q2 2003, all of these employees had left Cypress.

In Q2 2003, we placed back into service certain of these assets previously
recorded as held for sale. The assets were needed to meet increased production
requirements resulting from a substantial increase in unit demand versus our
initial assumptions at the time of the restructuring in Q4 2002. When the assets
were put back into service, they were recorded at their fair value in accordance
with SFAS No. 144, and the related impairment reserve of $3.2 million was
reversed.

The following table summarizes the activity associated with the restructuring
liabilities and asset write-downs since the inception of the restructuring plan
in the Q4 2002:



--------------------------------------------------------------------------------------------------
                                 Property, plant       Leased
(In thousands)                     & equipment       Facilities         Personnel         Total
--------------------------------------------------------------------------------------------------
                                                                             
Q4 2002 Provision                    $ 35,959         $ 1,211            $ 8,188         $ 45,358
Non-cash charges                          (39)             --                (40)             (79)
Cash charges                              (50)           (524)            (5,276)          (5,850)
--------------------------------------------------------------------------------------------------
Balance at December 29, 2002           35,870             687              2,872           39,429
Q1 2003 Provision                          --              --              3,360            3,360
Non-cash charges                       (2,413)             --                 --           (2,413)
Cash charges                              (98)             (2)            (2,263)          (2,363)
--------------------------------------------------------------------------------------------------
Balance at March 30, 2003              33,359             685              3,969           38,013
Non-cash charges                       (3,161)             --                 --           (3,161)
Cash charges                             (225)            (51)            (3,224)          (3,500)
Other adjustments                      (3,191)             --                 --           (3,191)
--------------------------------------------------------------------------------------------------
Balance at June 29, 2003             $ 26,782         $   634            $   745         $ 28,161
--------------------------------------------------------------------------------------------------


Fiscal 2001 Restructuring Plan:

On July 16, 2001, we announced a restructuring plan that involved resizing our
manufacturing facilities, reducing our workforce and combining facilities. The
restructuring was precipitated by the worldwide economic slowdown, particularly
in the business areas in which we operate. The intended effect of the plan was
to size the manufacturing operations and facilities to meet future demand and
reduce expenses in all operations areas. During the third quarter of fiscal
2001, we recorded restructuring charges of $132.1 million related to property,
plant and equipment, leased facilities and personnel.

In connection with the July 16, 2001 announcement, in the third quarter of
fiscal 2001, we removed from service and held for sale equipment with a net book
value of $116.9 million, resulting in a charge of $113.4 million. We have
actively marketed the equipment. Through June 29, 2003, we had disposed of
equipment with a net book value of $55.4 million. The proceeds from the sales of
the assets generally approximated their carrying values. In the second and third
quarters of fiscal 2002 ("Q2 2002" and "Q3 2002," respectively), we placed back
into service certain of these assets previously recorded as held for sale. The
assets were needed to meet increased production requirements resulting from a
substantial increase in unit demand versus our initial assumptions at the time
of the restructuring in the third quarter of 2001 ("Q3 2001"). When the assets
were put back into service, they were written up to their prior cost basis (an
adjustment of $13.2 million and $9.6 million in Q2 2002 and Q3 2002,
respectively), reduced for depreciation expense that would have been recorded
during the period the asset was removed from service (an adjustment of $2.9
million and $2.6 million in Q2 2002 and Q3 2002, respectively), as required by
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
("SFAS 121"). The net effect of the asset adjustment was a credit to the
Restructuring line on the Condensed Consolidated Statement of Operations of
$10.3 million and $7.0 million in their prior cost basis. In the first


                                       23


quarter of fiscal 2002 ("Q1 2002"), we also sold and then leased back certain
other pieces of equipment classified as held for sale. The proceeds from the
sales of the assets approximated their net carrying values. We continue to
actively market the remaining assets held for sale.

In Q1 2002, we recorded an additional charge of $1.6 million for additional cost
reductions identified as part of the personnel portion of the Fiscal 2001
Restructuring Plan. The charge related to severance and related employee benefit
costs for the termination of employees, the majority of whom were located in the
Philippines facility.

In Q3 2002, as a result of the continued drive to lower our cost structure and
break-even sales, we further expanded the scope of the restructuring and
recorded net restructuring costs of $2.4 million, which was comprised of a
charge of $9.4 million offset by a $7.0 million reversal for previously
written-down equipment put back into service discussed above. The charge of $9.4
million consisted of $3.3 million for work force reductions, and included
severance, benefit costs and stock compensation, $3.4 million for capital
equipment removed from service and held for sale and $2.7 million for the
exiting of facility leases.

In Q4 2002, we recorded a credit of $0.7 million related to the revised estimate
of personnel costs. In connection with the Fiscal 2001 Restructuring Plan, we
had accrued costs related to an estimated 890 employees to be terminated. As of
the end of Q2 2003, all of these employees had left Cypress.

The remaining net book value of unsold equipment as of June 29, 2003 was
$26.7 million.

The following table summarizes the activity associated with the restructuring
liabilities and asset write-downs since the inception of the Fiscal 2001
Restructuring Plan in Q3 2001:



--------------------------------------------------------------------------------------------------
                                 Property, plant       Leased
(In thousands)                     & equipment       Facilities         Personnel         Total
--------------------------------------------------------------------------------------------------
                                                                             
Initial provision in September
 30, 2001                            $113,350         $ 4,079            $14,684         $132,113
Non-cash charges                       (5,145)             --             (8,970)         (14,115)
Cash charges                             (380)            (53)            (3,836)          (4,269)
--------------------------------------------------------------------------------------------------
Balance at September 30, 2001         107,825           4,026              1,878          113,729
Non-cash charges                       (2,124)             --                (86)          (2,210)
Cash charges                           (1,239)           (160)              (407)          (1,806)
--------------------------------------------------------------------------------------------------
Balance at  December 30, 2001         104,462           3,866              1,385          109,713
Provision                                  --              --              1,595            1,595
Non-cash charges                       (5,096)             --                 --           (5,096)
Cash charges                             (147)           (375)            (1,581)          (2,103)
--------------------------------------------------------------------------------------------------
Balance at March 31, 2002              99,219           3,491              1,399          104,109
Cash charges                             (151)           (503)              (553)          (1,207)
Other adjustments                     (13,217)             --                 --          (13,217)
--------------------------------------------------------------------------------------------------
Balance at June 30, 2002               85,851           2,988                846           89,685
Provision                               3,378           2,761              3,251            9,390
Non-cash charges                      (12,316)             --               (924)         (13,240)
Cash charges                             (484)           (502)            (1,039)          (2,025)
Other adjustments                      (9,545)             --                 --           (9,545)
--------------------------------------------------------------------------------------------------
Balance at September 29, 2002          66,884           5,247              2,134           74,265
Provision                                  --              --               (701)            (701)
Non-cash charges                      (12,786)             --                 --          (12,786)
Cash charges                             (419)           (582)              (799)          (1,800)
--------------------------------------------------------------------------------------------------
Balance at December 29, 2002           53,679           4,665                634           58,978
Provision                                  --              --                 --               --
Non-cash charges                      (16,046)             --                 --          (16,046)
Cash charges                             (862)           (674)              (540)          (2,076)
--------------------------------------------------------------------------------------------------
Balance at March 30, 2003              36,771           3,991                 94           40,856
Provision                                  --              --                 --               --
Non-cash charges                       (1,206)             --                 --           (1,206)
Cash charges                             (471)           (739)              (115)          (1,325)
Other adjustments                         (64)             --                 21              (43)
--------------------------------------------------------------------------------------------------
Balance at June 29, 2003             $ 35,030         $ 3,252            $     0         $ 38,282
--------------------------------------------------------------------------------------------------


Acquisition Costs

Acquisition costs consist primarily of the amortization of acquired intangible
assets and expensed in-process research and development charges. Amortization of
intangible assets was $9.3 million and $18.8 million for the three and six
months ended June 29, 2003, respectively, compared to $9.8 million and $21.5
million for the three and six months ended June 30, 2002, respectively. We
expensed in-process research and development of $0.5 million in Q1 2002 related
to the acquisition of Sahasra Networks.


                                       24


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



                                                                 Three months ended                     Six months ended
--------------------------------------------------------------------------------------------------------------------------------
                                                             June 29,           June 30,           June 29,           June 30,
(In thousands)                                                 2003               2002               2003               2002
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                        
Interest income                                            $      5,131       $      3,835       $      8,324       $     12,359
Interest expense                                                 (5,130)            (4,684)            (9,806)            (9,629)
Other income and (expense), net                                  (3,721)            (1,527)            (4,080)             1,177
--------------------------------------------------------------------------------------------------------------------------------
Interest and other income and (expense), net               $     (3,720)      $     (2,376)      $     (5,562)      $      3,907
--------------------------------------------------------------------------------------------------------------------------------


Interest income increased by $1.3 million or 33.8% in Q2 2003 versus Q2 2002 due
to higher cash balances, but was tempered by lower investment yields. The higher
cash balance was driven primarily by proceeds received from our 1.25%
convertible bond offering during Q2 2003. Interest bearing cash and investment
balances increased by $351.9 million from $247.9 million as of June 30, 2002 to
$599.8 million as of June 29, 2003. Subsequent to June 29, 2003, we retired all
of our 4.0% convertible subordinated notes (principle amount $255.2 million) and
$70.0 million (principle amount), of our 3.75% convertible subordinated notes.
Interest income for the three and six month periods ended June 29, 2003 included
$1.1 million and $1.3 million, respectively, of interest related to the
shareholder approved Stock Purchase Assistance Plan (see Note 11 for more
details).

Interest expense increased by $0.4 million in Q2 2003 to $5.1 million versus Q2
2002 primarily due to the issuance of $600.0 million 1.25% convertible
subordinated notes on June 3, 2003. Interest expense is primarily associated
with our 4.0%, 3.75% and 1.25% convertible subordinated notes issued in January
2000, June 2000 and June 2003, respectively.

Other income and (expense), net was $(3.7) million and $(4.1) million,
respectively, for Q2 2003 and the first six months of fiscal 2003 compared to
$(1.5) million and $1.2 million, respectively, for the comparable fiscal 2002
periods. Below is a summary of the major components:



                                                                 Three months ended                     Six months ended
--------------------------------------------------------------------------------------------------------------------------------
                                                             June 29,           June 30,           June 29,           June 30,
(In thousands)                                                 2003               2002               2003               2002
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                        
Amortization of bond issuance costs                        $       (960)      $       (704)      $     (1,651)      $     (1,456)
Gain (loss) on repurchase of bonds                               (1,247)             1,242             (1,247)             5,946
 Investment impairment charges                                   (1,012)            (2,101)            (1,012)            (2,101)
Foreign exchange losses                                            (608)                40               (897)            (1,366)
Minority interest                                                    66                 --              1,045                 --
Other                                                                40                 (4)              (318)               154
--------------------------------------------------------------------------------------------------------------------------------
Other income and (expense), net                            $     (3,721)      $     (1,527)      $     (4,080)      $      1,177
--------------------------------------------------------------------------------------------------------------------------------


Income Taxes

Our effective rates of income tax expense for Q2 2003 and Q2 2002 were 1.7% and
7.6%, respectively. For the six months ended June 29, 2003 and June 30, 2002,
our effective rates of income tax expense were 3.9% and 1.2%, respectively. A
tax provision of $0.2 million was recorded during Q2 2003 compared to a tax
provision of $2.0 million during Q2 2002. The tax provision for each fiscal year
is attributable to foreign withholding tax on royalty income and income earned
in certain countries that is not offset by current year net operating losses in
other countries. The future tax benefit of certain losses is not currently
recognized due to management's assessment of the likelihood of realization of
these benefits. Our effective tax rate may vary from the U.S. statutory rate
primarily due to utilization of future benefits, the earnings of foreign
subsidiaries taxed at different rates, tax credits, and other business factors.

Liquidity and Capital Resources

--------------------------------------------------------------------------------
                                                       June 29,     December 29,
                                                         2003          2002
(In thousands)
--------------------------------------------------------------------------------
Cash, cash equivalents and short-term investments    $    511,293   $    127,937
Long-term marketable securities                            25,761         16,574
Restricted cash                                            62,728         62,380
Long-term debt (excluding current portion)                685,159        469,875
--------------------------------------------------------------------------------


                                       25


Key Components of Cash Flow

Our cash, cash equivalents and short-term investments totaled $511.3 million at
June 29, 2003, a $383.4 million increase from the end of fiscal 2002. In July
2003, we redeemed $325.2 million of our 4.0% and 3.75% convertible notes. The
increase is primarily due to financing activities in the first six months of
fiscal 2003.

Cash generated from operations was $36.7 million in the first half of fiscal
2003 compared to a use of cash of $8.8 million in the first half of fiscal 2002.
Lower operating losses contributed $22.1 million of this; $11.8 million resulted
from lower working capital requirements and the balance of $11.6 million is
related to changes in non-cash items.

Investment activities used cash of $34.4 million in the first half of fiscal
2003 compared to a use of cash of $5.6 million in the first half of fiscal 2002,
despite $52.7 million of lower capital expenditures and $22.6 million less of
other investments. The difference was driven by the lower sales or maturities of
investments.

Financing activities generated $392.4 million in the first half of fiscal 2003
compared to using $26.8 million in the first half of fiscal 2002. This was
driven by the timing of the new convertible debt issue with the net proceeds
received in the second quarter of fiscal 2003. See Note 7 to the Condensed
Consolidated financial statements for a detailed discussion related to changes
in our convertible debt.

Liquidity

Based on our current plan, we expect to generate positive cash flow from
operations in the fiscal year ending December 28, 2003. Our expected significant
investment and financing cash outlays for the fiscal year ending December 28,
2003 include capital expenditures for investment in our product development and
technology initiatives and investments in SunPower Corporation ("SunPower"). The
Board of Directors has approved programs authorizing the repurchase of our
common stock and convertible subordinated notes (the "Subordinated Notes") in
the open market or in privately negotiated transactions at anytime. However, the
timing and actual number of shares or principal amount to be repurchased is
limited to $15.0 million, is at the discretion of management and is contingent
on numerous factors including cash flow.

We have $668.7 million of aggregate principal amount in subordinated notes that
are due in July 2005 and June 2008 in the amount of $68.7 million and $600.0
million, respectively. In July 2003, we repurchased our 3.75% Convertible
Subordinated Notes with a principal balance of $70.0 million and repurchased the
remaining outstanding 4.0% Convertible Subordinated Notes with a principal
balance of $255.2 million. All the subordinated notes are subject to compliance
with certain covenants that do not contain financial ratios. As of June 29,
2003, 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 Subordinated Notes, or the holders of a specific percentage thereof,
would have the ability to demand immediate payment of all amounts outstanding.

We have entered into a new master synthetic operating lease agreement, to
replace two previously existing synthetic operating lease agreements, for
manufacturing and office facilities with one lessor. This lease requires us to
purchase the property or to arrange for the property to be acquired by a third
party at lease expiration. If we had exercised our right to purchase all the
properties subject to this lease at June 29, 2003, 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 this lease.
As of June 29, 2003, the amount of restricted cash recorded was $62.7 million,
which was classified as a non-current asset on our condensed consolidated
balance sheet.

 At June 29, 2003, we had an outstanding note with Sumitomo Bank Japan. The
principal amount including accrued interest was $3.9 million (denominated in
Yen). This amount was paid on June 30, 2003.

In May 2002, we invested $8.7 million in convertible preferred stock of
privately held SunPower, a manufacturer of ultra-high-efficiency silicon solar
cells. We currently own approximately 57% of SunPower on an as converted basis.
We own a warrant to purchase an additional $16.0 million in convertible
preferred stock ("Preferred Stock Warrant") of SunPower. Since we did not
exercise the warrant by April 1, 2003, we are obligated to fund SunPower up to
$5.6 million through May 2004 at a rate of up to $0.4 million per month. As of
June 29, 2003, we had loaned SunPower $1.2 million bearing interest at the
applicable federal rate in accordance with this obligation. Subject to certain
product qualification tests, we intend to exercise the Preferred Stock Warrant
in the second half of fiscal 2003.


                                       26


In Q1 2003, we loaned SunPower $2.5 million. SunPower will be repaying the loan
monthly through 2008. In addition, we intend to secure financing for a loan of
up to $30.0 million on behalf of SunPower in the third quarter of fiscal 2003
("Q3 2003"). As of June 29, 2003, Cypress had advanced $3.5 million against this
future facility. Subsequent to June 29, 2003, Cypress advanced an additional
$8.2 million. During Q1 2003, we obtained effective control and now include
SunPower in our condensed consolidated financial results.

As disclosed in Note 7, we entered into long-term loan agreements with two
lenders with an aggregate principal equal to $24.8 million in Q1 2003. These
agreements are collateralized by specific equipment located at our U.S.
manufacturing facilities. Principal amounts are to be repaid with monthly
installments inclusive of accrued interest, over a 3 to 4 year period. The
applicable interest rates are variable based on changes to LIBOR rates. Both
loans are subject to financial and non-financial covenants and we were in
compliance with these covenants as of June 29, 2003. As of June 29, 2003, the
remaining principal amount of both loans was $23.7 million.

We currently plan for approximately $100.0 million in expenditures on equipment
in fiscal 2003 and anticipate significant continuing capital expenditures in
subsequent years.

Capital Resources and Financial Condition

As of June 30, 2003 we had cash, cash equivalents, and investments totaling
$537.1 million. In July 2003, we used $325.2 million to retire our 4.0%
convertible subordinated notes (principal amount of $255.2) and 3.75%
convertible subordinated notes (principal amount of $70.0 million). After the
retirement of the above notes, we had cash, cash equivalents, and investments of
approximately $211.9 million. We had an additional $62.7 million of restricted
cash held as collateral for real estate synthetic leases.

We believe that liquidity provided by existing cash, cash equivalents,
investments, 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, refinance and/or restructure our debt and
provide us with additional flexibility to take advantage of business
opportunities that arise.

Recent Accounting Pronouncements

Financial Accounting Standards Board ("FASB") Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), was issued in January
2003. FIN 46 requires that if an entity is the primary beneficiary of a variable
interest entity, the assets, liabilities and results of operations of the
variable interest entity should be included in the consolidated financial
statements of the entity. The provisions of FIN 46 are effective immediately for
all arrangements entered into after January 31, 2003. We have not invested in
any variable interest entities after January 31, 2003. For those arrangements
entered into prior to January 31, 2003, the provisions of FIN 46 are required to
be adopted at the beginning of the first interim or annual period beginning
after June 15, 2003. On June 27, 2003, we entered into a new operating lease to
refinance the old ones (see Note 6). We refinanced these leases in a manner that
best met our financing strategy and is not subject to the consolidation
provisions of FIN 46. We are evaluating the effect on our condensed consolidated
financial statements of arrangements created prior to February 1, 2003. We do
not expect to identify any significant variable interest entities that would be
consolidated.

In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). The new guidance
amends SFAS 133 for decisions made: (a) as part of the Derivatives
Implementation Group process that effectively required amendments to SFAS 133,
(b) in connection with other Board projects dealing with financial instruments,
and (c) regarding implementation issues raised in relation to the application of
the definition of a derivative, particularly regarding the meaning of
"underlying" and the characteristics of a derivative that contains financing
components. The amendments set forth in SFAS 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. SFAS 149 is generally effective for contracts entered into or
modified after June 30,


                                       27


2003 (with a few exceptions) and for hedging relationships designated after June
30, 2003. We will apply the provisions of SFAS 149 prospectively to transactions
entered into and or modified after June 30, 2003.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in certain circumstances). Many of these instruments
were previously classified as equity. Although some of the provisions of this
statement are consistent with the current definition of liabilities in FASB
Concepts Statement No. 6, "Elements of Financial Statements", the remainder are
consistent with FASB's intention to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own
shares. This statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. There was no impact to the
condensed consolidated financial statements related to SFAS 150 for the six
months ended June 29, 2003. We do not expect the application of SFAS 150 to have
a material effect on our condensed consolidated financial statements.

Risk Factors

The discussion in this report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that involve risks and uncertainties, including,
but not limited to, statements as to future operating results and business
plans, our prospects and the prospects of the semiconductor industry generally,
the impact of new product development and improvements in manufacturing
technologies and yields on variances, pressure on and trends for average selling
prices, our intention to seek intellectual property protection for our
manufacturing processes, expected capital expenditures, future acquisitions, the
financing of SunPower Corporation, the repayment of loans by SunPower, the
dependence of future success on our ability to develop and introduce new
products, the general economy and its impact to the market segments we serve,
changing environment and the cycles of the semiconductor industry, competitive
pricing and the rate at which new products are introduced, successful
integration and achieving the objectives of the acquired businesses, cost goals
emanating from manufacturing efficiencies, expected financing and investment
cash outlays, adequacy of cash and working capital, when we expect to generate
positive cash flow from operations, risks related to investing in development
stage companies, 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 "Risk Factors" below and elsewhere in this report.

We are exposed to the risks associated with the slowdown in the U.S. and
worldwide economy.

Among other factors, concerns about inflation, decreased consumer confidence and
spending and reduced corporate profits and capital spending have resulted in a
downturn in the U.S. economy generally and in the semiconductor industry in
particular. As a result of the downturn, our volumes initially declined and were
followed by significant reductions in our average selling prices. We expect
continued pressure on average selling prices in the future. As a consequence of
the continued economic downturn in fiscal 2002, during the fourth quarter of
fiscal 2002, we announced a restructuring plan that resized our manufacturing
facilities, reduced our workforce and combined facilities. In Q1 2003, we took
an additional charge for personnel related to the Fiscal 2002 Restructuring
Plan. In fiscal 2002, we recorded a charge for the impairment of goodwill and
intangibles related to Silicon Light Machines as well as the impairment of
certain other investments in development stage companies. If the adverse
economic conditions continue or worsen, additional restructuring of operations
may be required, and our business, financial condition and results of operations
may be seriously harmed.

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

The semiconductor industry has historically been characterized by wide
fluctuations in the demand for, and supply of, semiconductors. These
fluctuations have helped produce many occasions when supply and demand for
semiconductors have not been in balance. In the past, these industry-wide
fluctuations in demand, which have resulted in under-utilization of our
manufacturing capacity, have seriously harmed our operating results. In some
cases, industry downturns with these characteristics have lasted more than a
year. Prior experience has shown that restructuring of the operations, resulting
in significant restructuring charges, may become necessary if an industry
downturn persists. In response to the current significant downturn, we
restructured our manufacturing operations and administrative areas in Q3 2001
and Q4 2002 to increase cost efficiency while


                                       28


still maintaining an infrastructure that will enable us to grow when sustainable
economic recovery begins. When these cycles occur, however, they will likely
seriously harm our business, financial condition and results of operations and
we may need to take further action to respond to them.

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

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

o     the intense competitive pricing pressure to which our products are
      subject, which can lead to rapid and unexpected declines in average
      selling prices;
o     the complexity of our manufacturing processes and the sensitivity of our
      production costs to declines in manufacturing yields, which make yield
      problems both possible and costly when they occur; and
o     the need for constant, rapid, new product introductions which present an
      ongoing design and manufacturing challenge, which can be significantly
      impacted by even relatively minor errors, and which may result in products
      never achieving expected market demand.

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

In addition, because we recognize revenues from sales to 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.

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

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

o     networking equipment;
o     wireless telecommunications equipment;
o     computers and computer-related peripherals; and
o     consumer electronics, automotive electronics and industrial controls.

Many of our products are incorporated into data communications and
telecommunications end products. Any reduction in the growth of, or decline in
the demand for, networking applications, mass storage, telecommunications,
cellular base stations, cellular handsets and other personal communication
devices that incorporate our products could seriously harm our business,
financial condition and 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 and may in the future experience significant fluctuations in
demand. We may also be seriously harmed by slower growth in the other markets in
which we sell our products.

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

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

In addition to following the general pattern of decreasing average selling
prices, the selling prices for certain products, particularly commodity
products, fluctuate significantly with real and perceived changes in the balance
of supply and demand for these products. In the event we are unable to decrease
per unit manufacturing costs at a rate equal to or faster than the rate at which
selling prices continue to decline, our business, financial


                                       29


condition and results of operations will be seriously harmed. Furthermore, we
expect our competitors to invest in new manufacturing capacity and achieve
significant manufacturing yield improvements in the future. These developments
could dramatically increase the worldwide supply of competitive products and
result in further downward pressure on prices.

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

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

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

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

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

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

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

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

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


                                       30



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.

Our ability to meet our cash requirements depends on a number of factors, many
of which are beyond our control.

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 assure 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 compared to our
competitors. There can be no assurance that we will 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 or increased working capital requirements may be adversely
affected.

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

Our semiconductor manufacturing operations require raw materials that must meet
exacting standards. We generally have more than one source available for these
materials, but 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, for certain of our
products the raw materials we need for our business could become more scarce as
worldwide demand for semiconductors increases. Interruption of our sources of
raw materials could seriously harm our business, financial condition and results
of operations.

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

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

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

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

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

We have 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 any of a variety of reasons, including inadequate demand or a
significant shift in the


                                       31


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. If the downturn continues, we could incur additional
restructuring charges, which could further negatively affect our business.

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

Our headquarters, some manufacturing facilities and some of our major vendors'
facilities are located near major earthquake faults. We have not been able to
maintain earthquake 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.

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

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

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

o     our success in developing new products and manufacturing technologies;
o     the quality and price of our products;
o     the diversity of our product line;
o     the cost effectiveness of our design, development, manufacturing and
      marketing efforts;
o     our customer service;
o     our customer satisfaction;
o     the pace at which customers incorporate our products into their systems;
o     the number and nature of our competitors and general economic conditions;
      and
o     our access to and the availability of capital.

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.

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

We order materials and build semiconductors based primarily on our internal
forecasts and secondarily on existing orders, which may be cancelled under many
circumstances. Consequently, we depend on our forecasts 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


                                       32


business, financial condition and results of operations could be seriously
harmed, either through missed revenue opportunities because inventory for sale
was insufficient or through excessive inventory that would require write-offs.

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

In order to remain competitive, semiconductor manufacturers generally must spend
heavily on equipment to maintain or increase technology and design development
and manufacturing capacity and capability. We currently plan for approximately
$100.0 million in expenditures on equipment in fiscal 2003 and anticipate
significant continuing capital expenditures in subsequent years. In the past, we
have reinvested a substantial portion of our cash flow from operations in
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 flow from operations to maintain or increase
manufacturing capability and capacity as necessary. In such a situation, we
would need to seek financing from external sources to satisfy our needs for
manufacturing equipment and, if cash flow from operations declines too much, for
operational cash needs as well. Such financing, however, may not be available on
terms that are satisfactory to us or at all, in which case our business,
financial condition and results of operations would be seriously harmed.

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

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

We believe that stock option grants are critical to our ability to attract and
retain personnel. The New York Stock Exchange implemented rules effective June
30, 2003 that would require, subject to certain exceptions, stockholder approval
for equity compensation plans, including stock option plans. Our ability to hire
or retain highly qualified personnel may be seriously impacted due to an
inability to grant stock options and other equity based compensation if we are
unable to obtain stockholder approval for such new plans in a timely manner or
at all.

If we lose existing qualified personnel or are unable to hire new qualified
personnel as needed, our business, financial condition and results of operations
could be seriously harmed.

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

International revenues accounted for 61% of our total revenues in Q2 2003 and
the first six months of fiscal 2003. Long-lived assets are held primarily in the
United States with 10% held in the Philippines and 1% in other foreign
countries. Our Philippine assembly and test operations, as well as our
international sales offices, face risks frequently associated with foreign
operations including:

o     currency exchange fluctuations;
o     the devaluation of local currencies;
o     political instability;
o     changes in local economic conditions;
o     import and export controls; and
o     changes in tax laws, tariffs and freight rates.

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


                                       33


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

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

We depend on third parties to transport our products.

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

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

We completed one acquisition in fiscal 2002, six acquisitions in fiscal 2001 and
four acquisitions in fiscal 2000 and may pursue additional acquisitions in the
future. If we fail to integrate these businesses successfully or properly, our
quarterly and annual results may be seriously harmed. Integrating these
businesses, people, products and services with our existing business could be
expensive, time-consuming and a strain on our resources. Specific issues that we
face with regard to prior and future acquisitions include:

o     integrating acquired technology or products;
o     integrating acquired products into our manufacturing facilities;
o     assimilating the personnel of the acquired companies;
o     coordinating and integrating geographically dispersed operations;
o     our ability to retain customers of the acquired company;
o     the potential disruption of our ongoing business and distraction of
      management;
o     the maintenance of brand recognition of acquired businesses;
o     the failure to successfully develop acquired in-process technology,
      resulting in the impairment of amounts currently capitalized as intangible
      assets;
o     unanticipated expenses related to technology integration;
o     the development and maintenance of uniform standards, corporate cultures,
      controls, procedures and policies;
o     the impairment of relationships with employees and customers as a result
      of any integration of new management personnel; and
o     the potential unknown liabilities associated with acquired businesses.

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

We have outstanding loans, consisting of principal and cumulative accrued
interest, of $108.0 million to employees and former employees under the
shareholder-approved 2001 Employee Stock Purchase Assistance Plan. (See Note 11
to our condensed consolidated financial statements included in this report for a
further description of this plan.) We made the loans to employees for the
purpose of purchasing Cypress 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 Cypress's 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 CEO and the Board of
Directors do not participate in this program. To date, there have been
immaterial write-offs. As of June 29, 2003, we have a loss reserve against these
loans of $16.2 million, including an increase to the reserve of $0.1 million
recorded during Q2 2003. In determining this reserve requirement, management
considered various factors, including an independent fair value analysis of
these loans and the underlying collateral. At June 29, 2003, the difference
between the carrying value of the loans and the underlying common stock
collateral was $31.3 million. While the loans are secured by the shares of our
stock purchased with the loan proceeds, the value of this collateral would be
adversely affected if our stock price declined significantly.


                                       34


Our results of operations would be adversely affected if a significant amount of
these loans were not repaid. Similarly, if our stock price were to decrease, our
employees bear greater repayment risk 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.

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

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


                                       35


ITEM III. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest and Foreign Currency Exchange Rates

Cypress is exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. A majority of Cypress's revenue and
capital spending is transacted in U.S. dollars. However, Cypress does enter into
these transactions in other currencies, primarily the Japanese Yen and the Euro.
To protect against reductions in value and the volatility of future cash flows
caused by changes in foreign exchange rates, Cypress has established hedging
programs for balance sheet exposures and exposures to exchange rate changes for
purchases of capital equipment. Cypress's hedging programs reduce, but do not
always eliminate, the impact of foreign currency exchange rate movements. To
mitigate these risks, Cypress utilizes derivative financial instruments. Based
on Cypress's overall currency rate exposure at June 29, 2003, a near-term 10%
appreciation or depreciation in the U.S. dollar, relative to the Japanese Yen or
the Euro, would have an immaterial effect on Cypress's financial position,
results of operations and cash flows over the next fiscal year. Cypress does not
use derivative financial instruments for speculative or trading purposes.

A 100 basis point increase or decrease in interest rates would not materially
impact the fair market value of Cypress's investment portfolio nor Cypress's
statement of operations due to the short-term nature of Cypress's investment
portfolio and the variable interest rate characteristics of Cypress's debt and
synthetic lease obligations. At June 29, 2003, Cypress's debt and synthetic
lease obligations containing variable interest rate characteristics amounted to
$23.7 million and $62.7 million, respectively.

Equity Options

At June 29, 2003, Cypress had outstanding a series of equity options on Cypress
common stock with an initial cost of $26.0 million, which is classified in
stockholders' equity. The contracts, which were extended during Q2 2003, require
physical settlement and expire in December 2003. Upon expiration of the options,
if Cypress's stock price is above the threshold price of $20.00 per share,
Cypress will receive a settlement value totaling $28.9 million. If Cypress's
stock price is below the threshold price of $20.00 per share, Cypress will
receive 1.4 million shares of its common stock. Alternatively, the contract may
be renewed and extended. The transaction is recorded in stockholders' equity in
the accompanying condensed consolidated balance sheet.

In conjunction with the 1.25% convertible subordinated notes offering in June
2003, Cypress purchased a call spread option on Cypress's common stock ("Call
Spread Option") maturing in July 2004 for $49.3 million. The Call Spread Option,
including fees and costs, has been accounted for as an equity transaction in
accordance with Emerging Issues Task Force No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock." The Call Spread Option covers approximately 32 million shares of Cypress
common stock. The Call Spread Option is designed to mitigate dilution from
conversion of the 1.25% convertible subordinated notes in the event that the
market price per share of the Company's common stock upon exercise of the call
spread options is greater than $15 per share and is less than or equal to $24.50
per share. The call spread option may be settled at the Company's option in
either net shares or in cash. Settlement of the Call Spread Option in net shares
on the expiration date would result in the Company receiving a number of shares,
not to exceed 12.4 million shares, of our common stock with a value equal to the
amount otherwise receivable on cash settlement. Should there be an early unwind
of the Call Spread Option, the amount of cash or net shares potentially received
by the Company will be dependent upon then existing overall market conditions,
and on the Company's stock price, the volatility of the Company's stock and the
amount of time remaining on the Call Spread Option.

Investments in Development Stage Companies

Cypress has 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
June 29, 2003, Cypress had invested $25.2 million in development stage
companies, all of which could be lost if the companies are not successful.

As Cypress's equity investments generally do not permit Cypress to exert
significant influence or control over the entity in which Cypress is investing,
these amounts generally represent Cypress's cost of the investment, less any
adjustments Cypress makes when it determines that an investment's net realizable
value is less than its carrying cost.


                                       36


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, Cypress carefully considers 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 Cypress requests 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 its evaluation, Cypress previously
recorded impairment charges related to Cypress's investments in privately held
companies in the aggregate of $19.6 million in fiscal years 2002 and 2001.
Cypress has recorded impairment charges of $1.0 million in Q2 2003 and the six
months ended Q2 2003.

Estimating the net realizable value of investments in privately held early-stage
technology companies is inherently subjective and may contribute to volatility
in Cypress's reported results of operations. For example, if the current weak
investing environment continues throughout fiscal 2003, Cypress may incur
additional impairments to its equity investments in privately held companies.

Stock Purchase Assistance Plan

Included in Other current assets at June 29, 2003, Cypress has outstanding
loans, consisting of principal and cumulative accrued interest, of $108.0
million to employees and former employees under the shareholder-approved 2001
Employee Stock Purchase Assistance Plan. As of the end of fiscal 2002, the
outstanding principal and cumulative accrued interest totaled $106.6 million.
Cypress made the loans to employees for the purpose of purchasing Cypress 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
Cypress's common stock purchased with the proceeds of the loan. The primary
benefit to Cypress from this program is increased employee retention. In
accordance with the plan, the CEO and the Board of Directors do not participate
in this program. To date, there have been immaterial write-offs. As of June 29,
2003, Cypress had a loss reserve against these loans of $16.2 million. In
determining the reserve, management considered various factors, including an
independent fair value analysis of the loans and the underlying collateral. At
June 29, 2003, the difference between the carrying value of the loans and the
underlying common stock collateral was $31.3 million.

If there were an additional 10% decline in the stock price, the difference
between the carrying value of the loans and the underlying common stock
collateral would be $37.4 million. If the stock continues at the same level, or
does not increase, Cypress may have to further evaluate the reserve. However,
Cypress is 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.


                                       37


ITEM 4. CONTROLS AND PROCEDURES

(a)   Evaluation of disclosure controls and procedures. Based on their
      evaluation as of a date within 90 days of the filing date of this
      Quarterly Report on Form 10-Q, Cypress's principal executive officer and
      principal financial officer have concluded that Cypress's disclosure
      controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under
      the Securities Exchange Act of 1934 (the "Exchange Act")) are effective to
      ensure that information required to be disclosed by Cypress in reports
      that it files or submits under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in Securities
      and Exchange Commission rules and forms.

(b)   Changes in internal controls. There were no significant changes in
      Cypress's internal controls or in other factors that could significantly
      affect these controls subsequent to the date of their evaluation. Cypress
      has not identified any significant deficiencies or material weaknesses in
      such controls, and therefore there were no corrective actions taken.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required by this item is included in Part I in Note 6 to the
Condensed Consolidated Financial Statements and is incorporated herein by
reference.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On June 3, 2003, Cypress sold $600 million in principal amount of its 1.25%
Convertible Subordinated Plus Cash(SM) Notes due 2008 to U.S. Bancorp Piper
Jaffray Inc., Credit Suisse First Boston LLC, Merrill Lynch, Pierce Fenner &
Smith Incorporated and Wachovia Securities, Inc. initial purchasers, pursuant to
the exemption from registration under Section 4(2) of the Securities Act of
1933, as amended, for resale by the initial purchasers to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as
amended. The proceeds to Cypress from the offering were net of the initial
purchasers' discount of $18,000,000.

Each $1,000 principal amount of the notes is convertible into 55.172 shares
(subject to certain adjustment of Cypress's common stock plus a cash payment of
$300. Upon conversion of a note, Cypress may, at its option and subject to
certain conditions, elect to make the $300 cash payment in shares of its common
stock based on the market price of its common stock at the time of conversion.
At any time prior to maturity, Cypress may, at its option, elect to terminate
the holders' conversion rights if the closing price of Cypress common stock
exceeds $21.75 (subject to certain adjustments) for 20 out of 30 consecutive
trading days. Cypress may redeem some or all of the notes at any time on or
after June 20, 2006 at 100% of the principal amount, plus accrued and unpaid
interest to, but excluding, the redemption date.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

On May 1, 2003, at Cypress's Annual Meeting of Shareholders, the nominated
directors were elected and the appointment of PricewaterhouseCoopers LLP as
Cypress's independent auditors was ratified. The results of the votes were as
follows:

(1)   Election of Directors:

--------------------------------------------------------------------------------
                              Total Votes for Each     Total Votes Withheld From
                                    Director            Each Director including
                                                              abstentions
--------------------------------------------------------------------------------
T.J. Rodgers                       112,288,005                  763,309
W. Steve Albrecht                  110,179,045                2,872,269
Eric A. Benhamou                   109,779,394                3,271,919
Fred B. Bialek                     111,638,362                1,412,952
John C. Lewis                      109,822,182                3,229,132
James R. Long                      109,811,557                3,239,757
Alan F. Shugart                    112,283,268                  768,046


                                       38


(2)   Ratify the appointment of PricewaterhouseCoopers LLP as the independent
      auditors of Cypress for the fiscal year ending December 28, 2003:

        For 107,479,167         Against 5,493,601       Abstain 78,546

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(1)   Exhibits

      Exhibit 4.1         Indenture, dated as of June 3, 2003, between Cypress
                          Semiconductor Corporation and U.S. Bank National
                          Association, as trustee (incorporated by reference to
                          Exhibit 4.1 to Cypress's Registration Statement on
                          Form S-3 filed on June 30, 2003 (file No.
                          333-106667)).

      Exhibit 4.2         Form of 1.25% Convertible Subordinated Plus Cash
                          (incorporated by reference to Exhibit 4.2 to Cypress's
                          Registration statement on Form S-3 filed on June 30,
                          2003 (file No. 333-106667).

      Exhibit 4.3         Registration Rights Agreement, dated June 3, 2003,
                          between the Registrant and the initial purchasers
                          named therein (incorporated by reference to Exhibit
                          4.3 to Cypress's Registration Statement on Form S-3
                          filed on June 30, 2003 (File No. 33-106667).

      Exhibit 10.1        Amendment to 1999 Nonstatutory Stock Option Plan.

      Exhibit 10.2        Lease Agreement dated as of June 27, 2003 between
                          Wachovia Development Corporation and Cypress
                          Semiconductor Corporation.

      Exhibit 10.3        Participation Agreement, dated as of June 27, 2003, by
                          and among Cypress Semiconductor Corporation, Wachovia
                          Development Corporation, the holders of credit notes
                          from time to time party thereto, the mortgage lenders
                          from time to time party thereto, the Wachovia Bank,
                          National Association, as agent.

      Exhibit 10.4        Call Spread Option Confirmation, dated May 29, 2003,
                          among Cypress Semiconductor Corporation, Credit Suisse
                          First Boston International, and Credit Suisse First
                          Boston.

      Exhibit 99.1        Certification Pursuant to 18 U.S.C. Section 1350, as
                          Adopted Pursuant to Section 906 of the Sarbanes-Oxley
                          Act of 2002.

      Exhibit 99.2        Certification Pursuant to 18 U.S.C. Section 1350, as
                          Adopted Pursuant to Section 906 of the Sarbanes-Oxley
                          Act of 2002.

(2)   Reports on Form 8-K

      We filed three reports on Form 8-K:

      Filing Date         Item Reported On

      April 17, 2003      Item 9. We furnished a copy of our press release
                          announcing our results for the fiscal quarter ending
                          March 30, 2003, including a reconciliation between
                          GAAP and non-GAAP measures discussed in the press
                          release.

      April 18, 2003      Item 9. We furnished a reconciliation between certain
                          non-GAAP financial information included in our Annual
                          Report to Stockholders and financial measures
                          calculated in accordance with GAAP.

      May 29, 2003        Item 5. We filed as exhibits: (1) the registrant's
                          press release, dated May 28, 2003, announcing the
                          registrant's intention to offer approximately $500
                          million aggregate principal amount (excluding any
                          option of the initial purchasers to purchase
                          additional notes) of convertible subordinated notes
                          plus cash notes (the "Notes") through an offering to
                          qualified institutional buyers pursuant to Rule 144A
                          under the Securities Act of 1933, as amended and the
                          simultaneous purchase of issuer call spread options
                          and (2) the registrant's press release, dated May 29,
                          2003, announcing that the registrant priced its
                          offering of the $500.0 million aggregate principal
                          amount of the Notes.


                                       39


                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                  CYPRESS SEMICONDUCTOR CORPORATION

                                  By  /s/ Emmanuel Hernandez
                                      ------------------------------------------
                                      Emmanuel Hernandez
                                      Vice President, Finance and
                                      Administration and Chief Financial Officer

Dated: August 11, 2003


                                       40


                        CERTIFICATION OF QUARTERLY REPORT

I, T.J. Rodgers, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Cypress
      Semiconductor Corporation;

2.    Based on my knowledge, this quarterly report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this quarterly report, fairly present in all
      material respects the financial condition, results of operations and cash
      flows of the registrant as of, and for, the periods presented in this
      quarterly report;

4.    The registrant's other certifying officer and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
      have:

      a)    designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this
            quarterly report is being prepared;

      b)    evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this quarterly report (the "Evaluation Date"); and

      c)    presented in this quarterly report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5.    The registrant's other certifying officer and I have disclosed, based on
      our most recent evaluation, to the registrant's auditors and the audit
      committee of registrant's board of directors (or persons performing the
      equivalent function):

      a)    all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and

      b)    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6.    The registrant's other certifying officer and I have indicated in this
      quarterly report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.

Dated: August 11, 2003

                                   By    /s/ T.J. Rodgers
                                         -------------------------------------
                                         President and Chief Executive Officer


                                       41


                        CERTIFICATION OF QUARTERLY REPORT

I, Emmanuel Hernandez, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Cypress
      Semiconductor Corporation;

2.    Based on my knowledge, this quarterly report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this quarterly report, fairly present in all
      material respects the financial condition, results of operations and cash
      flows of the registrant as of, and for, the periods presented in this
      quarterly report;

4.    The registrant's other certifying officer and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
      have:

      a)    designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this
            quarterly report is being prepared;

      b)    evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this quarterly report (the "Evaluation Date"); and

      c)    presented in this quarterly report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5.    The registrant's other certifying officer and I have disclosed, based on
      our most recent evaluation, to the registrant's auditors and the audit
      committee of registrant's board of directors (or persons performing the
      equivalent function):

      a)    all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and

      b)    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6.    The registrant's other certifying officer and I have indicated in this
      quarterly report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.

Dated: August 11, 2003

                                By   /s/ Emmanuel Hernandez
                                      ------------------------------------------
                                      Vice President, Finance and
                                      Administration and Chief Financial Officer


                                       42