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 March 31, 2002

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 March 31, 2002 was 122,699,000.

Page 1 of 30

INDEX

PART I – FINANCIAL INFORMATION

PART II – OTHER INFORMATION

Page 2

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.

Page 3

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.

Page 4

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.

Page 5

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2002
(Unaudited)

Note 1 – Summary of Significant Accounting Policies

Fiscal Year

Cypress Semiconductor Corporation (“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 March 31, 2002 (“Q1 2002”) and April 1, 2001 (“Q1 2001”) included thirteen weeks.

Basis of Presentation

In the opinion of the management of Cypress, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial information included therein. Certain prior year amounts have been reclassified to conform to current year presentation. Cypress believes that the disclosures are adequate to make the information not misleading. However, this financial data should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Cypress’s Annual Report on Form 10-K for the fiscal year ended December 30, 2001.

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

The results of operations for Q1 2002 are not necessarily indicative of the results to be expected for the full year.

Goodwill and Purchased Intangibles

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) Nos. 141 and 142, “Business Combinations” and “Goodwill and Other Intangible Assets,” respectively. SFAS No. 141 replaced Accounting Principles Board (“APB”) Opinion No. 16 and eliminated pooling-of-interests accounting prospectively. It also provided guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. SFAS No. 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. Under SFAS No. 142, goodwill is required to be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired.

Cypress adopted SFAS No. 142 in fiscal 2002. In connection with the adoption of SFAS No. 142, Cypress performed a transitional goodwill impairment assessment and determined that there was no impairment of goodwill. There can be no assurance that a future goodwill impairment test will not result in a charge to earnings.

On December 31, 2001 (the first day of fiscal 2002), Cypress stopped amortizing goodwill, including $17.5 million of acquired workforce previously classified as purchased intangible assets. As a result, in Q1 2002, Cypress did not recognize $10.1 million of goodwill amortization expense that would have been recognized had the previous standards been in effect.

The following table presents the impact of SFAS No. 142 on net income (loss) and net income (loss) per share had the standard been in effect for the Q1 2001:

Page 6

Recent Accounting Pronouncements

In May 2002, the FASB issued SFAS 145, “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections.” Among other things, SFAS 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met. SFAS 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002. Management does not believe that the adoption of this statement will have a material impact on our consolidated financial statements.

Note 2 – Acquisitions

Acquisition of Sahasra Networks, Inc.

On February 28, 2002, Cypress acquired 100% of the outstanding capital stock of Sahasra Networks, Inc. (“Sahasra”), a company working on a software-based method of making large-entry, next generation network search engines, for $3.2 million in cash and Cypress common stock. Sahasra will be part of the Non-memory business segment and the Wide Area Network/Storage Area Network (“WAN/SAN”) market segment. The acquisition resulted in identifiable intangible assets of $2.7 million and a charge for in-process research and development of $0.5 million.

The agreement with Sahasra includes provisions for contingent cash payments to employees and third parties of up to $2.3 million through December 2005 based on the amount of revenues generated by certain products in future periods. Additional provisions are included for the contingent issuance of up to 0.3 million shares of Cypress common stock through December 2004 based on the achievement of certain product development milestones. Cash payments or the issuance of shares contingent upon the payees remaining employed by Cypress will be accounted for as compensation for services and expensed in the appropriate periods. Cash payments to third parties based solely on product revenues will be recorded as an increase in the purchase price, if paid.

Pro forma results of operations have not been presented, as this is not considered a material business combination.

Page 7

Purchased Intangibles

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

Amortization expense for Q1 2002 of $10.6 million associated with these acquired intangibles is included in “Acquisition costs” in the statement of operations. The estimated annual amortization expense of purchased intangible assets is as follows:

Contingent milestone/revenue-based compensation related to acquisitions of $4.9 million is included in Research and Development in the statements of operations.

Note 3 – Restructuring Costs

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

A restructuring charge of $1.6 million was recorded in Q1 2002 for additional opportunities identified as part of the personnel portion of the 2001 restructuring plan. The charge relates to severance and related employee benefit costs for the termination of approximately 250 employees, the majority of whom are located in our Philippines facility. As of the end of Q1 2002, 102 of these employees had left Cypress.

Page 8

The following table summarizes the restructuring reserve and charges for the quarter ended March 31, 2002.

Note 4 – Balance Sheet Components

Cash and Investments

Inventories, Net

Other Current Assets

Other Assets

Page 9

Other Current Liabilities

Note 5 – Commitments and Contingencies

Legal Matters

In July 2001, we filed a complaint in the United States International Trade Commission (“ITC”) against Integrated Circuit Systems, Inc. (“ICS”) and Pericom Semiconductor Corporation (“Pericom”) for infringement of a U.S. patent. The ITC subsequently instituted an investigation based upon Cypress’s complaint. In December 2001, we agreed to settle this dispute with Pericom. Trial in the ITC against ICS is scheduled for July 2002. We will vigorously pursue and/or protect our rights in this matter. In November 2001, ICS filed a complaint in the ITC against us for infringement of two U.S. patents, one of which is also asserted against us in an earlier-filed action in California (see below), the other of which (U.S. Patent No. 5,703,537) ICS voluntarily withdrew from the ITC proceedings following our motion that ICS’ own product data sheets invalidated ICS’ asserted claim. We have investigated the remaining allegations in ICS’ complaint. We believe that we have meritorious defenses to these allegations. While no assurance can be given regarding the outcome of this action, we believe that the final outcome of the matter will not have a material effect on our consolidated financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of this action be unfavorable, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

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

On November 16, 2000, Momentum, Inc. (“Momentum”) 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 and costs. In February 2001, Momentum’s complaint was dismissed, but Momentum was given thirty days to refile. Momentum filed its amended complaint on April 16, 2001. We have investigated the allegations in the amended complaint. We believe that we have meritorious defenses to these allegations. We will continue to defend ourselves vigorously in this matter. While no assurance can be given regarding the outcome of this action, we believe that the final outcome of the matter will not have a material effect on our consolidated financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of this action be unfavorable, we may be required to pay damages and other expenses, which could have a material adverse effect on our financial position, results of operations and cash flows.

On June 12, 2000, Cypress filed a complaint in the Superior Court of California against Altera Corporation for tortious interference with existing contractual relations, tortious interference with prospective economic relations, misappropriation of trade secrets and unfair competition. The complaint arises from Altera’s interference with a multi-year agreement to collaborate on research and development between Cypress and Right Track CAD Corporation. In February 2001, we amended our complaint to add a cause of action based on fraud. We have resolved the dispute with Altera, and our suit was dismissed in April 2002.

Page 10

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

Note 6 – Debt and Equity Transactions

At March 31, 2002, Cypress had outstanding a series of equity options (on Cypress common stock) in the amount of $27.6 million. The options require physical settlement and expire in June 2002. Upon expiration of the options, if Cypress’s stock price is above the trigger price, Cypress will have its capital returned with a premium. If below the trigger price, Cypress will receive a specified number of shares of Cypress common stock instead of a return of capital. The range of the trigger prices is $20.00 — $23.42. The transactions are recorded in stockholders’ equity in the accompanying condensed consolidated balance sheet. During Q1 2002, maturing contracts net of new contracts written resulted in net cash inflow of $0.6 million.

During fiscal 2001, Cypress sold put warrants through private placements for which Cypress received premiums under the program of $16.9 million. As of March 31, 2002, Cypress had a maximum potential obligation under such puts to purchase 0.3 million shares of its common stock at an aggregate price of $3.6 million. These puts had a strike price of $14.58, and expired unexercised in April 2002. Subsequently, Cypress sold additional put warrants with a strike price of $20.00 for which Cypress received premiums of $0.2 million. As of May 11, 2002, Cypress had a maximum potential obligation to purchase 0.3 million shares of its common stock at an aggregate price of $5.0 million under these puts. The new put warrants will expire in July 2003. Cypress has the right to settle the put warrants with cash or settle with shares of Cypress’s common stock. These transactions have been and will be recorded in stockholders’ equity in the accompanying condensed consolidated balance sheet.

Cypress recorded provisions for deferred stock compensation related to acquisitions and certain other grants of approximately $5.0 million in Q1 2002 related to the issuance of stock options below fair value in connection with the Silicon Packets acquisition. This amount is being amortized over the vesting period of the individual stock options or stock, generally a period of four to five years. Deferred stock compensation expense, included in Selling General and Administrative expense and Research and Development expense in the statements of operations, totaled approximately $10.0 million in Q1 2002 and $4.2 million in Q1 2001.

Convertible Subordinated Notes

During 2001, Cypress’s Board of Directors authorized the repurchase from time to time of up to $143.8 million of 3.75% Convertible Subordinated Notes (“3.75% Notes”). In the Q1 2002, Cypress retired a total of $36.0 million principal of the 3.75% Notes, for $30.7 million, resulting in a pre-tax net gain of $4.7 million. The gain was net of the write-off of bond issuance costs of $0.6 million (pre-tax). The net after-tax gain was recorded as an extraordinary item in the statement of operations. Since November 2001 Cypress has repurchased $88.8 million in principal of the 3.75% notes.

Page 11

Note 7 – Comprehensive Income

The components of comprehensive income (loss), net of tax, are as follows:

Note 8 – Segment Reporting

Cypress operates under 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 is generally subject to greater pricing pressures than our Non-memory Products. The Non-memory Products business segment includes data communication devices, programmable logic products, specialty memories, timing and interface products.

Cypress’s divisions are aligned to enhance focus on communications market segments. The WAN and SAN divisions are helping provide product definition in the networking arena. Similarly, the Wireless Terminals and 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 provides systems knowledge, cross-product-line product portfolio definition, early engagement with strategic accounts and added management of research and development (“R&D”) spending.

Cypress evaluates the performance of its segments based on profit or loss from operations before income taxes, excluding acquisition costs and non-recurring 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 acquisition costs and 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 (Loss) Before Provision for Income Taxes

Page 12

Business Segment Information

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

The tables below set forth information about the reportable business segments for the three months ended March 31, 2002 and April 1, 2001. Cypress does not allocate interest income and expense, income taxes or acquisition costs and 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 Provision for Income Taxes

Page 13

Note 9 – Earnings (Loss) Per Share

As required by SFAS No. 128, following is a reconciliation of the numerators and the denominators of the basic and diluted earnings (loss) per share computation:

For the quarters ended March 31, 2002 and April 1, 2001 options to purchase 25,192,000 and 18,543,000 shares, respectively, of common stock were outstanding, and 25,192,000 and 7,236,000 were excluded from the computation of diluted EPS, as their effect was anti-dilutive. Convertible debentures outstanding at March 31, 2002 and April 1, 2001 were convertible to 9,296,000 and 10,715,000 shares, respectively, of common stock and were also excluded from diluted EPS, as their effect was anti-dilutive.

Page 14

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 Month Period Ended March 31, 2002

This report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, 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, capital expenditure plans, planned manufacturing capacity, the bottom of the economic downturn, our ability to rebound from the economic downturn, 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.

Results of Operations

Overview

Cypress continues to be adversely affected by the ongoing worldwide economic downturn. Revenues and earnings for the fiscal quarter ended March 31, 2002 (“Q1 2002”) are significantly lower than for the fiscal quarter ended April 1, 2001 (“Q1 2001”). Compared to the fiscal quarter ended December 30, 2001 (“Q4 2001”), revenue and net loss before extraordinary items improved slightly while unit sales, backlog and bookings all increased.

For Q1 2002, revenues were $193.2 million, up 1% from the Q4 2001 revenues of $191.1 million, and down 26% when compared to revenues for Q1 2001. Q1 2002 was the second sequential quarter of revenue improvement and may indicate that the third quarter of fiscal 2001 was the bottom of the recent downturn for Cypress. Bookings of $201.5 million resulted in a book-to-bill ratio of 1.04 and resulted in a 15% increase in backlog.

On a same device basis, average selling prices (“ASPs”) declined significantly compared to Q4 2001. All product families were affected with Random Access Memory (“RAM”) and clocks showing the greatest decline. Compared to the year ended December 30, 2001, device prices were down across all product families. Unit shipments were 128.8 million, up 15% from Q4 2001 and 25% from Q1 2001. Unit growth came from all areas except wide area and storage area networks (“WAN/SAN”). Q1 2002 represented the third consecutive quarter in which unit volumes increased helping to increase facility utilization. Gross margin for Q1 2002 was 39%, a decline of 13 percentage points from Q1 2001 and 1 percentage point from the Q4 2001.

Net loss before extraordinary gain for Q1 2002 was $42.6 million versus income of $10.5 million for Q1 2001 and loss (before extraordinary gain) of $42.0 million for Q4 2001. We have begun to see the positive effects of the third quarter 2001 restructuring. We expect to rebound from the economic downturn at least in line with the industry.

A discussion of the Cypress’s critical accounting policies can be found in Cypress’s Annual Report on Form 10-K. There were no changes in these policies in Q1 2002.

Page 15

Revenues

Revenues of the WAN and SAN markets decreased 54% when compared to Q1 2001 due to decreased unit demand in the networking end markets. Demand in all aspects of the networking market (Transmission, Metro & Access) showed decreases compared to the year-ago quarter due to postponed infrastructure investment and excess inventory both at original equipment manufacturers and in the after markets. The segment is showing modest recovery as it marked the second consecutive quarter-on-quarter growth but end market demand remains slow.

Revenues for the wireless terminal (“WIT”) and wireless infrastructure (“WIN”) divisions decreased 8% when compared to Q1 2001 due primarily to decreased unit demand in the WIN segment. The recovery in this segment is being lead by our WIT products, where increased handset unit demand has more than offset declining ASPs, resulting in revenue growth of 23% compared to Q1 2001.

Revenues for the computation division increased 23% when compared to Q1 2001. The growth is primarily due to the development and market acceptance of our family of plug-and-play USB devices. Additional unit demand for the USB products has offset lower sales of memories into the PC market. Clock product revenue grew compared to Q1 2001 despite declining ASPs.

Cost of Revenues

Cost of revenues represented 61% of revenues in Q1 2002 versus 48% of revenues in Q1 2001, reflecting the economic slowdown that has adversely affected the semiconductor industry in general and market pricing in particular. Cost of revenues declined $7.4 million from $125.7 million in Q1 2001 to $118.3 million in Q1 2002. Volume increases have been more than offset by lower unit costs. On a unit basis, volumes have increased 25% as all areas except WAN/SAN improved. Unit costs are substantially lower due to the favorable effect of our third quarter 2001 restructuring on labor and depreciation and due to higher plant utilization. The improvements have been slightly offset by higher wafer costs.

In January 2002, the Department of Commerce revoked a 1998 antidumping order that had been imposed on static RAMs fabricated in Taiwan and imported into the United States. The United States Customs Service was ordered to refund, with interest, all duties deposited under the 1998 antidumping order. Between 1998 and 2001, we charged $10.3 million to cost of revenues for such duties. During the three months ended March 31, 2002, we received $11.8 million in refunds, of which $9.9 million was recorded as an offset to cost of revenues and $1.9 million was recorded in interest income. This benefit to our gross margin was substantially offset by certain other items, including a change in estimate for deferred income on sales to distributors.

Page 16

Research and Development

Research and development (“R&D”) expenditures in Q1 2002 increased from Q1 2001 as Cypress continued its effort to accelerate the development of new products and migrate to more advanced process technologies. In addition, R&D costs increased as a result of headcount increases from acquisitions completed in 2001.

During Q1 2002, Cypress recorded $11.9 million in non-cash deferred stock compensation and cash compensation related to milestone/revenue-based compensation from acquisitions as compared to $1.2 million in Q1 2001. The increase in acquisition related compensation charges is attributed to our 2001 acquisitions.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses in Q1 2002 decreased from Q1 2001 due primarily to reduced labor charges, decreased commission and travel expenses and decreases in general spending levels.

During Q1 2002, Cypress recorded $2.0 million in non-cash deferred compensation and cash compensation related to milestone/revenue-based compensation from acquisitions compared to $2.3 million in Q1 2001. Acquisition-related compensation charges are primarily attributed to the Silicon Light Machines, International Microcircuits, Inc. (“IMI”) and ScanLogic Corporation acquisitions.

Restructuring

On July 16, 2001, Cypress announced a restructuring plan that involved resizing its manufacturing facilities, reducing its workforce and combining facilities. The restructuring was precipitated by the worldwide economic slowdown, particularly in the business areas in which Cypress operates. The intended effect of the plan was to size the manufacturing operations and facilities to meet future demand and reduce expenses in all operations areas. During the third quarter of 2001, Cypress recorded restructuring charges of $132.1 million related to property, plant and equipment, leased facilities and personnel. Cypress expects to realize a benefit of up to $12.0 million per quarter from lower depreciation and payroll costs in future periods.

A restructuring charge of $1.6 million was recorded in Q1 2002 for additional opportunities identified as part of the personnel portion of the 2001 restructuring plan. The charge relates to severance and related employee benefit costs for the termination of approximately 250 employees, the majority of whom are located in our Philippines facility. As of the end of Q1 2002, 102 of these employees had left Cypress.

Page 17

The following table summarizes the restructuring reserve and charges for the quarter ended March 31, 2002.

Acquisition Costs

Acquisition costs consist primarily of the amortization of acquired intangible assets and expensed in-process research and development charges. Amortization of intangible assets was $10.6 million and $11.7 million in Q1 2002 and Q1 2001, respectively. Cypress expensed in-process research and development of $0.5 million in Q1 2002 related to the acquisition of Sahasra. Cypress expensed in-process research and development of $11.3 million in Q1 2001 related to the acquisitions of IMI and HiBand.

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

Interest income, interest expense and other income and (expense), net, was $1.6 million for the Q1 2002 compared to $9.9 million for Q1 2001. Other income and (expense), net includes amortization of bond issuance costs, foreign exchange gains and losses and other non-operating items.

Interest income decreased $8.5 million or 49.8% for Q1 2002 versus Q1 2001 due to lower average cash and investment balances and decreased yields in Q1 2002. That reduction was partially offset by $1.9 million in interest income related to the duty refunds from the United States Customs Service.

Interest expense was $4.9 million for Q1 2002, compared to $5.6 million for Q1 2001. Interest expense is primarily associated with the 4.0% Convertible Subordinated Notes (“4.0% Notes”), issued in January 2000, due in 2005, and the 3.75% Convertible Subordinated Notes (“3.75% Notes”), issued in June 2000, due in 2005. The decrease in interest expense in Q1 2002 compared to Q1 2001 is primarily associated with the repurchase of $88.8 million in principal of the 3.75% Notes which occurred between November 2001 and March 2002.

Other income and (expense), net of $(2.0) million for Q1 2002 primarily reflects foreign exchange loses of $1.4 million and $0.7 million related to the amortization of bond issuance costs. During Q1 2001, foreign exchange gains and losses were negligible while amortization of bond costs were $0.8 million. The decrease in amortization of bond costs is related to the previously discussed repurchase of a portion of the 3.75% Notes.

Page 18

Extraordinary Gain

In Q1 2002, Cypress retired a total of $36.0 million principal of 3.75% Notes, for $30.7 million, resulting in a pre-tax net gain of $4.7 million. The gain was net of the write-off of bond issuance costs of $0.6 million (pre-tax). The net after-tax gain of $2.8 million was recorded as an extraordinary gain.

Taxes

Cypress’s effective tax rates for Q1 2002 and Q1 2001 were 2.9% and 46.9%, respectively. A tax benefit of $1.2 million was recorded during Q1 2002 compared to tax expense of $9.2 million during Q1 2001. The Q1 2002 tax benefit was attributable primarily to current year net operating losses, but is minimal in amount because of the significant limitation, based on management’s assessment, on realization of future benefits. On an ongoing basis, Cypress’s effective tax rate may vary from the U.S. statutory rate primarily due to utilization of future benefits, the earnings of foreign subsidiaries taxed at different rates, tax credits, and other business factors.

Pro Forma Earnings (Loss)

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

This information should be read in conjunction with our condensed consolidated financial statements prepared in accordance with GAAP included in this report.

Page 19

Liquidity and Capital Resources

Cypress’s cash, cash equivalents and short-term investments totaled $155.2 million at March 31, 2002, a $50.2 million decrease from the end of fiscal 2001. Working capital decreased $40.2 million during the same period. These decreases are primarily attributable to net cash flows used for financing activities and cash flows used in operations in Q1 2002.

During Q1 2002, cash used in operating activities of $19.1 million was primarily attributed to changes in working capital of $40.8 million and operating losses less non-cash items. In Q1 2001, cash flows generated by operating activities were $67.9 million. The change in operating cash flows from Q1 2001 to Q1 2002 was primarily attributable to operating losses less non-cash items and changes in working capital during Q1 2002.

Net cash flows provided by investing activities of $11.5 million during Q1 2002 were related primarily to sales of investments of $58.2 million and repayment of loans by employees under the stockholder-approved Stock Purchase Assistance Plan of $13.1 million. During Q1 2002, purchases of investments totaled $28.0 million. In addition, Cypress purchased $34.0 million during Q1 2002 in capital equipment, a $44.2 million decrease from the $78.2 million purchased in Q1 2001. The purchases included equipment for Cypress’s domestic wafer fabrication plants, assembly and test facility in the Philippines, back-end manufacturing subcontractors and design and technology groups. Capital expenditures in fiscal 2002 are expected to be slightly lower when compared to fiscal 2001 and are expected to be primarily on projects which increase wafer manufacturing, assembly and test, and research and design capabilities. In fiscal 2002, Cypress expects to purchase approximately $165 million in capital equipment.

Net cash flows used in financing activities were $22.6 million during Q1 2002. Redemption of convertible debt was $30.7 million. This cash outflow was offset primarily by cash inflows $8.1 million related to the issuance of common shares from the exercise of options and purchases through the Employee Stock Purchase Program.

In the next twelve months the current economic downturn may negatively impact cash and cash equivalent balances and cash flow from operations; however, Cypress believes that existing cash, cash equivalents and investments, and cash from operations will be sufficient to meet present and anticipated working capital requirements and other cash needs for at least the next twelve months. Beyond twelve months, a continuation of the economic downturn, changes in market demand and the possible need to change manufacturing capacity and capability, may require 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.

Recent Accounting Pronouncements

In May 2002, the FASB issued SFAS 145, “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections.” Among other things, SFAS 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met. SFAS 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002. Management does not believe that the adoption of this statement will have a material impact on our consolidated financial statements.

Page 20

Risk Factors

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

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

Among other factors, concerns about inflation, decreased consumer confidence and spending and reduced corporate profits and capital spending have resulted in a downturn in the U.S. economy generally and in the semiconductor industry in particular. As a result of these unfavorable economic conditions, we experienced a significant slowdown in customer orders including large order cancellations across nearly all of our product lines, especially during the first six months of fiscal 2001, which resulted in historically low net bookings during that period. In addition, we experienced corresponding decreases in revenues and average selling prices during fiscal 2001 and expect continued pressure on average selling prices in both 2002 and the future. As a consequence of the economic downturn in 2001, we announced a restructuring plan that involved resizing our manufacturing facilities, reducing our workforce and combining facilities. In addition, we recorded a provision for excess inventory and related purchase commitments. If the adverse economic conditions continue or worsen, additional restructuring of operations may be required, and our business, financial condition and results of operations may be seriously harmed.

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

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

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

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

Page 21

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

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

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

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

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

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

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

As a result of the economic downturn, prices declined during 2001 and have continued to do so during 2002. In addition to following the general pattern of decreasing average selling prices, the selling prices for certain products, particularly commodity products, fluctuate significantly with real and perceived changes in the balance of supply and demand for these products. In the event we are unable to decrease per unit manufacturing costs at a rate equal to or faster than the rate at which selling prices continue to decline, our business, financial condition and results of operations will be seriously harmed. Furthermore, we expect our competitors to invest in new manufacturing capacity and achieve significant manufacturing yield improvements in the future. These developments could dramatically increase the worldwide supply of competitive products and result in further downward pressure on prices.

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

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

Page 22

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

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

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

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

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

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

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

Page 23

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

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

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

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

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

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

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

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

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

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

Page 24

In response to the weakening insurance market we decided to substantially increase our reliance on self-insurance for property damages. We now cover the expense of property loss up to $20.0 million per event. If such event(s) occurs, we could be required to spend significant amounts to repair or replace such property, which, in turn, could seriously harm operating results and financial condition.

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

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

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

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

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

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

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

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

Page 25

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

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

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

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

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

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

International sales represented approximately 45% in Q1 2002 and 50% of our revenues during fiscal 2001. Long-lived assets are held primarily in the United States with 11% held in the Philippines and 1% in other foreign countries at the end of 2001. Our Philippine assembly and test operations, as well as our international sales, face risks frequently associated with foreign operations, including:

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

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

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

Page 26

We depend on third parties to transport our products.

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

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

We completed one acquisition in Q1 2002, fourteen acquisitions in the three previous fiscal years and may pursue additional acquisitions in the future. If we fail to integrate these businesses successfully or properly, our quarterly and annual results may be seriously harmed. Integrating these businesses, people, products and services with our existing business could be expensive, time-consuming and a strain on our resources. Specific issues that we face with regard to prior and future acquisitions include:

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

In May 2001, we implemented our stockholder-approved 2001 Employee Stock Purchase Assistance Plan through which we make loans to our employees to purchase shares of our common stock through a broker on the open market. While the loans are secured by the shares of our stock purchased with the loan proceeds, the value of this collateral would be adversely affected if our stock price declined significantly. Further, the note is full recourse to the employee, and is secured by all of the assets of the employee. Our liquidity and results of operations would be adversely affected if a significant amount of these loans were not repaid. Similarly, if our stock price were to decrease, our employees bear greater repayment risk.

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

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

Page 27

ITEM III. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest and Foreign Currency Exchange Rates

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

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

A majority of Cypress’s revenue and capital spending is transacted in U.S. dollars. However, Cypress does enter into these transactions in other currencies, primarily the Japanese yen and the euro. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, Cypress has established hedging programs for balance sheet exposures and exposures to exchange rate changes for purchases of capital equipment. Cypress’s hedging programs reduce, but do not always eliminate, the impact of foreign currency exchange rate movements. Based on Cypress’s overall currency rate exposure at March 31, 2002, a near-term 10% appreciation or depreciation in the U.S. dollar, relative to the Japanese Yen or the Euro, would have an immaterial effect on Cypress’s financial position, results of operations and cash flows over the next fiscal year.

Equity Options

At March 31, 2002, Cypress had outstanding a series of equity options (on Cypress common stock) in the amount of $27.6 million. The options require physical settlement and expire in June 2002. Upon expiration of the options, if Cypress’s stock price is above the trigger price, Cypress will have its capital returned with a premium. If below the trigger price, Cypress will receive a specified number of shares of Cypress common stock instead of a return of capital. The range of the trigger prices is $20.00 — $23.42. The transactions are recorded in stockholders’ equity in the accompanying condensed consolidated balance sheet.

At March 31, 2002, Cypress had outstanding 250,000 put options (on Cypress common stock) with a $14.58 strike price. Upon expiration of the options, if Cypress’s stock price is below the strike price, Cypress could take delivery of the underlying shares and be required to pay $3.6 million. If Cypress’s stock price is above the strike price, Cypress will have no further obligations. The transaction is recorded in stockholders’ equity in the accompanying condensed consolidated balance sheet.

Investments in Development Stage Companies

Cypress has also invested in several privately held companies, all of which can be considered in the startup or development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. At March 31, 2002, Cypress had invested $17.4 million, directly or indirectly, in development stage companies, all of which could be lost if the companies are not successful.

Stock Purchase Assistance Plan

Cypress has loans of $104.2 million to employees under the shareholder-approved Employee Stock Purchase Assistance Plan for the purpose of purchasing Cypress common stock. Each loan is evidenced by a full recourse promissory note executed by the employee in favor of Cypress and is secured by all of the employee’s assets, as well as, a pledge of the shares of our common stock purchased with the proceeds of the loan. Cypress maintains an allowance for doubtful accounts. For the quarter ending March 31, 2002, there were no write-offs of such loans. If the price of Cypress common stock declined from its March 31, 2002 level of $23.00 by 10%, Cypress’s exposure to loans with the underlying common stock collateral worth less than the face value of the notes would be $2.4 million.

Page 28

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required by this item is included in Part I in Note 5 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 2, 2002, at Cypress’s Annual Meeting of Shareholders, the nominated slate of directors was elected and the appointment of PricewaterhouseCoopers LLP as Cypress’s independent accountants was ratified. The results of the votes were as follows:

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

None

Page 29

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: May 14, 2002

Page 30