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 July 1, 2001

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)

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  |_|

The total number of shares of the registrant’s common stock outstanding as of July 1, 2001 was 125,232,000.

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INDEX

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

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

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

PART II –OTHER INFORMATION

Item 1.  Legal Proceedings

Item 2.  Changes in Securities and Use of Proceeds

Item 3.  Defaults Upon Senior Securities

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

Item 5.  Other Information

Item 6.  Exhibits and Reports on Form 8-K
                a)       Exhibits
                b)       Reports on Form 8-K

Signatures

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ITEM 1.   FINANCIAL STATEMENTS

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

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

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CYPRESS SEMICONDUCTOR CORPORATION

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

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

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CYPRESS SEMICONDUCTOR CORPORATION

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

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

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CYPRESS SEMICONDUCTOR CORPORATION

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

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

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended July 1, 2001
(Unaudited)

Note 1 – Interim Statements

In the opinion of management of Cypress Semiconductor Corporation (“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 adjusted 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 31, 2000.

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.

Cypress reports on a fiscal basis and ends its quarters on the Sunday closest to the end of the applicable calendar quarter. The three-month periods ended July 1, 2001 (“Q2 2001”), April 1, 2001 (“Q1 2001”), July 2, 2000 (“Q2 2000”) and April 2, 2000 (“Q1 2000”) all included thirteen weeks. The results of operations for the three and six-month periods ended July 1, 2001 are not necessarily indicative of the results to be expected for the full year.

Note 2 – Acquisitions Using Purchase Accounting

Acquisition of ScanLogic Corporation

On May 29, 2001, Cypress completed its acquisition of ScanLogic Corporation (“ScanLogic”), a provider of USB controllers for embedded and PC applications. The acquisition was accounted for using the purchase method of accounting. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s condensed consolidated balance sheet as of May 29, 2001, the effective date of the purchase. The results of operations are included in Cypress’s condensed consolidated results of operations as of and since the effective date of the purchase. There were no significant differences between the accounting policies of Cypress and ScanLogic.

Cypress acquired ScanLogic for a total consideration of $30.1 million, including $15.6 in cash, options for 0.5 million shares of Cypress common stock valued at $11.7 million, notes payable to shareholders of $1.9 million and direct acquisition costs of $0.9 million for legal and accounting fees and broker commissions. The total purchase price was preliminarily allocated to the estimated fair value of assets acquired and liabilities assumed as follows:

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The amounts allocated to current technology, assembled workforce and residual goodwill are being amortized using the straight-line method over their respective estimated useful lives, which range from three to four years.

Acquisition of HiBand Semiconductors, Inc.

On March 27, 2001, Cypress acquired all of the outstanding capital stock of HiBand Semiconductors, Inc. (“HiBand”). HiBand is a provider of mixed-signal integrated circuits for high-speed communications markets. The acquisition was accounted for using the purchase method of accounting. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s condensed consolidated balance sheet as of March 27, 2001, the effective date of the purchase. Other than the charge for in-process research and development, HiBand’s results of operations from the date of purchase to the end of the fiscal quarter were not significant because the acquisition was completed during the last week of the fiscal quarter and are therefore not included in Cypress’s condensed consolidated results of operations for the quarter ended April 1, 2001. There were no significant differences between the accounting policies of Cypress and HiBand.

Cypress acquired HiBand for a total consideration of $34.0 million, including 1.4 million shares of Cypress common stock valued at $28.2 million, options for 0.2 million shares of Cypress common stock valued at $4.0 million, an existing $1.3 million cash advance and direct acquisition costs of $0.5 million for legal and accounting fees. The total purchase price was preliminarily allocated to the estimated fair value of assets acquired and liabilities assumed as follows:

The amounts allocated to current technology, assembled workforce and residual goodwill are being amortized using the straight-line method over their respective estimated useful lives, which range from three to six years.

In addition, contingent compensation valued at $28.0 million is payable in cash to Cypress HiBand employees based upon the future achievement of established performance milestones. This commitment related to contingent compensation is being accrued as a charge to operating expenses on a straight-line basis over the estimated timeframe required to achieve the performance milestones, which is three years.

Acquisition of International Microcircuits, Inc.

On February 23, 2001, Cypress completed its acquisition of International Microcircuits Inc. (“IMI”), a company specializing in timing technology integrated circuits. IMI’s product portfolio includes programmable clocks, clock distribution products, electromagnetic interference suppression devices, and application-specific products. The acquisition was accounted for using the purchase method of accounting. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s condensed consolidated balance sheet as of February 23, 2001, the effective date of the purchase. The results of operations are included in Cypress’s condensed consolidated results of operations as of and since the effective date of the purchase. There were no significant differences between the accounting policies of Cypress and IMI.

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Cypress acquired IMI for a total consideration of $150.3 million, including $111.2 million in cash, options for 1.3 million shares of Cypress common stock valued at $32.8 million, notes payable to shareholders of $3.3 million, and direct acquisition costs of $3.0 million for investment banking, legal and accounting fees. The total purchase price was preliminarily allocated to the estimated fair value of assets acquired and liabilities assumed as follows:

The amounts allocated to current technology, assembled workforce, other intangibles and residual goodwill are being amortized using the straight-line method over their respective estimated useful lives, which range from three to five years.

Valuation Methodology – IMI, HiBand and ScanLogic

The valuation method used to value in-process technology is a form of discounted cash flow method commonly known as the “percentage of completion” approach. This approach is a widely recognized appraisal method and is commonly used to value technology assets. The value of the in-process technology is the sum of the discounted expected future cash flows attributable to the in-process technology, taking into consideration the percentage of completion of products utilizing this technology, utilization of pre-existing technology, the risks related to the characteristics and applications of the technology, existing and future markets and the technological risk associated with completing the development of the technology. The cash flows derived from the in-process technology projects were discounted at a rate of 27.0% for IMI, 30.0% for HiBand and 25% for ScanLogic. Cypress believes these rates were appropriate given the risks associated with the technologies for which commercial feasibility had not been established. The percentage of completion for each in-process project was determined by identifying the elapsed time invested in the project as a ratio of the total time required to bring the project to technical and commercial feasibility. The percentage of completion for in-process projects acquired ranged from 10.0% to 90.0% for IMI, 5.0% to 75.0% for HiBand and 28.0% to 79.0% for ScanLogic. Schedules were based on management’s estimate of tasks completed and the tasks to be completed to bring the project to technical and commercial feasibility. As of July 1, 2001, the actual development timelines and costs are in line with management’s estimates.

The value of current technology was determined by estimating the future cash flows to be derived from products based on existing commercially feasible technologies at the date of the acquisition, and discounting associated cash flows using discount rates ranging from 20.0% to 27.0%. Cypress believes these rates were appropriate given the business risks inherent in manufacturing and marketing these products. Factors considered in estimating the discounted cash flows to be derived from the existing technology include risks related to the characteristics and applications of the technology, existing and future markets and an assessment of the age of the technology within its life span.

The value of the assembled workforce is based on estimated costs to replace the existing staff, including recruiting, hiring and training costs for employees in all categories, and fully deploy a work force of similar size and skill to the same level of productivity as the existing work force. The value of non-compete agreements is based on the estimated loss of cash flow that would be suffered due to a loss of members of the workforce to a competitor in the absence of the non-compete agreements.

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Other intangibles include the value of an existing customer base, existing trademarks and a facilities lease with below market rental rates. These intangible assets were valued using discount rates ranging from 15.0% to 24.5%.

Development of in-process technology remains a substantial risk to Cypress due to a variety of factors including the remaining effort to achieve technical feasibility, rapidly changing customer requirements and competitive threats from other companies and technologies. Additionally, the value of other intangible assets acquired may become impaired. The in-process research and development valuation, as well as the valuation of other intangible assets was prepared by management or an independent appraisal firm, based on input from Cypress and the acquired companies’ management, using valuation methods that are recognized by the United States Securities and Exchange Commission (“SEC”) staff. However, there can be no assurance that the SEC staff will not take issue with assumptions used in the appraiser’s valuation model and require Cypress to revise the amount allocated to in-process research and development.

Pro Forma Financial Information

Summarized below are the unaudited pro forma results of Cypress as though IMI, HiBand and ScanLogic had been acquired at the beginning of the periods indicated. Adjustments have been made for the estimated increases in amortization of intangibles, amortization of stock-based compensation and other appropriate pro forma adjustments. The charge for purchased in-process research and development is not included in the pro forma results, because it is non-recurring.

The above amounts are based upon certain assumptions and estimates, which we believe are reasonable and do not reflect any benefit from economies, which might be achieved from combined operations. The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisitions taken place at the beginning of the periods indicated or of future results of operations of the combined companies.

Acquisition Costs

Acquisition costs in Q2 2001 consisted of amortization of intangibles related to acquisitions, as well as in-process research and development charges related to the acquisition of ScanLogic. For the six months ended July 1, 2001, acquisition costs consisted of amortization of intangibles and in-process research and development charges related to the acquisitions of IMI, HiBand and ScanLogic.

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Note 3– Balance Sheet Components

Cash and Investments

Long-term investments are comprised of available for sale debt securities maturing in greater than twelve months. Restricted investments represents restricted cash held as a deposit for a facilities lease.

Inventories

Other Assets

Note 4– Earnings Per Share Calculation

Following is a reconciliation of the numerators and denominators of the basic and diluted Earnings Per Share (“EPS”) computations for the periods presented below:

Three-month periods ended July 1, 2001 and July 2, 2000

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Six-month periods ended July 1, 2001 and July 2, 2000

At July 1, 2001 and July 2, 2000, stock options to acquire 16,032,000 and 23,128,000 shares, respectively were outstanding. Of the options outstanding at July 1, 2001 and July 2, 2000, 16,032,000 and 471,000 shares, on a weighted average basis, were excluded from the computation of diluted EPS because their exercise prices were greater than the average market price of common shares during the respective quarters. Convertible debentures outstanding at July 1, 2001 which were convertible to 10,715,000 shares of common stock were also excluded from diluted EPS in the three and six-month periods ended July 1, 2001, because their effect was anti-dilutive.

Note 5 – Equity and Debt Transactions

During Q2 2001, Cypress purchased capped call options through private placements in the amount of $50.0 million. The capped call options require physical settlement and expire on various dates in October and November 2001. Upon expiration of the capped call options, Cypress will have its capital returned with a premium or receive a specified number of shares of Cypress common stock, depending on the price of Cypress’s common stock on the expiration date. The transaction is recorded in stockholders’ equity in the accompanying condensed consolidated balance sheet.

On March 16, 2001, the Board of Directors of Cypress authorized the repurchase of an additional 5.0 million shares of Cypress’s outstanding common stock, bringing the total shares authorized in the 2000/2001 repurchase program to 15.0 million. During the first six months of fiscal 2001, Cypress repurchased 3.6 million shares at an average cost of $19.70 per share, bringing the total repurchases through July 1, 2001 to 9.9 million shares at an average cost of $21.73 per share. In conjunction with the stock repurchase program, the Board of Directors authorized the sale of put warrants. In the first six months of fiscal 2001, Cypress sold put warrants through private placements for which the Company received a premium of $10.1 million, bringing the total premiums received under the program to $16.4 million. As of July 1, 2001, Cypress had a maximum potential obligation to purchase 2.8 million shares of its common stock at an aggregate price of $50.2 million. The puts have various expiration periods from July 2001 through November 2001. Cypress has the right to settle the put warrants with cash or settle with shares of Cypress’s common stock. No amount was classified out of stockholders’ equity in the accompanying condensed consolidated balance sheet.

On January 31, 2000, Cypress filed a registration statement on Form S-3 with the SEC. Under this shelf registration, which was effective February 8, 2000, as amended by a post-effective amendment thereto effective March 7, 2000, Cypress can, through January 2002, sell any combination of debt securities, preferred stock and common stock in one or more offerings up to a total amount of $400.0 million. The shelf registration statement allows Cypress flexibility to raise funds from the offering of debt securities, common stock, preferred stock or a combination thereof, subject to market conditions and Cypress’s capital needs. As of July 1, 2001, the balance remaining related to the shelf registration statement was $112.5 million.

During Q2 2001, Cypress recorded provisions for deferred compensation of $7.3 million for the difference between the grant or issuance price and the fair value of Cypress’s common stock for Cypress common stock options issued in conjunction with the ScanLogic acquisition. These amounts are being amortized in accordance with Financial Accounting Standards Board (“FASB”) Interpretation 28 over the vesting period of the individual stock options. Deferred compensation expense related to ScanLogic and other previous acquisitions totaled $6.5 million during the quarter ended July 1, 2001. For the six months ended July 1, 2001, Cypress recorded deferred compensation in connection with acquisitions of $28.2 million and amortization of deferred compensation expense of $10.7 million.

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Note 6 – Derivative Financial Instruments

Cypress 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 and currency option contracts, to manage the exposures associated with forecasted purchases of equipment, net asset or liability positions, and revenue backlog denominated in foreign currencies. Cypress does not hold derivative financial instruments for speculative or trading purposes.

On January 1, 2001, Cypress adopted FASB Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. SFAS No. 133 requires that all derivatives be recorded at fair value. The adoption of SFAS No. 133 did not have a material effect on Cypress’s financial condition or results of operations.

Under SFAS No. 133, Cypress accounts for its hedges of forecasted purchases of equipment and revenue backlog as cash flow hedges, such that changes in fair value for the effective portion of hedge contracts, if material, are recorded in other comprehensive income in stockholders’ equity. Amounts deferred in other comprehensive income will be recorded in the statement of operations in the period in which the underlying transactions are recorded, and are not material at July 1, 2001. As of July 1, 2001, such forward contracts had an aggregate notional value of $21.8 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. The gains and losses on these contracts are substantially offset by transaction losses and gains on the underlying balances being hedged. As of July 1, 2001, Cypress held forward contracts with an aggregate notional value of $28.2 million to hedge the risks associated with foreign currency denominated assets and liabilities.

Note 7 – Employee Stock Purchase Assistance Plan

On May 3, 2001, Cypress stockholders approved the adoption of the 2001 Employee Stock Purchase Assistance Plan (“Plan”). The Plan allows for loans to employees to purchase shares of Cypress common stock on the open market. Employees of Cypress and its subsidiaries, including executive officers of Cypress, may participate in the Plan. Each loan will be evidenced by a full recourse promissory note executed by the employee in favor of Cypress and will be secured by a pledge of the shares of our common stock purchased with the proceeds of the loan. If a participant sells the shares of our common stock purchased with the proceeds of the loan, the proceeds of the sale must first be used to repay the principal and interest on the loan before being received by the employee. The loans will bear interest at a rate at least equal to the applicable federal rate under Section 1274 of the Internal Revenue Code for long-term loans, compounded annually. All other terms of a loan will be determined by Cypress’s Board of Directors on a case-by-case basis. 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 July 1, 2001 loans outstanding under the Plan were $41.9 million and are classified on the condensed consolidated balance sheet as other current assets.

Note 8 — 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 (“RAMs”) and is characterized by high unit sales volume and generally lower gross margins. The Non-memory Products business segment includes data communication devices, programmable logic products, specialty memories, timing and interface products and wafers manufactured by Cypress foundries.

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In October 2000, Cypress announced the formation of new divisions in order to enhance its focus on communications market segments. The WAN (Wide Area Networks) and SAN (Storage Area Networks) divisions are helping provide product definition in the networking arena. Similarly, the WIT (Wireless Terminals) and WIN (Wireless Infrastructure) divisions help focus our efforts in the wireless space. The Computation and Other market segment includes products used in computers, peripherals and other applications. Cypress’s current Memory and Non-memory business segments continue to operate as they have in the past. 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 nonrecurring gains and losses.

Market Segment Information

The tables below set forth information about the market segments formed during fiscal 2000. Cypress does not allocate interest income and expense, income taxes or non-recurring items 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

Market Segment Income Before Income Taxes

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 lower gross margins. 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 but the product is used specifically 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). 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 our OC-48 SERDES device for optical communications systems.

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The tables below set forth information about the reportable business segments for the three and six months ended July 1, 2001 and July 2, 2000. Cypress does not allocate interest income and expense, income taxes or non-recurring items to 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

Business Segment Income (Loss) Before Income Taxes

Note 9 – Legal Matters

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

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

In March 2001, Cypress filed a complaint in the United States District Court for the District of Delaware against Integrated Circuit Systems, Inc. (“ICS”), for infringement of three (3) U.S. patents. In April 2001, ICS filed a complaint in the United States District Court for the Northern District of California against Cypress. We have investigated the allegations in ICS’ complaint and find them completely without merit. Cypress will vigorously pursue and/or protect its rights in this matter. While no assurance can be given regarding the outcome of this action, we believe that the final outcome of the matter will not have a material effect on our consolidated financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of this action be unfavorable, we may be required to pay expenses, which could (but is not expected to) have a material adverse effect on our financial position and results of operations.

In March 2001, Cypress filed a complaint in the United States District Court for the District of Delaware against Philips Semiconductors, Inc., for infringement of four U.S. patents held by Cypress. Cypress will vigorously pursue and/or protect its rights in this matter. While no assurance can be given regarding the outcome of this action, we believe that the final outcome of the matter will not have a material effect on our consolidated financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of this action be unfavorable, we may be required to pay expenses, which could (but is not expected to) have a material adverse effect on our financial position and results of operations.

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

On October 3, 2000, U.S. Philips Corp. filed a complaint in the United States District Court for the Southern District of New York against Cypress and five co-defendants for infringement of an U.S. patent. We have reviewed and investigated the allegations in the complaint and believe that we have meritorious defenses to these allegations. Cypress will vigorously defend itself in this matter. While no assurance can be given regarding the outcome of this action, we believe that the final outcome of the matter will not have a material effect on our consolidated financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of this action be unfavorable, we may be required to pay damages and other expenses, which could have a material adverse effect on our financial position and results of operations.

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

During 1998, EMI Group of North America, Inc. (“EMI”) filed suit against Cypress in the United States District Court for the District of Delaware, claiming that Cypress infringed on four patents owned by EMI. Cypress and EMI entered into a license agreement in February 1999, for one of the four patents in the lawsuit. EMI withdrew two of the four patents from the lawsuit, including the patent related to the licensing agreement. The case involving the two remaining patents went to trial in October 1999. The jury ruled in favor of us finding that we infringed none of the patents and that each asserted claim was invalid due to prior art and physical impossibility (i.e. the patents require a step that is physically impossible to perform). EMI has filed an appeal, and we intend to defend ourselves vigorously. However, should the outcome of this action be unfavorable, our business, financial condition and results of operations could be materially and adversely affected.

In January 1998, an attorney representing the estate of Mr. Jerome Lemelson contacted us and charged that we infringed certain patents owned by Mr. Lemelson and /or a foundation controlled by Mr. Lemelson’s estate. On February 26, 1999, the Lemelson attorneys sued us and eighty-seven other companies in United States District Court for District of Arizona for infringement of sixteen patents. In May 2000, the Court stayed litigation on fourteen of the sixteen patents in view of concurrent litigation in Nevada on the same fourteen patents, brought against the Lemelson Partnership by manufacturers of machine vision and bar coding equipment. We have reviewed and investigated the allegations in the complaint, and we believe that the suits against us are without merit. We will vigorously defend ourselves in this matter. While no assurance can be given regarding the outcome of this action, we believe that the final outcome of the matter will not have a material effect on our consolidated financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of this action be unfavorable, we may be required to pay damages and other expenses, which could have a material adverse effect on our financial position and results of operations.

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In June 1997, we commenced a declaratory judgment action in the United States District Court for the District of Nevada against the Li Second Family Trust (the “Trust”). In this action, we asked for declaratory relief to the effect that an U.S. patent relating to a part of the process for manufacturing semiconductors is unenforceable, invalid and not infringed by us. The Trust has counter-claimed for patent infringement on the same patent, alleging such patent covers oxide-isolated integrated circuits. In May 1999, in a related case, the United States District Court for the Eastern District of Virginia ruled that the patent is unenforceable due to inequitable conduct by Dr. Li and his attorneys in obtaining the patent. The Trust appealed, and the Virginia court’s ruling was upheld by the United States Court of Appeals for the Federal Circuit in November 2000. We therefore believe that our defenses to the counter-claim are meritorious and we intend to continue to defend ourselves vigorously. While no assurance can be given regarding the final outcome of this action, we believe that the final outcome of the matter will not have a material effect on our consolidated financial position or results of operations. However, should the outcome of this action be unfavorable, our business, financial condition and results of operations could be materially and adversely affected.

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

Note 10 – Recent Accounting Pronouncements

On June 29, 2001, the FASB completed its voting process on its proposed SFAS No. 141 “Business Combinations” and No. 142 “Goodwill and Other Intangible Assets” and expects to issue the final Standards later in July. Among other provisions, all future business combinations will be accounted for using the purchase method of accounting and the use of the pooling-of-interest method is prohibited. In addition, goodwill will no longer be amortized but will be subject to impairment tests at least annually. We expect to adopt SFAS No. 141 and SFAS No. 142 effective December 31, 2001, the beginning of fiscal year 2002, although certain provisions will be applied to any acquisitions we may close subsequent to June 30, 2001. Therefore, we expect to stop amortizing goodwill effective December 31, 2001 but will continue to amortize other intangible assets. At July 1, 2001 goodwill approximated $184.1 million and other intangible assets approximated $178.6 million. Goodwill amortization was $9.8 million and $14.6 million for the three and six months ended July 1, 2001, respectively. We may be required to reclassify certain other intangible assets to goodwill upon adoption. We will not be able to determine all of the impacts of such Standards until they are finalized and issued.

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Note 11 – Subsequent Events

On July 3, 2001, Cypress completed its acquisition of Lara Networks, Inc. (“Lara”) a provider of high- performance, silicon-based packet processing solutions for WAN infrastructure equipment. Lara solutions target switches, routers and multi-service gateways handling multiple high-speed protocols up to OC-768 and including 10-Gigabit Ethernet. Cypress paid Lara’s shareholders approximately $200 million in cash and 1.2 million options to acquire Cypress common stock. Cypress will account for the transaction using the purchase method of accounting.

At a July 16, 2001 special meeting of the Board of Directors, Cypress’s management and board decided to size the manufacturing operations and the company in an effort to increase cost efficiency for the remainder of this downturn while retaining necessary infrastructure to allow Cypress to grow when sustainable economic recovery begins. This action will result in a restructuring charge, to be taken in the third quarter of 2001, in the range of $140 to $180 million, which will include losses on assets that will be held for sale and a reduction in force currently estimated to impact about 650 employees. Management will continue to evaluate other appropriate actions to address the impact of the industry downturn on Cypress.

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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 July 1, 2001 and July 2, 2000

This report may contain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, about the prospects for Cypress as well as the semiconductor industry more generally, including without limitation, statements about increases in gross margin, rate of growth of research and development expenditures as a percent of revenues, improved competitiveness with changes in our non-U.S. sales distribution model, rate of growth of selling, general and administrative expenses, profitability goals, revenue goals, growth rate goals, market share goals, market size and growth projections, new product introductions, planned manufacturing capacity, and efficiency and cost goals. Actual results could differ materially from those described in the forward-looking statements as a result of various factors including, but not limited to, the factors identified in “Risk Factors” below.

Overview

For the second quarter of fiscal 2001 ended July 1, 2001 (“Q2 2001”), revenues were $185.5 million, down 29% from the first quarter of fiscal 2001 of $262.3 million, and down 38% from $300.8 million when compared to revenues for the second quarter of fiscal 2000 ended July 2, 2000 (“Q2 2000”). Q2 2001 witnessed continued inventory reduction efforts by our customers and a fundamental slowdown in demand that began in Q4 2000. As a result of lower backlog, factory utilization fell dramatically causing degradation in gross margins and profits. When compared to the three months ended April 1, 2001 (“Q1 2001”), unit sales decreased 10%. Exacerbating the pressure on margins average selling prices (“ASPs”) declined approximately 19% quarter on quarter. During Q1 2001, large cancellations in all segments, most notably the cell phone market, resulted in historically low net bookings for the quarter. During the second quarter, cancellations decreased significantly allowing the company to record a $100 million increase in bookings when compared to Q1 2001. While we experienced an improvement in bookings in the second quarter, the market segments that we serve are projected to recover in phases, with the computation segment potentially showing some growth in the third quarter, the wireless segment likely flat and the wireline segment still depressed. Given this environment, we are projecting third quarter revenue to be down 5-10% from the second quarter, and expect a modest 5% growth in sales in the fourth quarter. This forecast is a forward looking statement and actual results can differ materially from those described in the statement. During Q2 2001, the company successfully implemented a cost reduction program intended to blunt some of the impacts of the business decline. This program included, but was not limited to: reductions and eliminations of variable compensation, hiring limitations and related attrition programs and cuts in discretionary spending. These programs will continue to be in force until the company achieves suitable profit levels.

For the six months ended July 1, 2001, revenues were $447.8 million, down 21% from the first half of fiscal 2000. Included in the 2001 results were two changes in Cypress’s business model, which resulted in an incremental one-time revenue deferral of $25.0 million in the first quarter. Details of this deferral can be found in the March 2001 10Q. For direct comparison, excluding these changes, revenue in the first half of 2001 would have been $472.8 million, a 16% decline from the first half of fiscal 2000. The decline in revenues and profits for the first half of fiscal 2001 was caused by continued inventory reduction efforts by our customers and a fundamental slowdown in demand in the markets we serve. This slowdown has placed pressure on selling prices and created factory under absorption, which impinged on profits.

On May 29, 2001, Cypress completed its acquisition of ScanLogic Corporation (“ScanLogic”), a provider of USB controllers for embedded and PC applications. Cypress acquired ScanLogic for a total consideration of $30.1 million, including $15.6 in cash, options for 0.5 million shares of Cypress common stock valued at $11.7 million, notes payable to shareholders of $1.9 million and direct acquisition costs of $0.9 million for legal and accounting fees and broker commissions. The acquisition was accounted for using the purchase method of accounting. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s condensed consolidated balance sheet as of May 29, 2001, the effective date of the purchase. ScanLogic revenues of $1.4 million were included in Cypress’s condensed consolidated results of operations during Q2 2001. The ScanLogic acquisition reduced net income by $1.5 million during the quarter, due primarily to charges of $1.5 million for in-process research and development, $0.5 million for amortization of intangibles and goodwill and $0.4 million in non-cash deferred compensation charges, which were offset by net operating results of $0.9 million.

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On March 27, 2001, Cypress acquired all of the outstanding capital stock of HiBand Semiconductors, Inc. (“HiBand”). HiBand is a provider of mixed-signal integrated circuits for high-speed communications markets. Cypress acquired HiBand for a total consideration of $34.0 million, including 1.4 million shares of Cypress common stock valued at $28.2 million, options for 0.2 million shares of Cypress common stock valued at $4.0 million, an existing $1.3 million cash advance and direct acquisition costs of $0.5 million for legal and accounting fees. The acquisition was accounted for using the purchase method of accounting. In-process research and development of $6.5 million was included in the results of operations for Q1 2001. Other than the charge for in-process research and development, HiBand’s results of operations from the date of purchase to the end of the fiscal quarter were not significant because the acquisition was completed during the last week of the fiscal quarter and are therefore not included in Cypress’s condensed consolidated results of operations for the quarter ended April 1, 2001.

On February 23, 2001, Cypress completed its acquisition of International Microcircuits, Inc. (“IMI”), a company specializing in timing technology integrated circuits for network applications. IMI’s product portfolio includes programmable clocks, electromagnetic interference suppression devices, clock distribution products and application-specific products. IMI has clock products for applications in communications, cable and DSL modems, office automation, digital cameras, DVDs and video games. Cypress acquired IMI for a total consideration of $150.3 million, including $111.2 million in cash, options for 1.3 million shares of Cypress common stock valued at $32.8 million, notes payable to shareholders of $3.3 million, and direct acquisition costs of $3.0 million for investment banking, legal and accounting fees. The acquisition was accounted for using the purchase method of accounting. IMI revenues of $5.0 million were included in Cypress’s condensed consolidated results of operations during Q1 2001. The IMI acquisition reduced net income by $8.1 million during the quarter, due primarily to charges of $4.9 million for in-process research and development, $2.6 million for amortization of intangibles and goodwill and $1.4 million in non-cash deferred compensation charges, which were offset by net operating results of $0.8 million.

Results of Operations

Revenues

Revenues of the wide area network (“WAN”) and storage area network (“SAN”) markets in the first half of 2001 declined 4.6% when compared to the first half of 2000. Q2 2001 revenues for the WAN & SAN markets declined 34.2% when compared to Q2 2000 due to decreased unit demand in the networking end markets. Although average selling prices (“ASPs”) in Q2 2001 remain higher when compared to Q2 2000, demand in all aspects of the networking market (Transmission, Metro, & Access) show declines due to postponed infrastructure investment and excess inventory both at original equipment manufacturers (“OEMs”) and after markets.

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Revenues for the wireless terminal (“WIT”) and wireless infrastructure (“WIN”) divisions fell 35.4% in the first half of 2001 compared to the first half of 2000. Similarly, quarterly revenue for WIT & WIN fell 44.8% between Q2 2001 and Q2 2000 due to a flattening of end customer demand in the cellular handset market and a concurrent inventory reduction program at key wireless customers. Price pressures have been partially offset by a shift to higher density products. While market conditions have slowed the installation of the next generation of digital mobile phone services (2.5/3G), sales of 1M and x36 Dual Ports to “WIN” companies such as NEC are showing strength.

Revenue for computation market segments dropped 27.2% in the first half of 2001 compared to the first half of 2000. Similarly, computation market segment revenue for Q2 2001 dropped 35.5% versus Q2 2000 revenue. This decline was driven by a reduction in end demand in the personal computer (“PC”) market. PC manufacturers generally run to lean inventory profiles. While sales volumes are still depressed in this segment, the company is expecting a quicker turn-around in this segment in the upcoming quarters based on projected customer profiles.

Cost of Revenues

Cost as a percent of revenues for Q2 2001 was 55.8% compared to 44.9% for Q2 2000. Likewise for the first half, they were 51.2% and 47.1% for 2001 and 2000, respectively. The increase in cost of sales as a percentage of revenue was caused by a decline in factory loading, particularly in our Philippines plant, created by the lack of customer demand mentioned in the overview and revenue sections above. During the first half of 2001, Cypress ran its wafer fabrication plants at slightly reduced rates of utilization, while running its assembly and test facilities in the Philippines at much lower rates to match demand. This resulted in the absorption of more fixed overhead of the wafer fabs while building inventory. Should the industry downturn continue for a protracted period of time, absorption losses at the wafer fabs will increase. Adding to the gross margin pressures are the declines in ASPs in our commodity memory, clock and universal serial bus (“USB”) products, which occurred in the first half of 2001. Overall ASP declines for the first half of fiscal 2001 were approximately 20%. Additional declines in commodity products of 10%-20% are projected for the second half of fiscal 2001. Cypress is continuing its strong emphasis on new product development and improvements in manufacturing technologies and yields, which will help offset some of the impact of near term margin declines.

The cost of revenues for the first half of 2001 were also impacted by increases in inventory reserves to cover lower demand requirements and the aging of parts in inventory. Cypress charged cost of revenues $13.0 million to increase inventory reserves during Q2 2001. During the six months ended July 1, 2001, charges to costs of revenues to increase inventory reserves were $38.8 million. Additional charges to cost of revenues to increase inventory reserves may be necessary in the future if demand continues to decline.

Research and Development

Overall, research and development (“R&D”) expenditures, excluding non-cash deferred compensation, increased $13.7 million or 32% from Q2 2000. The increase in expenditures is primarily related to spending in Cypress’s New Product and Technology Development divisions and was caused by increased headcount and capital spending. Growth in the R&D area was focused on the WAN/SAN market segment where over three-fourths of the dollar growth occurred. Cypress has focused heavily in this segment which is at the core of data-communications. In addition to its numerous memory offerings, Cypress has delivered products in the Physical Layer space, both Port and Back-plane. Cypress has increased its thrust into the networking arena through its R&D efforts in Packet over SONET framer (“POSIC”), Programmable Serial Interfaces (“PSI”) and optoelectronics. This increase in spending in 2001 contributed to the decline in profitability in the WAN/SAN market segment as well as the Non-memory business segment.

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     Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses for Q2 2001 were $37.6 million, compared to $36.5 million for Q2 2000, an increase of $1.1 million. Excluding non-cash deferred compensation charges, SG&A expenses for Q2 2001 were $34.8 million compared to $36.4 million for Q2 2000, a decrease of $1.6 million. The decrease in SG&A spending excluding non-cash deferred compensation is primarily due to decreased sales commission expenses.

For the six months ended July 1, 2001, SG&A expenses increased $13.8 million; however, excluding non-cash deferred compensation charges SG&A expenses increased $8.8 million. The increases in SG&A expenses from the three and six-month periods ended July 2, 2000 to the comparable period in fiscal 2001 are primarily due to increased sales and marketing headcount, non-cash deferred compensation charges and worldwide infrastructure development. Expenses for legal and professional services related to patent infringement litigation, patent filing and tax services have also contributed to an increase in administrative costs in the periods under comparison. Offsetting these increases were lower sales commission expenses.

Acquisition and Other Non-Recurring Costs, net

Acquisition costs in Q2 2001 consisted of in-process research and development from the ScanLogic acquisition and amortization of intangibles related to ScanLogic and prior acquisitions. The increase in amortization for the three and six-month periods ending July 1, 2001 when compared to the comparable periods ended July 2, 2000 relates to the acquisitions of RadioCom Corporation, Silicon Light Machines, IMI, HiBand and ScanLogic, which were completed since Q2 2000. Amortization expense is likely to increase in future periods.

In-process research and development charges relate to the acquisitions of ScanLogic, which was completed during Q2 2001 and IMI and HiBand, which were completed during Q1 2001. The valuation method used to value in-process technology is a form of discounted cash flow method commonly known as the “percentage of completion” approach. This approach is a widely recognized appraisal method and is commonly used to value technology assets. The value of the in-process technology is the sum of the discounted expected future cash flows attributable to the in-process technology, taking into consideration the percentage of completion of products utilizing this technology, utilization of pre-existing technology, the risks related to the characteristics and applications of the technology, existing and future markets and the technological risk associated with completing the development of the technology. The cash flows derived from the in-process technology projects were discounted at a rate of 27.0% for IMI, 30.0% for HiBand and 25.0% for ScanLogic. Cypress believes these rates were appropriate given the risks associated with the technologies for which commercial feasibility had not been established. The percentage of completion for each in-process project was determined by identifying the elapsed time invested in the project as a ratio of the total time required to bring the project to technical and commercial feasibility. The percentage of completion for in-process projects acquired ranged from 10.0% to 90.0% for IMI, 5.0% to 75.0% for HiBand and 28.0% to 79.0% for ScanLogic. Schedules were based on management’s estimate of tasks completed and the tasks to be completed to bring the project to technical and commercial feasibility. As of July 1, 2001, the actual development timelines and costs are in line with management’s estimates.

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Interest Income, Interest Expense and Other Income & (Expense), net

Interest income was $13.2 million in Q2 2001 compared to $12.6 million in Q2 2000. This increase of $0.6 million in interest income is primarily due to the interest income related to the 2001 Employee Stock Purchase Assistance Plan. This increase was partially offset by a decrease in the average cash and investment balances when comparing Q2 2001 to Q2 2000 and marginally lower investment yields.

The increase in interest income of $7.5 million from the six months ended July 2, 2000 to the comparable period in fiscal 2001 is primarily due to higher average cash and investments balances in Q1 2001 than in Q1 2000 and higher investment yields.

Interest expense increased by $0.1 million when comparing Q2 2001 to Q2 2000. The increase in interest expense in Q2 2001 is primarily associated with the 3.75% Convertible Subordinated Notes, issued in June 2000 and due in 2005. This increase is offset by a reduction in interest expense due to the conversion on October 2, 2000 of substantially all of the then outstanding 6.0% Convertible Subordinated Notes.

Interest expense increased by $1.2 million when comparing the six months ended July 1, 2001 to the six months ended July 2, 2000. The increase in interest expense is primarily associated with the 4.0% Convertible Subordinated Notes, issued in January 2000 and due in 2005, and the 3.75% Convertible Subordinated Notes, issued in June 2000 and due in 2005. This increase is offset by a reduction in interest expense due to the conversion on October 2, 2000 of substantially all of the then outstanding 6.0% Convertible Subordinated Notes.

Other income and (expense), net includes foreign exchange gains and losses and other operating items. Reflected in the Q2 2001 results is a $1.6 million benefit following the resolution of a dispute with a supplier over an equipment purchase. Other income and (expense), net in Q1 2000 included a $5.0 million gain on the sale of the FCT product line.

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Taxes

Cypress’s effective tax rates for Q2 2001 and Q2 2000 were 35.6% and 23.8%, respectively, resulting in an income tax benefit of $9.9 million and income tax expense of $20.5 million, respectively. The change in the effective rate in Q2 2001 can be largely attributed to losses generated in the U.S. in the current year period. Cypress’s effective rate varies from the U.S. statutory rate primarily due to earnings of foreign subsidiaries taxed at lower rates, tax credits and non-deductible charges associated with acquisitions.

Net Income (Loss) Per Share

Cypress reported a net loss for Q2 2001 of $17.8 million or $0.14 per share on a diluted basis, compared to a net income for Q2 2000 of $65.6 million or $0.49 per share on a diluted basis. For the six months ended July 1, 2001, the reported net loss was $7.4 million or $0.06 per share on a diluted basis, compared to a net income for the six months ended July 2, 2000 of $117.7 million or $1.01 per share on a diluted basis.

Earnings before Goodwill

Cypress reported basic and diluted earnings before goodwill (“EBG”) per share of $0.01 for the three months ended July 1, 2001. EBG refers to earnings excluding goodwill and acquisition costs, restructuring related charges and credits and non-recurring items. Goodwill and acquisition costs consist of the amortization of intangibles, cash and non-cash deferred compensation expenses, in-process research and development costs, and transaction costs, net of tax. These types of charges and credits are excluded from the computation of EBG and are collectively referred to as goodwill by Cypress. We have presented EBG as a measure of our operating results, but EBG is not intended to replace operating income or net income as an indicator of operating performance, or to replace cash flow as a measure of liquidity, because EBG is not a recognized concept under generally accepted accounting principles. Also, our calculation of EBG may not be comparable to EBG as calculated by other companies. The tables below reconcile basic and diluted net income per share to basic and diluted earnings before goodwill per share, respectively.

Reconciliation of basic net income per share to basic earnings before goodwill:

Reconciliation of diluted net income per share to diluted earnings before goodwill:

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Liquidity and Capital Resources

Cypress’s cash, cash equivalents and short-term investments totaled $585.8 million at the end of Q2 2001, a decrease of $298.8 million from the end of fiscal 2000. Working capital also decreased $242.7 million during the same period. These decreases are attributed primarily to net cash flows used in investing and financing activities.

During the six months ended July 1, 2001, Cypress generated cash flows from operations of $84.6 million, which represents a decrease of $106.1 million from the $190.7 million generated from operations during the six months ended July 2, 2000. The decrease in cash flows from operations can be primarily attributed to increases in inventory, decreases in accounts payables and lower earnings adjusted for non-cash items such as depreciation, amortization and charges for in-process research and development, which was partially offset by a decrease in accounts receivable.

Net cash flows used in investing activities of $144.6 million for the six months ended July 1, 2001 related primarily to the use of $126.7 million in cash for the acquisitions of IMI and ScanLogic, net of cash acquired and $117.1 million for purchases of property, plant and equipment. Purchases of investments totaled $121.5 million during the six-month period ended July 1, 2001, while investments, which were sold or matured totaled $261.4 million. Purchases of investments during the six months ended July 2, 2000 totaled $275.2 million, while investments, which were sold or matured, totaled $49.0 million.

During the six months ended July 1, 2001, net cash flows used for financing activities were $99.2 million. Purchases of capped call options were $50.0 million and the repurchase of common shares totaled $71.1 million. These cash outflows were offset by cash inflows of $10.1 million related to premiums received from the issuance of stock put options and $15.1 million related to the issuance of common shares. Net cash flows from financing activities in the six months ended July 2, 2000 were $599.0 million, which are primarily related to the proceed from the issuance of convertible subordinated notes, net of issuance costs of $554.8 million, the issuance of common shares of $39.6 million and cash received upon repayment of notes by shareholders of $5.7 million.

On January 31, 2000, Cypress filed a registration statement on Form S-3 with the SEC. Under this shelf registration, which was effective February 8, 2000, as amended by a post-effective amendment thereto effective March 7, 2000, Cypress can, through January 2002, sell any combination of debt securities, preferred stock and common stock in one or more offerings up to a total amount of $400.0 million. The shelf registration statement allows Cypress flexibility to raise funds from the offering of debt securities, common stock, preferred stock or a combination thereof, subject to market conditions and Cypress’s capital needs. As of July 1, 2001, the balance remaining related to the shelf registration statement was $112.5 million.

In the next twelve months the current economic downturn may negatively impact cash and cash equivalent balances and cash flow from operations; however, Cypress believes that existing cash, cash equivalents and cash from operations will be sufficient to meet present and anticipated working capital requirements and other cash needs for at least the next twelve months. As of July 1, 2001 commitments for capital expenditures were approximately $64 million. Beyond twelve months, a continuation of the current economic downturn, changes in market demand and the possible need to change manufacturing capability and/or capacity, may cause Cypress to raise additional capital through debt or equity financing. Although additional financing may be required, there can be no assurance that it would be available to Cypress or available at terms Cypress deems satisfactory.

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Risk Factors

     The discussion in this 10-Q report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, statements as to the future operating results and business plans, that involve risks and uncertainties. We use such words as “anticipates,” “believes,” “expects,” “future,” “intends,” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for any reason, including the risks described below and elsewhere in this Form 10-Q. If any of the following risks actually occur, our business, financial condition and operating results could be seriously harmed.

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

     Among other factors, concerns about inflation, decreased consumer confidence and spending and reduced corporate profits and capital spending have resulted in a recent downturn in the U.S. economy generally and in the semiconductor industry in particular. As a result of these unfavorable economic conditions, we have recently experienced a significant slowdown in customer orders including large order cancellations across nearly all of our product lines, which resulted in historically low net bookings during the first six months of fiscal 2001. In addition, we experienced corresponding decreases in revenues and average selling prices during the half and are expecting revenues and average selling prices to decline further in the third quarter of fiscal 2001. If the economic conditions in the U.S. continue or worsen, or if a wider or global economic slowdown occurs, 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. History indicates that restructuring of the operations resulting in significant charges may become necessary if an industry downturn persists. In response to the current significant downturn, we have indicated that we will restructure our manufacturing operations in the third quarter of fiscal 2001 to increase cost efficiency while still maintaining an infrastructure that will enable us to grow when sustainable economic recovery begins. If, however, these cycles continue, they will seriously harm our business, financial condition and results of operations and other actions may be necessary.

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

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

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

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

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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:

     A significant portion of our products are incorporated into data communications and telecommunications end products. Any decline in the demand for networking applications, mass storage, telecommunications, cellular base stations, cellular handsets and other personal communication devices that incorporate our products could seriously harm our business, financial condition and operating results. In addition, certain of our products, including USB microcontrollers, high-frequency clocks and static RAMs, 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 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 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 RAM products and result in associated 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.

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

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

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

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

     Like many semiconductor companies, which frequently operate in a highly competitive, quickly changing environment marked by rapid obsolescence of existing products, our future success depends on our ability to develop and introduce new products that customers choose to buy. We introduce significant numbers of products each year, which are an important source of revenue for us. If we fail to introduce new product designs in a timely manner or are unable to manufacture products according to the requirements of these designs (discussed more below), 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 Cypress and many other semiconductor companies, introduction of new products is a major manufacturing challenge. The new products the market requires tend to be increasingly complex, incorporating more functions and operating at faster speeds than prior products. Increasing complexity generally requires smaller features on a chip. This makes manufacturing new generations of products substantially more difficult than prior generations. Ultimately, whether we can successfully introduce these and other new products depends on our ability to develop and implement new ways of manufacturing semiconductors. If we are unable to design, develop, manufacture, market and sell new products successfully, our business, financial condition and results of operations would be seriously harmed.

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

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

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

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

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

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

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

     We have spent, and expect to continue to spend, significant amounts of money to upgrade and increase our wafer fabrication, assembly and test manufacturing capability and capacity. If we do not need some of this capacity and capability for any of a variety of reasons, including inadequate demand or a significant shift in the mix of product orders that makes our existing capacity and capability inadequate or in excess of our actual needs, our fixed costs per semiconductor produced will increase, which will harm us. In addition, if the need for more advanced products requires accelerated conversion to technologies capable of manufacturing semiconductors having smaller features, or requires the use of larger wafers, we are likely to face higher operating expenses and may need to write-off capital equipment made obsolete by the technology conversion, either of which could seriously harm our business and results of operations. As stated previously, in response to the current economic downturn, we intend to restructure our manufacturing operations (See also Note 11 to the Condensed Consolidated Financial Statements).

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

     Our headquarters and some manufacturing facilities and some of our major vendors’ facilities are located near major earthquake faults. If a major earthquake or other natural disaster occurs, we could suffer damages that could seriously harm our business, financial condition and results of operations.

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

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

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

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

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

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

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

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

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

     In order to remain competitive, semiconductor manufacturers generally must spend heavily on equipment to maintain or increase manufacturing capacity and capability. We have budgeted for approximately $105 million in expenditures on equipment in fiscal 2001 and anticipate significant continuing capital expenditures in subsequent years. In the past, we have reinvested a substantial portion of our cash flow from operations in capacity expansion and improvement programs.

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

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

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

     International sales represented approximately 50% and 49% of our revenues during the first six months of fiscal 2001 and fiscal 2000, respectively. Our offshore assembly and test operations, as well as our international sales, face risks frequently associated with foreign operations, including:

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

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

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

We depend on third parties to transport our products and could be harmed if these parties experience problems.

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

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 four acquisitions in calendar 2000, completed the acquisitions of International Microcircuits, Inc., HiBand Semiconductors, Inc., ScanLogic Corporation and Lara Networks, Inc. in 2001 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 additional businesses, products and services could be expensive, time-consuming and a strain on our resources. Specific issues that we face with regard to prior and future acquisitions include:

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Cypress is exposed to financial market risks, including changes in interest rates and foreign currency exchange rates.

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

A majority of Cypress’s revenue and capital spending is transacted in U.S. dollars. However, Cypress does enter into these transactions in other currencies, primarily Japanese yen and certain other European currencies. To mitigate these risks, Cypress utilizes derivative financial instruments. Cypress does not use derivative financial instruments for speculative or trading purposes. Cypress’s hedging programs reduce, but do not always eliminate, the impact of foreign currency exchange rate movements. A 10% change in the foreign currency exchange rates to which Cypress is exposed would not have a material effect on Cypress’s financial condition or results of operations.

There have been no significant changes in the market risks impacting Cypress during the three months ended July 1, 2001.

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PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The information required by this item is included in Part I in Note 8 of Notes to the Condensed Consolidated Financial Statements and is incorporated herein by reference.

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

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

     On May 3, 2001, at Cypress’s Annual Meeting of Shareholders, the nominated slate of directors was elected, the appointment of PricewaterhouseCoopers LLP as Cypress’s independent accountants was ratified, and Cypress’s proposal to adopt the 2001 Employee Stock Purchase Assistance Plan was approved. The results of the votes were as follows:

ITEM 5.  OTHER INFORMATION

None

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ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

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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.

Dated: July 18, 2001

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