10-K

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

FORM 10-K

(Mark One)

[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 30, 2001

Or

[_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________.

Commission File Number: 1-10079

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

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

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

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

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

Title of Each Class
Common Stock, $.01 par value
4% Convertible Subordinated Notes due 2005
3.75% Convertible Subordinated Notes due 2005 Name of Each Exchange
On Which Registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange

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

None

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

INDEX

PART I		3
	ITEM I. BUSINESS	3
	ITEM 2. PROPERTIES	18
	ITEM 3. LEGAL PROCEEDINGS	19
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	20
PART II		21
	ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK    AND RELATED STOCKHOLDER MATTERS	21
	ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA	21
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	36
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	37
	CONSOLIDATED BALANCE SHEETS	37
	CONSOLIDATED STATEMENTS OF OPERATIONS	38
	CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY	39
	CONSOLIDATED STATEMENTS OF CASH FLOWS	40
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	41
	REPORT OF INDEPENDENT ACCOUNTANTS	73
	QUARTERLY FINANCIAL DATA	74
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS    ON ACCOUNTING AND FINANCIAL DISCLOSURES	74
PART III		75
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	75
	ITEM 11. EXECUTIVE COMPENSATION	75
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS    AND MANAGEMENT	75
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	75
PART IV		76
	ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND    REPORTS ON FORM 8-K	76
SIGNATURES		78

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PART I

ITEM I. BUSINESS

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

General

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

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

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

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

• maintain our position in high-performance markets;

• increase our presence in data communications and telecommunications markets;

• continue to successfully design and develop new products utilizing advanced semiconductor design and process technologies in a timely fashion;

• improve manufacturing yields and reduce manufacturing costs and cycle time; and

• effectively market and sell our products in light of significant domestic and international competition.

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

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Products

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

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

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

Memory Products

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

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

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

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

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

Non-memory Products

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Research and Development

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

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

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

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

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

Manufacturing

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

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

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

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

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

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

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

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

Marketing and Sales

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

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

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

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

Backlog

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

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Competition

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

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

• our success in developing new products and manufacturing technologies;

• the delivery, performance, quality and price of our products;

• the diversity of our product line;

• the cost effectiveness of our design, development, manufacturing and marketing efforts;

• the pace at which customers incorporate our products into their systems; and

• the number and nature of our competitors and general economic conditions.

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

Patents and Licenses

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

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

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

Acquisitions

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

• Silicon Packets, Inc. designs 10 Gigabit-per-second (Gbps) framers for OC-192/STM-64 SONET/SDH and 10G Ethernet transport solutions. These framers complement our existing communications product portfolio, accelerating our current schedule to develop 10 Gbps solutions for MAN/WAN infrastructure equipment such as switches and routers.

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• In-System Design, Inc. is a system-on-chip design company specializing in personal communications solutions. The immediate benefit to us relates to ISD’s 300A product, a Universal Serial Bus 2.0-to-AT Attachment/AT Attachment Packet Interface (“ATA/ATAPI”) bridge device that enables PC’s and other information appliances to connect to external mass storage devices, including hard disk, CD-ROM, CD-RW DVD-RAM, and Zip® drives.

• Lara Networks, Inc. (“Lara”) provides high-performance, silicon-based packet processing solutions for WAN infrastructure equipment. This acquisition expands our portfolio of solutions across the linecard. Lara’s family of network search engines and network coprocessors (“NCPs”) target switches, routers, and multiservice gateways handling multiple high-speed protocols up to OC-768, including 10G Ethernet.

• ScanLogic Corporation (“ScanLogic”) designs USB controller solutions for embedded and PC applications. ScanLogic’s host/slave chip family extends USB connectivity to a range of non-PC applications, including PDAs, cellular phones, set-top boxes, digital cameras, Internet appliances, and automotive communication systems.

• HiBand Semiconductors, Inc. (“HiBand”) provides mixed-signal integrated circuits for high-speed communications markets, such as SONET, Ethernet, Fibre Channel, and InfiniBand™. HiBand is developing a 10 Gbps physical layer device for Ethernet applications. HiBand intellectual property is expected to serve as the building block in future generations of high-performance Cypress communications devices that transition from electrical to optical technology.

• International Microcircuits, Inc. (“IMI”) specializes in timing technology integrated circuits for network applications. IMI’s portfolio of timing solutions includes high performance zero delay buffers (“ZDBs”), programmable clocks, clock distribution products, electromagnetic interference suppression devices, and application-specific products for applications in communications, cable and DSL modems, office automation, digital cameras, DVDs and video games.

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

Employees

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

Risk Factors

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

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

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

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

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

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

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

• the intense competitive pricing pressure to which our products are subject, which can lead to rapid and unexpected declines in average selling prices;

• the complexity of our manufacturing processes and the sensitivity of our production costs to declines in manufacturing yields, which make yield problems both possible and costly when they occur; and

• the need for constant, rapid, new product introductions which present an ongoing design and manufacturing challenge, which can be significantly impacted by even relatively minor errors, and which may result in products never achieving expected market demand.

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

     In addition, because we recognize revenues from sales to 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:

• networking equipment;

• wireless telecommunications equipment;

• computers and computer related peripherals; and

• consumer electronics, automotive electronics and industrial controls.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• our success in developing new products and manufacturing technologies;

• the quality and price of our products;

• the diversity of our product line;

• the cost effectiveness of our design, development, manufacturing and marketing efforts;

• the pace at which customers incorporate our products into their systems;

• the number and nature of our competitors and general economic conditions, and

• our access to and the availability of capital.

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

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

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

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

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

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

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

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

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

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

• currency exchange fluctuations,

• political instability,

• changes in local economic conditions,

• the devaluation of local currencies,

• import and export controls, and

• changes in tax laws, tariffs and freight rates.

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

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

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

We depend on third parties to transport our products.

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

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

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

• the difficulty of integrating acquired technology or products;

• the difficulty of integrating acquired products into our manufacturing facilities;

• the difficulty of assimilating the personnel of the acquired companies;

• the difficulty of coordinating and integrating geographically dispersed operations;

• our ability to retain customers of the acquired company;

• the potential disruption of our ongoing business and distraction of management;

• the maintenance of brand recognition of acquired businesses;

• the failure to successfully develop acquired in-process technology, resulting in the impairment of amounts currently capitalized as intangible assets;

• unanticipated expenses related to technology integration;

• the development and maintenance of uniform standards, corporate cultures, controls, procedures and policies;

• the impairment of relationships with employees and customers as a result of any integration of new management personnel; and

• the potential unknown liabilities associated with acquired businesses.

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

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

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

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

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Executive Officers of the Registrant

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

Name	Age	Positions	Executive Officer Since
T. J. Rodgers	54	President, Chief Executive Officer and Director	1982
Antonio R. Alvarez	45	Executive Vice President, Memory Products Division	1993
Emmanuel T. Hernandez	46	Executive Vice President, Finance and Administration,	1994
		Chief Financial Officer
Ralph A. Schmitt	41	Executive Vice President, Sales and Marketing	2000

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

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

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

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

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

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ITEM 2. PROPERTIES

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

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

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

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

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

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

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

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

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ITEM 3. LEGAL PROCEEDINGS

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

• enforce our patents or other intellectual property rights;

• protect our trade secrets and know-how;

• determine the validity or scope of the proprietary rights of others; and

• defend against claims of infringement or invalidity.

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

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

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

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

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

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

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

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

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

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

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

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PART II

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

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

	PRICE RANGE OF COMMON STOCK ($)
	LOW	HIGH	CLOSE
Fiscal Year ended December 30, 2001:
First Quarter	16.50	29.25	17.73
Second Quarter	13.72	25.36	23.85
Third Quarter	14.04	28.95	14.86
Fourth Quarter	14.00	26.20	20.62
Fiscal Year ended December 31, 2000:
First Quarter	28.94	53.19	49.31
Second Quarter	39.19	57.00	42.25
Third Quarter	32.00	55.56	41.56
Fourth Quarter	18.81	41.50	19.69

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

	Year ended (1,2)
	2001		2000	1999	1998		1997
	(In thousands, except per share amounts)
Operating results:
Revenues	$  819,192		$1,287,787	$  745,042	$  588,915		$  632,969
Restructuring, acquisition and other
non-recurring costs, net	293,366		55,729	34,091	60,737		13,551
Operating income (loss)	(459,618	)	328,839	51,607	(115,559	)	4,324
Income (loss) before income taxes and
extraordinary gain	(444,437	)	370,170	95,169	(112,702	)	9,305
Net income (loss) before extraordinary gain	(411,757	)	277,308	88,130	(101,594	)	3,196
Extraordinary gain (net of tax of $2,896)	4,345		—	—	—		—
Net income (loss)	$ (407,412	)	$   277,308	$    88,130	$ (101,594	)	$      3,196
Basic net income (loss) per share:
Before extraordinary gain	$       (3.32	)	$         2.29	$        0.81	$       (0.97	)	$        0.03
Extraordinary gain	0.04		—	—	—		—
Net income (loss)	$       (3.28	)	$         2.29	$        0.81	$       (0.97	)	$        0.03
Diluted net income (loss) per share:
Before extraordinary gain	$       (3.32	)	$         2.03	$        0.76	$       (0.97	)	$        0.03
Extraordinary gain	0.04		—	—	—		—
Net income (loss)	$       (3.28	)	$         2.03	$        0.76	$       (0.97	)	$        0.03
Weighted average common and common
equivalent shares outstanding:
Basic	124,135		121,126	108,156	105,238		102,920
Diluted	124,135		144,228	115,527	105,238		110,820
Balance sheet data:
Cash, cash equivalents and short-term
investments	$  205,422		$   884,601	$  280,947	$  174,513		$  213,939
Working capital	372,333		983,359	360,639	250,889		319,836
Total assets	1,886,436		2,361,754	1,146,958	850,645		1,000,597
Long term debt and capital lease
obligations (excluding current
portion)	525,673		631,055	170,884	170,540		188,467
Stockholders’ equity	$  868,428		$1,327,668	$  718,620	$  517,825		$  658,643

(1) We operate on a 52- or 53-week fiscal year. Fiscal years 2001, 2000 and 1999 were 52-week fiscal years ending on the Sunday closest to December 31. 1998 was a 53-week fiscal year ending on the Sunday closest to December 31. Fiscal year 1997 was a 52-week fiscal year ending on the Monday closest to December 31.

(2) The preceding table presents financial information including the fourteen acquisitions completed in fiscal 2001, 2000 and 1999. See Notes 3 and 4 of the Consolidated Financial Statements included in this report for discussions of the acquisitions, which may affect the comparability of the data.

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

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

Overview

	Year Ended
(In thousands, except per share amounts)	December 30, 2001		December 31, 2000	January 2, 2000
Revenue	$ 819,192		$1,287,787	$745,042
Net Income (Loss)	(407,412	)	277,308	88,130
Diluted Earnings (Loss) Per Share	$      (3.28	)	$         2.03	$      0.76

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

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

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

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

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

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

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

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Results of Operations

Revenues

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

Business Segment Net Revenues

(In thousands)	2001	2000	1999
Memory	$350,908	$   638,111	$309,002
Non-memory	468,284	649,676	436,040
Total consolidated revenues	$819,192	$1,287,787	$745,042

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

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

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

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

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

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Cost of Revenues

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

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

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

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

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

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

Research and Development

	Year Ended
(In thousands)	December 30, 2001		December 31, 2000		January 2, 2000
Revenues	$819,192		$1,287,787		$745,042
Research and development	267,522		184,471		136,858
R&D as percent of revenues	32.7	%	14.3	%	18.4	%
One-time charges	5,500		—		—
Acquisition related compensation	25,412		3,192		254
R&D excluding acquisition related compensation and one-time charges	$236,610		$   181,279		$136,604
R&D excluding acquisition related compensation and one-time charges as       percent of revenues	28.9	%	14.1	%	18.3	%

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

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

Page 25

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

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

Selling, General and Administrative

	Year Ended
(In thousands)	December 30, 2001		December 31, 2000		January 2, 2000
Revenues	$819,192		$1,287,787		$745,042
Selling, general and administrative	165,655		153,909		113,601
SG&A as percent of revenues	20.2	%	12.0	%	15.2	%
Acquisition related compensation	11,135		2,415		358
SG&A excluding acquisition related compensation	$154,520		$   151,494		$113,243
SG&A excluding acquisition related compensation    as percent of revenues	18.9	%	11.8	%	15.2	%

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

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

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

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

Acquisition and Other Non-Recurring Costs

	Year Ended
(In thousands)	December 30, 2001	December 31, 2000	January 2, 2000
Amortization of intangibles	$  71,493	$21,825	$  9,654
In-process research and development	23,200	32,425	4,019
Other non-recurring costs	66,560	1,964	24,229
Total acquisition and other non-recurring costs	$161,253	$56,214	$37,902

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

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

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

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

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

Restructuring

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

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

(In thousands)	Provision	Non-Cash Charges	Cash Charges	Reserves And Write-Downs at 12/30/2001
Property, plant & equipment	$113,350	$  7,269	$1,619	$104,462
Leased facilities	4,079	—	213	3,866
Personnel	14,684	9,056	4,243	1,385
Total	$132,113	$16,325	$6,075	$109,713

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

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

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

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

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

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

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

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

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

	Year Ended
(In thousands)	December 30, 2001		December 31, 2000		January 2, 2000
Interest income	$ 48,231		$ 59,152		$ 18,297
Interest expense	(22,398	)	(23,633	)	(9,643	)
Other income and (expense), net	(10,652	)	5,812		34,908
Total interest income, interest expense and    other income and (expense), net	$ 15,181		$ 41,331		$ 43,562

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

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

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

Taxes

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

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

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Extraordinary Gain

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

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

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

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

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

	Year Ended
(In thousands)	December 30, 2001		December 31, 2000		January 2, 2000
Net income (loss)	$(407,412	)	$ 277,308		$ 88,130
Goodwill and acquisition costs(1)	135,773		62,082		39,396
Restructuring costs (credits) (2)	132,113		(485	)	(3,811	)
Write-downs of certain investments and intangibles (3)	74,810		—		—
Gains on sales of certain assets (4)	—		(11,630	)	(36,237	)
Unusual costs (5)	11,776		1,898		—
Tax effects of pro forma adjustments	(20,075	)	63		632
Income (loss) before extraordinary gain	(73,015	)	329,236		88,110
Extraordinary gain net of taxes	(4,345	)	—		—
Pro forma earnings (loss) (6)	$(77,360	)	$ 329,236		$ 88,110

(1) In-process technology, non-cash stock compensation costs, cash charges based on the achievement of milestones under acquisition agreements, and the amortization of intangible assets and goodwill related to those acquisitions.

(2) In 2001 charges related to the resizing of facilities including the writing off of property, plant and equipment, the reduction in personnel, and exiting certain leased facilities

(3) An impairment loss related to a wholly owned subsidiary (SLM) and the write-down of two long-term investments.

(4) Non-operating gains related to the sale of certain assets and investments.

(5) Unusual or one-time charges to reflect the result of a physical count of property, plant and equipment, settlement of legal disputes and the write-off of bond costs.

(6) For purposes of pro forma earnings as discussed, Cypress’s effective tax rates for the fiscal years 2001, 2000, and 1999, were 14.2%, 22.0%, and 5.0%, respectively.

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

Liquidity and Capital Resources

(In thousands)	December 30, 2001	December 31, 2000	January 2, 2000
Cash, cash equivalents and short-term investments	$205,422	$   884,601	$280,947
Working capital	372,333	983,359	360,639
Long-term debt and capital lease obligations
(excluding current portion)	525,673	631,055	170,884
Stockholders’ equity	868,428	1,327,668	718,620
Net cash flow generated from operating activities	$  95,148	$   521,097	$157,622

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

	Payments Due by Period
(In thousands)	Total	Less than 1 Year	1-3 Years	4-5 Years	After 5 Years
Convertible subordinated notes
-including interest	$593,515	$  21,112	$40,242	$532,161	—
Operating leases, including synthetic leases	66,235	20,297	31,938	11,829	2,171
Purchase commitments	33,448	29,934	1,990	762	762
Customer advances	65,058	30,497	34,561	—	—
Sumitomo Bank- Japan
-including interest	5,791	—	5,791	—	—
Total	$764,047	$101,848	$114,522	$544,752	$2,933

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Critical Accounting Policies

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

Revenue Recognition

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

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

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

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

Accounting for income taxes

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

Valuation of Inventory

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

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Valuation of Long-Lived Assets

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

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

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

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

• significant negative industry trends;

• significant underutilization of the assets;

• significant changes in how we use the assets or our plans for their use;

• underperformance relative to historical or projected future operating results; and

• significant changes in company strategy.

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

Subsequent Events

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

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

Recent Accounting Pronouncements

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

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

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

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

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest and Foreign Currency Exchange Rates

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

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

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

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

Equity Options

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

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

Investments in Development Stage Companies

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

Stock Purchase Assistance Plan

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

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ASSETS

	December 30, 2001		December 31, 2000
Current assets:
Cash and cash equivalents	$    109,999		$    551,025
Short-term investments	95,423		333,576
Total cash, cash equivalents and short-term investments	205,422		884,601
Accounts receivable, net	97,817		193,525
Inventories, net	73,268		104,935
Other current assets	250,328		99,725
Total current assets	626,835		1,282,786
Property, plant and equipment, net	499,795		571,475
Other assets	759,806		507,493
Total assets	$ 1,886,436		$ 2,361,754
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$      73,916		$      95,735
Accrued compensation and employee benefits	62,669		61,379
Other current liabilities	104,691		60,108
Deferred income on sales to distributors	11,926		34,084
Income taxes payable	1,300		48,121
Total current liabilities	254,502		299,427
Convertible subordinated notes	517,700		570,500
Deferred income taxes and other tax liabilities	203,272		103,604
Other long-term liabilities	42,534		60,555
Total liabilities	1,018,008		1,034,086
Commitments and contingencies (See Note 15)
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000 shares authorized; none
issued and outstanding	—		—
Common stock, $.01 par value, 650,000 and 250,000 shares authorized;
139,052 and 136,895 issued; 121,495 and 125,659 outstanding at
December 30, 2001 and December 31, 2000	1,391		1,369
Additional paid-in-capital	1,162,642		1,008,211
Deferred stock compensation	(53,141	)	(10,360	)
Accumulated other comprehensive income	2,722		—
Retained earnings	103,860		513,649
	1,217,474		1,512,869
Less: shares of common stock held in treasury, at cost; 17,557 shares and
11,236 shares at December 30, 2001 and December 31, 2000	(349,046	)	(185,201	)
Total stockholders’ equity	868,428		1,327,668
Total liabilities and stockholders’ equity	$ 1,886,436		$ 2,361,754

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

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

	Year Ended
	December 30, 2001		December 31, 2000		January 2, 2000
Revenues	$    819,192		$ 1,287,787		$ 745,042
Cost of revenues	552,267		564,839		408,885
Research and development	267,522		184,471		136,858
Selling, general and administrative	165,655		153,909		113,601
Acquisition and other non-recurring costs	161,253		56,214		37,902
Restructuring	132,113		(485	)	(3,811	)
Total operating costs and expenses	1,278,810		958,948		693,435
Operating income (loss)	(459,618	)	328,839		51,607
Interest income	48,231		59,152		18,297
Interest expense	(22,398	)	(23,633	)	(9,643	)
Other income and (expense), net	(10,652	)	5,812		34,908
Income (loss) before income taxes and extraordinary gain	(444,437	)	370,170		95,169
(Provision) benefit for income taxes	32,680		(92,862	)	(7,039	)
Net income (loss) before extraordinary gain	(411,757	)	277,308		88,130
Extraordinary gain (net of tax of $2,896)	4,345		—		—
Net income (loss)	$  (407,412	)	$    277,308		$   88,130
Basic net income (loss) per share:
Before extraordinary gain	$       (3.32	)	$          2.29		$       0.81
Extraordinary gain (net of tax)	0.04		—		—
Net income (loss)	$       (3.28	)	$          2.29		$       0.81
Diluted net income (loss) per share:
Before extraordinary gain	$       (3.32	)	$          2.03		$       0.76
Extraordinary gain (net of tax)	0.04		—		—
Net income (loss)	$       (3.28	)	$          2.03		$       0.76
Weighted average common and common equivalent    shares outstanding:
Basic	124,135		121,126		108,156
Diluted	124,135		144,228		115,527

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

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)

	Common Stock			Additional Paid-In		Deferred Stock		Accumulated Other Comprehensive	Retained		Treasury		Total Stockholders’
	Shares		Amount	Capital		Compensation		Income	Earnings		Stock		Equity
Balances at January 3, 1999	100,819		$1,141	$    476,821		$(1,961	)	$     —	$ 175,669		$(133,845	)	$    517,825
Cypress (Galvantech) activities for the
quarter ended March 31, 1999	—		—	—		—		—	232		—		232
Re-issuance of treasury shares and
issuance of common stock under employee
stock plans and other	13,292		50	40,265		—		—	(27,690	)	91,914		104,539
Tax benefit resulting from stock option
transactions	—		—	13,772		—		—	—		—		13,772
Notes receivable from stockholders	—		—	(8,186	)	—		—	—		—		(8,186	)
Conversion of note payable into common
stock	—		—	300		—		—	—		—		300
Compensation expense to outside
consultants	—		—	234		—		—	—		—		234
Provision for and amortization of deferred
compensation	—		—	1,745		29		—	—		—		1,774
Net income for the year	—		—	—		—		—	88,130		—		88,130
Balances at January 2, 2000	114,111		1,191	524,951		(1,932	)	—	236,341		(41,931	)	718,620
Issuance of common stock in relation
to acquisitions	3,513		35	186,390		(15,053	)	—	—		—		171,372
Repurchase of common stock
under stock repurchase program	(6,256	)	—	—		—		—	—		(143,270	)	(143,270	)
Issuance of common stock under
employee stock plans and other	7,519		75	67,891		—		—	—		—		67,966
Issuance of common stock due to
conversion of notes	6,772		68	159,918		—		—	—		—		159,986
Amortization of deferred
compensation	—		—	—		6,625		—	—		—		6,625
Notes receivable from stockholders	—		—	6,040		—		—	—		—		6,040
Premiums received from issuance
of put options	—		—	6,288		—		—	—		—		6,288
Tax benefit resulting from stock option
transactions	—		—	56,733		—		—	—		—		56,733
Net income for the year	—		—	—		—		—	277,308		—		277,308
Balances at December 31, 2000	125,659		1,369	1,008,211		(10,360	)	—	513,649		(185,201	)	1,327,668
Issuance of common stock in
relation to acquisitions	2,157		22	107,566		(42,140	)	—	—		—		65,448
Repurchase of common stock under stock
repurchase program	(9,534	)	—	—		—		—	—		(190,459	)	(190,459	)
Re-issuance of treasury shares and
issuance of common stock under employee
stock plans and other	3,213		—	6,604		—		—	(2,377	)	26,614		30,841
Provision for and amortization of
deferred stock compensation	—		—	42,676		(641	)	—	—		—		42,035
Notes receivable from stockholders	—		—	871		—		—	—		—		871
Premiums received from issuance
of put options	—		—	10,648		—		—	—		—		10,648
Structured purchase of options, net	—		—	(13,934	)	—		—	—		—		(13,934	)
Other comprehensive income	—		—	—		—		2,722	—		—		2,722
Net loss for the year	—		—	—		—		—	(407,412	)	—		(407,412	)
Balances at December 30, 2001	121,495		$1,391	$ 1,162,642		$(53,141	)	$2,722	$ 103,860		$(349,046	)	$    868,428

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

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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

	Year Ended
	December 30, 2001		December 31, 2000		January 2, 2000
Cash flow from operating activities:
Net income (loss)	$(407,412	)	$ 277,308		$   88,130
Adjustments to reconcile net income (loss) to net cash
generated by operating activities:
Depreciation and amortization	249,003		150,704		109,920
Acquired in-process research and development	23,200		32,425		4,019
Extraordinary gain on early retirement of debt	(4,345	)	—		—
Loss on write down of assets	—		—		11,047
Deferred gain on sale of fixed assets	—		—		(3,959	)
Gain on sales of assets	—		(5,000	)	(36,237	)
Restructuring costs (credits)	115,333		(485	)	(3,811	)
Other non-recurring costs	80,436		1,964		—
Tax benefit resulting from stock option transactions	—		56,733		13,722
Deferred income taxes	(31,085	)	5,434		(9,971	)
Changes in operating assets and liabilities, net of affects of
acquisitions:
Accounts receivable, net	102,262		(89,166	)	(30,416	)
Inventories, net	40,718		(7,162	)	(30,149	)
Other assets	(7,197	)	(14,367	)	(13,507	)
Accounts payable, accrued and other liabilities	(43,454	)	71,876		58,676
Deferred income	(22,158	)	13,023		7,221
Income taxes payable	(153	)	27,810		(7,002	)
Net cash flow generated from operating activities	95,148		521,097		157,683
Cash flow from investing activities:
Purchase of investments	(183,168	)	(492,855	)	(218,383	)
Sale or maturities of investments	502,658		181,018		66,872
Acquisition of property, plant and equipment	(176,793	)	(338,740	)	(114,364	)
Cash paid for acquisitions	(352,096	)	—		(41,726	)
Proceeds from sale of investment	—		7,500		36,237
Issuance of notes to employees, net	(117,220	)	—		—
Proceeds from sale of equipment	4,132		325		16,179
Net cash flow used for investing activities	(322,487	)	(642,752	)	(255,185	)
Cash flow from financing activities:
Issuance of convertible subordinated notes, net of
issuance costs	—		554,812		—
Redemption of convertible debt	(45,406	)	—		—
Repurchase of common stock	(190,459	)	(143,270	)	—
Re-issuance of treasury shares and issuance of common
stock	30,841		63,538		116,982
(Issuance) repayment of notes to stockholders, net	871		6,040		(8,186	)
Premiums received from put options	10,648		6,288		—
Structured purchase of options, net	(13,934	)	—		—
Other liabilities, including minority interest	(6,248	)	17,566		(1,257	)
Net cash flow generated from (used for) financing activities	(213,687	)	504,974		107,539
Net change in cash during the period due to mergers
and acquisitions	—		8,618		(2,339	)
Net increase (decrease) in cash and cash equivalents	(441,026	)	391,937		7,698
Cash and cash equivalents, beginning of year	551,025		159,088		151,390
Cash and cash equivalents, end of year	$ 109,999		$ 551,025		$ 159,088
Supplemental disclosures:
Cash paid (received) during the year for:
Interest	$   23,559		$   15,734		$     9,626
Income taxes	$    (9,778	)	$   15,252		$     5,467
Non-cash flow items:
Common stock and options issued for acquisitions	$ 107,588		$ 186,425		$     6,200

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Summary of Significant Accounting Policies

     Cypress — Cypress Semiconductor Corporation (“Cypress”) designs, develops, manufactures and markets a broad line of high-performance digital and mixed-signal integrated circuits for a range of markets, including data communications, telecommunications, computation, consumer products, and industrial control. With a focus on emerging communications applications, Cypress’s product portfolios include: networking-optimized and micro-power static RAMs; high-bandwidth multi-port and FIFO memories; datacom products; high-density programmable logic devices; timing technology for PCs and other digital systems; and controllers for Universal Serial Bus (“USB”).

     Cypress’s operations outside of the U.S. include its assembly and test plant in the Philippines and several sales offices and design centers located in various parts of the world. Revenues to international customers were 50%, 49% and 49% of total revenues in 2001, 2000 and 1999, respectively.

     The consolidated financial statements include the accounts of Cypress and all of its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

     Fiscal Year — The Cypress fiscal year ends on the Sunday closest to December 31. Fiscal years 2001, 2000 and 1999 ended December 30, 2001, December 31, 2000 and January 2, 2000, respectively, and each included 52 weeks.

     Management Estimates — 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. Significant estimates in these financial statements include reserves for deferred income, reserves for price adjustment on sales to distributors, the sales return reserve, restructuring charges, allowances for doubtful accounts receivable, estimates for future cash flows associated with assets, asset impairments, reserves for loans under the Stock Purchase Assistance Program, net realizable value for inventories, certain accrued liabilities and income taxes and tax valuation allowances. Actual results could differ from those estimates, although such differences are not expected to be material to the financial statements.

     Reclassifications — Certain prior year amounts have been adjusted to conform to current year presentation.

     Fair Value of Financial Instruments — For certain of Cypress’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these items. Investments in debt securities are carried at fair value based on quoted prices. At December 30, 2001, the estimated fair value of the Convertible Subordinated Notes was approximately $443.0 million. Foreign currency derivative financial instruments are carried at fair value based on changes in forward rate from quoted market sources (see Note 9).

     The estimated fair values have generally been determined by Cypress using available market information. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that Cypress could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts.

     Cash Equivalents— Highly liquid investments purchased with an original maturity of ninety days or less are considered equivalent to cash.

     Investments —All Cypress investments in debt securities are classified as available-for-sale. Investments in available-for-sale securities are reported at fair value with unrealized gains and losses, net of related tax, as a component of stockholders’ equity. Unrealized gains and (losses) were $4.5 million, and were $2.7 million net of related taxes, for the year ended December 30, 2001. Unrealized gains and (losses) net of related taxes were immaterial for prior years.

     Cypress also has other minority equity investments in nonpublicly traded companies. These investments are included in other assets on the balance sheet and are generally carried at cost. Cypress monitors these investments for impairment and makes appropriate reductions in carrying values when declines are deemed to be other than temporary.

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     Inventories — Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. Market is based on estimated net realizable value. Cypress establishes “lower of cost or market” reserves, aged inventory reserves, obsolescence reserves and research and development reserves. Inventory reserves are generally recorded when the inventory for a device exceeds nine months of demand for that device and when individual parts have been in inventory for greater than six months.

     Property, Plant and Equipment — Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the assets as presented below. Leasehold improvements and leasehold interests are amortized over the shorter of the estimated useful lives of the assets or the remaining term of the lease. Accelerated methods of computing depreciation are used for tax purposes.

	Useful Lives in Years
Equipment	3 to 7
Building and leasehaold improvements	5 to 20
Furniture and fixtures	5 to 7

     Pre-operating Costs — Pre-operating costs incurred in connection with developing major production capability at new manufacturing plants are expensed as incurred.

     Long-Lived Assets — Cypress currently evaluates its long-lived assets, including intangible assets, in accordance with the provisions of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable. Factors Cypress considers important that could result in an impairment review include, but are not limited to, significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for Cypress’s overall business, significant underutilization of the assets, the negative industry or economic trends, a significant decline in our stock price for a sustained period of time, and Cypress’s market capitalization relative to net book value. When it is determined that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, Cypress measures any impairment based on projected discounted cash flows using a discount rate commensurate with the risk inherent in our current business model.

     Revenue Recognition — In December 1999, the staff of the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 101 (“SAB 101”) “Revenue Recognition in Financial Statements,” which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The adoption of SAB 101 in fiscal 2000 did not have a material effect on Cypress’s results.

     Revenues from product sales are generally recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery of product has occurred. Reserves are provided for estimated returns. A portion of Cypress’s sales are made to distributors under agreements that allow certain rights of return and price protection on products unsold. Accordingly, Cypress defers recognition of revenues, cost of sales and profit on such sales until these distributors resell these products. Inventory is relieved, accounts receivable are recorded and reserves for deferred income and price adjustments are provided at the time the products are shipped to the distributors.

     Cypress also sells to certain international distributors whose contracts have provisions for price adjustments on certain products without a right of return. Cypress generally recognizes revenue upon shipment to these distributors and reserves for estimated price adjustments at that time.

     Cypress also has inventory, which is held by certain customers on a consignment basis. Revenues are recorded when title and risk of loss transfers as defined per the respective consignment agreements.

     Earnings Per Share — Basic Earnings Per Share (“EPS”) is computed using weighted average common shares outstanding. Diluted EPS is computed using weighted average common shares outstanding plus any potentially dilutive securities, except when their effect is anti-dilutive. Dilutive securities include stock options, convertible debt and put options.

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     Translation of Foreign Currencies — Cypress uses the U.S. dollar as its functional currency for all foreign subsidiaries. Accordingly, gains and losses from translation of foreign currency financial statements into U.S. dollars are included in results of operations. Sales to customers are primarily denominated in U.S. dollars. Translation gains and losses have not been material in any year.

     Concentration of Credit Risk — Financial instruments that potentially subject Cypress to concentrations of credit risk are primarily investments and trade accounts receivable. Cypress’s investment policy requires cash investments to be placed with high-credit quality institutions and to limit the amount of credit risk from any one issuer.

     Cypress sells its products to original equipment manufacturers and distributors throughout the world. Cypress performs ongoing credit evaluations of its customers’ financial condition whenever deemed necessary and generally does not require collateral. Cypress maintains an allowance for doubtful accounts receivable based upon the expected collectibility of all accounts receivable. No individual customer represented greater than 10% of accounts receivable at December 30, 2001. No individual customer accounted for greater than 10% of total revenues in 2001. Sales to Motorola, Inc. accounted for 10.9% of total revenues in fiscal 2000. In fiscal 1999 no individual customer accounted for greater than 10% of total revenues. No individual distributor accounted for greater than 10% of total revenues in either fiscal 2001 or fiscal 2000. Sales to Arrow Electronics, Inc., a distributor, accounted for 10% of total revenues in fiscal 1999. Write-offs of accounts receivable have been immaterial during the preceding three fiscal years.

     Accounting for Stock-Based Compensation — Cypress accounts for its stock option plans and its employee stock purchase plan using the intrinsic value method in accordance with provisions of the Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and complies with the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”. If there is any compensation cost under the rules of APB Opinion No. 25, the expense is amortized using an accelerated method prescribed under the rules of Financial Accounting Standards Board (“FASB”) Interpretation 28.

      Comprehensive Income — Comprehensive income is defined as the change in equity during a period from non-owner sources. Cypress’s comprehensive income is comprised of net income and unrealized gains and losses (net of taxes) on investments classified as available for sale.

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

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

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

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

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Note 2: Balance Sheet Components

Available-For-Sale Securities

(In thousands)	December 30, 2001	December 31, 2000
Corporate debt securities	$164,394	$   515,352
Federal, state and municipal obligations	77,405	117,336
Money markets funds	60,616	425,359
Other	17,832	14,089
Available-for-sale securities	$320,247	$1,072,136

     Available-for-sale securities include cash and cash equivalents, short-term investments, plus long-term investments shown below in Other Assets. Cash of $19.7 million and $23.9 million is excluded from available-for-sale securities as of December 30, 2001 and December 31, 2000, respectively. At December 30, 2001 the net unrealized holding gains and losses on securities were $4.5 million gross ($2.7 million net of tax) and prior to 2001 it was not material. The securities at December 30, 2001 and December 31, 2000 are shown by contractual maturity below.

(In thousands)	December 30, 2001	December 31, 2000
Due in one year or less	$185,752	$   860,692
Due after one year through two years	134,495	211,444
Available-for-sale securities	$320,247	$1,072,136

Accounts Receivable, Net

(In thousands)	December 30, 2001		December 31, 2000
Accounts receivable, gross	$ 105,156		$ 199,730
Allowance for doubtful accounts and customer
returns	(7,339	)	(6,205	)
Accounts receivable, net	$   97,817		$ 193,525

Inventories, Net

(In thousands)	December 30, 2001	December 31, 2000
Raw materials	$  6,708	$  11,387
Work-in-process	42,624	63,200
Finished goods	23,936	30,348
Inventories, net	$73,268	$104,935

Other Current Assets

(In thousands)	December 30, 2001	December 31, 2000
Employee stock purchase assistance plan, net	$117,220	$       —
Deferred tax assets	104,798	61,772
Other current assets	28,310	37,953
Other current assets	$250,328	$99,725

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Property, Plant and Equipment, Net

(In thousands)	December 30, 2001		December 31, 2000
Land	$      14,426		$      14,448
Equipment	956,667		984,395
Buildings and leasehold improvements	165,089		152,606
Furniture and fixtures	11,015		10,046
Total property, plant and equipment	1,147,197		1,161,495
Accumulated depreciation and amortization	(647,402	)	(590,020	)
Property, plant and equipment, net	$    499,795		$    571,475

Other Assets

(In thousands)	December 30, 2001	December 31, 2000
Restricted investments	$  74,968	$  60,698
Long-term investments	134,495	211,444
Intangible assets	196,680	191,569
Goodwill	300,024	23,068
Deferred tax asset	36,791	853
Other	16,848	19,861
Other assets	$759,806	$507,493

Other Current Liabilities

(In thousands)	December 30, 2001	December 31 2000
Customer advances	$  30,497	$20,159
Accrued interest payable	9,139	10,305
Sales representative commissions	3,057	7,301
Accrued royalties	3,975	4,007
Other	58,023	18,336
Other current liabilities	$104,691	$60,108

Note 3: Acquisitions Using Purchase Accounting

2001 Acquisitions

Acquisition of Silicon Packets, Inc.

     On December 27, 2001, Cypress acquired 100% of the outstanding common and preferred stock of Silicon Packets, Inc. (“Silicon Packets”) a company that specializes in designing 10 Gigabit-per-second framers for OC-192/STM-64 Synchronous Optical Network/Synchronous Digital Hierarchy (“SONET/SDH”) and 10G Ethernet transport solutions. Silicon Packets will be part of the Non-memory business segment and the Wide Area Network/ Storage Area Network (“WAN/SAN”) market segment. The acquisition accelerates Cypress’s current schedule to develop 10 Gigabit-per-second solutions for MAN (Metropolitan Area Networks), which is part of the SAN/WAN market segment, and WAN infrastructure equipment such as switches and routers. The acquisition was accounted for using the purchase method of accounting per FASB SFAS No. 141. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of December 27, 2001, the effective date of the purchase. Other than the charge for in-process research and development, Silicon Packet’s results of operations from the date of purchase to the end of the fiscal year were not significant because the acquisition was completed during the last week of the fiscal year and are therefore not included in Cypress’s consolidated results of operations for the year ended December 30, 2001. There were no significant differences between the accounting policies of Cypress and Silicon Packets.

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     Cypress acquired Silicon Packets for total consideration of $27.3 million, including 0.7 million shares of Cypress common stock valued at $14.2 million, $7.1 million in cash, options for 0.2 million shares of Cypress common stock valued at $3.2 million and direct acquisition costs of $2.8 million for underwriting, legal, valuation, accounting and regulatory fees. The total purchase price was preliminarily allocated to the estimated fair value of assets acquired and liabilities assumed as set forth in the following table:

(In thousands)
Current assets	$      968
Property, plant and equipment, net	951
Deferred tax asset	2,110
Other assets	58
Goodwill	9,751
Current technology	4,300
Non-compete agreements	800
Total assets acquired	18,938
Current liabilities	(745	)
Long term liabilities	(509	)
Deferred tax liabilities	(2,040	)
Total liabilities assumed	(3,294	)
Deferred stock compensation (See Note 8)	6,589
Net assets acquired	22,233
In-process research and development	5,100
Total consideration	$ 27,333

     The amounts allocated to current technology and non-compete agreements have weighted average useful lives of 4 years and 3 years, respectively. These intangible assets are amortized using the straight-line method over their respective estimated useful lives. None of the $9.8 million in goodwill recorded is expected to be deductible for tax purposes, and, in accordance with SFAS No. 142, will not be amortized.

     The agreement with Silicon Packets includes provisions for contingent cash payments of up to $5.0 million through December 2002 based on the achievement of specific targets in future periods. These cash payments are also contingent upon the payees remaining employed by Cypress and will be accounted for as compensation for services and expensed in the appropriate periods.

Acquisition of In-System Design, Inc.

     On September 14, 2001, Cypress acquired 100% of the outstanding capital stock of In-System Design, Inc. (“ISD”), a system-on-chip design company specializing in personal communications solutions. ISD will be part of the Non-memory business segment and the Computation and Other market segment. The immediate benefit to Cypress relates to ISD’s 300A product, a USB 2.0 to ATA/ATAPI bridge device that enables PC’s and other information appliances to connect to external mass storage devices including hard disk drives, CD-ROMs, CD-RWs DVD-Rams, and ZIP drives. The acquisition will also bring a veteran development team with an average eight years of experience to Cypress. The ISD team has a wide range of engineering competencies, including system-on-a-chip (“SoC”) expertise, software design, board-level design, test and validation, that are expected to accelerate Cypress’s current and future development projects. The acquisition was accounted for using the purchase method of accounting per SFAS No. 141. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of September 14, 2001, the effective date of the purchase. The results of operations are included in Cypress’s 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 ISD.

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     Cypress acquired ISD for total consideration of $43.0 million, including $36.7 million in cash, options for 0.3 million shares of Cypress common stock valued at $5.4 million and direct acquisition costs of $0.9 million for legal, appraisal and accounting fees. The total purchase price was preliminarily allocated to the estimated fair value of assets acquired and liabilities assumed as set forth in the following table:

(In thousands)
Current assets	$   4,554
Property, plant and equipment, net	632
Deferred tax asset	5,378
Goodwill	19,922
Current technology	17,200
Non-compete agreements	12,350
Trademarks	2,400
Customer purchase orders	450
Total assets acquired	62,886
Current liabilities	(9,445	)
Deferred tax liabilities	(12,960	)
Total liabilities assumed	(22,405	)
Deferred stock compensation (See Note 8)	1,679
Net assets acquired	42,160
In-process research and development	800
Total consideration	$ 42,960

     The amounts allocated to current technology, non-compete and customer purchase orders and trademarks have weighted average useful lives of 4 years, 3 years, 1 year and 4 years, respectively. These intangible assets are amortized using the straight-line method over their respective estimated useful lives. None of the $19.9 million in goodwill recorded is expected to be deductible for tax purposes, and, in accordance with SFAS No. 142, will not be amortized.

     The agreement with ISD includes provisions for contingent cash payments of up to $27.5 million through September 2004 based on USB product revenues achieving specific targets in future periods. These cash payments are also contingent upon the payees remaining employed by Cypress. The agreement with ISD provides for additional contingent cash payments of up to $12.0 million through September 2004 based on continued employment with Cypress. All of these contingent payments will be accounted for as compensation for services and expensed in the appropriate periods.

Acquisition of Lara Networks, Inc.

     On July 3, 2001, Cypress acquired 100% of the outstanding common and preferred stock of Lara Networks, Inc. (“Lara”), a provider of high-performance, silicon-based packet processing solutions for WAN infrastructure equipment. Lara will be part of the Non-memory business segment and the SAN/WAN market segment. Lara fits strategically and leverages Cypress’s core competencies in data communications and specialty memories. Lara was acquired to expand Cypress’s portfolio of solutions across the linecard. Lara’s products will enable Cypress to address the core functionality of packet processing. The acquisition was accounted for using the purchase method of accounting per SFAS No. 141. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of July 3, 2001, the effective date of the purchase. The results of operations are included in Cypress’s 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 Lara.

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     Cypress acquired Lara for total consideration of $200.1 million, including $185.3 in cash, options for 0.4 million shares of Cypress common stock valued at $8.1 million and direct acquisition costs of $6.7 million for underwriting, legal, valuation, accounting and regulatory fees. The total purchase price was preliminarily allocated to the estimated fair value of assets acquired and liabilities assumed as follows:

(In thousands)
Current assets	$   11,234
Property, plant and equipment, net	4,789
Deferred tax asset	17,016
Other assets	1,222
Goodwill	158,322
Current technology	14,850
Trademarks	2,250
Non-compete agreements	1,550
Customer purchase orders	150
Total assets acquired	211,383
Current liabilities	(13,969	)
Deferred tax liabilities	(7,520	)
Total liabilities assumed	(21,489	)
Deferred stock compensation (See Note 8)	5,662
Net assets acquired	195,556
In-process research and development	4,550
Total consideration	$ 200,106

     The amounts allocated to current technology, trademarks, non-compete and customer purchase orders have weighted average useful lives of 5 years, 5 years, 3 years and 0.5 years, respectively. These intangible assets are amortized using the straight-line method over their respective estimated useful lives. None of the $158.3 million in goodwill recorded is expected to be deductible for tax purposes, and, in accordance with SFAS No. 142, will not be amortized.

     The agreement with Lara includes provisions for contingent cash payments of up to $80.0 million through December 2002 based on certain Lara products achieving specific revenue targets in future periods, which will be recorded as an increase in the purchase price if paid. As of December 30, 2001, no such payments have been made.

     The agreement with Lara further provides for contingent cash payments of up to $3.9 million to certain Lara employees through December 2004 based on certain conditions including continued employment with Cypress. As such, this contingency will be accounted for as compensation for services and expensed in the appropriate periods.

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 per APB Opinion No. 16. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of May 29, 2001, the effective date of the purchase. The results of operations are included in Cypress’s 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.

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     Cypress acquired ScanLogic for total consideration of $30.1 million, including $15.6 million 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:

(In thousands)
Fair value of tangible assets and liabilities	$(1,446	)
In-process research and development	1,450
Current technology	11,950
Assembled workforce and non-compete agreements	1,400
Deferred stock compensation (See Note 8)	7,330
Excess of purchase price over identifiable net assets acquired	9,419
Total	$ 30,103

     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 per APB Opinion No. 16. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of March 27, 2001, the effective date of the purchase.

     Cypress acquired HiBand for total consideration of $34.0 million, including 1.4 million shares of Cypress common stock valued at $28.2 million, options 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:

(In thousands)
Fair value of tangible assets and liabilities	$    (181	)
In-process research and development	6,450
Current technology	2,800
Assembled workforce and non-compete agreements	2,650
Deferred tax liability	(2,180	)
Deferred stock compensation (See Note 8)	1,793
Excess of purchase price over identifiable net assets acquired	22,634
Total	$ 33,966

     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.

     The agreement with HiBand includes provisions for contingent cash payments of up to $28.0 million through March 2004 based upon the achievement of established performance milestones and continued employment with Cypress. As such, this contingency will be accounted for as compensation for services and expensed in the appropriate periods.

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 per APB Opinion No. 16. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of February 23, 2001, the effective date of the purchase. The results of operations are included in Cypress’s 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 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:

(In thousands)
Fair value of tangible assets	$   14,847
Fair value of liabilities assumed	(11,517	)
In-process research and development	4,850
Current technology	14,700
Assembled workforce and non-compete agreements	7,450
Other intangibles	7,550
Deferred tax liability	(11,880	)
Deferred stock compensation (See Note 8)	19,087
Excess of purchase price over identifiable net assets acquired	105,179
Total	$ 150,266

     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, ScanLogic, Lara, ISD and Silicon Packets

     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% for IMI, 30% for HiBand, 25% for ScanLogic, 30% for Lara, 29% for ISD and 30% for Silicon Packets. Cypress believes these rates were appropriate given the risks associated with the technologies for which commercial feasibility had not been established. The percentage of completion for each in-process project was determined by identifying the elapsed time invested in the project as a ratio of the total time required to bring the project to technical and commercial feasibility. The percentage of completion for in-process projects acquired ranged from 10% to 90% for IMI, 5% to 75% for HiBand, 28% to 79% for ScanLogic, 1% to 89% for Lara, 10% to 70% for ISD and 9% to 87% for Silicon Packets. Schedules were based on management’s estimate of tasks completed and the tasks to be completed to bring the project to technical and commercial feasibility. As of December 30, 2001, the actual development timelines and costs are in line with management’s estimates.

     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% to 27%. 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 non-compete agreements was 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. The value of the assembled workforce was 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.

     Other intangibles include the value of an existing customer base, existing customer orders, existing trademarks and a facilities lease with below market rental rates. These intangible assets were valued using discount rates ranging from 15.0% to 28.5%.

     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 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.

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Pro Forma Financial Information

     Summarized below are the unaudited pro forma results of Cypress as though IMI, HiBand, ScanLogic, Lara, ISD and Silicon Packets 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 charges for purchased in-process research and development are not included in the pro forma results, because they are non-recurring. The pro forma results do not include goodwill amortization for the Lara, ISD and Silicon Packets acquisitions. Pro forma results of operations are not included for fiscal 1999, as they are not materially different.

	Year Ended
(In thousands, except per share amounts)	December 30, 2001		December 31, 2000
Total revenue	$    842,634		$     1,402,617
Net income (loss)	$   (478,647	)	$        162,838
Net income (loss) per share:
Basic	$         (3.79	)	$              1.35
Diluted	$         (3.79	)	$              1.19

     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.

2000 Acquisitions

Acquisition of Silicon Light Machines

     On August 30, 2000, Cypress acquired all of the outstanding capital stock of Silicon Light Machines (“SLM”) that Cypress did not previously own. SLM is a supplier of microelectromechanical systems (“MEMS”) technology applicable to fiber-optic networks and other applications. The acquisition was accounted for using purchase accounting. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of August 30, 2000, the effective date of the purchase. There were no significant differences between the accounting policies of Cypress and SLM.

     Cypress acquired SLM for a total consideration of $164.0 million, including $161.2 million in stock, an existing $2.2 million investment, and direct acquisition costs of $0.6 million for legal and accounting fees. The total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed based on appraisals prepared by an independent appraisal firm using estimates and projections provided by management. The asset values estimates are as follows:

(In thousands)
Fair value of tangible net assets	$   17,017
In-process research and development	30,400
Current technology	107,200
Assembled workforce	4,700
Deferred tax liability	(44,760	)
Excess of purchase price over identifiable net assets acquired	49,456
Total	$ 164,013

     The valuation method used to value the in-process technology of SLM is a form of discounted cash flow method commonly known as the “percentage of completion” approach whereby the cash flow derived from the technology is multiplied by the percentage of completion of the in-process technology. This approach is a widely recognized appraisal method and is commonly used to value technology assets. The value of the in-process technology of SLM is the discounted expected future cash flow 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 flow derived from the in-process technology projects was discounted using a discount rate of 30.0%, which Cypress believes was appropriate for the risk of this technology 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 complete the project to technical and commercial feasibility. Schedules were based on management’s estimate of tasks completed and the tasks to be completed to bring the project to technical and commercial feasibility. As of December 30, 2001, the actual development timelines and costs are in line with management’s estimates.

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     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 flow using discount rates of 10.0% and 27.0% (depending on the products), which Cypress believes was appropriate for the business risks inherent in manufacturing and marketing these products. Factors considered in estimating the future cash flow to be derived from the existing technology include risks related to the characteristics and applications of the technology, existing and future markets, and 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 employee in all categories, to fully deploy a work force of similar size and skill to the same level of productivity as the existing work force.

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

     Summarized below are the unaudited pro forma results of Cypress as though SLM had been acquired at January 4, 1999. Adjustments have been made for the estimated increases in amortization related to the purchased core technology, completed products, workforce, amortization of stock-based compensation and other appropriate pro forma adjustments.

(In thousands, except per share amount)	December 31, 2000	January 2, 2000
Total revenue	$     1,291,106	$     744,872
Net income	$        296,015	$       30,021
Net income per share:
Basic	$              2.44	$           0.28
Diluted	$              2.24	$           0.26

     The above amounts are based upon certain assumptions and estimates, which Cypress believes are reasonable and do not reflect any benefit from economies of scale, 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 acquisition taken place at the beginning of fiscal 1999 or of future results of operations of the combined companies. The charge for purchased in-process research and development has not been included in the pro forma results above because it is non-recurring and directly related to the acquisition.

Acquisition of RadioCom Corporation

     On June 29, 2000, Cypress acquired all of the outstanding capital stock of RadioCom Corporation (“RadioCom”). RadioCom specializes in the design and development of semiconductor radio frequency (“RF”) integrated circuits. The acquisition was accounted for using purchase accounting. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of June 29, 2000, the effective date of the purchase. The results of operations of RadioCom from June 29, 2000 through Cypress’s quarter ended July 2, 2000 were not significant and were therefore excluded from that quarter’s reported results. There are no significant differences between the accounting policies of Cypress and RadioCom.

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     Cypress acquired RadioCom for a total consideration of $10.2 million in stock. The total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed based on appraisals prepared by management. The asset values estimates are as follows:

(In thousands)
Fair value of tangible net assets	$       51
In-process research and development	2,025
Current technology	1,752
Assembled workforce	802
Excess of purchase price over identifiable net assets acquired	5,584
Total	$10,214

     The valuation method used to value the in-process technology of RadioCom is the “percentage of completion” approach. The value of the in-process technology of RadioCom is the discounted expected future cash flow 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 flow derived from the in-process technology projects was discounted using a discount rate of 20.0%, which Cypress believes was appropriate for the risk of this technology for which commercial feasibility had not been established. The percentage of completion for each in-process project was determined by identifying milestones of completed project steps as compared to the remaining milestones to be completed to bring the project to technical and commercial feasibility. Milestones were based on management’s estimate of tasks completed, value added and degree of difficulty of the portion of the project completed as of the acquisition date, in comparison with the tasks to be completed to bring the project to technical and commercial feasibility. As of December 30, 2001, the actual development timelines and costs are in line with management’s estimates.

     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 flow using a discount rate of 35.0%, which Cypress believes was appropriate for the business risks inherent in manufacturing and marketing these products. Factors considered in estimating the future cash flow to be derived from the existing technology include risks related to the characteristics and applications of the technology, existing and future markets, and 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, to fully deploy a work force of similar size and skill to the same level of productivity as the existing work force.

     The amounts allocated to current technology, assembled workforce and residual goodwill are being amortized over their respective estimated useful lives of between six and ten years using the straight-line method. During the third quarter of 2001, the useful life of current technology was reduced by four years to six years.

1999 Acquisitions

Acquisition of Arcus Technology Companies

     On June 30, 1999, Cypress acquired all of the outstanding capital stock of Arcus Technology (USA), Inc. and the assets of Arcus Technology (India) Limited (referred to as “Arcus” on a combined basis). Arcus specializes in data communications technologies including dense wave multiplexing (which allows multiple signals to be transmitted over a single fiber optic cable) and “IP over SONET” (the technology used to code and decode Internet traffic to send it over the telephone system). The acquisition was accounted for using purchase accounting. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of and since June 30, 1999, the effective date of the purchase. There are no significant differences between the accounting policies of Cypress and Arcus. The results of operations of Arcus are included in Cypress’s consolidated results of operations during the second half of Cypress’s fiscal year 1999.

     Cypress acquired Arcus for a total consideration of $17.7 million, including cash of $11.5 million and stock of $6.2 million. Through December 31, 2000 Cypress paid $10.5 million in cash and issued $6.2 million in stock. Cypress incurred a one-time charge of $2.0 million in fiscal 2000 due to the acceleration of contractual obligation. The remaining $1.0 million in cash will be paid as certain performance milestones are reached. The total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed at the time of the acquisition based on independent appraisals and management estimates as follows:

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(In thousands)
Fair value of tangible net assets	$     391
In-process research and development	2,500
Current technology	4,400
Assembled workforce	1,600
Deferred compensation	5,553
Excess of purchase price over net assets acquired	3,264
Total	$17,708

     The valuation method used to value the in-process technology of Arcus is the “percentage of completion” approach. The value of the in-process technology of Arcus is the discounted expected future cash flow 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 flow derived from the in-process technology projects was discounted using a discount rate of 32.5%, which Cypress believes was appropriate for the risk of this technology for which commercial feasibility had not been established. The percentage of completion for each in-process project was determined by identifying milestones of completed project steps as compared to the remaining milestones to be completed to bring the project to technical and commercial feasibility. Milestones were based on management’s estimate of tasks completed, value added and degree of difficulty of the portion of the project completed as of the acquisition date, in comparison with the tasks to be completed to bring the project to technical and commercial feasibility. A deduction of 7.5% to 12.0% of expected future revenue was made in calculating future cash flows from in-process technology and attributed to previously existing technology.

     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 flow using a discount rate of 25.0%, which Cypress believes was appropriate for the business risks inherent in manufacturing and marketing these products. Factors considered in estimating the future cash flow to be derived from the existing technology include risks related to the characteristics and applications of the technology, existing and future markets, and 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, to fully deploy a work force of similar size and skill to the same level of productivity as the existing work force. Deferred compensation value is the cash and stock consideration to be paid upon the future achievement of established performance milestones.

     The amounts allocated to current technology, assembled workforce, and residual goodwill are being amortized over their respective estimated useful lives between six and ten years using the straight-line method. The deferred compensation is being amortized on a straight-line basis over the estimated timeframe required to achieve the performance milestones, which is two years. During the third quarter of 2001, the useful life of existing technology was reduced by six years to five years.

Acquisition of Anchor Chips, Incorporated

     On May 25, 1999, Cypress acquired all of the outstanding capital stock of Anchor Chips, Inc. (“Anchor”), a company that designs and markets micro-controller chips that support Universal Serial Bus applications. The acquisition was accounted for using purchase accounting. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of and since May 25, 1999, the effective date of the purchase. There are no significant differences between the accounting policies of Cypress and Anchor. The results of operations of Anchor were included in Cypress’s consolidated results of operations as of and since the effective date of the purchase.

     Cypress paid approximately $15.0 million in cash. In addition, Cypress assumed net liabilities of approximately $0.9 million. The total purchase consideration of $15.9 million was allocated to the estimated fair value of assets acquired and liabilities assumed based on a valuation completed by management, as follows:

(In thousands)
Fair value of tangible net liabilities	$    (919	)
In-process research and development	1,519
Assembled workforce	1,320
Current technology	13,036
Total	$ 14,956

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     The valuation method used to value the in-process technology of Anchor is the “percentage of completion” approach. The value of the in-process technology of Anchor is the discounted expected future cash flow 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 flow derived from the in-process technology projects was discounted using a discount rate of 32.5%, which Cypress believes was appropriate for the risk of this technology for which commercial feasibility had not been established. The percentage of completion for each in-process project was determined by identifying milestones of completed project steps as compared to the remaining milestones to be completed to bring the project to technical and commercial feasibility. Milestones were based on management’s estimate of tasks completed, value added and degree of difficulty of the portion of the project completed as of the acquisition date, in comparison with the tasks to be completed to bring the project to technical and commercial feasibility. A deduction of 7.5% to 12.0% of expected future revenue was made in calculating future cash flows from in-process technology and attributed to previously existing technology. As of December 30, 2001, the actual development timelines and costs are in line with management’s estimates.

     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, to fully deploy a work force of similar size and skill to the same level of productivity as the existing work force.

     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 flow using a discount rate of 25.0%, which Cypress believes was appropriate for the business risks inherent in manufacturing and marketing these products. Factors considered in estimating the future cash flow to be derived from the existing technology include risks related to the characteristics and applications of the technology, existing and future markets, and assessment of the age of the technology within its life span.

     The amounts allocated to current technology, and assembled workforce are being amortized over their estimated useful lives of five years using the straight-line method. There was no goodwill associated with the acquisition of Anchor.

     Development of in-process technology remains a substantial risk to Cypress due to 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 inputs from Cypress and the acquired company’s management, utilizing valuation methods that are recognized by the 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 results of operations for Arcus, Anchor and RadioCom are not presented, as they are not materially different.

Acquisition Costs

	Year Ended
(In thousands)	December 30, 2001	December 31, 2000	January 2, 2000
Amortization of intangibles and merger-related costs	$71,493	$21,825	$  9,654
In-process research and development	23,200	32,425	4,019
Total acquisition costs	$94,693	$54,250	$13,673

     Acquisitions costs are included in Acquisition and other non-recurring costs in the Consolidated Statement of Operations. Acquisition costs in fiscal 2001 consisted of amortization of intangibles related to acquisitions, as well as in-process research and development charges related to the acquisitions of IMI, HiBand, ScanLogic, Lara, ISD and Silicon Packets. However, in accordance with SFAS No. 141, goodwill recognized in the Lara, ISD and Silicon Packets acquisitions is not being amortized.

     During fiscal 2000, Cypress recorded acquisition and merger-related costs of $54.2 million. In-process research and development costs were $32.4 million. Amortization of intangible assets relating to current and prior year acquisitions totaled $18.4 million. Transaction costs of $3.4 million, which consist primarily of non-cash deferred compensation charges, legal, accounting and investment banking fees, were expensed during the fiscal year.

     Acquisition related costs incurred during fiscal 1999 were $13.7 million. In the first quarter of fiscal 1999, Cypress recorded one-time charges of $3.8 million associated with the merger with IC WORKS. These charges were for investment banking fees and other professional fees. Cypress also recorded $8.8 million in costs associated with the purchase of Anchor and Arcus consisting of $4.0 million for in-process technology, $1.6 million for transaction costs and $3.2 million in amortization of intangible assets. During the fourth quarter of fiscal 1999, Cypress acquired Altera’s MAX 5000 Programmable Logic Device product line and its equity interest in Cypress’s wafer fabrication facility in Round Rock, Texas. As part of the transaction, Cypress recorded intangible assets associated with the product rights and recorded $0.3 million for the amortization of these intangibles. Transaction costs and non-cash compensation costs incurred for other acquisitions were $0.8 million.

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Note 4: Mergers Using Pooling of Interests

Merger with Alation Systems, Incorporated

     On May 24, 2000, Cypress completed a merger with Alation Systems, Inc. (“Alation”), which was accounted for as a pooling of interests. Cypress issued 0.5 million shares of its common stock plus options in exchange for all outstanding stock and options of Alation. These consolidated financial statements and the notes to the consolidated financial statements give effect to the merger for all periods presented. The fiscal years of Cypress and Alation were different, and Alation has changed its fiscal periods to coincide with that of Cypress. Cypress’s consolidated balance sheets as of January 2, 2000 and January 3, 1999 have been combined with Alation’s consolidated balance sheets as of December 31, 1999 and December 31, 1998, respectively. For the purpose of the consolidated statements of operations for the periods ended January 2, 2000 and January 3, 1999, Cypress’s statements of operations have been combined with Alation’s statements of operations for the periods ended December 31, 1999 and December 31, 1998 respectively.

     During the quarter ended July 2, 2000, Cypress recorded merger-related costs of $1.4 million related to the acquisition of Alation. These charges, which consist primarily of non-cash deferred compensation charges, legal, and accounting, have been included under acquisition and other non-recurring costs in the consolidated statements of operations.

Merger with Galvantech Incorporated

     On March 2, 2000, Cypress completed a merger with Galvantech, Inc. and its subsidiaries (“Galvantech”), which was accounted for as a pooling of interests. Cypress issued 3.0 million shares of common stock plus options in exchange for all outstanding stock and options of Galvantech. These consolidated financial statements and the notes to the consolidated financial statements give effect to the merger for all periods presented. The fiscal years of Cypress and Galvantech were different, and Galvantech has changed its fiscal periods to coincide with that of Cypress. Cypress’s consolidated balance sheets as of April 2, 2000 and January 2, 2000 have been combined with Galvantech’s consolidated balance sheets as of April 2, 2000 and December 31, 1999 respectively. For the purpose of the consolidated statements of operations for the periods ended April 2, 2000 and April 4, 1999, Cypress’s statements of operations have been combined with Galvantech’s statements of operations for the three-month periods ended April 2, 2000 and March 31, 1999, respectively. As a result of combining Cypress’s and Galvantech’s financial statements for the fiscal years ended January 2, 2000 and January 3, 1999, the results of operations of Galvantech for the quarter ended March 31, 1999 were included in the consolidated statements of operations of both 1998 and 1999. Therefore, the balance sheet and cash and cash equivalents for the quarter ended December 31, 1998 and March 31, 1999 are the same.

     During the quarter ended April 2, 2000, Cypress recorded merger-related costs of $1.8 million related to the acquisition of Galvantech. These charges, which consist primarily of legal, accounting and investment banking fees, have been included under acquisition and other non-recurring costs in the consolidated statements of operations.

Combined Financial Statements of Cypress with Merged Companies

     The results of operations previously reported by the separate companies prior to the mergers and included in the results of operations for the fiscal year ended January 2, 2000 is presented below.

(In thousands)	Cypress	Galvantech	Alation		Total
Year ended January 2, 2000:
Revenue	$705,487	$39,316	$    239		$745,042
Net income (loss)	$  91,054	$     908	$(3,832	)	$  88,130

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Note 5: Other Business Transactions

Sale of FCT Business

On February 25, 2000, Cypress sold its Fast CMOS Technology (“FCT”) business including inventories, product software, all technical data, and a license for the related intellectual property. Total proceeds from the sale were $7.5 million and Cypress recorded a gain of $5.0 million from the sale. In conjunction with this sale, Cypress entered into a supply agreement for the related existing inventories and future requirements, based on historical run rates. Cypress completed its obligations under the supply agreement during the fourth quarter of fiscal 2000. Revenues from FCT products were approximately 1% of 1999 revenues.

Acquisition from Altera

     On October 5, 1999, Cypress announced that it had signed a definitive agreement with Altera Corporation (“Altera”) to acquire Altera’s MAX 5000 Programmable Logic Device (“PLD”) product line and its equity interest in Cypress’s wafer fabrication facility in Round Rock, Texas (“Fab 2”) for approximately $13.0 million in cash. In 1988, Altera had licensed its MAX 5000 family of products to Cypress in consideration for manufacturing capacity. Altera later acquired a 17% equity interest in the Round Rock wafer fabrication facility. By acquiring Altera’s equity interest in October 1999, Fab 2 is now 100% owned by Cypress.

Note 6: 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 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.

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

(In thousands)	Provision	Non-Cash Charges	Cash Charges	Reserves And Write-Downs at 12/30/2001
Property, plant and equipment	$113,350	$  7,269	$1,619	$104,462
Leased facilities	4,079	—	213	3,866
Personnel	14,684	9,056	4,243	1,385
Total	$132,113	$16,325	$6,075	$109,713

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

Property, plant and equipment

     Restructuring costs related to property, plant and equipment amounted to $113.4 million. In sizing Cypress to meet future demand, Cypress has taken out of service and is holding for sale manufacturing assets with a net book value of $122.1 million (and a gross book value of $168.0 million). The charge represents the difference between the net book value of the assets less the estimated amount to be realized upon sale of the equipment, net of the estimated cost to dispose of the equipment. This amount has been recorded as a reduction in the carrying amount of the assets. The restructuring affects Cypress’s facilities in Minnesota, Texas, California and the Philippines. Fixed asset sales and/or dispositions are expected to be completed within one year. In each case, the asset was removed from service prior to September 30, 2001.

Leased Facilities

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

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Personnel

     Cypress implemented a reduction in force that affected employees at all significant locations. Under the program Cypress announced in July 2001 that it would terminate the employment of several hundred persons. Those individuals were notified in July that their employment would cease on September 30, 2001. Cypress has terminated the employment of 714 persons, which was approximately 15% of the workforce, of whom 709 employees had left Cypress as of December 30, 2001. The remainder will leave during the next six months after the completion of certain projects in which they are involved.

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

Restructuring Credits

     During fiscal 2000, Cypress reversed $0.5 million of previously provided restructuring costs related to the decision to close down the wafer fab located in San Jose, California. During fiscal 1999, Cypress recorded restructuring credits of $3.8 million, which included a reversal of $3.1 million of the 1998 restructuring reserve. The reversed charges of $2.5 million primarily related to excess accruals for severance and other employee related charges. Cypress also reversed $0.6 million of the 1998 restructuring reserve for excess fixed asset write-downs from the 1998 restructuring. In addition, during fiscal 1999, Cypress reversed $0.7 million of excess fixed asset write-downs of the 1996 restructuring.

Note 7: Provisions for Inventory and Other Charges

2001 Provision for Inventory

     Cypress recorded an unusual provision of $93.1 million to cost of sales during the quarter ended September 30, 2001 for excess inventory and related purchase commitments, which Cypress did not expect to sell. The excess was a result of the continuing decline in revenue, greater uncertainty with respect to the timing of the recovery, which then appeared later than previously anticipated and the slower rate of expected recovery.

2001 Impairment of Intangibles and Long-lived Asset Review

     During the third quarter of 2001, Cypress reviewed the carrying values and remaining useful lives of its long-lived assets, particularly the intangible assets acquired in recent years. Based on this review, the remaining useful lives on certain intangible assets were reduced and an impairment loss of $65.9 million related to the SLM subsidiary was recorded during fiscal 2001.

     During 2001, the optical market in which SLM participates experienced a severe economic downturn. Reduced demand for SLM’s products places increased risk on the future revenue streams anticipated from the existing display and monitor technology. For these reasons, Cypress then reviewed SLM’s long-lived assets for impairment and recognized an impairment loss totaling $65.9 million, the amount by which the carrying value of the acquired existing technology and a pro-rata portion of the related goodwill exceeded the present value of the estimated future cash flows of the existing technology of SLM. Goodwill was impaired $29.1 million, and existing technology was impaired $36.8 million. This impairment loss is reported on the consolidated statements of operations under the caption acquisition and other non-recurring costs, net.

     The remaining useful lives on intangible assets were reviewed in light of current product offerings, discounted projected revenue streams, competitive environments and other business factors. Based on this review, the acquired intangibles and other long-lived assets continue to be fairly stated; however, the remaining useful lives of several assets were reduced. The useful life of assembled workforce acquired with RadioCom was reduced by two years to four years. The useful lives of the existing technology and goodwill acquired with RadioCom were reduced by four years to six years. The useful life of the assembled workforce acquired with Arcus was reduced by three years to three years. The useful lives of existing technology and goodwill acquired with Arcus were reduced by five years to five years. The effect of these changes was to increase amortization by $1.0 million in fiscal 2001. Amortization will decrease by approximately $1 million annually thereafter as goodwill and assembled workforce will no longer be amortized in accordance with SFAS No. 141 and 142.

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2001 Other Long-term Investments, Property, Plant and Equipment and Certain Settlements

     Other one-time charges of $20.7 million included in the fiscal 2001 results were related to the write-down of investments and property, plant and equipment and the settlement of two intellectual property-related disputes.

     Cypress recorded a one-time charge to reduce the carrying value of two long-term investments including startup, development stage and technology companies to their estimated net realizable values. These investments were reduced by $1.5 million and $7.4 million to $1.5 million and $4.2 million, respectively. The charge of $8.9 million is reported on the consolidated statements of operations in other income and (expense), net.

     Property, plant and equipment with a net book value of $5.6 million were also written off to operating expenses as one-time charges as a result of a periodic physical count of property, plant and equipment completed during the third quarter of fiscal 2001.

     During the third quarter, Cypress recorded charges of $8.7 million on the resolution of two disputes including an agreement in principle to settle a patent infringement suit for $8.0 million, of which $5.5 million pertained to prior periods and was included in the consolidated statements of operations with research and development costs. The remaining $2.5 million relates to future product shipments and has been recorded as a prepaid asset and will be expensed over the next three years (see Note 15 for additional information).

2000 Other Non-Recurring Costs

     Cypress incurred a one-time charge of $2.0 million due to the acceleration of contractual obligations related to the Arcus acquisition.

1999 Other Non-Recurring Costs

     During fiscal 1999, Cypress recorded $24.2 million in other non-recurring costs. One-time, non-recurring costs included a $12.3 million write-off of a manufacturing asset that was not being used and was subsequently scrapped and an $11.9 million one-time compensation charge associated with retention and performance payments to key employees in December 1999.

Note 8: Equity and Debt Transactions

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

     In 2000 and 2001, the Board of Directors of Cypress authorized the repurchase of 15.0 million shares of Cypress’s outstanding common stock and sell put options for 2.5 million shares. During fiscal 2001, Cypress repurchased 9.5 million shares at an average cost of $19.98 per share, bringing the total repurchases through December 30, 2001 to 15.8 million shares at an average cost of $21.14 per share. In fiscal 2001, Cypress sold put warrants through private placements for which Cypress received premiums of $10.6 million, bringing the total premiums received under the program to $16.9 million. As of December 30, 2001, Cypress had a maximum potential obligation to purchase 0.3 million shares of its common stock at an aggregate price of $3.6 million. The puts expire in April 2002. Cypress has the right to settle the put warrants with cash or settle with shares of Cypress’s common stock. The transaction is recorded in stockholders’ equity in the accompanying consolidated balance sheet.

     On January 31, 2000, Cypress filed a registration statement on Form S-3 with the SEC. Under this shelf registration statement, which was effective February 8, 2000, as amended by a post-effective amendment thereto effective March 7, 2000, Cypress can, 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. At December 30, 2001, the balance remaining related to the shelf registration statement was $112.5 million.

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     Cypress recorded provisions for deferred stock compensation related to acquisitions and certain other grants of approximately $76.8 million, $15.1 million and $1.7 million in fiscal years ended December 30, 2001, December 31, 2000 and January 2, 2000, respectively. These amounts are 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 totaled approximately $42.0 million, $6.6 million and $1.8 million in fiscal years 2001, 2000 and 1999, respectively.

     In March 1999, Cypress announced a program whereby all U.S. employees were offered loans to facilitate the exercise of vested stock options. Under the terms of the program, only options which were vested as of March 1, 1999 and whose exercise price was less than or equal to $9.75 could qualify for a loan. The loans, including interest, are due at the earlier of three days following the sale of the shares, within thirty days of the date the individual ceases to be an employee of Cypress or 3 years from the grant date of the loan. The loans bear interest and are secured by our common shares. At December 30, 2001, loans receivable and accrued interest under this program totaled $0.8 million. Amounts receivable under subsidiary loan programs were $0.4 million at December 30, 2001.

Convertible Subordinated Notes

     During 2001, the 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 fourth quarter of 2001, Cypress retired a total of $52.8 million principal of its $287.5 million notes, for $44.6 million, resulting in a pre-tax net gain of $7.2 million. The gain was net of the write-off of bond issuance costs of $1.0 million (pre-tax). The net after-tax gain was recorded as an extraordinary item in our consolidated statement of operations.

     On September 7, 2000, Cypress called for the redemption of all its 6.0% Convertible Subordinated Notes (“6.0% Notes”) due in 2002. The aggregate amount of principal outstanding at the time of the call was approximately $160 million. Holders of the 6.0% Notes could convert their 6.0% Notes into shares of Cypress’s common stock at a conversion rate of approximately 42.33 shares of stock per $1,000 principal amount of the 6.0% Notes. Substantially all of the 6.0% Notes were converted prior to the redemption deadline of October 2, 2000 increasing the amount of common stock outstanding by 6.8 million shares.

     On June 26, 2000, Cypress completed a $287.5 million registered-placement of 5-year convertible subordinated notes. The notes are due in 2005, with a coupon rate of 3.75% and an initial conversion premium of 27.0%. The notes are convertible into approximately 4.6 million shares of common stock and are callable by Cypress no earlier than July 5, 2003. Net proceeds were $279.6 million, after issuance costs of $7.9 million.

     On January 19, 2000, Cypress completed a $283.0 million registered-placement of 5-year convertible subordinated notes. The notes are due in 2005, with a coupon rate of 4.00% and an initial conversion premium of 28.5%. The notes are convertible into approximately 6.1 million shares of common stock and are callable by Cypress no earlier than February 5, 2003. Net proceeds were $275.2 million, after issuance costs of $7.8 million.

     In 1998, Cypress retired a total of $15.0 million principal of its $175.0 million, 6.0% Notes for $12.9 million, resulting in a pre-tax net gain of $1.7 million. The gain was offset by the write-off of bond issuance costs of $0.4 million (pre-tax). The net gain was recorded as interest income and other. The 6.0% Notes were called on October 2, 2000.

Customer Advances and Other Liabilities

     As of December 30, 2001 Cypress has recorded $65.1 million in customer advances, of which $30.5 million is recorded in Other current liabilities and $34.6 million is recorded in Other long-term liabilities. The customer advance is related to a financing and supply agreement into which Cypress entered with a specific customer in October 2000. The agreement called for the customer to provide funding to Cypress for the purpose of purchasing equipment and increasing fabrication capacity in order to supply product at future dates according to the supply agreement. The customer maintains a security interest in the equipment purchased. The supply agreement calls for Cypress to make available to the customer a minimum quantity of wafers each year from 2001 through 2003.

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

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Note 9: Foreign Currency Derivatives

     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, to manage the exposures associated with forecasted purchases of equipment, and net asset or liability positions. Cypress does not enter into derivative financial instruments for speculative or trading purposes.

     On January 1, 2001, Cypress adopted 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. Cypress estimates the fair value of its forward contracts based on changes in forward rates from published sources.

     Under SFAS No. 133, Cypress accounts for its hedges of committed purchases of equipment 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 impact earnings, and are not material at December 30, 2001. As of December 30, 2001, such forward contracts for Euro exposures had an aggregate notional value of $15.8 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 December 30, 2001, Cypress held forward contracts with an aggregate notional value of $9.2 million to hedge the risks associated with Yen foreign currency denominated assets and liabilities. Aggregate foreign exchange gains and (losses) on these hedging transactions and foreign currency remeasurement gains and (losses) of $0.3 million, $1.6 million and $(0.2) million are included in other income and (expense), net during fiscal 2001, 2000 and 1999, respectively.

Note 10: Comprehensive Income

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

(In thousands)	December 30, 2001		December 31, 2000	January 2, 2000
Net income (loss)	$(407,412	)	$277,308	$88,130
Other comprehensive income:
Change in net unrealized gains on investments,      net of tax of $1,814	2,722		—	—
Total	$(404,690	)	$277,308	$88,130

Note 11: Employee Stock Purchase Assistance Plan

On May 3, 2001, Cypress stockholders approved the adoption of the 2001 Employee Stock Purchase Assistance Plan. The Plan allowed for loans to employees to purchase shares of Cypress common stock on the open market. Employees of Cypress and its subsidiaries, including executive officers of Cypress, were allowed to participate in the Plan. Each loan was evidenced by a full recourse, promissory note executed by the employee in favor of Cypress and was secured by all of the employees assets, as well as a pledge of the shares of common stock purchased with the proceeds of the loan. If a participant sells the shares of Cypress 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 are callable and bear interest at a rate at the applicable federal rate under Section 1274 of the Internal Revenue Code for long-term loans, compounded annually. As the loans are at rates below the rate at which a stock broker would charge, Cypress has recorded $1.7 million of compensation expense which is based on the difference between the applicable federal rate and an estimated market rate for each employee. In addition, Cypress is recording interest income on the outstanding loan balances. 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 December 30, 2001 loans outstanding under the Plan were $117.2 million, and this amount is classified on the consolidated balance sheet as other current assets. Cypress has created a reserve with a charge to operating expenses for estimated uncollectible balances.

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Note 12: 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:

	2001					2000			1999
(In thousands, except per-share amounts)	(Loss)		Shares	Per-Share Amount		Income	Shares	Per-Share Amount	Income	Shares	Per-Share Amount
Net income (loss) before
extraordinary gain	$(411,757	)	124,135	$(3.32	)	$277,308	121,126	$2.29	$88,130	108,156	$0.81
Extraordinary gain (net of tax of
$2,896)	4,345		—	0.04		—	—	—	—	—	—
Basic EPS:
Net income (loss)	$(407,412	)	124,135	$(3.28	)	$277,308	121,126	$2.29	$88,130	108,156	$0.81
Effects of dilutive securities:
6.0% Convertible notes	—		—			4,800	5,079		—	—
4.0% Convertible notes	—		—			6,848	5,749		—	—
3.75% Convertible notes	—		—			3,361	2,387		—	—
7.0% Convertible notes	—		—			6	16		—	—
Options	—		—			—	9,871		—	7,371
Diluted EPS:
Net income (loss)	$(407,412	)	124,135	$(3.28	)	$292,323	144,228	$2.03	$88,130	115,527	$0.76

     For the years ended December 30, 2001, December 31, 2000 and January 2, 2000 options to purchase 8,738,000, 6,278,000 and 47,000 shares, respectively, of common stock were outstanding, but were excluded from the computation of diluted EPS, as their effect was anti-dilutive. Convertible debentures outstanding at December 30, 2001 and January 2, 2000 were convertible to 9,871,000 and 6,772,000 shares, respectively, of common stock but were also excluded from diluted EPS, as their effect was anti-dilutive.

Note 13: Common Stock Option and Other Employee Benefit Plans

Cypress Stock Option Plans

     Cypress has two stock option plans: the 1999 Stock Option Plan and the 1994 Stock Option Plan.

     In 1999, Cypress adopted the 1999 Non-Qualified Stock Option Plan. Under the terms of the 1999 Stock Option Plan, which is a non-shareholder approved plan, options may be granted to qualified employees, including those of acquired companies and consultants of Cypress or its majority-owned subsidiaries, but options may not be granted to Officers. Options become exercisable over a vesting period as determined by the Board of Directors and expire over terms not exceeding ten years from the date of grant. The plan allows for the granting of options at exercise prices less than fair market value of the common stock at grant date.

     In 1994, Cypress adopted the 1994 Stock Option Plan, which replaced Cypress’s 1985 Incentive Stock Option Plan and the 1988 Directors’ Stock Option Plan (the “Terminated Plans”) with respect to future option grants. Under the terms of the 1994 Stock Option Plan, options may be granted to qualified employees, consultants, officers and directors of Cypress or its majority-owned subsidiaries. Options become exercisable over a vesting period as determined by the Board of Directors and expire over terms not exceeding ten years from the date of grant. The option price for shares granted, under the 1994 Stock Option Plan, is equal to the fair market value of the common stock at the date of grant. The 1994 Stock Option Plan provides for an annual increase in shares available for issuance equal to 4.5% of Cypress’s outstanding common stock at the end of each fiscal year.

     In March 2001, Cypress employees were offered the opportunity to exchange stock options for a promise to receive new options six months and one day after the cancellation of the forfeited options. The new options were granted on October 8, 2001 with an exercise price equal to the New York Stock Exchange closing price on the same day. Any remaining grant issued prior to April 4, 2000 was eligible for this program. The new options were issued with 12 months vested. The balance will vest 1/48^th per month regardless of how many options were vested at the time of the cancellation election. Employees canceled 4,563,800 options with exercise prices between $16.73 and $54.19 per share.

     In December 2000, Cypress employees were offered the opportunity to exchange their stock options for a promise to receive new options six months and one day after the cancellation of the forfeited options. The new options were granted on June 13, 2000 with an exercise price equal to the NYSE closing price on the same day. Any remaining grant issued prior to December 11, 2000 was eligible for this program. The new options were issued with 12 months vested. The balance will vest 1/48^th per month regardless of how many options were vested at the time of the cancellation election. Employees canceled 3,701,080 options with exercise prices between $20.90 and $54.20 per share.

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Shares Under Cypress Stock Option Plans

     The following table summarizes Cypress’s stock option activity and related weighted average exercise price for each category for the years ended December 30, 2001, December 31, 2000, and January 2, 2000.

	2001			2000			1999
(In thousands, except per share amounts)	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
Options outstanding, beginning of year	24,382		$16.93	25,712		$11.40	26,810		$  8.25
Options forfeited	(6,141	)	27.80	(5,818	)	32.51	(2,061	)	9.81
Options granted	21,117		16.29	10,415		39.42	8,776		17.27
Options exercised	(2,412	)	7.62	(5,927	)	8.25	(7,813	)	7.57
Options outstanding, end of year	36,946		15.08	24,382		16.93	25,712		11.40
Options exercisable at December 30, 2001	13,584		$12.96	9,134		$10.90	9,692		$  8.49

     Cypress has, in connection with the acquisitions of various companies, assumed the stock option plans of each acquired company. During fiscal 2001 and 2000, respectively, a total of approximately 2.9 million and 0.6 million shares of Cypress’s common stock have been reserved for issuance under the assumed plans and the related options are included in the preceding table. At December 30, 2001, stock options available for grant were 0.4 million. The increase in options available for grant was 13.1 million under all option plans during fiscal 2001.

     The weighted average estimated fair value at the date of grant, as defined by SFAS No. 123, for options granted in 2001, 2000, and 1999 was $19.33, $33.17 and $8.96 per option, respectively. The estimated grant date fair value is calculated using the Black-Scholes model. The Black-Scholes model, as well as other currently accepted option valuation models, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from Cypress’s stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated grant date fair value.

     The following weighted average assumptions were used in the estimated grant date fair value calculations for Cypress’s stock option awards:

	2001		2000		1999
Expected life	5 year	s	5 year	s	7 year	s
Risk-free interest rate	4.46	%	5.54	%	5.76	%
Volatility	0.6219		1.7701		0.5668
Dividend yield	0.00	%	0.00	%	0.00	%

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     Significant option groups outstanding as of December 30, 2001 and the related weighted average exercise price and contractual life information, are as follows:

	Outstanding		Exercisable
Range of Option Exercise Prices	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price	Remaining Life (years)
(In thousands, except per-share amounts)
$ 0.01--5.91	5,159	$  4.13	1,437	$  3.35	7.87
6.81--8.75	3,799	8.38	2,767	8.43	6.21
8.94--9.75	4,398	9.93	3,772	9.92	5.45
9.86--16.7	4,077	14.12	1,251	12.93	6.72
16.84--16.8	8,084	16.84	1,389	16.84	9.77
17.56--22.8	4,406	21.39	1,432	21.56	8.14
22.90--23.8	5,278	23.61	1,184	23.72	9.37
24.07--54.1	1,745	31.14	352	34.20	8.99
$ 0.01--54.19	36,946	$15.08	13,584	$12.96	8.00

Subsidiary Stock Option Plans

     In 2001, Cypress’s Silicon Magnetic Systems (“SMS”) and Silicon Light Machines (“SLM”) subsidiaries each adopted a stock option plan. SMS made available for grant 25 million shares under the terms of its plan. SLM made available for grant 11 million shares under the terms of its plan. The plans allow the subsidiaries to grant options to qualified employees and consultants. Options become exercisable over a five year period and expire over terms not exceeding ten years from the date of grant. The exercise price for options granted under the plans have been the estimated fair value of each subsidiary’s common stock at the date of grant.

     The following table summarizes SMS and SLM stock option activity and related weighted average exercise price for each category for the year ended December 30, 2001.

	SMS		SLM
(In thousands, except per share amounts)	Shares	Exercise Price	Shares	Exercise Price
Options outstanding, beginning of year	—	NA	—	NA
Options cancelled	—	NA	—	NA
Options granted	19,550	$0.058	3,263	$0.65
Options exercised	—	NA	—	NA
Options outstanding, end of year	19,550	$0.058	3,263	$0.65
Options exercisable at December 30, 2001	—	NA	—	NA

Subsidiary Restricted Stock Purchase Plan

     Cypress Microsystems, Inc. (“CMS”) 1999 Stock Purchase Plans allows eligible employees of CMS, a subsidiary of Cypress, to purchase restricted CMS stock. This stock has a vesting period of five years. Of the 15,500,000 shares authorized under the plan, 15,0775,100 shares were issued through fiscal 2001. The purchase price of the restricted shares has a range of $0.01 to $0.02 per share, which equals the estimated grant date fair value.

Employee Qualified Stock Purchase Plan

     In 1998, Cypress amended and re-stated its Employee Qualified Stock Purchase Plan (“ESPP”), the plan allows eligible employees of Cypress and its subsidiaries to purchase shares of Cypress common stock through payroll deductions. The ESPP consists of consecutive 24-month offering periods composed of four 6-month exercise periods. The shares can be purchased at the lower of 85% of the fair market value of the common stock at the date of commencement of this two-year offering period or at the last day of each 6-month exercise period. Purchases are limited to 10% of an employee’s eligible compensation, subject to a maximum annual employee contribution limited to a $25,000 market value. Of the 13,030,746 shares authorized under the ESPP, 9,434,000 shares were issued through 2001 including 801,000 in 2001, 1,314,000 in 2000, and 953,000 in 1999. The plan provides for an annual increase in shares available for issuance equal to 2.5% of the number of outstanding Cypress common stock on the last day of the fiscal year.

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     The following weighted average assumptions are included in the estimated grant date fair value calculations for rights to purchase stock under the ESPP:

	2001		2000		1999
Expected life	6 mont	hs	6 mont	hs	6 mont	hs
Risk-free interest rate	3.77	%	5.99	%	5.94	%
Volatility	0.7755		2.5507		0.5773
Dividend yield	0.00	%	0.00	%	0.00	%

     The weighted average estimated grant date fair value, as defined by SFAS No. 123, for rights to purchase stock under the ESPP granted in 2001, 2000 and 1999 were $15.95, $27.31 and $7.50 per share, respectively.

Pro Forma Net Income (Loss) and Net Income (Loss) Per Share

     If Cypress had recorded compensation costs based on the estimated grant date fair value, as defined by SFAS No. 123, for awards granted under its stock option plans and its Employee Stock Purchase Plan, Cypress’s pro forma net income (loss) and earnings per share for the years ended would have been as follows:

(In thousands, except per-share amounts)	2001		2000	1999
Pro forma net income (loss):
Basic	$    (517,101	)	$      202,242	$     55,424
Diluted	$    (517,101	)	$      217,256	$     55,424
Pro forma net income (loss) per share:
Basic	$         (4.17	)	$           1.67	$         0.51
Diluted	$         (4.17	)	$           1.51	$         0.48

Other Employee Benefit Plans

     Cypress maintains a Section 401(k) Plan, New Product Bonus Plan, Key Employee Bonus Plan and Deferred Compensation Plan. The 401(k) Plan provides participating employees with an opportunity to accumulate funds for retirement and hardship. Eligible participants may contribute up to 15% of their eligible earnings to the Plan Trust. Cypress does not make contributions to the plan.

     Under the New Product Bonus Plan, which was adopted in 1997, all qualified employees are provided bonus payments based on Cypress attaining certain levels of new product revenue, plus attaining certain levels of profitability. In 2001, 2000, and 1999, $1.0 million, $14.3 million and $6.9 million, respectively, were charged to operations.

     In 1994, a Key Employee Bonus Plan was established, which provides for bonus payments to selected employees upon achievement of certain Cypress and individual performance targets. In 2001, 2000 and 1999, $0.0 million, $15.0 million and $4.9 million, respectively, were charged to operations in connection with this program.

     In 1995, Cypress adopted a deferred compensation plan, which provides certain key employees with an opportunity to defer income and related taxes and an opportunity to accumulate funds for retirement on a tax deferred basis. Cypress does not make contributions to the plan. Costs incurred by Cypress for the Key Employee Deferred Compensation Plan during fiscal years 2001, 2000 and 1999 were insignificant.

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Note 14: Income Taxes

     The geographic distribution of income (loss) and the components of the provision for income taxes are summarized below:

	Year Ended
(In thousands)	December 30, 2001		December 31, 2000		January 2, 2000
U.S. income (loss) before provision for taxes	$(406,589	)	$ 278,679		$ 62,890
Foreign income (loss) before provision for taxe	(30,607	)	91,491		32,279
Income (loss) before provision for taxes	(437,196	)	370,170		95,169
Current tax expense:
U.S. Federal	-0-		81,267		15,732
State and local	137		4,284		518
Foreign	1,164		1,877		760
Total current	1,301		87,428		17,010
Deferred tax expense (benefit):
U.S. Federal	(25,652	)	(169	)	(9,971	)
State and local	(5,433	)	5,603		—
Total deferred	(31,085	)	5,434		(9,971	)
Total	$(29,784	)	$   92,862		$   7,039

The tax provision (benefit) differs from the amounts obtained by applying the statutory U.S. federal income tax rate to income before taxes as shown below.

	Year Ended
(In thousands)	December 30, 2001		December 31, 2000		January 2, 2000
Statutory rate	35	%	35	%	35	%
Tax at U.S. statutory rate	$(142,306	)	$ 129,559		$ 33,309
Foreign income at other than U.S. rates	55		(30,145	)	(11,443	)
State income taxes, net of federal benefit	137		4,214		114
Tax credits	(7,500	)	(5,500	)	(9,568	)
Prior year net operating losses, credits and other
benefits recognized	—		(26,180	)	(8,968	)
Future benefits not recognized	60,256		—		—
Nondeductible restructuring	24,652		—		—
Nondeductible goodwill and other charges	34,802		20,746		4,326
Other, net	160		168		(731	)
Total	$(29,744	)	$   92,862		$   7,039

The components of deferred tax assets and liabilities at December 30, 2001 and December 31, 2000, under SFAS 109 were as follows:

(In thousands)	December 30, 2001		December 31, 2000
Deferred tax assets:
Deferred income on sales to distributors	$     1,562		$   23,287
Reserves and accruals	106,527		33,934
Credits and net operating loss carryovers	93,756		17,644
Total deferred tax assets	201,845		74,865
Deferred tax liabilities:
Excess of tax over book depreciation	(75,228	)	(45,095	)
Intangibles arising from acquisitions	(66,246	)	(58,402	)
Other, net	(115	)	(107	)
Total deferred tax liabilities	(141,589	)	(103,604	)
Net deferred tax asset (liability)	60,256		(28,739	)
Valuation allowance	(60,256	)	—
Net deferred tax assets (liabilities) after valuati
allowance	$        -0-		$(28,739	)

     Tax benefits arising from employee stock transactions of $56.7 million and $13.8 million were realized in fiscal 2000 and 1999, respectively, and were credited to shareholders’ equity. Deferred tax assets of approximately $7.9 million as of December 30, 2001 pertain to certain net operating loss carryforwards resulting from the exercise of employee stock options. When recognized, the tax benefit of these loss carryforwards will be accounted for as a credit to additional paid-in capital rather than a reduction of the income tax provision.

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     At December 31, 2001, Cypress had net federal operating loss carryovers of approximately $237.4 million, which if not utilized will expire from 2016 through 2021. A significant portion of these net operating loss carryovers relate to recent acquisitions and are subject to certain limitations under the U.S. Internal Revenue Code. In addition, Cypress had U.S. federal and state tax credit carryforwards of approximately $9.8 million which, if not utilized, will expire in 2021.

     U.S. income taxes and foreign withholding taxes were not provided for on a cumulative total of $167.9 million of undistributed earnings for certain non-U.S. subsidiaries. Cypress intends to reinvest these earnings indefinitely in operations outside the United States. If these earning are repatriated additional U.S. tax will be due. Cypress’s global operations involve manufacturing, research and development, and selling activities outside the U.S. Cypress’s operations outside the U.S. are in certain countries that impose a statutory tax rate higher than the U.S., as well as countries that impose a lower statutory tax rate than the U.S. U.S. tax has not been provided on profits from certain non-U.S. sales, until such profits are repatriated back to the U.S. Overall, Cypress expects its foreign earnings to be taxed at a rate lower than the statutory tax rate in the U.S.

     In connection with acquisitions in the current year, Cypress recorded deferred tax assets of $24.5 million and deferred tax liabilities of $36.6 million. The deferred tax assets valuation allowance of $60.3 million in 2001 is attributed to U.S. federal and state deferred tax assets, which result primarily from restructuring and other one-time charges, and net operating loss carryovers. The recognition of deferred tax assets was limited to the extent that management believes it is more likely than not that the net deferred tax asset will not be realized.

Note 15: Commitments and Contingencies

Operating Lease Commitments

     Cypress leases most of its manufacturing facilities, office facilities and some equipment under non-cancelable operating lease agreements that expire at various dates through 2012. Some leases include renewal options, which would permit extensions of the expiration dates at rates approximating fair market rental values.

     The aggregate gross annual rental commitments under non-cancelable operating leases, as of December 30, 2001, are as follows:

Fiscal Year	(In thousands)
2002	$20,297
2003	19,406
2004	12,532
2005	7,556
2006	4,273
2007 and thereafter	2,171
Total	$66,235

     Such rental expenses totaled approximately $20.9 million in fiscal 2001, $18.9 million in 2000 and $19.5 million in 1999. In addition, these leases require us to pay taxes, insurance, maintenance and other expenses with respect to the properties.

     In April 1997, Cypress sold capital equipment located in its Minnesota wafer fabrication facility to Fleet Capital Leasing for $25 million in a sale-leaseback agreement. Cypress paid $9.6 million upon termination of the lease in March 2000.

Synthetic Lease Transactions

     In 1994, Cypress entered into a synthetic lease agreement with respect to our office and manufacturing facilities in San Jose, which was renewed in 1999 and now expires in 2004. In 1995, Cypress entered into a synthetic lease agreement with respect to our manufacturing facility in Minnesota, which expires in 2004. In 1996, Cypress entered into an additional synthetic lease agreement that renewed in 2001 and expires in 2006 for two additional office facilities in San Jose. In addition, Cypress entered into a synthetic lease agreement with a lessor to construct and lease an additional headquarters facility in San Jose to support consolidation from acquired companies onto one main campus. This facility is expected to be completed and rental fees will begin in the first quarter of 2002. The lease will expire in 2007. Synthetic leases are leases that qualify as capital leases for tax purposes, but qualify as operating leases for financial reporting. As such, synthetic leases represent a form of “off balance sheet” financing.

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     These agreements require periodic payments that vary based on the London Interbank Offering Rate (“LIBOR”), plus a spread. The total amount of such payments in 2001 was $3.7 million, in 2000 was $4.7 million, and in 1999 was $4.0 million. All synthetic leases provide us with (i) the options for renewal at mutually agreed upon terms, and (ii) if the leases are not extended, the right and duty to acquire the property at the Lessor’s cost or to arrange for the property to be acquired by a third party at market value.

     If Cypress had purchased all the properties subject to synthetic leases at December 30, 2001, we would have been required to make a payment and record assets totaling $76.3 million. Cypress is required to maintain (and does maintain) restricted cash or investments to serve as collateral for our obligations under these leases. The aggregate amount of such restricted cash recorded as of December 30, 2001 and December 31, 2000 was $75.0 million and $60.7 million, respectively, and was classified on the Balance Sheet as a non-current asset.

     If Cypress does not purchase the properties subject to the synthetic leases on the required dates (including any acceleration of such date due to a default) and the property is sold to a third party at a price below lessor’s cost, then Cypress is contingently liable for such shortfall in an aggregate amount of up to $62.2 million as of December 30, 2001. Based on management’s estimate of the fair value of the properties, no liability was required to be recorded at December 30, 2001 or December 31, 2000.

     The amounts Cypress must pay (or find a third party to pay) for all of the properties subject to synthetic leases and the dates such payments are scheduled to be made are as follows:

Synthetic Lease Obligations Maturing:
Within 1 year	none
1 to 3 years	$43.9 million
4 to 5 years	$18.4 million
Beyond 5 years	$14.0 million
Total	$76.3 million

     Synthetic lease transactions require compliance by Cypress with certain financial covenants. Failure to meet these requirements can result in an event of default. Upon any such default, the lessors could require Cypress to immediately purchase the applicable facilities at cost or sell it to a third party at the fair market value. At December 30, 2001 Cypress was in violation of one financial covenant related to one synthetic lease agreement. Cypress received a waiver from the lessor for this covenant violation and have negotiated new covenants for future periods in an amendment to the lease, effective February 15, 2002. Cypress was in compliance with all other financial covenants as of December 30, 2001. While Cypress expects to maintain compliance with the covenants, Cypress’s ability to meet these financial covenants can be effected by events beyond its control and Cypress cannot assure that it will meet these covenants in the future.

Litigation and Asserted Claims

     The semiconductor industry has experienced a substantial amount of litigation regarding patent and other intellectual property rights. From time to time, Cypress has 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. Cypress is 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, Cypress may be involved with litigation to:

• enforce our patents or other intellectual property rights;

• protect our trade secrets and know-how;

• determine the validity or scope of the proprietary rights of others; and

• defend against claims of infringement or invalidity.

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

     In July 2001, we filed a complaint in the United States International Trade Commission (“ITC”) against Integrated Circuit Systems, Inc. (“ICS”) and Pericom Semiconductor Corporation (“Pericom”) for infringement of a U.S. patent. The ITC subsequently instituted an investigation based upon Cypress’s complaint. In December 2001, Cypress agreed to settle this dispute with Pericom. Trial in the ITC against ICS is scheduled for April 2002. We will vigorously pursue and/or protect our rights in this matter. In November 2001, ICS filed a complaint in the ITC against us for infringement of two U.S. patents, one of which is also asserted against us in an earlier-filed action in California (see below). We have investigated the allegations in ICS’ complaint. We find at least some of the allegations to be completely without merit, and we are confident that we have meritorious defenses to the remainder of the 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, we may be required to pay expenses, which could (but is not expected to) have a material adverse effect on our financial position, results of operations and cash flows.

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     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 and find them completely without merit. 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, we may be required to pay damages and/or expenses, which could (but is not expected to) have a material adverse effect on our financial position, results of operations and cash flows.

     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 and costs. In February 2001, the Momentum complaint was dismissed, but they were given thirty days to refile. Momentum filed its Amended Complaint on April 16, 2001. We have reviewed and are investigating the allegations in the Amended Complaint. Based on the information available at this time, we believe that the suit against us is without merit. We will continue to 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, results of operations and cash flows.

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

     On June 12, 2000, 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 believe that we will ultimately prevail in this matter. While no assurance can be given regarding the outcome of this action, Cypress believes 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, results of operations and cash flows.

     During 1998, EMI Group of North America, Inc. (“EMI”) filed suit against Cypress in the Federal Court in 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 our favor, finding that we infringed none of the patents and that each asserted claim was invalid due to prior art and physical impossibility (i.e., the patents require a step that is physically impossible to perform). EMI’s Motion for Judgment notwithstanding the Verdict was denied in part and granted in part, leaving the verdicts on noninfringement and invalidity due to physical impossibility intact, but reversing the prior art invalidity verdicts. EMI filed an appeal, and the Court of Appeals for the Federal Circuit (“CAFC”) recently ruled in our favor, upholding the noninfringement and invalidity due to physical impossibility verdicts and reversing the District Court on the prior art invalidity verdicts, thereby reinstating the jury’s finding that the patents are invalid in view of the prior art. We therefore believe that our defenses are meritorious, and we intend to continue to defend ourselves vigorously, should it be necessary to do so. The deadline for EMI to file an appeal to the U.S. Supreme Court has passed, and we understand that EMI has not filed or petitioned for such an appeal. However, should the outcome of this action be unfavorable, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

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     In January 1998, an attorney representing the estate of Mr. Jerome Lemelson contacted us and charged that we infringed certain patents owned by Mr. Lemelson and/or a partnership controlled by Mr. Lemelson’s estate. On February 26, 1999, the Lemelson Partnership sued us and 87 other companies in United States District Court for 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 (2) 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, and we believe that the suit against us is 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, results of operations and cash flows.

     On October 2, 1997, we filed an action against Kevin Yourman, Joseph Weiss, and their associated law offices in the Superior Court of California (“Superior Court”) in Santa Clara County for malicious civil prosecution in the underlying securities fraud actions initiated by Messrs. Yourman and Weiss in 1992. The underlying securities fraud actions were dismissed because the court found that none of our officers made any actionable false or misleading statements or omissions. An appeal affirmed the lower court’s finding that Messrs. Yourman and Weiss failed to put forth evidence showing a genuine issue of fact with regard to any statements by our officers. On May 4, 1999, the Superior Court granted a summary judgment motion by Messrs. Yourman and Weiss, holding that Messrs. Yourman and Weiss had probable cause to bring the underlying litigation. Our appeal of this decision has been denied. This action has not had a material effect on our consolidated financial position, results of operations and cash flows.

Purchase Commitments

     At December 3, 2001, Cypress had purchase commitments aggregating $33.4 million, principally for manufacturing equipment, and facilities and bulk gas and nitrogen. These commitments relate to purchases to be made in 2002 of $29.9 million and the remainder is committed through 2008.

Note 16: Related Parties

Between 1992 and 1995, Cypress made cost-basis investments in QuickLogic Corporation (“QuickLogic”) Series D and Series E preferred stock. In addition, during 1996 Cypress had other various arrangements, including supply and licensing arrangements, which increased Cypress’s ownership in QuickLogic. In October 1999, QuickLogic announced its initial public offering. Cypress sold its investment in QuickLogic in October 1999 and as a result, recorded a $36.2 million gain. Cypress recorded sales to QuickLogic of $7.1 million in 1999.

     On February 22, 2001 Cypress’s Chief Executive Officer, TJ Rodgers made an investment in Sunpower Corporation, a private company developing solar cells using semiconductor technology. The investment by Mr. Rodger’s was a $750,000 bridge loan with an interest rate of 6%, which is convertible into Preferred Stock with a conversion feature priced at a 15% discount to the next round of financing. In the fourth quarter of 2001, Cypress made loans to Sunpower aggregating $450,000 with the same terms as described above through the Cypress Venture Fund (CVF). Cypress is evaluating further investments in Sunpower Corp.

Note 17: Segment Information

     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 subject to greater pricing pressures. The Non-memory Products business segment includes data communication devices, programmable logic products, specialty memories, timing and interface products.

     In October 2000, Cypress announced the formation of new divisions in order to enhance its focus on communications market segments. The 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.

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     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

(In thousands)	2001	2000
Wide area networks / storage area networks	$341,760	$   536,566
Wireless terminals / wireless infrastructure	225,949	473,738
Computation	251,483	277,483
Total consolidated revenues	$819,192	$1,287,787

Market Segment Income (Loss) Before Provision for Income Taxes

(In thousands)	2001		2000
Wide area networks / storage area networks	$(79,851	)	$ 166,224
Wireless terminals / wireless infrastructure	(35,245	)	156,046
Computation	(51,156	)	62,298
Acquisition, restructuring and other non-recurring
costs	(293,366	)	(55,729	)
Interest income	48,231		59,152
Interest expense	(22,398	)	(23,633	)
Other income and (expense), net	(10,652	)	5,812
Income (loss) before provision for income taxes	$(444,437	)	$ 370,170

Business Segment Net Revenues

     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 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), 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 fiscal years 2001, 2000 and 1999. 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.

(In thousands)	2001	2000	1999
Memory	$350,908	$   638,111	$309,002
Non-memory	468,284	649,676	436,040
Total consolidated revenues	$819,192	$1,287,787	$745,042

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Business Segment Income (Loss) before Provision for Income Taxes

(In thousands)	2001		2000		1999
Memory	$(71,503	)	$ 184,279		$(19,091	)
Non-memory	(94,749	)	200,289		104,789
Acquisition, restructuring and other non-recurring
costs	(293,366	)	(55,729	)	(34,091	)
Interest income	48,231		59,152		18,297
Interest expense	(22,398	)	(23,633	)	(9,643	)
Other income and (expense), net	(10,652	)	5,812		34,908
Income (loss) before provision for income taxes	$(444,437	)	$ 370,170		$   95,169

Business Segment Depreciation and Amortization

(In thousands)	2001	2000	1999
Memory	$123,400	$  73,067	$  67,306
Non-memory	125,603	77,637	42,614
Total consolidated depreciation and amortization	$249,003	$150,704	$109,920

Geographic Area

     Revenues are attributed to countries based on the customer location. Revenues by geographic locations were:

(In thousands)	2001	2000	1999
United States	$406,692	$   657,388	$377,625
Europe	131,578	281,574	131,528
Japan	105,998	133,669	69,041
Other foreign countries	174,924	215,156	166,848
Total revenues	$819,192	$1,287,787	$745,042

     Long-lived assets (property, plant and equipment, net) by geographic locations were:

(In thousands)	2001	2000	1999
United States	$441,188	$498,843	$276,576
Philippines	52,983	65,503	77,426
Other foreign countries	5,624	7,129	4,204
Total long-lived assets	$499,795	$571,475	$358,206

Note 18: Subsequent Events

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

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

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of Cypress Semiconductor Corporation

     In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Cypress Semiconductor Corporation and its subsidiaries at December 30, 2001 and December 31, 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
——————————————

PricewaterhouseCoopers LLP
San Jose, California
January 23, 2002, except as to Notes 15 and 18,
which are as of February 28, 2002

Page 73

QUARTERLY FINANCIAL DATA
(In thousands, except per share amounts)

	Three Months Ended
	Dec. 30, 2001		Sep. 30, 2001		July 1, 2001		Apr. 1, 2001
Revenues	$       191,099		$       180,284		$       185,546		$      262,263
Gross profit (loss)	76,169		(27,827	)	82,029		136,554
Income (loss) before extraordinary gain	(42,049	)	(362,309	)	(17,856	)	10,457
Extraordinary gain	4,345		—		—		—
Net income (loss)	$      (37,704	)	$    (362,309	)	$      (17,856	)	$       10,457
Basic net income (loss) per share:
Before extraordinary gain	$         (0.35	)	$         (2.92	)	$         (0.14	)	$           0.08
Extraordinary gain (net of tax)	0.04		—		—		—
Net income (loss)	$         (0.31	)	$         (2.92	)	$         (0.14	)	$           0.08
Diluted net income (loss) per share
Before extraordinary gain	$         (0.35	)	$         (2.92	)	$         (0.14	)	$           0.08
Extraordinary gain (net of tax)	0.04		—		—		—
Net income (loss)	$         (0.31	)	$         (2.92	)	$         (0.14	)	$           0.08

	Three Months Ended
	Dec. 31, 2000	Oct. 1, 2000	July 2, 2000	Apr. 2, 2000
Revenues	$370,025	$352,687	$300,834	$264,241
Gross Profit	$218,938	$204,904	$165,691	$133,415
Net income	$  97,590	$  62,049	$  65,629	$  52,040
Net income per share:
Basic	$      0.75	$      0.51	$      0.56	$      0.45
Diluted	$      0.68	$      0.45	$      0.49	$      0.40

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

     None

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PART III

     Certain information required by Part III is omitted from this Report in that the registrant will file a definitive proxy statement pursuant to Regulation 14A (the “Proxy Statement”) not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item concerning our directors is incorporated by reference to the information set forth in the sections entitled “Proposal One-Election of Directors” and “Compliance with Section 16(a) of the Exchange Act” in our Proxy Statement for the 2001 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of Cypress’s fiscal year ended December 30, 2001, except that the information required by this item concerning the executive officers of Cypress is incorporated by reference to the information set forth in the section entitled “Executive Officers of the Registrant” at the end of Part I of this Report on Form 10-K.

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by this item is incorporated by reference to our Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is incorporated by reference to our Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is incorporated by reference to our Proxy Statement.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

     Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities to file reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the SEC and the National Association of Securities Dealers. Such officers, directors and 10% stockholders are also required by SEC rules to furnish us with copies of all Section 16(a) forms that they file.

     Based solely on its review of the copies of such forms received by us, we believe that, during the fiscal year ended December 30, 2001, all Section 16(a) filing requirements applicable to our officers, directors and 10% stockholders were satisfied.

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PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) The following documents are filed as a part of this report:

(1) FINANCIAL STATEMENTS

	Page
Consolidated Balance Sheets at December 30, 2001 and December 31, 2000	37
Consolidated Statements of Operations for the three years ended December 30, 2001	38
Consolidated Statements of Stockholders’ Equity for the three years
ended December 30, 2001	39
Consolidated Statements of Cash Flows for the three years ended December 30, 2001	40
Notes to Consolidated Financial Statements	41
Report of Independent Accountants	73

(2) FINANCIAL STATEMENT SCHEDULE

     All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

(3) EXHIBITS

EXHIBIT
NUMBER DESCRIPTION

2.1(1) Agreement and Plan and Reorganization dated as of January 21, 1999 by and among Cypress Semiconductor Corporation, CY Acquisition Corp. and IC WORKS, Inc., as amended.

2.2(2) Agreement and Plan of Reorganization dated as of January 10, 2000 by and among Cypress Semiconductor Corporation, CE Acquisition Corporation and Galvantech, Inc.

2.3(3) Agreement and Plan of Reorganization dated as of April 25, 2000 by and between Cypress Semiconductor Corporation, and Alation Systems, Inc.

2.4(4) Agreement and Plan of Reorganization dated as of July 20, 2000 between Cypress and SLM and with respect to Article VII thereof only, U.S. Bank Trust, N.A. and Dave B. Corbin.

2.5(5) Agreement and Plan of Reorganization dated as of January 16, 2001 by and among Cypress Semiconductor Corporation, Clock Acquisition Corporation, International Microcircuits, Inc., U.S. Bank Trust, N.A., as Escrow Agent and Kurt R. Jaggers, as Securityholder Agent.

2.6(5) Agreement and Plan of Reorganization dated as of January 26, 2001 by and among Cypress Semiconductor Corporation, Hilo Acquisition Corporation, HiBand Semiconductors, Inc., the shareholders party thereto, U.S. Bank Trust, N.A., as Escrow Agent and Rich Bowers, as Securityholder Agent.

2.7(6) Stock Purchase Agreement as of May 29, 2001 by and among Cypress Semiconductor Corporation, ScanLogic Holding Company, ScanLogic Corporations, the shareholders party thereto, U.S. Bank Trust, N.A., as Escrow Agent and Israel Zilberman, as Securityholder Agent.

2.8(7) Agreement and Plan of Reorganization dated June 2, 2001 by and among Cypress Semiconductor Corporation, Lion Acquisition Corporation, Lara Networks, Inc., U.S. Bank Trust, N.A., as Escrow Agent and Kenneth P. Lawler, as Securityholder Agent.

2.9(7) First Amendment to Agreement and Plan of Reorganization dated July 3, 2001 by and among Cypress Semiconductor Corporation, Lion Acquisition Corporation, Lara Networks, Inc., U.S. Bank Trust, N.A., as Escrow Agent and Kenneth P. Lawler, as Securityholder Agent.

2.10(7) Agreement and Plan of Reorganization dated August 19, 2001 by and among Cypress Semiconductor Corporation, In-System Design, Inc., U.S. Bank Trust, N.A., as Escrow Agent and Lynn Watson, as Securityholder Agent.

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2.11(7) First Amendment to Agreement and Plan of Reorganization dated September 10, 2001 by and among Cypress Semiconductor Corporation, Idaho Acquisition Corporation, In-System Design, Inc., U.S. Bank Trust, N.A., as Escrow Agent and Lynn Watson, as Securityholder Agent.

2.12* Agreement and Plan of Reorganization dated November 17, 2001 by and among Cypress Semiconductor Corporation, Steelers Acquisition Corporation, Silicon Packets, Inc., U.S. Bank Trust, N.A., as Escrow Agent and Robert C. Marshall, as Securityholder Agent.

3.1(8) Second Restated Certificate of Incorporation.

3.2* Bylaws, as amended.

4.1(9) Subordinated Indenture, dated as of January 15, 2000, between Cypress Semiconductor Corporation and State Street Bank and Trust Company of California, N.A., as Trustee.

4.2(10) Supplemental Trust Indenture, dated as of January 15, 2000, between Cypress Semiconductor Corporation and State Street Bank and Trust Company of California, N.A., as Trustee.

4.3(11) Supplemental Trust Indenture, dated as of June 15, 2000, between Cypress Semiconductor Corporation and State Street Bank and Trust Company of California, N.A., as Trustee.

10.1(12) Form of Indemnification Agreement.

10.2(11)(13) Cypress Semiconductor Corporation 1994 Stock Option Plan.

10.3(13)(14) Cypress Semiconductor Corporation Employee Qualified Stock Purchase Plan, as amended.

10.4(13)(15) Consulting Agreement between Fred Bialek and Cypress Semiconductor Corporation.

10.5(11)(13) Cypress Semiconductor Corporation 1999 Key Employee Bonus Plan Agreement.

10.6(13)(16) Cypress Semiconductor Corporation 1999 Non-statutory Stock Option Plan.

21.1* Subsidiaries of Cypress Semiconductor Corporation.

23.1* Consent of Independent Accountants.

24.1* Power of Attorney.

(1) Previously filed as an exhibit to our current report on Form 8-K filed February 12, 1999.

(2) Previously filed as an exhibit to our current report on Form 8-K filed January 18, 2000.

(3) Previously filed as an exhibit to our current report on Form 8-K filed June 14, 2000.

(4) Previously filed as an exhibit to our current report on Form 8-K filed September 20, 2000.

(5) Previously filed as an exhibit to our quarterly report on Form 10-Q for the fiscal quarter ended April 1, 2001.

(6) Previously filed as an exhibit to our quarterly report on Form 10-Q for the fiscal quarter ended July 1, 2001.

(7) Previously filed as an exhibit to our quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2001.

(8) Previously filed as an exhibit to our annual report on Form 10-K for the fiscal year ended December 31, 2000.

(9) Previously filed as an exhibit to our current report on Form 8-K filed March 17, 2000.

(10) Previously files as an exhibit to our annual report on Form 10-K for the fiscal year ended January 2, 2000.

(11) Previously filed as an exhibit to our current report on Form 8-K filed July 11, 2000.

(12) Previously filed as an exhibit to our registration statement on Form S-1 which was declared effective on March 4, 1987 (SEC file number 33-12153).

(13) Management compensatory plan, contract or arrangement.

(14) Previously filed as an exhibit to our registration statement on Form S-8 dated December 10, 1998 (SEC file number 333-68703).

(15) Previously filed as an exhibit to our annual report on Form 10-K for the fiscal year ended January 3, 1999.

(16) Previously filed as an exhibit to our registration statement on Form S-8 dated April 20, 1999 (SEC file number 333-76665).

* Filed as an exhibit to this annual report.

(b) Reports on Form 8-K:

     None

Page 77

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant, Cypress Semiconductor Corporation, a corporation organized and existing under the laws of the State of Delaware, has duly caused this Annual Report to be signed on its behalf by the undersigned, thereto duly authorized, in the City of San Jose, State of California, on the 25th day of March 2002.

CYPRESS SEMICONDUCTOR CORPORATION


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

Page 78

EX-2.12

Exhibit 2.12

AGREEMENT AND PLAN OF REORGANIZATION

BY AND AMONG

CYPRESS SEMICONDUCTOR CORPORATION,

STEELERS ACQUISITION CORPORATION,

SILICON PACKETS, INC.

AND WITH RESPECT TO ARTICLE VII ONLY:

U.S. BANK TRUST, N.A., AS ESCROW AGENT

AND ROBERT C. MARSHALL, AS SECURITYHOLDER AGENT

Dated as of November 17, 2001

TABLE OF CONTENTS

Page

ARTICLE I THE MERGER 2

1.1 The Merger 2

1.2 Effective Time 2

1.3 Effect of the Merger 2

1.4 Certificate of Incorporation; Bylaws 2

1.5 Directors and Officers 2

1.6 Merger Consideration 3

1.7 Dissenting Shares for Holders of Company Capital Stock 6

1.8 Surrender of Certificates 7

1.9 Cash Elections 9

1.10 Proration 9

1.11 Tax Consequences 10

ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY 10

2.1 Organization of the Company 10

2.2 Company Capital Structure 10

2.3 Subsidiaries 11

2.4 Authority 11

2.5 Company Financial Statements 12

2.6 No Undisclosed Liabilities 12

2.7 No Changes 12

2.8 Tax and Other Returns and Reports 14

2.9 Restrictions on Business Activities 15

2.10 Title to Properties; Absence of Liens and Encumbrances 16

2.11 Intellectual Property 16

2.12 Agreements, Contracts and Commitments 20

2.13 Interested Party Transactions 21

2.14 Compliance with Laws 21

2.15 Litigation 21

2.16 Insurance 22

2.17 Minute Books 22

2.18 Environmental Matters 22

2.19 Brokers’ and Finders’ Fees; Third Party Expenses 23

2.20 Employee Matters and Benefit Plans 23

2.21 Tax Matters 27

2.22 Representations and Materials Complete 27

ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB 27

3.1 Organization, Standing and Power 27

3.2 Authority 27

3.3 Litigation 28

3.4 SEC Documents; Parent Financial Statements 28

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TABLE OF CONTENTS
(continued)

Page

3.5 Tax Matters 28

ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME 29

4.1 Conduct of Business of the Company 29

4.2 No Solicitation 31

ARTICLE V ADDITIONAL AGREEMENTS 32

5.1 Fairness Hearing; Stockholder Approval 32

5.2 Stock Certificate Legends 33

5.3 Access to Information 33

5.4 Confidentiality 33

5.5 Expenses 33

5.6 Public Disclosure 34

5.7 Consents 34

5.8 FIRPTA Compliance 34

5.9 Reasonable Best Efforts 34

5.10 Notification of Certain Matters 34

5.11 Employee Matters 34

5.12 NYSE 35

5.13 Form S-8 35

5.14 Additional Documents and Further Assurances 35

5.15 Termination of 401(k) Plan 35

5.16 Noncompetition Agreements 36

5.17 New Options 36

5.18 Employee Bonus 36

5.19 Indemnification of Directors and Others 36

5.20 Plan of Reorganization 36

ARTICLE VI CONDITIONS TO THE MERGER 37

6.1 Conditions to Obligations of Each Party to Effect the Merger 37

6.2 Additional Conditions to Obligations of the Company 37

6.3 Additional Conditions to the Obligations of Parent and Merger Sub 38

ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW 40

7.1 Survival of Representations and Warranties 40

7.2 Escrow Arrangements 40

ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER 48

8.1 Termination 48

8.2 Effect of Termination 49

8.3 Amendment 49

8.4 Extension; Waiver 49

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TABLE OF CONTENTS
(continued)

Page

ARTICLE IX GENERAL PROVISIONS 50

9.1 Notices 50

9.2 Interpretation 51

9.3 Counterparts 52

9.4 Entire Agreement; Assignment 52

9.5 Severability 52

9.6 Other Remedies 53

9.7 Governing Law; Forum 53

9.8 Rules of Construction 53

9.9 Specific Performance 53

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AGREEMENT AND PLAN OF REORGANIZATION

     This AGREEMENT AND PLAN OF REORGANIZATION (this “Agreement”) is made and entered into as of November 17, 2001 by and among Cypress Semiconductor Corporation, a Delaware corporation (“Parent”); Steelers Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”); Silicon Packets, Inc., a Delaware corporation (the “Company”); U.S. Bank Trust, N.A. (the “Escrow Agent”) and Robert C. Marshall (the “Securityholder Agent”) (the Escrow Agent and the Securityholder Agent being signatories with respect to Article VII hereof only).

RECITALS

     A. The Boards of Directors of each of the Company, Parent and Merger Sub believe it is in the best interests of each company and their respective stockholders that Parent acquire the Company through the statutory merger of the Company with and into Merger Sub (the “Merger”) in accordance with the terms and conditions of this Agreement and, in furtherance thereof, have approved the Merger.

     B. Pursuant to the Merger and subject to the terms and conditions of this Agreement, (i) all of the issued and outstanding shares of preferred stock of the Company shall be converted into the right to receive, at the option of each holder of Company Preferred Stock (as defined below), either (1) cash, (2) shares of common stock of Parent (“Parent Common Stock”), or (3) a combination of cash and Parent Common Stock; (ii) all of the issued and outstanding shares of Company Common Stock (as defined below) shall be converted into the right to receive shares of Parent Common Stock; and (iii) all outstanding options, warrants and other rights to acquire or receive shares of capital stock of the Company shall be assumed and become options, warrants or rights to acquire or receive shares of Parent Common Stock.

     C. A portion of the cash and/or Parent Common Stock otherwise payable by Parent in connection with the Merger shall be placed in escrow by Parent, the release of which amount shall be contingent upon certain events and conditions, all as set forth in Article VII hereof.

     D. The parties intend that for Federal income tax purposes the Merger will qualify and shall be accounted for as a “reorganization” under Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”).

     E. Concurrently with the execution of this Agreement, and as a condition and inducement to Parent’s willingness to enter into this Agreement, certain stockholders of the Company are entering into Voting Agreements in substantially the form attached hereto as Exhibit A (the “Voting Agreements”) and certain key employee stockholders of the Company are entering into agreements not to compete with Parent in the form of Exhibit B hereto (the “Noncompetition Agreements”).

     F. The Company, Parent and Merger Sub desire to make certain representations and warranties and other agreements in connection with the Merger.

     NOW, THEREFORE, in consideration of the covenants, promises and representations set forth herein, and for other good and valuable consideration, intending to be legally bound hereby, the parties agree as follows:

ARTICLE I

THE MERGER

     1.1 The Merger.  At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement and the applicable provisions of the Delaware General Corporation Law (“Delaware Law”), the Company shall be merged with and into Merger Sub, the separate corporate existence of the Company shall cease and Merger Sub shall continue as the surviving corporation. The surviving corporation after the Merger is sometimes referred to hereinafter as the “Surviving Corporation.”

     1.2 Effective Time.  Unless this Agreement is earlier terminated pursuant to Section 8.1, the closing of the Merger (the “Closing”) will take place at 10:00 a.m. local time as promptly as practicable, but no later than two (2) business days following satisfaction or waiver of the conditions set forth in Article VI (other than those conditions which by their terms are not to be satisfied or waived until the Closing), at the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California, unless another date, place or time is agreed to in writing by Parent and the Company; provided however, that in no event shall the Closing occur prior to December 16, 2001. The date upon which the Closing actually occurs is herein referred to as the “Closing Date.” On the Closing Date, the parties hereto shall cause the Merger to be consummated by filing a Certificate of Merger in such form as shall be agreed upon by Parent and the Company (the “Certificate of Merger”) with the Delaware Secretary of State, in accordance with the relevant provisions of applicable Delaware Law (the time of filing with the Delaware Secretary of State being referred to herein as the “Effective Time”).

     1.3 Effect of the Merger.  At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of Delaware Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation.

     1.4 Certificate of Incorporation; Bylaws.

     (a) Unless otherwise determined by Parent prior to the Effective Time, the Certificate of Incorporation of Merger Sub as in effect immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended in accordance with Delaware Law and as provided in such Certificate of Incorporation.

     (b) Unless otherwise determined by Parent prior to the Effective Time, the Bylaws of Merger Sub as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation at the Effective Time, until thereafter amended in accordance with Delaware Law and as provided in the Certificate of Incorporation of the Surviving Corporation and such Bylaws.

     1.5 Directors and Officers.  Unless otherwise determined by Parent prior to the Effective Time, the directors of Merger Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation, each to hold the office of a director of the Surviving Corporation in accordance with the provisions of Delaware Law and the Certificate of Incorporation and Bylaws of the Surviving Corporation until their successors are duly elected and qualified. The officers of Merger Sub immediately prior to the Effective Time shall be the officers of the Surviving Corporation, each to hold office in accordance with the provisions of the Bylaws of the Surviving Corporation.

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     1.6 Merger Consideration.

     (a) Certain Definitions. For purposes of this Agreement, the following terms shall have the following meanings:

     “Company Capital Stock” shall mean shares of Company Common Stock and Company Series A Preferred Stock.

     “Company Common Stock” shall mean shares of common stock of the Company.

     “Company Convertible Securities” shall mean Company Options, Company Warrants and any other rights to acquire or receive shares of Company Capital Stock, but shall not include Company Preferred Stock.

     “Company Options” shall mean all issued and outstanding options to purchase or otherwise acquire newly issued shares of Company Capital Stock, whether vested or not, but shall not include Company Preferred Stock or Company Warrants.

     “Company Restricted Stock” shall mean any shares of Company Common Stock that are unvested or subject to a repurchase option, risk of forfeiture or other similar condition under any applicable restricted stock purchase agreement or other agreement with the Company.

     “Company Series A Preferred Stock” shall mean shares of Series A Preferred Stock of Company.

     “Company Stockholders” shall mean holders of any shares of Company Capital Stock immediately prior to the Effective Time.

     “Company Warrants” shall mean all outstanding warrants to purchase or otherwise acquire newly issued shares of Company Common Stock, whether or not vested, but shall not include Company Preferred Stock or Company Options.

     “Escrow Amount” shall mean an amount equal to $2,500,000. The Escrow Amount shall be contributed in cash, Parent Common Stock, and Parent Common Stock issuable upon exercise of assumed Company Options in the same relative proportions as cash, Parent Common Stock and Parent Common Stock issuable upon exercise of assumed Company Options are to the total consideration paid to the Company Stockholders and holders of assumed Company Options. For purposes of this definition only, each share of Parent Common Stock that is contributed to the Escrow Amount shall be valued at the Per Share Cash Amount.

     “Five-Day Price” shall mean the average closing price of a share of Parent Common Stock as reported by the New York Stock Exchange for the five (5) trading days prior to the second day before the Effective Time.

     “Per Share Cash Amount” shall mean the Total Transaction Value divided by the Total Outstanding Shares.

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     “Per Share Stock Amount” shall mean the Per Share Cash Amount divided by the Five-Day Price.

     “Total Outstanding Shares” shall mean the number of shares of Company Common Stock outstanding immediately prior to the Effective Time plus the number of shares of Company Common Stock issuable upon conversion or exercise of Company Convertible Securities and Company Series A Preferred Stock outstanding immediately prior to the Effective Time, except shares to be cancelled pursuant to section 1.6(g) below.

     “Total Transaction Value” shall mean $25,000,000; provided however, that if the Company’s Third Party Expenses (as defined in Section 5.5) exceed $2,270,000, then the Total Transaction Value shall be reduced to the extent that such Third Party Expenses exceed $2,270,000.

     (b) Conversion of Company Common Stock. Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares and shares of Company Common Stock owned by Parent or Merger Sub) shall be converted at the Effective Time (the “Common Merger Consideration”) into the right to receive a number of fully paid and nonassessable shares of Parent Common Stock equal to the Per Share Stock Amount. Upon such conversion, all such shares of Company Common Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each Company Certificate (as defined in Section 1.8(c)) shall thereafter represent only the right to receive the Common Merger Consideration.

     Notwithstanding the foregoing, the amount of Parent Common Stock to be distributed at Closing to Company Stockholders with respect to shares of Company Common Stock shall be reduced pursuant to the escrow provisions of Section 1.8(b) and Article VII hereof. If any shares of Company Common Stock issued and outstanding immediately prior to the Effective Time are Company Restricted Stock, then the Parent Common Stock to be received by the holder of such Company Restricted Stock shall be subject to the same restrictions as such Company Restricted Stock was subject to immediately prior to the Effective Time. If the Company Restricted Stock was held in escrow prior to the Effective Time, then the Parent Common Stock issued in exchange therefore shall be held in escrow by Parent after the Effective Time.

     (c) Conversion of Company Preferred Stock. Prior to the Effective Time, the Company shall cause its Certificate of Incorporation to be amended to remove the liquidation preferences and participation rights of the Company Preferred Stock. Thereafter, subject to Section 1.10, each share of Company Preferred Stock issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares and shares of Company Preferred Stock owned by Parent or Merger Sub) shall be converted at the Effective Time as follows (the “Preferred Merger Consideration”): (i) for each such share of Company Preferred Stock with respect to which an election to receive cash has been effectively made and not revoked or lost pursuant to Section 1.9 (the “Electing Preferred Shares”), the right to receive the Per Share Cash Amount; and (ii) for each such share of Company Preferred Stock other than Electing Preferred Shares, the right to receive a number of fully paid and nonassessable shares of Parent Common Stock equal to the Per Share Stock Amount. Upon such conversion, all such shares of Company Preferred Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each Company Certificate (as defined in Section 1.8(c)) shall thereafter represent only the right to receive the Preferred Merger Consideration.

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     Notwithstanding the foregoing, the amount of cash and/or Parent Common Stock to be distributed at Closing to Company Stockholders with respect to shares of Company Preferred Stock shall be reduced pursuant to the escrow provisions of Section 1.8(b) and Article VII hereof.

     (d) Assumption of Company Options. At the Effective Time, each outstanding Company Option granted pursuant to the Company’s 2000 Stock Plan (the “Option Plan”) or otherwise, whether vested or unvested and whether exerciseable or unexerciseable, shall by virtue of the Merger be assumed by Parent in such manner that Parent is assuming a stock option in a transaction to which Section 424(a) applies or to the extent that Section 424(a) of the Code does not apply to any such Company Options, would be a transaction within Section 424 of the Code. Each Company Option so assumed by Parent under this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the applicable Option Plan and/or as provided in the respective option agreements immediately prior to the Effective Time (including, without limitation, any vesting schedule or repurchase rights), except as follows:

     (i) each such Company Option will be exercisable for that number of whole shares of Parent Common Stock equal to (x) the number of shares of Company Common Stock that were issuable upon exercise of such Company Option immediately prior to the Effective Time multiplied by (y) the Per Share Stock Amount, rounded down to the nearest whole number of shares of Parent Common Stock, and

     (ii) the per share exercise price for the shares of Parent Common Stock issuable upon exercise of such assumed Company Option will be equal to (x) the exercise price per share of Company Common Stock at which such Company Option was exercisable immediately prior to the Effective Time divided by (y) the Per Share Stock Amount, rounded up to the nearest whole cent.

It is the intention of the parties hereto that Company Options assumed by Parent following the Closing pursuant to Section 1.6(d) will, to the extent permitted by applicable Law, qualify as incentive stock options as defined in Section 422 of the Code, to the extent any such Company Options qualified as incentive stock options immediately prior to the Effective Time. Notwithstanding the foregoing, shares of Parent Common Stock issuable upon exercise of such assumed Company Options shall be subject to the escrow provisions of Section 1.8(b) and Article VII hereof.

     (e) Assumption of Company Warrant. At the Effective Time, the outstanding Company Warrant shall, by virtue of the Merger, be assumed by Parent. Such assumed Company Warrant shall continue to have, and be subject to, the same terms and conditions set forth in the warrant agreement governing such warrant immediately prior to the Effective Time, except as follows:

     (i) such Company Warrant will be exercisable for that number of whole shares of Parent Common Stock equal to (x) the number of shares of Company Series A Preferred that were issuable upon exercise of such Company Warrant immediately prior to the Effective Time multiplied by (y) the Per Share Stock Amount, rounded down to the nearest whole number of shares of Parent Common Stock, and

     (ii) the per share exercise price for the shares of Parent Common Stock issuable upon exercise of such assumed Company Warrant will be equal to (x) the exercise price per share of Company Series A Preferred at which such Company Warrant was exercisable immediately prior to the Effective Time divided by (y) the Per Share Stock Amount, rounded up to the nearest whole cent.

     (f) Adjustments to Parent Common Stock. The number of shares of Parent Common Stock issuable in exchange for shares of Company Capital Stock and upon the exercise of Company Options assumed by Parent pursuant to Section 1.6 shall be adjusted to reflect fully the effect of any stock split, reverse stock split, stock dividend (including any dividend or distribution of securities convertible into Parent Common Stock or Company Capital Stock), reorganization, recapitalization or other like change with respect to Parent Common Stock or Company Capital Stock after the date hereof and prior to the Effective Time.

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     (g) Fractional Shares. No fractional share of Parent Common Stock shall be issued in the Merger. In lieu thereof, any fractional share (after aggregating all fractional shares of Parent Common Stock to be received by each holder) shall be rounded to the nearest whole share of Parent Common Stock (with .5 being rounded up).

     (h) Cancellation of Parent-Owned and Company-Owned Stock. At the Effective Time, by virtue of the Merger and without any action on the part of any of the parties hereto, each share of Company Capital Stock owned by Parent, Merger Sub, the Company or any direct or indirect wholly-owned subsidiary thereof, immediately prior to the Effective Time shall be cancelled and extinguished without any conversion thereof.

     (i) Capital Stock of Merger Sub. At the Effective Time, by virtue of the Merger and without any action on the part of any of the parties hereto, each share of capital stock of the Merger Sub shall remain outstanding as a share of capital stock of the Surviving Corporation. Each stock certificate of Merger Sub evidencing ownership of any shares of Merger Sub shall after the Effective Time evidence ownership of shares of capital stock of the Surviving Corporation.

     1.7 Dissenting Shares for Holders of Company Capital Stock.

     (a) Notwithstanding any provision of this Agreement to the contrary, any shares of Company Capital Stock held by a holder who has demanded and perfected appraisal rights for such shares in accordance with Delaware Law and, if applicable, dissenters’ rights for such shares in accordance with Chapter 13 of the California Corporations Code (“California Law”) and who, as of the Effective Time, has not effectively withdrawn or lost such appraisal rights and, if applicable, dissenters’ rights (“Dissenting Shares”), shall not be converted into or represent a right to receive the Merger Consideration pursuant to Section 1.6, but the holder thereof shall only be entitled to such rights as are granted by Delaware Law and, if applicable, California Law.

     (b) Notwithstanding the provisions of subsection (a), if any holder of shares of Company Capital Stock who demands appraisal of such shares under Delaware Law and, if applicable, dissenters’ rights with respect to such shares under California Law, shall effectively withdraw or lose (through failure to perfect or otherwise) the right to appraisal and, if applicable, dissenters’ rights, then, as of the later of the Effective Time and the occurrence of such event, such holder’s shares shall automatically be converted into and represent only the right to receive the Merger Consideration as provided in Section 1.6 (and be subject to the provisions of Section 7.2 hereof), without interest thereon, upon surrender of the certificate representing such shares.

     (c) The Company shall give Parent (i) prompt notice of any written demands for appraisal and dissenters’ rights with respect to any shares of Company Capital Stock, withdrawals of such demands, and any other instruments served pursuant to Delaware Law and, if applicable, California Law and received by the Company and (ii) the opportunity to participate in all negotiations and proceedings with respect to demands for appraisal under Delaware Law and, if applicable, California Law. The Company shall not, except with the prior written consent of Parent, voluntarily make any payment with respect to any demands for appraisal and dissenters’ rights with respect to capital stock of the Company or offer to settle or settle any such demands.

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     1.8 Surrender of Certificates.

     (a) Payment Agent. The transfer agent of Parent (or another entity reasonably acceptable to Parent and the Company) shall serve as payment agent (the “Payment Agent”) in the Merger.

     (b) Parent to Provide Cash and Parent Common Stock.

     (i) Promptly after the Closing, Parent shall deliver to the Payment Agent for exchange in accordance with this Article I an amount of cash and Parent Common Stock sufficient to exchange all outstanding shares of Company Capital Stock other than Company Restricted Stock; provided, that on behalf of the Company Stockholders, Parent shall deposit into the Escrow Fund (as defined in Section 7.2(b) hereof) an amount of cash and Parent Common Stock equal to their pro rata portion of the Escrow Amount out of the cash and Parent Common Stock otherwise payable pursuant to Section 1.6 and this Section 1.8(b). At the Effective Time, each Company Stockholder will be deemed to have received and deposited with the Escrow Agent such stockholder’s pro rata portion of the Escrow Amount without any act of any Company Stockholder.

     (ii) The amount contributed to the Escrow Fund on behalf of each Company      Stockholder and holder of Company Options shall be contributed in cash, Parent Common Stock and Parent Common Stock underlying assumed Company options in the same relative proportions as cash, Parent Common Stock and Parent Common Stock underlying assumed Company Options are to the total consideration paid to such holder. With respect to each holder of Company Common Stock, the percentage of Parent Common Stock contributed to the Escrow Fund on behalf of such holder that is subject to any repurchase right, risk of forfeiture, or other condition in favor of the Surviving Corporation shall be proportional to the percentage of such holder’s Company Common Stock that is Company Restricted Stock as of immediately prior to the Effective Time. With respect to each holder of assumed Company Options, upon each exercise of assumed Company Options, the holder of such assumed Company Option shall be deemed to have contributed to the Escrow Fund a number of shares of Parent Common Stock that is proportional to such holder’s pro rata portion of the Escrow Fund.

     (c) Exchange Procedures. Promptly after the Closing, Parent shall cause to be mailed to each Company Stockholder (i) a letter of transmittal (which shall be in such form and contain such provisions as Parent and the Company shall mutually agree and which shall specify that delivery shall be effected, and risk of loss and title to the certificates which immediately prior to the Effective Time represented outstanding shares of Company Capital Stock (the “Company Certificates”) that are being converted into the right to receive the cash amount to be received by each Company Stockholder by virtue of the Merger (the “Stockholder Cash Payment”) and the shares of Parent Common Stock to be received by each Company Stockholder by virtue of the Merger (the “Stockholder Stock Payments”) pursuant to Section 1.6, shall pass, only upon delivery of the Company Certificates to the Payment Agent) and (ii) instructions for use in effecting the surrender of the Company Certificates in exchange for the Stockholder Cash Payments and Stockholder Stock Payments to which such Company Stockholder is entitled pursuant to Section 1.6. Upon surrender of a Company Certificate for cancellation to the Payment Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, such Company Stockholder shall be entitled to receive, and the Payment Agent shall promptly deliver in exchange therefor, any Stockholder Cash Payment and/or Stockholder Stock Payment to be received (less any amount of cash and Parent Common Stock, as applicable, to be deposited in the Escrow Fund on such holder’s behalf pursuant to Section 1.8(b) and Article VII hereof), and the Company Certificate so surrendered shall forthwith be canceled. As soon as practicable after the Effective Time, and subject to and in accordance with the provisions of Article VII hereof, Parent shall cause to be delivered to the Escrow Agent (as defined in Article VII) an amount of cash and Parent Common Stock equal to the Escrow Amount.

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     (d) Transfers of Ownership. If any portion of the Stockholder Cash Payment or the Stockholder Stock Payment is to be paid to any person other than the person(s) in whose name(s) the Company Certificate surrendered in exchange therefor is registered, it will be a condition of such payment that the Company Certificate so surrendered will be properly endorsed and otherwise in proper form for transfer to the person who shall receive such Stockholder Cash Payment and/or Stockholder Stock Payment and that the person(s) requesting such exchange will have paid to Parent or any agent designated by it any transfer or other taxes required by reason of the payment of such Stockholder Cash Payment or Stockholder Stock Payment other than to the registered holder(s) of the Company Certificate surrendered.

     (e) Distributions With Respect to Unexchanged Shares. No dividends or other distributions declared or made after the Effective Time with respect to Parent Common Stock with a record date after the Effective Time will be paid to the holder of any unsurrendered Company Certificate with respect to the shares of Parent Common Stock represented thereby until the holder of record of such certificate shall surrender such certificate. Subject to applicable Law, following surrender of any such Company Certificate, there shall be paid to the record holder of the certificates representing whole shares of Parent Common Stock issued in exchange therefor, without interest, at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Parent Common Stock.

     (f) Lost, Stolen or Destroyed Certificates. If any Company Certificates evidencing shares of Company Capital Stock shall have been lost, stolen or destroyed, the Payment Agent shall pay the Stockholder Cash Payment and/or Stockholder Stock Payment as required pursuant to Section 1.6, and any dividends or other distributions as may be required pursuant to Section 1.8(e), in exchange for such lost, stolen or destroyed Company Certificates, upon the delivery by the holder thereof of an affidavit of that fact by the holder thereof containing customary indemnification provisions satisfactory to Parent.

     (g) No Liability. Notwithstanding anything to the contrary in this Section 1.8, neither Parent nor any party hereto shall be liable to a holder of shares of Company Capital Stock for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar Law.

     (h) No Further Ownership Rights in Company Capital Stock. The Stockholder Cash Payment and/or Stockholder Stock Payment paid to the holders of Company Capital Stock in accordance with the terms hereof shall be deemed to be in full satisfaction of all rights pertaining to shares of Company Capital Stock outstanding prior to the Effective Time, and there shall be no further registration of transfers on the records of Parent of shares of Company Capital Stock that were outstanding prior to the Effective Time. If, after the Effective Time, Company Certificates are presented to Parent for any reason, they shall be canceled and paid or exchanged as provided in this Article I.

     (i) Taking of Necessary Action; Further Action. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of the Company and Merger Sub, the officers and directors of the Company and Parent are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action.

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     1.9 Cash Elections.

     (a) Each holder of Company Series A Preferred Stock may, with respect to all or any portion of such holder’s shares other than Dissenting Shares, make an unconditional election (a “Cash Election”) on or prior to the Election Date (as defined below) to receive cash for such holder’s shares of Company Series A Preferred Stock rather than Parent Common Stock, on the basis hereinafter set forth.

     (b) Parent shall prepare a form of election (the “Form of Election”) which will be mailed to all holders of Company Series A Preferred Stock not more than 60 business days nor less than 20 business days prior to the Election Date. The Form of Election may be included with the proxy solicited from Company Stockholders in connection with the approval by the Company Stockholders of the Merger. The Form of Election shall be used by each holder of Company Series A Preferred Stock who wishes to elect to receive cash for any or all shares of Company Series A Preferred Stock held by such holder, subject to the proration provisions of Section 1.10. Any holder’s election to receive cash shall have been properly made only if the Payment Agent shall have received at its designated office, by 5:00 p.m., Palo Alto time, on the business day specified by the Company in the Form of Election (the “Election Date”), which Election Date shall be one business day prior to the date on which Parent reasonably believes the Effective Time will occur, a Form of Election properly completed and signed. Any Form of Election may be revoked by the stockholder submitting it only by written notice received by the Payment Agent prior to 5:00 p.m., Palo Alto time, on the Election Date.

     (c) The determination of the Payment Agent (or the mutual determination of Company and Parent in the event that the Payment Agent declines to make any such determination) shall be binding as to whether or not Cash Elections have been properly made or revoked pursuant to this Section 1.9 with respect to shares of Company Series A Preferred Stock and as to when Cash Elections and revocations were received by it. If the Payment Agent reasonably determines in good faith that any Cash Election was not properly made with respect to shares of Company Series A Preferred Stock, such shares shall be treated by the Payment Agent as shares which were not Electing Company Shares at the Effective Time, and such shares shall be converted in the Merger into the right to receive the stock consideration pursuant to Section 1.6(c). The Payment Agent (or Company and Parent by mutual agreement in the event that the Payment Agent declines to make any such determination) shall also make all computations as to the allocation and the proration contemplated by Section 1.10, and any such computation shall be conclusive and binding on the holders of Company Series A Preferred Stock. The Payment Agent may, with the mutual written agreement of Company and Parent, make such rules as are consistent with this Section 1.9 for the implementation of the Cash Elections provided for herein and as shall be necessary or desirable to fully effect such Cash Elections.

     1.10 Proration.

     (a) Proration Requirements. Notwithstanding anything in this Agreement to the contrary, the aggregate amount of cash that shall be paid in exchange for outstanding shares of Company Series A Preferred Stock (the “Maximum Cash Amount”) shall be equal to fifty percent of the dollar value of the sum of all cash and Parent Common Stock (the value of each share of Parent Common Stock for such purpose shall be the closing price of a share of Parent Common Stock as reported by the New York Stock Exchange on the day before the Effective Time) to be issued in exchange for outstanding shares of Company Common Stock and Company Series A Preferred Stock (but not Company Options or Company Warrants).

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     (b) Procedures for Reducing Number of Electing Company Shares. If the aggregate number of Electing Company Shares (the “Electing Number”) would cause the amount of cash to be paid in the Merger to exceed the Maximum Cash Amount, then the Electing Number shall be reduced on a pro rata basis among the holders of Electing Company Shares as follows: (i) a proration factor (the “Cash Proration Factor”) shall be determined by dividing the (x) the Maximum Cash Amount by (y) the amount of cash that would have been paid with respect to all Electing Company Shares; and (ii) the number of Electing Company Shares covered by each Cash Election shall be reduced by multiplying the number of Electing Company Shares covered by such Cash Election by the Cash Proration Factor. The shares of Company Series A Preferred Stock that shall no longer constitute Electing Company Shares by virtue of Section 1.10(b)(ii) shall be converted into the right to receive shares of Parent Common Stock (on a consistent basis among stockholders who made Cash Elections, pro rata to the respective numbers of shares of Company Series A Preferred Stock as to which they made such Cash Elections) as if such shares were not Electing Company Shares, in accordance with the terms of Section 1.6(c).

     1.11 Tax Consequences. It is intended by the parties that the Merger shall constitute a “plan of reorganization” within the meaning of Section 368(a) of the Code. The parties shall not take a position on any tax return inconsistent with this Section.

ARTICLE II

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     Subject to such exceptions as are disclosed in the disclosure schedules (referencing the applicable section of this Article II, or as otherwise are clearly applicable to any other section by reference only to such disclosure) delivered herewith by the Company to Parent (the “Company Schedules”), the Company represents and warrants to Parent that the following are true and correct as of the date hereof and shall be true and correct as of the Effective Time except where expressly stated to be true as of a specified date prior to the Effective Time, in which case it shall, as of the Effective Time, continue to be true as of such specified date:

     2.1 Organization of the Company.  The Company is duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization. The Company has the power to own its properties and to carry on its business as now being conducted and as proposed to be conducted. The Company is duly qualified to do business and in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a Material Adverse Effect on the Company. The Company has delivered a true and correct copy of its charter documents as amended to date, to Parent.

     2.2 Company Capital Structure.

     (a) As of the date hereof, the authorized capital stock of the Company consists of 25,000,000 shares of authorized Company Common Stock, of which 3,350,000 shares are issued and outstanding, and 5,525,000 shares of authorized Company Preferred Stock, all of which are designated Company Series A Preferred Stock, 5,500,000 of which are issued and outstanding The Company Capital Stock is held of record by the persons, with the addresses and in the amounts set forth on Schedule 2.2(a). All outstanding shares of Company Capital Stock are duly authorized, validly issued, fully paid and non-assessable and were not issued in violation of and are not subject to preemptive rights created by statute, the Certificate of Incorporation or Bylaws of the Company or any agreement to which the Company is a party or by which it is bound. All preferential rights of Company Preferred Stock in connection with or arising from the Merger are as set forth in the Certificate of Incorporation of the Company or as provided under Delaware Law.

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     (b) As of the date of this Agreement, the Company has reserved 2,590,000 shares of Company Common Stock for issuance to employees and consultants pursuant to the Option Plan, of which 1,345,000 shares are subject to outstanding, unexercised options and 805,000 shares remain available for future grant. The Company has reserved no shares of Company Common Stock for issuance upon exercise of outstanding Company Options except those granted under the Option Plan. Schedule 2.2(b) sets forth for each outstanding Company Option and Company Warrant, the name of the holder, the domicile address of the holder, the number of shares of Company Common Stock or Company Series A Preferred Stock subject to such option or warrant, the exercise price of such option or warrant and the vesting schedule for such option, including the extent such option is vested as of the date hereof and whether and to what extent the exercisability or vesting of such option would be accelerated by reason of the transactions contemplated by this Agreement. Except for Company Options or Company Warrants described in Schedule 2.2(b) and the conversion rights of the Company Series A Preferred Stock, there are no options, warrants, calls, rights, commitments or agreements of any character, written or oral, to which the Company is a party or by which it is bound obligating the Company to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of Company Common Stock or obligating the Company to grant, extend, accelerate the vesting of, change the price of, otherwise amend or enter into any such option, warrant, call, right, commitment or agreement. The holders of Company Options have received or will be given, or shall have properly waived, any required notice prior to the Effective Time, and all such notice requirements will be terminated at or prior to the Effective Time. At the Effective Time, Parent will be the record and sole beneficial owner of all Company Capital Stock and rights to acquire or receive such Company Capital Stock. Except as contemplated by this Agreement or set forth on Schedule 2.2(b), there are no rights agreements, voting trusts, proxies or other agreement or understanding to which the Company is a party or by which it is bound or of which it is aware with respect to any Company Capital Stock or Company Convertible Security. All of the Company’s outstanding securities were issued in compliance with the registration or qualification requirements of all applicable state and federal securities laws.

     2.3 Subsidiaries.  The Company does not have and has never had any subsidiaries and does not otherwise own and has never otherwise owned any shares of capital stock or any interest in, or control, directly or indirectly, any other corporation, partnership, association, joint venture or other business entity.

     2.4 Authority.  Subject to the requisite approval of the Merger and this Agreement by the stockholders of the Company pursuant to Delaware Law and the Company’s Certificate of Incorporation, the Company has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The vote required of the Company Stockholders to approve the Merger and this Agreement is a majority of the Company Series A Preferred Stock and the Company Common Stock, each voting as a separate class, and a majority of the outstanding Company Common Stock and Series A Preferred Stock, voting together as a single class. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company, subject to such Company Stockholder approval. The Company’s Board of Directors has unanimously approved the Merger and this Agreement. This Agreement has been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery by the parties other than the Company, constitutes the valid and binding obligation of the Company, enforceable in accordance with its terms. The execution and delivery of this Agreement by the Company do not, and, subject to the receipt of such Company Stockholder approval, as of the Effective Time, the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (any such event, a “Conflict”) (i) any provision of the Certificate of Incorporation or Bylaws of the Company, (ii) any mortgage, indenture, lease, Contract or other agreement or instrument, or (iii) any Permit, Order or Law applicable to the Company or its properties or assets. No consent, waiver, approval, Order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other federal, state, county, local or foreign governmental authority, instrumentality, agency or commission (“Governmental Entity”) or any third party (so as not to trigger any Conflict) is required by or with respect to the Company in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of the Certificate of Merger with the Delaware Secretary of State, (ii) consents, waivers, approvals, authorizations, registrations, declarations and filings as may be required under federal and state securities laws, (iii) consents, waivers, authorizations, filings, approvals and registrations which are set forth on Schedule 2.4 and (iv) such other consents waivers, approvals, Orders, authorizations, registrations, declarations or filings that if not obtained or made could not reasonably be expected to prevent or materially delay the consummation of the transactions contemplated by this Agreement.

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     2.5 Company Financial Statements.  Schedule 2.5 sets forth the Company’s unaudited balance sheet as of December 31, 2000 (the “Balance Sheet”) and the related statements of operations, cash flows and stockholders’ equity for the fiscal year then ended, and the Company’s unaudited balance sheet as of October 31, 2001 (the “Reference Balance Sheet”) and the related statements of operations, cash flows and stockholders’ equity for the ten months then ended (collectively, the “Company Financials”). The Company Financials have been prepared in accordance with generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods presented except that the Company Financials do not contain footnotes required by GAAP and are subject to normal year-end adjustments which will not be material individually or in the aggregate. The Company Financials fairly present the financial position of the Company as of their dates and results of operations for the periods then ended.

     2.6 No Undisclosed Liabilities.  The Company does not have any liability, indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of any type, whether accrued, absolute, contingent, matured, unmatured or otherwise, whether or not required to be reflected in financial statements in accordance with GAAP (“Liabilities”), except Liabilities that: (i) are reflected in the Reference Balance Sheet, or (ii) have arisen since the date of the Balance Sheet in the ordinary course of the Company’s business consistent with past practices and are not material either individually or in the aggregate.

     2.7 No Changes. Except as set forth on Schedule 2.7, since the date of the Reference Balance Sheet, there has not been, occurred or arisen any:

     (a) transaction by the Company except in the ordinary course of business as conducted on the date of the Reference Balance Sheet and consistent with past practice;

     (b) amendments or changes to the Certificate of Incorporation or Bylaws of the Company;

     (c) capital expenditure or commitment by the Company exceeding $5,000 individually or $20,000 in the aggregate;

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     (d) destruction of, material damage to or loss of any material assets, business or customer of the Company (whether or not covered by insurance);

     (e) labor trouble or claim of wrongful discharge or other unlawful labor practice or action;

     (f) event or condition that has had or would be reasonably expected to have a Material Adverse Effect on the Company;

     (g) change in accounting methods or practices (including any change in depreciation, amortization or revenue recognition policies or rates) by the Company;

     (h) revaluation by the Company of any of its assets;

     (i) declaration, setting aside or payment of a dividend or other distribution with respect to the capital stock of the Company, or any direct or indirect redemption, purchase or other acquisition by the Company of any of its capital stock;

     (j) increase in the salary or other compensation (including any equity-based compensation, bonus or payment) payable or to become payable to any of its officers or directors, or the declaration, payment or commitment or obligation of any kind for the payment of a bonus or other additional salary or compensation to any such person except in the ordinary course of business consistent with past practice or as otherwise contemplated by this Agreement;

     (k) sale, lease, license or other disposition of any of the assets or properties of the Company, except in the ordinary course of business consistent with past practice;

     (l) amendment or termination (other than pursuant to its terms) of any Contract described in Schedule 2.12(a) or Schedule 2.11(n) to which the Company is a party or by which it is bound;

     (m) loan by the Company to any person or entity, incurring by the Company of any indebtedness, guaranteeing by the Company of any indebtedness, issuance or sale of any debt securities of the Company or guaranteeing of any debt securities of others, except for advances to employees for travel and business expenses in the ordinary course of business consistent with past practice;

     (n) waiver or release of any material right or claim of the Company, including any write-off or other compromise of any account receivable of the Company;

     (o) issuance or sale by the Company of any of its shares of capital stock, or securities exchangeable, convertible or exercisable therefor, or of any other of its securities except for the grant of Company Options as set forth on Schedule 2.2(b) and the issuance of Company Common Stock upon the exercise of Company Options;

     (p) change in the pricing or royalties set or charged by the Company to its customers or licensees or in pricing or royalties set or charged by persons who have licensed Intellectual Property (as defined in Section 2.11) to the Company other than in the ordinary course of business consistent with past practice;

     (q) termination, voluntary or involuntary, of any key employees;

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     (r) reduction in projected purchase requirements by any material Company customer or any notice of intent to reduce such purchases by any such customer; or

     (s) negotiation or agreement by the Company or any officer or employees thereof to do any of the things described in the preceding clauses (a) through (r) (other than negotiations with Parent and its representatives regarding the transactions contemplated by this Agreement).

     2.8 Tax and Other Returns and Reports.

     (a) Definition of Taxes. For the purposes of this Agreement, “Tax” or, collectively, “Taxes,” means any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts and any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor entity.

     (b) Tax Returns and Audits. Except as set forth on Schedule 2.8:

     (i) The Company has prepared and filed, or will prepare and file, when due (including any extensions of such due date) all required federal, state, local and foreign returns, estimates, information statements and reports (“Returns”) relating to any and all Taxes concerning or attributable to the Company or its operations with respect to any taxable period ending on or before the Closing, and, except to the extent a reserve for Taxes has been established by the Company on the Company Financials, such Returns are, or will be, true and correct and have been, or will be, completed in accordance with applicable Law.

     (ii) The Company: (A) has paid or will pay in a timely manner all Taxes it is required to pay on or before the Closing, except to the extent a reserve for Taxes has been established by the Company on the Company Financials, and (B) has withheld or will withhold with respect to its employees all federal and state income taxes, FICA, FUTA and other Taxes required to be withheld and has paid or will pay all such withheld taxes to the proper governmental agencies.

     (iii) There is no Tax deficiency outstanding or assessed against the Company, nor has a Tax deficiency been proposed in writing against the Company, nor has the Company executed any waiver of any statute of limitations on or extending the period for the assessment or collection of any Tax.

     (iv) No audit or other examination of any Return of the Company is currently in progress, nor has the Company been notified of any request for such an audit or other examination. The Company is not aware of any factual basis upon which an audit or examination could be based that would result in a material assessment.

     (v) The Company does not have any liabilities for unpaid federal, state, local and foreign Taxes which have not been accrued or reserved against on the Company Financials, whether asserted or unasserted, contingent or otherwise.

     (vi) The Company has provided to Parent copies of all federal and state income and all state sales and use Tax Returns filed by the Company for all periods since the date of the Company’s incorporation.

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     (vii) There are (and as of immediately following the Effective Time there will be) no liens, pledges, charges, claims, security interests or other encumbrances of any sort (“Liens”) on the assets of the Company relating to or attributable to Taxes except for Liens for Taxes not yet due and payable.

     (viii) Except to the extent a reserve for Taxes has been established by the Company on the Company Financials, the Company has no knowledge of any basis for the assertion of any claim relating or attributable to Taxes which, if adversely determined, would result in any Lien on the assets of the Company.

     (ix) None of the Company’s assets are treated as “tax-exempt use property” within the meaning of Section 168(h) of the Code.

     (x) As of the Effective Time, there will not be any Contract, plan or arrangement, including but not limited to the provisions of this Agreement, covering any employee or former employee of the Company that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to Section 280G or 162 of the Code.

     (xi) The Company has not filed any consent agreement under Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Code) owned by the Company. The Company has not agreed, nor is it required, to make any adjustment under Section 481 of the Code by reason of a change in accounting method.

     (xii) The Company has never been a member of an affiliated group (as defined in Section 1504 of the Code) filing a consolidated federal income Tax Return (or member of any analogous group under applicable Law) other than a group of which the Company was the common parent. The Company is not a party to a tax sharing or allocation agreement nor does the Company owe any amount under any such agreement. The Company does not have any actual or potential liability for Taxes under U.S. Treasury Regulation Section 1.1502-6 (or any similar provision of Law) or as a successor or transferee.

     (xiii) The Company is not, and has not been at any time, a “United States real property holding corporation” within the meaning of Section 897(c)(2) of the Code.

     (xiv) The Company has not constituted either a “Distributing Corporation” or a “Controlled Corporation” in a distribution of stock qualifying for a tax-free treatment under Section 355 of the Code (X) in the two years prior to the date of this Agreement or (Y) in a distribution that could otherwise constitute part of a “Plan” or “Series of Related Transactions” (within the meaning of Section 355(e) of the Code) in conjunction with the Merger.

     (xv) No power of attorney relating to tax matters has been granted with respect to the Company.

     2.9 Restrictions on Business Activities.  There is no Contract or Order to which the Company is a party or by which it is bound which has or reasonably would be expected to have the effect of prohibiting or impairing any material business practice of the Company, any acquisition of property (tangible or intangible) by the Company or the conduct of the Company’s business. Without limiting the foregoing, the Company has not entered into any agreement under which the Company is restricted from selling, licensing or otherwise distributing any of its products to any class of customers, in any geographic area, during any period of time or in any segment of the market.

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     2.10 Title to Properties; Absence of Liens and Encumbrances.

     (a) The Company owns no real property nor has it ever owned any real property. Schedule 2.10(a) sets forth a list of all real property currently, or at any time in the past, leased or otherwise occupied by the Company (the “Company Facilities”), the name of the lessor, the date of the lease or other occupancy agreement and each amendment or other modification thereto (the “Company Leases”) and the aggregate annual rental and other fees payable under any such Company Leases currently in effect. All such current Company Leases are in full force and effect and are valid and enforceable in accordance with their respective terms. The Company is not in breach of or in default under any of such current Company Leases and, to the Company’s knowledge, no event or condition has occurred which could (with the giving of notice or the passage of time or both) constitute a breach of or default by the Company under any such current Company Lease. To the Company’s knowledge, no other party to any such current Company Lease is in breach of or in default under any such current Company Leases and no event or condition has occurred which could (with the giving of notice or the passage of time or both) constitute a breach of or default by the Company under any such current Company Lease. No party other than the Company has the right to occupy any Company Facility.

     (b) The Company has good and valid title to, or, in the case of leased properties and assets, valid leasehold interests in, all of its tangible properties and assets, real, personal and mixed, used or held for use in its business as currently conducted or currently proposed by the Company to be conducted, free and clear of any Liens, except (i) as reflected in the Company Financials or in Schedule 2.10(b), (ii) Liens for Taxes not yet due and payable, and (iii) such imperfections of title and encumbrances, if any, which are not material in character, amount or extent, and which do not materially detract from the value, or materially interfere with the present use, of the property subject thereto or affected thereby.

     2.11 Intellectual Property. For the purposes of this Agreement, the following terms have the following definitions:

     “Intellectual Property” shall mean any or all of the following and all rights in, arising out of, or associated therewith: (i) all United States and foreign patents and applications therefor and all reissues, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof; (ii) all inventions (whether patentable or not), invention disclosures, improvements, trade secrets, proprietary information, know how, technology, technical data and customer lists, and all documentation relating to any of the foregoing; (iii) all copyrights, copyright registrations and applications therefor and all other rights corresponding thereto throughout the world; (iv) all semiconductor and semiconductor circuit designs; (v) all rights to all mask works, mask work registrations and applications therefor; (vi) all industrial designs and any registrations and applications therefor throughout the world; (vii) all trade names, logos, common law trademarks and service marks; trademark and service mark registrations and applications therefor and all goodwill associated therewith throughout the world; (viii) all databases and data collections and all rights therein throughout the world; (ix) all computer software including all source code, object code, firmware, development tools, files, records and data, all media on which any of the foregoing is recorded, all Web addresses, sites and domain names; (x) any similar, corresponding or equivalent rights to any of the foregoing; and (xi) all documentation related to any of the foregoing.

     “Company Intellectual Property” shall mean any Intellectual Property that is owned by or exclusively licensed to the Company.

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     “Registered Intellectual Property” shall mean all United States, international and foreign: (i) patents, patent applications (including provisional applications); (ii) registered trademarks, applications to register trademarks, intent-to-use applications, or other registrations or applications related to trademarks; (iii) registered copyrights and applications for copyright registration; (iv) mask work registrations and applications to register mask works; and (v) any other Company Intellectual Property that is the subject of an application, certificate, filing, registration or other document issued by, filed with, or recorded by, any state, government or other public legal authority.

     “Company Registered Intellectual Property” shall mean all of the Registered Intellectual Property owned by, or filed in the name of, the Company.

     (a) Schedule 2.11(a) sets forth a complete and accurate list of all Company Registered Intellectual Property and specifies, where applicable, the jurisdictions in which each such item of Company Registered Intellectual Property has been issued or registered and lists any Proceedings before any court, tribunal (including the United States Patent and Trademark Office or equivalent authority anywhere in the world) related to any of Company Registered Intellectual Property.

     (b) Schedule 2.11(b) sets forth a complete and accurate list (by name and version number) of all products or service offerings (including related software) of the Company (“Company Products”) that have been distributed or provided to customers or channel partners since the Company’s inception or which the Company currently intends to distribute or provide to customers or channel partners in the future, including any products or service offerings currently under development.

     (c) The Company has no knowledge of any facts or circumstances that would render any of the Company Registered Intellectual Property invalid or unenforceable or that would adversely affect any pending application for any Company Registered Intellectual Property. Without limiting the foregoing, the Company knows of no information, materials, facts, or circumstances, including any information or fact that would constitute prior art, that would render any of Company Registered Intellectual Property invalid or unenforceable, or would adversely effect any pending application for any Company Registered Intellectual Property and the Company has not misrepresented, or failed to disclose, and has no knowledge of any misrepresentation or failure by a third party to disclose, any fact or circumstances in any application for any Company Registered Intellectual Property that would constitute fraud or a misrepresentation with respect to such application or that would otherwise adversely affect the validity or enforceability of any Company Registered Intellectual Property.

     (d) No Company Intellectual Property or Company Product is subject to any Proceeding, Order, Contract, Permit or stipulation restricting in any manner the use, transfer, or licensing thereof by the Company or which may adversely affect the validity, use or enforceability of such Company Intellectual Property or Company Product.

     (e) Each material item of Company Registered Intellectual Property is valid and subsisting, all necessary registration, maintenance and renewal fees currently due in connection with such Company Registered Intellectual Property have been made and all necessary documents, recordations and certificates in connection with such Company Registered Intellectual Property have been filed with the relevant patent, copyright, trademark or other authorities in the United States or foreign jurisdictions, as the case may be, for the purposes of perfecting and maintaining such Company Registered Intellectual Property.

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     (f) Schedule 2.11(f) sets forth a complete and accurate list of all actions that are required to be taken by the Company within ninety (90) days after the date hereof with respect to any of the Company Registered Intellectual Property.

     (g) The Company owns and has good and exclusive title to, or has a valid license to use, each material item of Company Intellectual Property free and clear of any Lien (excluding non-exclusive licenses and related restrictions granted in the ordinary course). Without limiting the foregoing: (i) the Company is the exclusive owner of all trademarks and trade names (other than trademarks and trade names licensed to the Company) used in connection with the operation or conduct of the business of the Company, including the sale, distribution or provision to customers or channel partners of any Company Products by the Company; and (ii) the Company owns exclusively, and has good title to, or has a valid license to use, all copyrighted works that are Company Products or which the Company otherwise purports to own or license.

     (h) Except set forth in Schedule 2.11(h), all Company Intellectual Property (other than off-the-shelf commercially available end-user software) will be fully transferable, alienable or licensable by the Surviving Corporation without restriction and without payment of any kind to any third party.

     (i) To the extent that any technology, software or material Intellectual Property has been developed or created independently or jointly by a third party for the Company or is incorporated into any of the Company Products, the Company has a written agreement with such third party with respect thereto and the Company thereby either (i) has obtained ownership of, and is the exclusive owner of, or (ii) has obtained a perpetual, non-terminable license (sufficient for the conduct of its business as currently conducted and as currently proposed to be conducted) to all such third party’s Intellectual Property in such work, material or invention by operation of Law or by valid assignment, to the fullest extent it is legally possible to do so.

     (j) With the exception of “shrink-wrap” or similar widely-available commercial end-user licenses, all Company Intellectual Property used in or necessary to the conduct of the Company’s business as presently conducted or currently contemplated to be conducted by the Company was written and created solely by either (i) employees of the Company acting within the scope of their employment or (ii) by third parties who have validly and irrevocably assigned all of their rights, including Intellectual Property rights therein, to the Company, and no third party owns or has any rights to any of Company Intellectual Property.

     (k) All employees of the Company have entered into valid and binding written agreements with the Company sufficient to vest title in the Company of all Intellectual Property created by such employee in the scope of his or her employment with the Company.

     (l) No person who has licensed any Intellectual Property to the Company has ownership rights or license rights to improvements made by the Company in such Intellectual Property.

     (m) The Company has not transferred ownership of, or granted any exclusive license with respect to, any Intellectual Property that is or was material Company Intellectual Property, to any third party, or permitted the Company’s rights in such material Company Intellectual Property to lapse or enter the public domain.

     (n) Schedule 2.11(n) lists all material Contracts to which the Company is a party: (i) with respect to Company Intellectual Property licensed or transferred to any third party (other than end-user licenses in the ordinary course); or (ii) pursuant to which a third party has licensed or transferred any Intellectual Property to the Company other than pursuant to industry-standard commercially available binary licenses.

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     (o) All Contracts relating to either (i) Company Intellectual Property or (ii) Intellectual Property of a third party licensed to the Company are in full force and effect. The consummation of the transactions contemplated by this Agreement will neither violate nor result in the breach, modification, cancellation, termination or suspension of such Contracts. The Company is in material compliance with, and has not materially breached any term of any such Contracts and, to the knowledge of the Company, all other parties to such Contracts are in compliance with, and have not materially breached any term of, such Contracts. Following the Closing Date, the Surviving Corporation will be permitted to exercise all of the Company’s rights under such Contracts to the same extent the Company would have been able to had the transactions contemplated by this Agreement not occurred and without the payment of any additional amounts or consideration other than ongoing fees, royalties or payments which the Company would otherwise be required to pay.

     (p) Except as set forth on Schedule 2.11(p), neither this Agreement nor the transactions contemplated by this Agreement, including the assignment to Parent or Merger Sub by operation of Law or otherwise of any Contract to which the Company is a party, will result in: (i) either Parent’s or the Merger Sub’s granting to any third party any right to or with respect to any material Intellectual Property right owned by, or licensed to, either of them; (ii) either Parent or Merger Sub being bound by, or subject to, any non-compete or other material restriction on the operation or scope of their respective businesses; or (iii) either Parent or Merger Sub being obligated to pay any royalties or other material amounts to any third party in excess of those payable by Parent or Merger Sub, respectively, prior to the Closing other than royalties that the Company would have otherwise been required to pay had the transactions contemplated by this Agreement not occurred.

     (q) The operation of the business of the Company as it currently is conducted or, to the knowledge of the Company, as it is currently contemplated to be conducted by the Company, including but not limited to the design, development, use, import, branding, advertising, promotion, marketing, manufacture and sale of Company Products (including products, technology or services currently under development) does not and will not, when conducted by Parent and/or the Surviving Corporation in substantially the same manner following the Closing, infringe or misappropriate any Intellectual Property right of any person, violate any right of any person (including any right to privacy or publicity) or constitute unfair competition or trade practices under the Laws of any jurisdiction, and the Company has not received notice from any person claiming that such operation or any act, product, technology or service (including products, technology or services currently under development) of the Company infringes or misappropriates any Intellectual Property right of any person or constitutes unfair competition or trade practices under the Laws of any jurisdiction (nor does the Company have knowledge of any basis therefor).

     (r) Except as set forth on Schedule 2.11(r), Company Intellectual Property constitutes all the Intellectual Property used in and/or necessary to the conduct of the business of the Company as it currently is conducted, and, to the knowledge of the Company, as it is currently planned or contemplated to be conducted by the Company, including, without limitation, the design, development, manufacture, use, import and sale of products, technology and performance of services (including products, technology or services currently under development).

     (s) To the knowledge of the Company, no person has or is infringing or misappropriating any Company Intellectual Property.

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     (t) The Company has taken reasonable steps for companies of similar size and in similar businesses to protect the Company’s rights in the Company’s material confidential information and trade secrets or any trade secrets or confidential information of third parties provided to Company under an obligation of confidentiality, and, without limiting the foregoing, the Company has and enforces a policy requiring each employee and contractor to execute a proprietary information/confidentiality agreement or consulting agreement with a proprietary information/confidentiality provision substantially in the forms provided to Parent and all current and former employees and contractors of Company have executed such an agreement, except where the failure to do any of the foregoing is not reasonably expected to be material to the Company.

     2.12 Agreements, Contracts and Commitments.

     (a) Except as set forth on Schedule 2.12(a), the Company does not have, is not a party to nor is it bound by:

     (i) any collective bargaining agreements,

     (ii) any agreements or arrangements that contain any severance pay or post-employment liabilities or obligations,

     (iii) any bonus, deferred compensation, pension, profit sharing or retirement plans, or any other employee benefit plans or arrangements,

     (iv) any employment or consulting Contract with an employee or individual consultant or salesperson or any consulting or sales Contract under which any firm or other organization provides services to the Company,

     (v) any agreement or plan, including, without limitation, any stock option plan, stock appreciation rights plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement (or upon the occurrence of any subsequent events) or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement (or upon the occurrence of any subsequent events),

     (vi) any fidelity or surety bond or completion bond,

     (vii) any lease of personal property having a value individually in excess of $50,000,

     (viii) any agreement of indemnification or guaranty,

     (ix) any Contract containing any covenant limiting the freedom of the Company to engage in any line of business or to compete with any person,

     (x) any Contract relating to capital expenditures and involving future payments in excess of $20,000,

     (xi) any Contract relating to the disposition or acquisition of assets or any interest in any business enterprise outside the ordinary course of the Company’s business,

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     (xii) any mortgages, indentures, loans or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money or extension of credit, including guaranties referred to in clause (viii) hereof in each case in excess of $10,000,

     (xiii) any purchase order or Contract for the purchase of raw materials or finished products involving $5,000 or more per order to be incurred by the Company following the date of this Agreement,

     (xiv) any construction Contract,

     (xv) any distribution, joint marketing or development agreement,

     (xvi) any agreement pursuant to which the Company has granted or may grant in the future, to any party, a source-code license or option or other right to use or acquire source-code, or

     (xvii) any other Contract that involves $20,000 or more or is not cancelable without penalty within thirty (30) days.

     (b) The Company has not breached, violated or defaulted under, or received notice that it has breached, violated or defaulted under, any of the material terms or conditions of any Contract required to be set forth on Schedule 2.12(a)or Schedule 2.11(n)(any such Contract, a “Scheduled Contract”). Each Scheduled Contract is in full force and effect (except for those Scheduled Contracts that have terminated or expired by their terms) and, except as otherwise disclosed in Schedule 2.12(b), to the Company’s knowledge, no party obligated to the Company pursuant to a Scheduled Contract is in default thereunder.

     2.13 Interested Party Transactions.  No officer or director of the Company (nor, to the knowledge of the Company, any ancestor, sibling, descendant or spouse of any of such persons, or any trust, partnership or corporation in which any of such persons has or has had an interest), has or has had, directly or indirectly, (i) an economic interest in any entity which furnished or sold, or furnishes or sells, services or products that the Company furnishes or sells, or proposes to furnish or sell, (ii) an economic interest in any entity that purchases from, or sells or furnishes to, the Company any goods or services or (iii) a beneficial interest in any Scheduled Contract; provided, that ownership of no more than one percent (1%) of the outstanding voting stock of a publicly traded corporation shall not be deemed an “economic interest in any entity” for purposes of this Section 2.13.

     2.14 Compliance with Laws.  The Company has complied in all material respects with, is not in material violation of, and has not received any notices (oral or written) of violation with respect to, any Law. To the Company’s knowledge, no event has occurred which will give rise to any violation of any Law.

     2.15 Litigation.  Except as set forth on Schedule 2.15, there is no Proceeding of any nature pending or, to the Company’s knowledge, threatened against the Company, its properties or any of its officers or directors, in their respective capacities as such and the Company is not aware of any basis for the foregoing. Schedule 2.15 sets forth, with respect to any pending or, to the knowledge of the Company, threatened Proceeding, the forum, the parties thereto, the subject matter thereof and the amount of damages claimed or other remedy requested. The Company has received no notice that any Governmental Entity has at any time challenged or questioned the legal right of the Company to manufacture, offer or sell any of its products in the present manner or style thereof.

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     2.16 Insurance.  With respect to the insurance policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of the Company, a listing of which is contained in Schedule 2.16, there is no claim by the Company pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. The Company has not made any claims under such insurance policies and fidelity bonds in the past two years. All premiums due and payable under all such policies and bonds have been paid and the Company is otherwise in material compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage). The Company has no knowledge of any threatened termination of, or material premium increase with respect to, any of such policies.

     2.17 Minute Books.  The minute books of the Company made available to counsel for Parent are the only minute books of the Company and contain an accurate and complete description, in all material respects, of all meetings of directors (including committees thereof) and stockholders or actions by written consent since the time of incorporation of the Company.

     2.18 Environmental Matters.

     (a) Hazardous Material. The Company has not operated any underground storage tanks, and has no knowledge of the existence during the period of its ownership, operation, occupation or leasehold, of any underground storage tank at any property that the Company has at any time owned, operated, occupied or leased. The Company has not, at any time, disposed of, discharged , emitted or released any amount of any substance that has been designated by any applicable federal, state or local Law to be a “hazardous substance,” “hazardous waste,” “hazardous material” or “toxic substance” or words of similar import, under any Environmental Laws, including, without limitation, PCBs, asbestos, oil and petroleum products, urea-formaldehyde (“Hazardous Materials”) so as to contaminate any soil, groundwater, surface water, air or building materials of any property in a manner which would legally require remediation, investigation or similar response activity. No Hazardous Materials are present as a result of the actions or omissions of the Company, or, as a result of any actions of any third party or otherwise, in, on or under any property that the Company has at any time owned, operated, occupied or leased, including the land and the improvements, ground water and surface water thereof so as to give rise to any material liability or clean-up obligation of the Company under any Environmental Laws. “Environmental Laws” means any and all Laws relating in any way to pollution , the environment or the protection of human health and worker safety, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Resource Conservation and Recovery Act of 1976, as amended; the Federal Water Pollution Control Act, as amended; the Clean Air Act, as amended, the Toxic Substance Control Act, as amended, and the Occupational Safety and Health Act of 1970, as amended.

     (b) Hazardous Materials Activities. The Company has not transported, stored, used, manufactured, disposed of, released or exposed its employees or others to Hazardous Materials in violation of any Environmental Laws in effect on or before the Effective Time, nor has the Company disposed of, transported, sold, or manufactured any product containing a Hazardous Material (any or all of the foregoing being collectively referred to as “Hazardous Materials Activities”) in violation of any Environmental Laws in effect prior to or as of the date hereof to prohibit, regulate or control Hazardous Materials or any Hazardous Material Activity.

     (c) Permits. The Company currently holds, and is (and has been) in compliance in all material respects with, all environmental approvals, permits, licenses, clearances and consents (the “Environmental Permits”) and any conditions placed thereon necessary for the conduct of the Company’s Hazardous Material Activities and other businesses of the Company as such activities and businesses are currently being conducted.

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     (d) Environmental Liabilities. No Proceeding or amendment procedure is pending or, to the Company’s knowledge, threatened concerning any Environmental Permit, Hazardous Material or any Hazardous Materials Activity of the Company. The Company is not aware of any fact or circumstance that is reasonably likely to involve the Company in any environmental litigation or impose upon the Company any environmental liability

     (e) Environmental Records.The Company has delivered to Parent or made available for inspection by Parent and its agents, representatives and employees all records in the Company’s possession concerning the Hazardous Materials Activities of the Company relating to its business and all environmental audits and environmental assessments of any Company Facility currently or previously owned, leased, occupied, or controlled by the Company, conducted at the request of, or otherwise in the possession of the Company.

     2.19 Brokers’ and Finders’ Fees; Third Party Expenses. Except as set forth on Schedule 2.19, the Company has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders’ fees or agents’ commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. Schedule 2.19 sets forth the principal terms and conditions of any agreement, written or oral, with respect to such fees. Schedule 2.19 also sets forth the Company’s current good faith and reasonable estimate of all Third Party Expenses (as defined in Section 5.5) expected to be incurred by the Company in connection with the negotiation and effectuation of the terms and conditions of this Agreement and the transactions contemplated hereby.

     2.20 Employee Matters and Benefit Plans.

     (a) Definitions. For purposes of this Agreement, the following terms shall have the meanings set forth below:

     (i) “Affiliate” shall mean any other person or entity under common control with the Company within the meaning of Section 414(b), (c), (m) or (o) of the Code and the regulations issued thereunder;

     (ii) “Company Employee Plan” shall mean any plan, program, policy, practice, Contract, agreement or other arrangement providing for compensation, severance, termination pay, deferred compensation, performance awards, stock or stock-related awards, fringe benefits or other employee benefits or remuneration of any kind, whether written or unwritten or otherwise, funded or unfunded, including without limitation, each “employee benefit plan,” within the meaning of Section 3(3) of ERISA which is or has been maintained, contributed to, or required to be contributed to, by the Company or any Affiliate for the benefit of any Employee, or with respect to which the Company or any Affiliate has or may have any liability or obligation;

     (iii) “COBRA” shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended;

     (iv) “DOL” shall mean the United States Department of Labor;

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     (v) “Employee” shall mean any current, former or retired employee, consultant or director of the Company or any Affiliate;

     (vi) “Employee Agreement” shall mean each management, employment, severance, consulting, relocation, repatriation, expatriation, visas, work permit or other agreement, Contract or understanding between the Company or any Affiliate and any Employee;

     (vii) “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended;

     (viii) “FMLA” shall mean the Family Medical Leave Act of 1993, as amended;

     (ix) “International Employee Plan” shall mean each Company Employee Plan that has been adopted or maintained by the Company or any Affiliate, whether informally or formally, or with respect to which the Company or any Affiliate will or may have any liability, for the benefit of Employees who perform services outside the United States;

     (x) “IRS” shall mean the Internal Revenue Service;

     (xi) “Multiemployer Plan” shall mean any “Pension Plan” (as defined below) which is a “multiemployer plan,” as defined in Section 3(37) of ERISA; and

     (xii) “Pension Plan” shall mean each Company Employee Plan which is an “employee pension benefit plan,” within the meaning of Section 3(2) of ERISA.

     (b) Schedule. Schedule 2.20(b) contains an accurate and complete list of each Company Employee Plan, International Employee Plan, and each Employee Agreement. The Company does not have any plan or commitment to establish any new Company Employee Plan, International Employee Plan, or Employee Agreement, to modify any Company Employee Plan or Employee Agreement (except to the extent required by Law or to conform any such Company Employee Plan or Employee Agreement to the requirements of any applicable Law, in each case as previously disclosed to Parent in writing, or as required by this Agreement), or to adopt or enter into any Company Employee Plan, International Employee Plan, or Employee Agreement.

     (c) Documents. The Company has provided to Parent: correct and complete copies of (i) all documents embodying each Company Employee Plan, International Employee Plan, and each Employee Agreement including (without limitation) all amendments thereto and all related trust documents; (ii) the most recent annual actuarial valuations, if any, prepared for each Company Employee Plan; (iii) the three (3) most recent annual reports (Form Series 5500 and all schedules and financial statements attached thereto), if any, filed under ERISA or the Code in connection with each Company Employee Plan; (iv) if the Company Employee Plan is funded, the most recent annual and periodic accounting of Company Employee Plan assets; (v) the most recent summary plan description together with the summary(ies) of material modifications thereto, if any, required under ERISA with respect to each Company Employee Plan; (vi) all IRS determination, opinion, notification and advisory letters, and all material applications and correspondence to or from the IRS or the DOL with respect to any such application or letter; (vii) all written agreements and Contract relating to each Company Employee Plan, including, but not limited to, administrative service agreements, group annuity Contracts and group insurance Contracts; (viii) all communications material to any Employee or Employees relating to any Company Employee Plan and any proposed Company Employee Plans, in each case, relating to any amendments, terminations, establishments, increases or decreases in benefits, acceleration of payments or vesting schedules or other events which would result in any material liability to the Company; (ix) all correspondence to or from any governmental agency relating to any Company Employee Plan; (x) all COBRA forms and related notices (or such forms and notices as required under comparable Law); (xi) all policies pertaining to fiduciary liability insurance covering the fiduciaries for each Company Employee Plan; (xii) the three (3) most recent plan years discrimination tests for each Company Employee Plan; and (xiii) all registration statements, annual reports (Form 11-K and all attachments thereto) and prospectuses prepared in connection with each Company Employee Plan.

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     (d) Employee Plan Compliance. Except as set forth on Schedule 2.20(d), (i) the Company has performed in all material respects all obligations required to be performed by it under, is not in default or violation of, and has no knowledge of any default or violation by any other party to each Company Employee Plan, and each Company Employee Plan has been established and maintained in all material respects in accordance with its terms and in compliance with all applicable Laws and Orders, including but not limited to ERISA or the Code; (ii) each Company Employee Plan intended to qualify under Section 401(a) of the Code and each trust intended to qualify under Section 501(a) of the Code has either received a favorable determination, opinion, notification or advisory letter from the IRS with respect to each such Company Employee Plan as to its qualified status under the Code, including all amendments to the Code effected by the Tax Reform Act of 1986 and subsequent legislation, or has remaining a period of time under applicable Treasury regulations or IRS pronouncements in which to apply for such a letter and make any amendments necessary to obtain a favorable determination as to the qualified status of each such Company Employee Plan; (iii) no “prohibited transaction,” within the meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA, and not otherwise exempt under Section 4975 of the Code or Section 408 of ERISA (or any administrative class exemption issued thereunder), has occurred with respect to any Company Employee Plan; (iv) there are no actions, suits or claims pending, or, to the knowledge of the Company, threatened or reasonably anticipated (other than routine claims for benefits) against any Company Employee Plan or against the assets of any Company Employee Plan; (v) each Company Employee Plan (other than any stock option plan) can be amended, terminated or otherwise discontinued after the Effective Time, without material liability to the Parent, the Company or any of its Affiliates (other than ordinary administration expenses); (vi) there are no audits, inquiries or Proceeding pending or, to the knowledge of the Company or any Affiliates, threatened by the IRS or DOL with respect to any Company Employee Plan; and (vii) neither the Company nor any Affiliate is subject to any penalty or tax with respect to any Company Employee Plan under Section 502(i) of ERISA or Sections 4975 through 4980 of the Code.

     (e) Pension Plan. Neither the Company nor any Affiliate has ever maintained, established, sponsored, participated in, or contributed to, any Pension Plan which is subject to Title IV of ERISA or Section 412 of the Code.

     (f) Collectively Bargained Multiemployer and Multiple Employer Plans. At no time has the Company or any Affiliate contributed to or been obligated to contribute to any Multiemployer Plan. Neither the Company, nor any Affiliate has at any time ever maintained, established, sponsored, participated in, or contributed to any multiple employer plan, or any plan described in Section 413 of the Code.

     (g) No Post-Employment Obligations. No Company Employee Plan provides, or reflects or represents any liability to provide retiree health to any person for any reason, except as may be required by COBRA or other applicable statute, and the Company has never represented, promised or contracted (whether in oral or written form) to any Employee (either individually or to Employees as a group) or any other person that such Employee(s) or other person would be provided with retiree health, except to the extent required by statute.

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     (h) Health Care Compliance. The Company has complied in all material respects with, and has no unsatisfied obligations under, the applicable health care continuation and notice requirements of COBRA, the requirements of FMLA, the requirements of the Health Insurance Portability and Accountability Act of 1996, the requirements of the Women’s Health and Cancer Rights Act, the requirements of the Newborns’ and Mothers’ Health Protection Act of 1996, and any amendment to each such Act, and any similar provisions of state law applicable to its Employees.

     (i) Effect of Transaction.

     (i) The execution of this Agreement and the consummation of the transactions contemplated hereby will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Company Employee Plan, Employee Agreement, trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Employee.

     (ii) No payment, compensation or benefit which will or may be made by Parent, the Company or its Affiliates with respect to any Employee or any other “disqualified individual” will be characterized as a “parachute payment,” within the meaning of Section 280G(b)(2) of the Code.

     (j) Employment Matters. The Company: (i) is in compliance with all applicable Laws respecting employment, employment practices, terms and conditions of employment and wages and hours, in each case, with respect to Employees; (ii) has withheld and reported all amounts required by Law or by agreement to be withheld and reported with respect to wages, salaries and other payments to Employees; (iii) is not liable for any arrears of wages or any taxes or any penalty for failure to comply with any of the foregoing; and (iv) is not liable for any payment to any trust or other fund governed by or maintained by or on behalf of any governmental authority, with respect to unemployment compensation benefits, social security or other benefits or obligations for Employees (other than routine payments to be made in the normal course of business and consistent with past practice). There are no pending, reasonably anticipated or threatened claims or actions against the Company under any worker’s compensation policy or long-term disability policy. Each person who is acting or has acted as a consultant to the Company is acting or has acted as an “independent contractor” and could not, based on the facts and circumstances of his or her consultancy, reasonably be deemed to be or have been “employed” with the Company. Disclosure Schedule 2.20(j) sets forth all outstanding offers of employment whether written or oral, made to any executive or managerial level employee or prospective executive or managerial level employee, which offer has not been rejected by the offeree.

     (k) Labor. No work stoppage or labor strike against the Company is pending or threatened or reasonably anticipated. The Company does not know of any activities or Proceedings of any labor union to organize any Employees. There are no actions, suits, claims, labor disputes or grievances pending, or, to the knowledge of the Company, threatened or reasonably anticipated relating to any labor, safety or discrimination matters involving any Employee, including, without limitation, charges of unfair labor practices or discrimination complaints, which, if adversely determined, would, individually or in the aggregate, result in liability to the Company. Neither the Company nor any of its Subsidiaries has engaged in any unfair labor practices within the meaning of the National Labor Relations Act. The Company is not presently, nor has it been in the past, a party to, or bound by, any collective bargaining agreement or union Contract with respect to Employees and no collective bargaining agreement is being negotiated by the Company.

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     (l) International Employee Plan. Each International Employee Plan has been established, maintained and administered in compliance with its terms and conditions and with the requirements prescribed by any and all Laws that are applicable to such International Employee Plan. Furthermore, no International Employee Plan has unfunded liabilities, that as of the Effective Time, will not be offset by insurance or fully accrued. Except as required by Law, no condition exists that would prevent the Company or Parent from terminating or amending any International Employee Plan at any time for any reason without liability to the Company or its Affiliates (other than ordinary administration expenses or routine claims for benefits).

     (m) Retention Matters. The Company has no knowledge that any Company employee, or group of Company employees, intends to terminate employment with the Company.

     2.21 Tax Matters.  Neither the Company nor any of its affiliates has taken or agreed to take any action that would reasonably be expected to cause the Merger to fail to qualify as a reorganization under Section 368(a) of the Code. The Company is not aware of any agreement, plan or other circumstance that would prevent the Merger from qualifying as a reorganization under Section 368(a) of the Code.

     2.22 Representations and Materials Complete.  None of the representations or warranties made by the Company in this Agreement (including the Company Schedules), nor any statement made in any schedule or certificate furnished by the Company pursuant to this Agreement, contains or will contain at the Effective Time any untrue statement of a material fact or omits or will omit at the Effective Time to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. The Company has delivered to Parent or its counsel true and complete copies of each document that has been requested by Parent or its counsel.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

     Parent and Merger Sub represent and warrant, jointly and severally, to the Company that the following are true and correct as of the date hereof and shall be true and correct as of the Effective Time except where expressly stated to be true as of a specified date prior to the Effective Time, in which case it shall, as of the Effective Time, continue to be true as of such specified date:

     3.1 Organization, Standing and Power.  Parent is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware. Merger Sub is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware. Each of Parent and Merger Sub has the corporate power to own its properties and to carry on its business as now being conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified would have a Material Adverse Effect on Parent. Parent has made available to the Company a true and correct copy of the Certificate of Incorporation and Bylaws of Parent and the Certificate of Incorporation and Bylaws of Merger Sub, each as amended to date.

     3.2 Authority.  Each of Parent and Merger Sub has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and Merger Sub. No vote of the holders of capital stock of Parent is necessary to approve this Agreement, the Merger and the transactions contemplated hereby. This Agreement has been duly executed and delivered by Parent and Merger Sub and, assuming the due authorization, execution and delivery by parties other than Parent and Merger Sub, constitutes the valid and binding obligations of Parent and Merger Sub, enforceable against Parent and Merger Sub in accordance with its terms. The shares of Parent Common Stock to be issued pursuant to the Merger, when issued in accordance with the terms and conditions of this Agreement, will be duly authorized, validly issued, fully paid, and non-assessable, and issued in compliance with Federal and all applicable state securities laws. The execution and delivery of this Agreement by Parent and Merger Sub do not, and, as of the Effective Time, the consummation of the transactions contemplated hereby will not constitute a Conflict with (i) any provision of the Certificate of Incorporation or Bylaws of Parent or the Certificate of Incorporation or Bylaws of Merger Sub, (ii) any material mortgage, indenture, lease, Contract or other agreement or instrument to which Parent or Merger Sub is a party, or (iii) any Permit, Order or Law applicable to Parent or Merger Sub or their respective properties or assets, except in the case of clauses (ii) and (iii) for any such Conflicts that would not, individually or in the aggregate, have a material adverse effect on Parent’s ability to consummate the transactions contemplated by this Agreement. No material consent, waiver, approval, Order or authorization of, or registration, declaration or filing with, any Governmental Entity or any third party (so as not to trigger any Conflict) is required by or with respect to Parent or Merger Sub in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of the Certificate of Merger with the Delaware Secretary of State, and (ii) such approvals, registrations, declarations or filings necessary under applicable federal and state securities laws.

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     3.3 Litigation.  There is no Proceeding pending or threatened against Parent, which in any manner challenges or seeks to prevent, enjoin, alter or materially delay any of the transactions contemplated by this Agreement.

     3.4 SEC Documents; Parent Financial Statements.  As of their respective filing dates, all reports filed since January 1, 2001 by Parent with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (collectively referred to as the “SEC Documents”) complied in all material respects with the requirements of the Exchange Act, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading, except to the extent corrected by a document subsequently filed with the SEC. The financial statements of Parent, including the notes thereto, included in the SEC Documents (the “Parent Financial Statements”) comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by Form 10-Q of the SEC) and present fairly the consolidated financial position of Parent at the dates thereof and the consolidated results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal audit adjustments).

     3.5 Tax Matters.  Neither Parent nor Merger Sub nor any of their affiliates has taken or agreed to take any action that would reasonably be expected to cause the Merger to fail to qualify as a reorganization under Section 368(a) of the Code. Parent is not aware of any agreement, plan or other circumstance that would prevent the Merger from qualifying as a reorganization under Section 368(a) of the Code.

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ARTICLE IV

CONDUCT PRIOR TO THE EFFECTIVE TIME

     4.1 Conduct of Business of the Company.  During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, the Company agrees (except to the extent that Parent shall otherwise consent in writing) to carry on its business in the usual, regular and ordinary course consistent with past practice, to pay its debts and Taxes when due, to pay or perform other obligations when due, and, to the extent consistent with such business, to use all commercially reasonable efforts consistent with past practice and policies to preserve intact its present business organization, keep available the services of its present officers and key employees and preserve their relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with it, all with the goal of preserving unimpaired its goodwill and ongoing businesses at the Effective Time. The Company shall promptly notify Parent of any event or occurrence or emergency not in the ordinary course of its business, and any material event involving the Company. Except as expressly contemplated by this Agreement, the Company shall not, without the prior written consent of Parent:

     (a) Enter into any commitment, activity or transaction not in the ordinary course of business consistent with past practice;

     (b) Transfer to any person or entity any rights to any Company Intellectual Property or enter into any agreement with respect to Company Intellectual Property with any person or entity, in each case, other than pursuant to non-exclusive end-user licenses in the ordinary course of business consistent with past practice;

     (c) Terminate any employees other than for cause or encourage any employees to resign from the Company;

     (d) Amend, terminate or otherwise modify, or violate the terms of, any of the agreements set forth or described in the Company Schedules;

     (e) Commence or settle any Proceeding, other than a Proceeding to collect debts in the ordinary course of business consistent with past practice;

     (f) Declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of capital stock of the Company, or repurchase, redeem or otherwise acquire, directly or indirectly, any shares of its capital stock (or options, warrants or other rights exercisable therefor) except for (i) repurchases of the Company Capital Stock upon the termination of service of any service providers of the Company in accordance with the standard terms set forth in the agreements governing such repurchases, all of which agreements have been provided or made available to Parent, and (ii) issuances of Company Common Stock upon exercise or conversion of Company Convertible Securities outstanding on the date hereof;

     (g) Issue, sell, grant, contract to issue, sell or grant, or authorize the issuance, sale or grant of any shares of Company Capital Stock or securities convertible into, or exercisable or exchangeable for, shares of Company Capital Stock, or any securities, warrants, options or rights to purchase any of the foregoing, except for (i) issuances of Company Capital Stock upon the exercise or conversion of Company Convertible Securities outstanding as of the date hereof and (ii) options to newly-hired, non-officer employees of the Company in amounts not to exceed 1,000 shares in any individual case or 5,000 shares in the aggregate provided that such options will be granted at fair market value pursuant to the Company’s 2000 Option Plan, have standard four-year vesting schedules and not have any terms providing for the acceleration of vesting.

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     (h) Cause or permit any amendments to its Certificate of Incorporation or Bylaws except as contemplated by this Agreement;

     (i) Acquire or agree to acquire by merging or consolidating with, or by purchasing any assets or equity securities of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to the business of the Company other than in the ordinary course consistent with past practice;

     (j) Sell, lease, license or otherwise transfer any of the assets or properties of the Company which are not Company Intellectual Property other than in the ordinary course of business consistent with past practice, including but not limited to the performance of obligations under contractual arrangements listed on the Company Schedules existing as of the date hereof, or create any security interest in such assets or properties;

     (k) Grant any loan to any person or entity, incur any indebtedness or guarantee any indebtedness, issue or sell any debt securities, guarantee any debt securities of others, purchase any debt securities of others or amend the terms of any outstanding agreements related to borrowed money in each case in excess of $5,000, except for advances to employees for travel and business expenses in the ordinary course of business consistent with past practice;

     (l) Grant (whether in cash, stock, equity securities or property) or make any commitment or obligation for the grant of any severance or termination pay (i) to any director or officer or (ii) to any employee, consultant or advisor or increase (whether in cash, stock, equity securities or property) the salary or other compensation payable or to become payable by the Company to any of its officers, directors, employees, consultants or advisors, or declare, pay or make any commitment or obligation of any kind for the payment (whether in cash, stock, equity securities or property) by the Company of a bonus or other additional salary or compensation to any such person, or adopt or amend any Company Employee Plan or enter into any Employee Agreement (as defined in Section 2.20);

     (m) Revalue any of its assets, including without limitation writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business and consistent with past practice;

     (n) Take any action to accelerate the vesting schedule of any of the outstanding Company Options or Company Capital Stock other than as required by existing agreements outstanding on the date hereof and disclosed in the Disclosure Schedule or as otherwise contemplated by this Agreement;

     (o) Pay, discharge or satisfy, in an amount in excess of $5,000 individually or $20,000 in the aggregate any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business consistent with past practice of liabilities reflected or reserved against in the Company Financial Statements;

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     (p) Make or change any material election in respect of Taxes, adopt or change any accounting method in respect of Taxes, enter into any closing agreement, settle any claim or assessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes;

     (q) Enter into any strategic alliance, joint development or joint marketing arrangement or agreement;

     (r) Fail to pay or otherwise satisfy its monetary obligations as they become due, except such as are being contested in good faith and with respect to which adequate reserves are established and reflected in the Financial Statements;

     (s) Waive any rights with a value in excess of $5,000 individually or $20,000 in the aggregate;

     (t) Cancel, materially amend or renew any insurance policy other than in the ordinary course of business consistent with past practice or allow any such insurance policy to expire;

     (u) Alter its interest in any corporation, association, joint venture, partnership or business entity in which the Company directly or indirectly holds any interest on the date hereof; or

     (v) Take, or agree in writing or otherwise to take, any of the actions described in Sections 4.1(a) through (u) above, or any other action that would prevent the Company from performing or cause the Company not to perform its covenants hereunder or cause any of the representations and warranties of the Company in this Agreement to be inaccurate as of the Effective Time.

     4.2 No Solicitation.  Until the earlier of the Effective Time and the date of termination of this Agreement pursuant to the provisions of Section 8.1 hereof, the Company will not (nor will the Company direct, authorize, knowingly encourage or permit any of the Company’s officers, directors, stockholders, agents, employees, representatives or affiliates to) directly or indirectly, take any of the following actions with any party other than Parent and Merger Sub or its designees: (a) solicit, initiate, seek, knowingly encourage or support any inquiry, proposal or offer from, or participate in any negotiations with, any corporation, partnership, person or other entity or group (other than discussions with Parent) relating to any possible acquisition of the Company or any Company Subsidiary (whether by way of merger, purchase of capital stock, purchase of assets or otherwise), any material portion of the assets of the Company or any Company Subsidiary or any equity interest in the Company or any of Company Subsidiary, (b) provide information with respect to the Company or any Company Subsidiary to any person, other than Parent and Merger Sub or their designees, relating to, or otherwise cooperate with, facilitate or knowingly encourage any effort or attempt by any such person with regard to, any possible acquisition of the Company or any Company Subsidiary (whether by way of merger, purchase of capital stock, purchase of assets or otherwise), any material portion of the assets of the Company or any Company Subsidiary or any equity interest in the Company or any Company Subsidiary, (c) enter into an agreement with any person, other than Parent and Merger Sub or their designees, providing for the acquisition of the Company or any Company Subsidiary (whether by way of merger, purchase of capital stock, purchase of assets or otherwise), any material portion of the capital stock or assets or any equity interest in the Company or any Company Subsidiary, or (d) make or authorize any statement, recommendation or solicitation in support of any possible acquisition of the Company or any Company Subsidiary (whether by way of merger, purchase of capital stock, purchase of assets or otherwise), any material portion of the assets or any equity interest in the Company or any Company Subsidiary by any person, other than by Parent and Merger Sub, or their designees. The Company shall immediately cease and cause to be terminated any such contacts or negotiations with third parties relating to any such transaction or proposed transaction. In addition to the foregoing, if the Company receives prior to the Effective Time or the termination of this Agreement any offer or proposal relating to any of the above, the Company shall promptly, and in any event within one (1) business day, notify Parent thereof, including information as to the identity of the offeror or the party making any such offer or proposal and the material terms of such offer or proposal, as the case may be, and such other information related thereto as Parent may reasonably request. Except as contemplated by this Agreement, disclosure by the Company or the Company’s officers, directors, stockholders, agents, employees, representatives or affiliates of the terms hereof (other than the prohibition of this Section 4.2) shall be deemed to be a violation of this Section 4.2.

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ARTICLE V

ADDITIONAL AGREEMENTS

     5.1 Fairness Hearing; Stockholder Approval.

     (a) As soon as reasonably practicable following the execution of this Agreement, Parent and the Company shall prepare the necessary documents and Parent shall apply to obtain a permit (a “California Permit”) from the California Commissioner of Corporations (after a hearing before such Commissioner) pursuant to Section 25121 of the California Corporate Securities Law of 1968, so that the issuance of Parent Common Stock in the Merger shall be exempt from registration under Section 3(a)(10) of the Securities Act. The Company and Parent will respond to any comments from the California Department of Corporations and use their reasonable best efforts to have the California Permit granted as soon as practicable after such filing. As promptly as practical after the date of this Agreement, Parent and the Company shall prepare and make such filings as are required under, and agree to take all actions necessary to comply with, applicable federal and state securities laws relating to the transactions contemplated by this Agreement.

     (b) As promptly as practicable after the receipt of a California Permit, the Company shall submit this Agreement and the transactions contemplated hereby to its stockholders for approval and adoption as provided by Delaware Law and its Certificate of Incorporation and Bylaws. The Company shall use its reasonable best efforts, prior to the Closing, to solicit and obtain the consent of its stockholders to (i) approve the Merger and this Agreement, (ii) terminate the Investors’ Rights Agreement and Voting Agreement each dated as of December 15, 2000 between the Company and certain of its stockholders (the “Rights Agreements”) and (iii) approve the amendment of the Company’s Certificate of Incorporation to remove the liquidation preferences and participation rights of the Company Preferred Stock, and to enable the Closing to occur as promptly as practicable and, in any event, within 45 days following the date hereof. Each of Parent and the Company agrees to provide promptly to the other such information concerning its business, financial statements and affairs as may be required or appropriate in the disclosure materials submitted to the Company Stockholders and to cause its representatives to cooperate with the other’s representatives in the preparation of the disclosure materials. The disclosure materials submitted to the Company Stockholders shall be subject to the review and approval (not to be unreasonably withheld) by Parent (and include information regarding the Company, the terms of the Merger and this Agreement and the recommendation of the Board of Directors of the Company in favor of the Merger and this Agreement, and the transactions contemplated hereby. None of the information contained in any documents mailed or delivered to the Company Stockholders in connection with soliciting their consent to this Agreement or the Merger will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information supplied by Parent for inclusion or incorporation by reference in any of said documents. None of the information supplied by Parent that is contained in any documents mailed or delivered to the Company Stockholders in connection with soliciting their consent to this Agreement and the Merger will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. Notwithstanding the foregoing, Parent makes no representation or warranty with respect to any information supplied by the Company for inclusion or incorporation by reference in any of said documents The Company will promptly advise Parent, and Parent will promptly advise the Company, in writing if at any time prior to the Effective Time either the Company or Parent shall obtain knowledge of any facts that might make it necessary or appropriate to amend or supplement the disclosure materials in order to make the statements contained or incorporated by reference therein not misleading or to comply with applicable Law.

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     (c) Alternative Exemption. If without the fault of the Company, a Permit is denied or no Permit for the issuance of the Parent Common Stock is issued to Parent on or before January 15, 2002, then Parent shall use its commercially reasonable efforts to issue the shares of Parent Common Stock pursuant to the “private placement” exemption under the Securities Act and shall file a resale registration statement with the SEC registering such shares no later than thirty (30) days after the Closing. The obligations of Parent and the Company with respect to the provision and accuracy of information to be provided in connection with the disclosure materials, as stated herein, shall apply equally to information required with respect to the resale registration statement and inquiries of the SEC with respect thereto.

     5.2 Stock Certificate Legends.  All certificates representing Parent Common Stock deliverable to any Company Stockholder pursuant to this Agreement and in connection with the Merger and any certificates subsequently issued with respect thereto or in substitution therefor (including any shares issued or issuable in respect of any such shares upon any stock split stock dividend, recapitalization, or similar event) shall bear any legends as are required pursuant to any federal, state, local or foreign Law governing such securities, including Rule 145 under the Securities Act.

     5.3 Access to Information.  The Company shall afford Parent and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Effective Time to (a) all of its properties, books, Contracts, commitments and records, and (b) all other information concerning its business, properties and personnel (subject to restrictions imposed by applicable Law) as Parent may reasonably request. No information or knowledge obtained in any investigation pursuant to this Section 5.3 shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Merger.

     5.4 Confidentiality.  Each of the parties hereto hereby agrees to and reaffirms the terms and provisions of that certain Mutual Nondisclosure Agreement by and between Parent and the Company dated as of October 30, 2001.

     5.5 Expenses.  Whether or not the Merger is consummated, all fees and expenses incurred in connection with the Merger including, without limitation, all legal, accounting, financial advisory, consulting and all other fees and expenses of third parties (“Third Party Expenses”) incurred by a party in connection with the negotiation and effectuation of the terms and conditions of this Agreement and the transactions contemplated hereby, shall, subject to Section 7.2(a), be the obligation of the respective party incurring such fees and expenses.

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     5.6 Public Disclosure.  Unless otherwise required by Law (including, without limitation, federal and state securities laws) or, as to Parent, by the rules and regulations of the New York Stock Exchange, prior to the Effective Time, no disclosure (whether or not in response to an inquiry) of the subject matter or existence of this Agreement shall be made by any party hereto (other than disclosures to the Company Stockholders pursuant to Section 5.1 or as otherwise necessary to comply with the terms of this Agreement, including, without limitation, in connection with seeking required consents) unless approved by Parent and the Company prior to release, provided that such approval shall not be unreasonably withheld.

     5.7 Consents.  The Company shall promptly apply for or otherwise seek and use its reasonable best efforts to obtain all consents and approvals required to be obtained by it for the consummation of the Merger including all consents, waivers and approvals under any of the Scheduled Contracts or with any Governmental Entity as may be required in connection with the Merger (all of such consents, waivers and approvals are set forth on the Company Schedules) so as to preserve all rights of and benefits to the Company thereunder.

     5.8 FIRPTA Compliance.  On or prior to the Closing Date, the Company shall deliver to Parent a properly executed statement in a form reasonably acceptable to Parent for purposes of satisfying Parent’s obligations under Treasury Regulation Section 1.1445-2(c)(3).

     5.9 Reasonable Best Efforts.  Subject to the terms and conditions provided in this Agreement, each of the parties hereto shall cooperate with the other parties hereto and use its reasonable best efforts to ensure that its representations and warranties remain true and correct in all material respects prior to and as of the Effective Time, and to take promptly, or cause to be taken, all actions, and to do promptly, or cause to be done, all things necessary, proper or advisable under applicable Laws and regulations to consummate and make effective the transactions contemplated hereby, to obtain all necessary waivers, consents and approvals, to effect all necessary registrations and filings, and to remove any injunctions or other impediments or delays, legal or otherwise, in order to consummate and make effective the transactions contemplated by this Agreement for the purpose of securing to the parties hereto the benefits contemplated by this Agreement; provided that Parent shall not be required to agree to any divestiture by Parent or the Company or any of Parent’s Subsidiaries or affiliates of shares of capital stock or of any business, assets or property of Parent or its Subsidiaries or affiliates or the Company or its affiliates, or the imposition of any material limitation on the ability of any of them to conduct their businesses or to own or exercise control of such assets, properties and stock.

     5.10 Notification of Certain Matters.  The Company shall give prompt written notice to Parent, and Parent shall give prompt written notice to the Company, of (i) the occurrence or non-occurrence of any event, the occurrence or non-occurrence of which has caused or is likely to cause any representation or warranty of the Company and Parent, respectively, contained in this Agreement or any document contemplated by this Agreement to be untrue or inaccurate in any material respect at or prior to the Effective Time and (ii) any failure of the Company or Parent, as the case may be, to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it hereunder or thereunder; provided, however, that the delivery of any notice pursuant to this Section 5.10 shall not (a) limit or otherwise affect any remedies available to the party receiving such notice or (b) limit or otherwise affect any remedies or defenses available to the party giving such notice.

     5.11 Employee Matters.  Each person who shall continue as an employee of the Company after the Effective Time shall, after the Effective Time, be an at-will employee of Parent or Surviving Corporation to the extent permitted by applicable Law (a “Continuing Employee”); provided that each employee employed in the United States shall provide proof of the right to work in the United States. Each Continuing Employee shall be eligible to receive salary and benefits (such as medical benefits, bonuses, 401(k) and stock options) maintained for employees of Parent on substantially the same terms and conditions in the aggregate as provided to a similarly situated employee of Parent. Except with respect to paid time off benefits, each Continuing Employee shall be given credit, for the purpose of any service requirements for participation eligibility, or vesting, for his or her period of continuous coverage under comparable Company benefit plans prior to the Effective Time to the extent permitted by Parent’s benefit programs and consistent with Parent’s employee benefit plans. No Continuing Employee, or any or his or her eligible dependents, who, at the Effective Time, are participating in a Company group health plan shall be excluded from Parent’s group plan, or limited in coverage thereunder, by reason of any waiting period restriction or preexisting condition limitation to the extent permitted by Parent’s employee benefit plans and the insurance carrier or provider. Parent shall use its reasonable best efforts to ensure that each Continuing Employee shall receive credit under the Parent group health plan in which the Continuing Employee participates (for the purpose of any annual out-of-pocket limitations) for any deductibles or co-payments that such individual has paid or has been charged with under any Company group health plan during the calendar year in effect at the Effective Time to the extent consistent with the applicable policies of the insurance carrier or other provider.

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     5.12 NYSE.  Parent agrees to authorize for listing on the New York Stock Exchange the shares of Parent Common Stock issuable in exchange for Company Capital Stock and upon the exercise of all Company Options assumed by Parent in accordance with the terms of this Agreement, upon official notice of issuance.

     5.13 Form S-8.  As soon as practicable, but in no event more than thirty (30) days after the Effective Time, Parent agrees to file a registration statement on Form S-8 registering the shares of Parent Common Stock issuable upon the exercise of all Company Options assumed by Parent hereunder.

     5.14 Additional Documents and Further Assurances.  Each party hereto, at the request of the other party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby.

     5.15 Termination of 401(k) Plan.

     (a) Effective as of the day immediately preceding the Effective Time, the Company shall terminate any and all group severance, separation or salary continuation plans, programs or arrangements and any and all plans intended to include a Code Section 401(k) arrangement (unless Parent provides written notice to the Company that such 401(k) plans shall not be terminated) (collectively, “Company Employee Plans”). Unless Parent provides such written notice to the Company no later than three (3) business days prior to the Effective Time, the Company shall provide Parent with evidence that such Company Employee Plan(s) have been terminated (effective as of the day immediately preceding the Effective Time) pursuant to resolutions of the Company’s Board of Directors. The form and substance of such resolutions shall be subject to prior review and approval of Parent. The Company also shall take such other actions in furtherance of terminating such Company Employee Plan(s) as Parent may reasonably require.

     (b) In the event that the distribution or rollover of assets from the trust of the 401(k) plan that is terminated is reasonably anticipated to trigger liquidation charges, surrender charges or other fees to be imposed upon the account of any participant or beneficiary of such terminated plan or upon the Company or plan sponsor, then the Company shall take such actions as are necessary to reasonably estimate the amount of such charges and/or fees and provide such estimate in writing to Parent at least fifteen (15) days prior to the Effective Time.

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     5.16 Noncompetition Agreements.  Schedule 5.16 sets forth those persons whom Parent deems to be key employees of the Company (each such person being referred to herein as a “Key Employee”). The Company shall deliver or cause to be delivered to Parent, prior to the Closing, from each of the Key Employees, an executed Noncompetition Agreement in the form attached hereto as Exhibit B.

     5.17 New Options.  Promptly after the Closing Date, Parent shall grant options to purchase shares of Parent Common Stock (the “New Options”) in accordance with the terms of and to the persons listed on Schedule 5.17.

     5.18 Employee Bonus. Parent shall pay bonuses (the “Employee Bonuses”) to the persons set forth on Schedule 5.18 in the amounts and subject to the terms and conditions set forth on Schedule 5.18.

     5.19 Indemnification of Directors and Others.  For a period of six (6) years from and after the Closing Date, Parent and the Surviving Corporation shall fulfill and honor in all respects the indemnification obligations to the past and present directors and officers of the Company pursuant to applicable Law, its Certificate of Incorporation, Bylaws or indemnification agreements existing on the date hereof. This Section 5.19 shall survive the consummation of the Merger, and is intended to benefit the Company, the Surviving Corporation and each indemnified party, shall be binding on all successors and assigns of Parent and the Surviving Corporation, and shall be enforceable by the indemnified parties.

     5.20 Plan of Reorganization.

     (a) From and after the date of this Agreement and until the Effective Time, each party hereto shall use its reasonable best efforts to cause the Merger to qualify, and will not knowingly take any action, cause any action to be taken, fail to take any action or cause any action to fail to be taken which action or failure to act could prevent the Merger from qualifying as a reorganization under the provisions of Section 368(a) of the Code. Following the Effective Time, neither the Surviving Corporation, Parent nor any of their affiliates shall knowingly take any action, cause any action to be taken, fail to take any action or cause any action to fail to be taken, which action or failure to act could reasonably be expected to cause the Merger to fail to qualify as a reorganization under Section 368(a) of the Code.

     (b) As of the date hereof, the Company does not know of any reason (i) why it would not be able to deliver to Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP (“Gunderson Dettmer”) (counsel to the Company) or Wilson Sonsini (counsel to Parent), at the date of the legal opinions referred to below, representation letters substantially in compliance with IRS published advance ruling guidelines, with customary exceptions and modifications thereto, to enable such firms to deliver the legal opinions contemplated by Sections 6.2(e) and 6.3(o), and the Company hereby agrees to deliver such representation letters effective as of the date of such opinions, or (ii) why Gunderson Dettmer or Wilson Sonsini would not be able to deliver the opinions required by Sections 6.2(e) and 6.3(o). As of the date hereof, Parent and Merger Sub do not know of any reason why they would not be able to deliver to Wilson Sonsini or Gunderson Dettmer, at the date of the legal opinions referred to below, representation letters substantially in compliance with the IRS published advance ruling guidelines, with customary exceptions and modifications thereto, to enable such firms to deliver the legal opinions contemplated by Sections 6.2(e) and 6.3(o), and Parent hereby agrees to deliver such representation letters effective as of the date of such opinions, or (ii) why Wilson Sonsini or Gunderson Dettmer would not be able to deliver the opinions required by Sections 6.2(e) and 6.3(o).

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     5.21 Company Warrant. The Company shall use its reasonable best efforts to cause the holder of the Company Warrant to exercise the Company Warrant prior to the Effective Time.

ARTICLE VI

CONDITIONS TO THE MERGER

     6.1 Conditions to Obligations of Each Party to Effect the Merger.  The respective obligations of each party to this Agreement to effect the Merger shall be subject to the satisfaction or waiver at or prior to the Closing of the following conditions:

     (a) Stockholder Approval. This Agreement and the Merger shall have been approved and adopted by the stockholders of the Company by the requisite vote under applicable Delaware Law and the Company’s Certificate of Incorporation.

     (b) California Permit. The California Commissioner of Corporations shall have approved the terms and conditions of the transactions contemplated by this Agreement, and the fairness of such terms and conditions, following a hearing for such purpose, and shall have issued a California Permit or Parent shall be eligible to rely on the “private placement” exemption under the Securities Act as provided in section 5.1(c).

     (c) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other Order issued by any court of competent jurisdiction or other legal or regulatory restraint or prohibition preventing or delaying or rendering illegal the consummation of the Merger or any of the transactions contemplated hereby shall be in effect.

     6.2 Additional Conditions to Obligations of the Company.  The obligations of the Company to consummate the Merger and the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions, any of which may be waived, in writing, exclusively by the Company:

     (a) Representations and Warranties. The representations and warranties of Parent and Merger Sub contained in this Agreement shall have been true and correct when made and true and correct on and as of the Closing Date except for (i) representations and warranties which address matters only as of a particular date (which shall remain true and correct as of such date), and (ii) inaccuracies which, individually or in the aggregate, would not materially and adversely affect the ability of the parties to consummate the transactions contemplated by this Agreement (assuming that each representation or warranty qualified by materiality or material adverse effect was not so qualified). The Company shall have received a certificate with respect to each of the foregoing signed on behalf of Parent by a duly authorized officer of Parent.

     (b) Agreements and Covenants. Parent and Merger Sub shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them on or prior to the Effective Time, and the Company shall have received a certificate to such effect signed by a duly authorized officer of Parent.

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     (c) Legal Opinion. The Company shall have received a legal opinion from legal counsel to Parent, in the form attached hereto as Exhibit C.

     (d) Listing of Parent Common Stock. The shares of Parent Common Stock issuable in connection with the Merger shall have been approved for listing (subject to notice of issuance) on the New York Stock Exchange.

     (e) Tax Opinion of Company’s Counsel. The Company shall have received the opinion of Gunderson Dettmer, counsel to the Company, based upon representations of Parent, Merger Sub and the Company and normal assumptions, to the effect that the Merger will be treated for federal income tax purposes as a reorganization qualifying under the provisions of Section 368(a) of the Code, which opinion shall not have been withdrawn or modified in any material respect. The issuance of such opinion shall be conditioned on receipt by Gunderson Dettmer of representation letters from each of Parent, Merger Sub and the Company as contemplated in Section 5.20 of this Agreement. Each such representation letter shall be dated on or before the date of such opinion and shall not have been withdrawn or modified in any material respect as of the Effective Time. Notwithstanding the foregoing, if the Company’s counsel does not render such opinion, this condition shall nevertheless be deemed satisfied with respect to the Company if Wilson Sonsini, counsel to Parent, renders such opinion to the Company;

     6.3 Additional Conditions to the Obligations of Parent and Merger Sub.

      The obligations of Parent and Merger Sub to consummate the Merger and the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions, any of which may be waived, in writing, exclusively by Parent:

     (a) Representations and Warranties. The representations and warranties of the Company contained in this Agreement and all other documents delivered pursuant hereto to which it is a party shall have been true and correct when made and true and correct on and as of the Closing Date except for (i) representations and warranties which address matters only as of a particular date (which shall remain true and correct as of such date), and (ii) inaccuracies which, individually or in the aggregate, would not have a Material Adverse Effect on the Company or materially and adversely affect the ability of the parties to consummate the transactions contemplated by this Agreement (assuming that each representation or warranty qualified by materiality or material adverse effect was not so qualified). In addition, the representations and warranties contained in sections 2.1, 2.2, 2.4, 2.8 and 2.11 shall each be true and correct in all material respects when made and on and as of the Closing Date except for representations and warranties which address matters only as of a particular date (which shall remain true and correct in all material respects as of such date) (assuming that each representation or warranty qualified by materiality or material adverse effect was not so qualified). Parent shall have received a certificate with respect to each of the foregoing signed on behalf of the Company by the chief executive officer and chief financial officer of the Company.

     (b) Agreements and Covenants. The Company shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Effective Time, and Parent and Merger Sub shall have received a certificate to such effect signed by a duly authorized officer of the Company;

     (c) Third Party Consents. Parent shall have been furnished with evidence satisfactory to it that the Company has obtained all consents, approvals and waivers the failure of which to obtain would reasonably be expected to have a Material Adverse Effect on the Company.

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     (d) Legal Opinion. Parent shall have received a legal opinion from legal counsel to the Company, in the form attached hereto as Exhibit D.

     (e) Stockholder Approval. The Company’s stockholders entitled to vote on the Merger holding at least ninety-five percent (95%) of the Company Capital Stock shall have approved this Agreement, the Merger and the transactions contemplated hereby.

     (f) No Material Adverse Effect. Since the date of this Agreement, there shall not have been any circumstance, event or occurrence that, individually, or in the aggregate, has resulted, or is reasonably likely to result, in a Material Adverse Effect on the Company. Parent shall have received a certificate with respect to the foregoing signed on behalf of the Company by the chief executive officer and chief financial officer of the Company.

     (g) No Proceedings. There shall not have been commenced or threatened against Parent or the Company any Proceeding involving any challenge to or seeking damages or other relief in connection with the Merger or any of the transactions contemplated hereby.

     (h) Secretary’s Certificate. The Company shall have delivered to Parent a copy of (i) the text of the resolutions adopted by the Board of Directors of the Company authorizing the execution, delivery and performance of this Agreement and the consummation of all of the transactions contemplated by this Agreement, (ii) the text of the resolutions adopted by the stockholders of the Company approving and adopting this Agreement and the Merger and (iii) the Certificate of Incorporation and Bylaws of the Company, along with a certificate executed on behalf of the Company by its corporate secretary certifying to Parent that such copies are true, correct and complete copies of such resolutions, Certificate of Incorporation and Bylaws, respectively, and that such resolutions, Certificate of Incorporation and Bylaws were duly adopted and have not been amended or rescinded.

     (i) Employees. Each person set forth on Schedule 6.3(i)(a) and two-thirds of the persons set forth on Schedule 6.3(i)(b) shall have accepted an offer of employment from Parent, or indicated that he or she will continue in the employ of the Surviving Corporation after the Effective Time.

     (j) Noncompetition Agreements. Each Key Employee shall have delivered to Parent an executed Noncompetition Agreement in the form of Exhibit B, which shall be in full force and effect.

     (k) Charter Amendment. The Company’s Certificate of Incorporation shall have been amended to remove the liquidation preferences and participation rights of the Company Preferred Stock and such amendment shall be in full force and effect.

     (l) Acceleration Provisions. Each person set forth on Schedule 6.3(l) shall have executed an amendment in the form attached to Schedule 6.3(l) and such amendment shall be in full force and effect.

     (m) Officer’s Certificate. The Company shall have delivered to Parent a copy of (i) the Company’s stock register, which sets forth the name, address and taxpayer identification number of each Company Stockholder and the class and number of shares of Company Capital Stock owned by each Company Stockholder and (ii) the Company’s option register, which sets forth the name, address and taxpayer identification number of each Company Optionholder and the number of shares of Company Capital Stock subject to each Company Option owned by each Company Optionholder, along with a certificate executed on behalf of the Company by the Company’s corporate secretary certifying to Parent that such copies are true, correct and complete copies of the Company’s stock register and option register, respectively.

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     (n) Tax Opinion of Parent’s Counsel. Parent shall have received the opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to Parent, based upon representations of Parent, Merger Sub and the Company and normal assumptions, to the effect that the Merger will be treated for Federal income tax purposes as a reorganization qualifying under the provisions of Section 368(a) of the Code, which opinion shall not have been withdrawn or modified in any material respect. The issuance of such opinion shall be conditioned on receipt by Wilson Sonsini of representation letters from each of Parent, Merger Sub and the Company as contemplated in Section 5.20 of this Agreement. Each such representation letter shall be dated on or before the date of such opinion and shall not have been withdrawn or modified in any material respect as of the Effective Time. Notwithstanding the foregoing, if Parent’s counsel does not render such opinion, this condition shall nevertheless be deemed satisfied with respect to Parent if Gunderson Dettmer, counsel to the Company, renders such opinion to Parent.

ARTICLE VII

SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW

     7.1 Survival of Representations and Warranties.  All of the Company’s representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement (each as modified by the Company Schedules) shall survive the Merger and shall expire at 5:00 p.m., California time, on the first anniversary of the Closing Date (the “Expiration Date”). All of Parent’s representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall expire at the Closing.

     7.2 Escrow Arrangements.

     (a) Indemnification. Subject to the limitations and qualifications in this Article VII, the Company Stockholders and holders of assumed Company Options shall jointly and severally indemnify and hold Parent and its officers, directors, employees, advisors, representatives and affiliates, including the Surviving Corporation after the Effective Time (“Parent Indemnified Parties”) harmless against all claims, losses, liabilities, damages (including incidental and consequential damages), deficiencies, diminutions in value, costs and expenses, including reasonable attorneys’fees and expenses of investigation and defense, whether or not related to third party claims (hereinafter individually a “Loss” and collectively “Losses”) incurred by any Parent Indemnified Party directly or indirectly as a result of (i) any inaccuracy or breach of a representation or warranty of the Company contained in this Agreement or in any certificate, instrument or other document delivered by the Company pursuant to the terms of this Agreement, (ii) any failure by the Company to perform or comply with any covenant contained herein or any other certificate, instrument or other document delivered by the Company pursuant to the terms of this Agreement, (iii) any Dissenting Shares (to the extent Parent is required to pay any amounts in respect of any Dissenting Shares that are in excess of the amount payable per share pursuant to Section 1.6), (iv) any Excess Third Party Expenses or (v) any amounts payable as a result of the matters set forth on Schedule 7.2 (collectively, the “Section 7.2 Fees”). For purposes of this Agreement, the term “Excess Third Party Expenses” means the amount by which the Company’s Third Party Expenses exceed $2,270,000; provided that Excess Third Party Expenses shall be reduced to the extent the Company’s Third Party Expenses have caused an adjustment to the Total Transaction Value pursuant to Section 1.6(a). In determining whether a breach of any representation, warranty or covenant has occurred, any materiality or knowledge standard contained in a representation, warranty or covenant shall be taken into account; provided however, that in determining the amount of any Losses attributable to a breach, any materiality or knowledge standard contained in a representation, warranty or covenant shall be disregarded. A Loss recoverable by a Parent Indemnified Party pursuant to this Article VII shall be reduced by (or if already paid by the Company Stockholders and holders of assumed Company Options, shall be promptly repaid to the Escrow Fund (or directly to the Company Stockholders and holders of assumed Company Options if the Escrow Fund has been distributed) in the amount of) any recoveries by the Parent Indemnified Party pursuant to (a) any insurance recovery (net of any increase in premiums and any associated costs and expenses), or (b) other payments received from third parties (net of any associated costs and expenses).

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     Notwithstanding any provision of this Agreement to the contrary, after the Effective Time no Parent Indemnified Party shall be entitled to indemnification for indemnifiable Losses unless and until one or more Officer’s Certificates (as defined in Section 7.2(f) below) identifying indemnifiable Losses in the aggregate in excess of $100,000 (the “Claim Threshold”) has or have been delivered by Parent to the Escrow Agent as provided in Section 7.2(f) hereof, in which case, such Parent Indemnified Party shall be entitled to recover all indemnifiable Losses in excess of $50,000 (the “Deductible Amount”); provided, however, that the Claim Threshold shall not apply to any claim with respect to (i) Excess Third Party Expenses, (ii) representations and warranties set forth in Section 2.2, (iii) Taxes, (iv) Dissenting Shares (to the extent Parent is required to pay any amounts in respect of any Dissenting Shares which is in excess of the amount payable pursuant to Section 1.6 hereof with respect to such shares), or (v) Section 7.2 Fees. (“Unrestricted Damages”), which Unrestricted Damages shall be recoverable in their entirety regardless of amount. Furthermore, the amount of any Unrestricted Damages shall count against the Claim Threshold but not the Deductible Amount. Nothing herein shall limit the liability of Parent or the Company for any breach of any representation, warranty or covenant if the Merger does not close (for the avoidance of doubt, in the event this Agreement is terminated prior to the Effective Time, any pre-closing breach of this Agreement by the Company shall be solely the obligation of the Company). Except for recovery by any officer or director of the Company (solely in their capacity as such) against Surviving Corporation pursuant to Section 5.19, the Company Stockholders and holders of assumed Company Options shall not have any right of contribution from the Company, the Surviving Corporation or Parent with respect to any Loss pursuant to this Article VII.

     (b) Escrow Fund. At the Effective Time, each Company Stockholder will be deemed to have received and deposited with the Escrow Agent (as defined below) such stockholder’s pro rata portion of the Escrow Amount, in accordance with the provisions of Section 1.8(b), without any act of any Company Stockholder. The Company Stockholders shall not be deemed to have received the cash portion of the Escrow Amount until such stockholders actually receive delivery of such cash from the Escrow Agent pursuant to the provisions of Section 7.2(c). Each holder of assumed Company Options shall contribute shares of Parent Common Stock to the Escrow Fund upon exercise of such assumed Company Options in accordance with the provisions of Section 1.8(b). To the extent that a holder of assumed Company Options does not fund fully his or her pro rata portion of the Escrow Amount during the Escrow Period, Parent shall have the right to recover Losses that were not paid in full from the Escrow Amount from such holder after the termination of the Escrow Amount as such holder exercises the assumed Company Options; provided however, that Parent’s right of recovery described in this sentence shall not exceed what would have been such holder’s pro rata portion of the Escrow Amount if such holder had funded fully his or her portion of the Escrow Amount. As soon as practicable after the Effective Time, without any act of any Company Stockholder, Parent will deposit the Escrow Amount with U.S. Bank Trust, N.A. (or other institution acceptable to Parent and the Securityholder Agent (as defined in Section 7.2(i) below)) (the “Escrow Agent”), the deposit of the cash portion of such Escrow Amount to constitute a cash escrow fund (the “Cash Escrow Fund”) and the deposit of the Parent Common Stock portion of such Escrow Amount to constitute a stock escrow fund (the “Stock Escrow Fund), (the Cash Escrow Fund and Stock Escrow Fund shall together constitute the “Escrow Fund”) to be governed by the terms set forth herein and at Parent’s cost and expense. Parent will make additional contributions to the Stock Escrow Fund as holders of assumed Company Options exercise such options. The Cash Escrow Fund and Stock Escrow Fund shall be maintained separately by the Escrow Agent. Parent and Company hereby agree that the Cash Escrow Fund shall be treated as an installment obligation for purposes of Code section 453 and neither party shall take any action or filing position inconsistent with such characterization. The Escrow Amount shall be available to compensate any Parent Indemnified Party for any claims by such parties for any Losses suffered or incurred by them and for which they are entitled to recovery under this Article VII. Parent and the Company each acknowledge that such Losses, if any, would relate to unresolved contingencies existing at the Effective Time, which if resolved at the Effective Time would have led to a reduction in the Total Transaction Value. The Escrow Agent may execute this Agreement following the date hereof and prior to the Closing, and such later execution, if so executed after the date hereof, shall not affect the binding nature of this Agreement as of the date hereof between the other signatories hereto.

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     (c) Escrow Period; Distribution upon Termination of Escrow Period. Subject to the following requirements, the Escrow Fund shall be in existence immediately following the Effective Time and shall terminate at 5:00 p.m., Pacific time, on the thirtieth (30^th) day after the Expiration Date (the “Escrow Period”). Notwithstanding the foregoing, the Escrow Period shall not terminate with respect to such amount (or some portion thereof), that together with the aggregate amount remaining in the Escrow Fund is necessary in the reasonable judgment of Parent, subject to the objection of the Securityholder Agent and the subsequent arbitration of the matter in the manner provided in Section 7.2(g) hereof, to satisfy any unsatisfied claims concerning facts and circumstances existing prior to the termination of the Escrow Period specified in any Officer’s Certificate delivered to the Escrow Agent prior to termination of such Escrow Period. As soon as all such claims have been resolved, the Escrow Agent shall deliver to the contributors of the Escrow Fund the remaining portion of the Escrow Fund to the extent not required to satisfy such claims. Deliveries of the amounts out of the Escrow Fund pursuant to this Section 7.2(c) shall be made in proportion to their respective original contributions to the Escrow Fund as determined pursuant to Section 1.8(b).

     (d) Protection and Investment of Escrow Fund. The Escrow Agent shall hold and safeguard the Escrow Fund during the Escrow Period. The Escrow Agent shall treat the Stock Escrow Fund as a trust fund in accordance with the terms of this Agreement and not as the property of Parent. The Escrow Agent shall treat the Cash Escrow Fund as a trust fund in accordance with the terms of this Agreement and not as the property of the Company Stockholders (except that such Cash Escrow Fund shall be treated as Property of Parent solely for Tax Purposes). The Escrow Agent shall hold and dispose of the Escrow Fund only in accordance with the terms hereof. Except as Parent and the Securityholder Agent may from time to time jointly instruct the Escrow Agent in writing, the cash portion of the Escrow Fund shall be invested from time to time, to the extent possible, in United States Treasury Bills having a remaining maturity of 90 days or less and repurchase obligations secured by such United States Treasury Bills, with any remainder being deposited and maintained in a money market deposit account with the Escrow Agent, until disbursement of the entire Escrow Fund. The Escrow Agent is authorized to liquidate in accordance with its customary procedures any portion of the Escrow Fund consisting of investments to provide for payments required to be made under this Agreement. It is agreed for federal income tax purposes that the parties hereto shall treat interest as the property of Parent and the Escrow Agent shall report the interest for federal income tax purposes consistently with such treatment.

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     (e) Voting Rights; Dividends; Recapitalizations.

     (i) Any shares of Parent Common Stock or other equity securities issued or distributed by Parent (including shares issued upon a stock split, stock dividend, recapitalization or other similar event) (“New Shares”) in respect of Parent Common Stock in the Escrow Fund which have not been released from the Escrow Fund shall be added to the Escrow Fund and become a part thereof. New Shares issued in respect of shares of Parent Common Stock which have been released from the Escrow Fund shall not be added to the Escrow Fund but shall be distributed to the record holders thereof. Cash dividends on Parent Common Stock shall not be added to the Escrow Fund but shall be distributed to the record holders thereof.

     (ii) Each Company Stockholder shall have voting rights with respect to the shares of Parent Common Stock held in the Escrow Fund (and on any voting securities added to the Escrow Fund in respect of such shares of Parent Common Stock).

     (f) Claims Upon Escrow Fund. Upon receipt by the Escrow Agent at any time on or before the last day of the Escrow Period of a certificate signed by any officer of Parent (an “Officer’s Certificate”): (A) stating that Parent has paid or properly accrued or reasonably anticipates that it will have to pay or accrue any indemnifiable Losses suffered, accrued or incurred by it prior to the Expiration Date, and (B) specifying in reasonable detail the individual items of such Losses included in the amount so stated, the date each such item was paid or properly accrued, or the basis for such anticipated Loss, and the nature of the misrepresentation, breach of warranty or covenant to which such item is related, the Escrow Agent shall, subject to the provisions of Sections 7.2(a), 7.2(b) and 7.2(g) hereof, deliver to Parent out of the Escrow Fund, as promptly as practicable, an amount equal to such Losses. Any indemnifiable Losses shall be paid from the Escrow Fund in cash, Parent Common Stock and Parent Common Stock issued upon exercise of assumed Company Options in the same relative proportions as cash, Parent Common Stock and Parent Common Stock issued upon exercise of assumed Company Options are to the total consideration paid to the Company Stockholders and holders of assumed Company Options. For the purposes of determining the number of shares of Parent Common Stock to be delivered to Parent out of the Escrow Fund pursuant to Article VII hereof, the shares of Parent Common Stock shall be valued at the Five Day Price.

     (g) Objections to Claims. At the time of delivery of any Officer’s Certificate to the Escrow Agent, a duplicate copy of such certificate shall be delivered to the Securityholder Agent and for a period of thirty (30) days after such delivery, the Escrow Agent shall make no delivery to Parent of any Escrow Amounts pursuant to Section 7.2(f) hereof unless the Escrow Agent shall have received written authorization from the Securityholder Agent to make such delivery. After the expiration of such thirty (30)-day period, the Escrow Agent shall make delivery of cash, Parent Common Stock and assumed Company Options from the Escrow Fund in accordance with Section 7.2(f) hereof, provided that no such payment or delivery may be made if the Securityholder Agent shall object in a written statement to the claim made in the Officer’s Certificate stating in reasonable detail the grounds for such objection, and such statement shall have been delivered to the Escrow Agent prior to the expiration of such thirty (30)-day period.

     (h) Resolution of Conflicts; Arbitration.

     (i) In case the Securityholder Agent shall so object in writing to any claim or claims made in any Officer’s Certificate, the Securityholder Agent and Parent shall attempt in good faith to agree upon the rights of the respective parties with respect to each of such claims. If the Securityholder Agent and Parent should so agree, a memorandum setting forth such agreement shall be prepared and signed by both parties and shall be furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on any such memorandum and distribute cash and Parent Common Stock from the Escrow Fund in accordance with the terms thereof.

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     (ii) If no such agreement can be reached after good faith negotiation, either Parent or the Securityholder Agent may demand arbitration of the matter unless the amount of the damage or loss is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both parties agree to arbitration; and in either such event the matter shall be settled by arbitration conducted by three (3) arbitrators. Parent and the Securityholder Agent shall each select one arbitrator, and the two (2) arbitrators so selected shall select a third arbitrator. The arbitrators shall set a limited time period and establish procedures designed to reduce the cost and time for discovery while allowing the parties an opportunity, adequate in the sole judgment of the arbitrators, to discover relevant information from the opposing parties about the subject matter of the dispute. The arbitrators shall rule upon motions to compel or limit discovery and shall have the authority to impose sanctions, including attorneys’ fees and costs, to the same extent as a court of law or equity, should the arbitrators determine that discovery was sought without substantial justification or that discovery was refused or objected to without substantial justification. The decision of a majority of the three (3) arbitrators as to the validity and amount of any claim in such Officer’s Certificate shall be binding and conclusive upon the parties to this Agreement, and notwithstanding anything in Section 7.2(g) hereof, the Escrow Agent shall be entitled to act in accordance with such decision and make or withhold payments out of the Escrow Fund in accordance therewith. Such decision shall be written and shall be supported by written findings of fact and conclusions which shall set forth the award, judgment, decree or order awarded by the arbitrators.

     (iii) Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. Any such arbitration shall be held in Santa Clara County, California under the rules then in effect of the American Arbitration Association.

     (i) Securityholder Agent; Power of Attorney.

     (i) If the Merger is approved by the stockholders of the Company, effective upon the Effective Time, and without further act of any Company Stockholder or holder of assumed Company Options, Robert C. Marshall shall be appointed as agent and attorney-in-fact (such person or any successor being the “Securityholder Agent”) for each Company Stockholder (except such stockholders, if any, as shall have perfected their appraisal rights under Delaware Law or, if applicable, dissenters’rights under California Law) and holder of assumed Company Options, for and on behalf of the Company Stockholders and holders of assumed Company Options, to give and receive notices and communications, to authorize delivery to Parent of cash, Parent Common Stock and Parent Common Stock issued upon exercise of assumed Company Options from the Escrow Fund in satisfaction of claims made by a Parent Indemnified Party pursuant to this Article VII, to object to such deliveries, to agree to, negotiate, enter into settlements and compromises of, and demand arbitration and comply with Orders of courts and awards of arbitrators with respect to such claims, and to take all actions necessary or appropriate in the judgment of the Securityholder Agent for the accomplishment of the foregoing. Such agency may be changed by the Company Stockholders and holders of assumed Company Options from time to time upon prior written notice to Parent; provided that the Securityholder Agent may not be removed unless holders of a two-thirds interest of the Escrow Fund agree to such removal and to the identity of the substituted agent. Any vacancy in the position of Securityholder Agent may be filled by approval of the holders of a majority in interest of the Escrow Fund. No bond shall be required of the Securityholder Agent, and the Securityholder Agent shall not receive compensation for his or her services. Notices or communications to or from the Securityholder Agent shall constitute notice to or from each of the Company Stockholders and holders of assumed Company Options.

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     (ii) The Securityholder Agent shall at all times act in his or her capacity as Securityholder Agent in a manner that he or she believes to be in the best interest of the Company Stockholders and holders of assumed Company Options. The Securityholder Agent shall not be liable to any Company Stockholder or holder of assumed Company Options for any error of judgment, act done or omitted hereunder as Securityholder Agent, except in the case of gross negligence, bad faith or willful misconduct. The Securityholder Agent may consult with legal counsel, financial advisors and other experts and shall not be liable for any act done or omitted in good faith pursuant to the advice of such counsel, advisors or experts. Each Company Stockholder or holder of Company Options on whose behalf the Escrow Amount was contributed to the Escrow Fund shall indemnify, hold harmless and reimburse the Securityholder Agent from and against such holder’s ratable share of any loss, liability, damage, claim, cost or expense incurred without gross negligence, bad faith or willful misconduct on the part of the Securityholder Agent and arising out of or in connection with the acceptance or administration of the Securityholder Agent’s duties hereunder, including the reasonable fees and expenses of any legal counsel retained by the Securityholder Agent (the “Agent Expenses”). With respect to any Agent Expenses that are not reimbursed by any Company Stockholder or holder of assumed Company Options as provided for herein, the Securityholder Agent shall be entitled to set off such Agent Expenses against the portion of the Escrow Fund that would otherwise have been distributed to such holder pursuant to the terms hereof.

     (j) Actions of the Securityholder Agent. A decision, act, consent or instruction of the Securityholder Agent shall constitute a decision of all the Company Stockholders and holders of assumed Company Options for whom a portion of the Escrow Amount otherwise issuable to them is deposited in the Escrow Fund and shall be final, binding and conclusive upon each of such Company Stockholders and holders of assumed Company Options, and the Escrow Agent and Parent may rely upon any such decision, act, consent or instruction of the Securityholder Agent as being the decision, act, consent or instruction of each of such Company Stockholders and holders of assumed Company Options. The Escrow Agent and Parent are hereby relieved from any liability to any person for any acts done by them in accordance with such decision, act, consent or instruction of the Securityholder Agent. The Securityholder Agent shall promptly provide written notice to the Company Stockholders and holders of assumed Company Options of any material action taken on behalf of them by the Securityholder Agent pursuant to the authority delegated to the Securityholder Agent under this Article VII.

     (k) Third-Party Claims. If Parent receives notice of a third-party claim that Parent believes may result in a claim against the Escrow Fund, Parent shall promptly notify the Securityholder Agent in writing of such claim (but the failure to promptly notify the Securityholder Agent shall not relieve the Company Stockholders and holders of assumed Company Options of their indemnification obligations hereunder except to the extent (and only to such extent) that the Securityholder Agent is materially prejudiced by such failure to notify). The Securityholder Agent, as a representative for the Company Stockholders and holders of assumed Company Options, may, at his election, undertake control of the defense thereof with counsel of his choosing reasonably acceptable to Parent, in which case Parent may participate in such defense through its own counsel and at its own expense. If the Securityholder Agent elects to undertake control of the defense of such claim, the Securityholder Agent shall not settle any such claim without the prior written consent of Parent, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, the Securityholder Agent shall not be entitled to undertake the defense of a third party claim if (i) such claim involves Taxes, (ii) such claim demands injunctive or other equitable relief, (iii) Parent reasonably determines that the claim is likely to exceed the then remaining amounts in the Escrow Fund, (iv) the Securityholder Agent or any Stockholder is also a party to such third-party claim or (v) Parent reasonably determines that it would be inappropriate for a single counsel to represent all parties under applicable standards of legal ethics; provided however that if the Securityholder Agent is prohibited from undertaking the defense of such claim, Parent will diligently pursue the defense of such claim. If the Securityholder Agent declines to undertake the defense of such claim within fifteen (15) days after written notice of such claim has been delivered to the Securityholder Agent or fails to diligently defend such claim at any time, Parent may, in its reasonable discretion, assume the defense of any such claim with counsel of its choice, and the fees and expenses of such counsel shall constitute Losses for purposes of this Article VII. Parent shall advise the Securityholder Agent of material developments and otherwise keep the Securityholder Agent informed with respect to such third-party claim; provided however, that Parent shall not be required to provide any confidential or non-public information. If the Securityholder Agent elects to undertake the defense of a third-party claim, the Securityholder Agent shall be entitled to recover its reasonable attorneys’ fees and expenses that relate to such third-party claim from the Escrow Fund immediately prior to the expiration of the Escrow Period out of amounts that would otherwise be distributed to the Company Stockholders and holders of assumed Company Options pursuant to Section 7.2(c); provided, however, that any and all Losses incurred by Parent, its officers, directors or affiliates (including the Surviving Corporation) that are recoverable against the Escrow Fund and any amounts necessary to satisfy unresolved claims pursuant to this Article VII shall be satisfied in full or reserved for before any attorneys’ fees and expenses of the Securityholder Agent may be paid from the Escrow Fund. If the Securityholder Agent declines to undertake the defense of a third-party claim or fails to diligently defend such claim at any time, Parent shall have the right in its reasonable discretion to settle any such claim; provided, however, that except with the consent of the Securityholder Agent, no settlement of any such claim with third-party claimants shall be determinative of the amount, validity or existence of any claim against the Escrow Fund. If the Securityholder Agent has consented to any such settlement, the Securityholder Agent shall have no power or authority to object under any provision of this Article VII to the amount of any claim by Parent against the Escrow Fund with respect to and in the amount of such settlement. Parent and the Securityholder Agent shall cooperate with each other in all reasonable respects in connection with the defense of any third-party claim, including making available records relating to such claim and furnishing employees of Parent or the Surviving Corporation as may be reasonably necessary for the preparation of the defense of any such third-party claim or for testimony as witness in any Proceeding relating to such claim.

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     (l) Escrow Agent’s Duties.

     (i) The Escrow Agent shall be obligated only for the performance of such duties as are specifically set forth herein, and as set forth in any additional written escrow instructions which the Escrow Agent may receive after the date of this Agreement which are signed by an officer of Parent and the Securityholder Agent, and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed to be genuine and to have been signed or presented by the proper party or parties. The Escrow Agent shall not be liable for any act done or omitted hereunder as Escrow Agent while acting in good faith and in the exercise of reasonable judgment, and any act done or omitted pursuant to the advice of counsel shall be conclusive evidence of such good faith.

     (ii) The Escrow Agent is hereby expressly authorized to comply with and obey Orders of any court of law, notwithstanding any notices, warnings or other communications from any party or any other person to the contrary. In case the Escrow Agent obeys or complies with any such Order of any court, the Escrow Agent shall not be liable to any of the parties hereto or to any other person by reason of such compliance, notwithstanding any such Order being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction.

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     (iii) The Escrow Agent shall not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver this Agreement or any documents or papers deposited or called for hereunder.

     (iv) The Escrow Agent shall not be liable for the expiration of any rights under any statute of limitations with respect to this Agreement or any documents deposited with the Escrow Agent.

     (v) In performing any duties under the Agreement, the Escrow Agent shall not be liable to any party for damages, losses, or expenses, except for gross negligence or willful misconduct on the part of the Escrow Agent. The Escrow Agent shall not incur any such liability for (A) any act or failure to act made or omitted in good faith, or (B) any action taken or omitted in reliance upon any instrument, including any written statement or affidavit provided for in this Agreement that the Escrow Agent shall in good faith believe to be genuine, nor will the Escrow Agent be liable or responsible for forgeries, fraud, impersonations, or determining the scope of any representative authority. In addition, the Escrow Agent may consult with legal counsel in connection with Escrow Agent’s duties under this Agreement and shall be fully protected in any act taken, suffered, or permitted by it in good faith in accordance with the advice of counsel. The Escrow Agent is not responsible for determining and verifying the authority of any person acting or purporting to act on behalf of any party to this Agreement.

     (vi) If any controversy arises between the parties to this Agreement, or with any other party, concerning the subject matter of this Agreement, its terms or conditions, the Escrow Agent will not be required to determine the controversy or to take any action regarding it. The Escrow Agent may hold all documents and the amounts in the Escrow Fund and may wait for settlement of any such controversy by final appropriate legal Proceeding or other means as, in the Escrow Agent’s discretion, the Escrow Agent may be required, despite what may be set forth elsewhere in this Agreement. In such event, the Escrow Agent will not be liable for damage. Furthermore, the Escrow Agent may at its option, file an action of interpleader requiring the parties to answer and litigate any claims and rights among themselves. The Escrow Agent is authorized to deposit with the clerk of the court all documents and the amounts in the Escrow Fund, except all costs, expenses, charges and reasonable attorney fees incurred by the Escrow Agent due to the interpleader action and which the parties jointly and severally agree to pay. Upon initiating such action, the Escrow Agent shall be fully released and discharged of and from all obligations and liability imposed by the terms of this Agreement.

     (vii) The parties and their respective successors and assigns agree jointly and severally to indemnify and hold Escrow Agent harmless against any and all losses, claims, damages, liabilities, and expenses, including reasonable costs of investigation, counsel fees, and disbursements that may be imposed on Escrow Agent or incurred by Escrow Agent in connection with the performance of its duties under this Agreement, including but not limited to any litigation arising from this Agreement or involving its subject matter; provided, however, that nothing contained in this clause (vii) shall affect the obligations of the parties as between themselves under Section 7.2(l), and provided further that the portion of any indemnification payable by the Company Stockholders and holders of assumed Company Options shall be paid solely from the Escrow Fund.

     (viii) The Escrow Agent may resign at any time upon giving at least thirty (30) days written notice to the parties; provided, however, that no such resignation shall become effective until the appointment of a successor escrow agent which shall be accomplished as follows: Parent and the Securityholder Agent shall use commercially reasonable efforts to mutually agree on a successor escrow agent within thirty (30) days after receiving such notice. If the parties fail to agree upon a successor escrow agent within such time, the Escrow Agent shall have the right to appoint a successor escrow agent authorized to do business in the State of California. The successor escrow agent shall execute and deliver an instrument accepting such appointment and it shall, without further acts, be vested with all the estates, properties, rights, powers, and duties of the predecessor escrow agent as if originally named as Escrow Agent. The predecessor escrow agent shall thereupon be discharged from any further duties and liability under this Agreement.

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     (m) Fees. All fees of the Escrow Agent for performance of its duties hereunder shall be paid by Parent. It is understood that the fees and usual charges agreed upon for services of the Escrow Agent shall be considered compensation for ordinary services as contemplated by this Agreement. If the conditions of this Agreement are not promptly fulfilled, or if the Escrow Agent renders any service not provided for in this Agreement, or if the parties request a substantial modification of its terms, or if any controversy arises, or if the Escrow Agent is made a party to, or intervenes in, any litigation pertaining to this escrow or its subject matter, the Escrow Agent shall be reasonably compensated for such extraordinary services and reimbursed for all costs, attorney’s fees, and expenses occasioned by such default, delay, controversy or litigation. Parent promises to pay these sums upon demand.

     (n) Exclusive Remedy. Except as provided in the following sentence and in the fourth sentence of Section 7.2(b) with respect to exercises of assumed Company Options after the Escrow Period, resort to the Escrow Fund pursuant to, and in compliance with, the provisions of this Article VII shall be the sole and exclusive right and remedy of Parent for breaches of the representations, warranties, covenants and agreements of the Company contained herein. Notwithstanding the foregoing, the existence of this Article VII and the rights and restrictions set forth herein do not limit any other potential remedies of Parent with respect to fraud or any intentional or knowing breach by the Company or its officers or directors in connection with making the representations, warranties or covenants of the Company contained in this Agreement.

ARTICLE VIII

TERMINATION, AMENDMENT AND WAIVER

     8.1 Termination. Except as provided in Section 8.2 below, this Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time:

     (a) by mutual consent of the Company and Parent;

     (b) by Parent or the Company if: (i) the Effective Time has not occurred before 5:00 p.m. (Pacific time) on February 28, 2002 (the “End Date”); provided that the right to terminate this Agreement under this Section 8.1(b)(i) shall not be available to any party whose willful failure to fulfill any obligation hereunder has been a cause of, or resulted in, the failure of the Effective Time to occur on or before such date; (ii) there shall be a final nonappealable Order of a federal or state court in effect preventing consummation of the Merger; or (iii) there shall be any Law or Order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity that would make consummation of the Merger illegal;

     (c) by Parent if there shall be any action taken, or any Law or Order enacted, promulgated or issued or deemed applicable to the Merger, by any Governmental Entity, which would: (i) prohibit Parent’s or the Company’s ownership or operation of all or any portion of the business of the Company or (ii) compel Parent or the Company to dispose of or hold separate all or a portion of the business or assets of the Company or Parent as a result of the Merger;

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     (d) by Parent, upon a breach of any representation, warranty, covenant or agreement on the part of the Company set forth in this Agreement which breach has a Material Adverse Effect on the Company, or if any representation or warranty of the Company shall have become untrue, in either case such that the conditions set forth in Section 6.3(a) or Section 6.3(b) would not be satisfied as of the time of such breach or as of the time such representation or warranty shall have become untrue, provided that if such inaccuracy in the Company’s representations and warranties or breach by the Company is curable by the Company within forty-five (45) days through the exercise of its commercially reasonable efforts, then for so long as the Company continues to exercise such commercially reasonable efforts Parent may not terminate this Agreement under this Section 8.1(d) unless such breach is not cured within forty-five (45) days.

     (e) by the Company, upon a breach of any representation, warranty, covenant or agreement on the part of Parent set forth in this Agreement which breach has a material adverse effect on Parent’s ability to pay the Total Transaction Value due upon Closing or any Employee Bonuses that may thereafter become payable or if any representation or warranty of Parent shall have become untrue, in either case such that the conditions set forth in Section 6.2(a) or Section 6.2(b) would not be satisfied as of the time of such breach or as of the time such representation or warranty shall have become untrue, provided, that if such inaccuracy in Parent’s representations and warranties or breach by Parent is curable by Parent within forty-five (45) days through the exercise of its commercially reasonable efforts, then for so long as Parent continues to exercise such commercially reasonable efforts the Company may not terminate this agreement under this Section 8.1(e) unless such breach is not cured within forty-five (45) days.

     Where action is taken to terminate this Agreement pursuant to this Section 8.1, it shall be sufficient for such action to be authorized by the Board of Directors (as applicable) of the party taking such action.

     8.2 Effect of Termination.  If this Agreement is terminated as provided in Section 8.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Parent, Merger Sub or the Company, or their respective officers, directors or stockholders, provided that the provisions of Sections 5.4 and 5.5 and Articles VIII and IX of this Agreement shall remain in full force and effect and survive any termination of this Agreement.

     8.3 Amendment.  Except as is otherwise required by applicable Law after the stockholders of the Company approve this Agreement, this Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed on behalf of each of the parties hereto.

     8.4 Extension; Waiver.  At any time prior to the Effective Time, Parent and Merger Sub, on the one hand, and the Company, on the other, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations of the other party hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party.

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ARTICLE IX

GENERAL PROVISIONS

     9.1 Notices.  All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) or sent via facsimile (with acknowledgment of complete transmission) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

     (a) if to Parent or Merger Sub, to:

Cypress Semiconductor Corporation
195 Champion Court
San Jose, California 95134
Attention: Chief Executive Officer
Telephone No.: (408) 943-2600
Facsimile No.: (408) 943-4730

with a copy to:

Wilson Sonsini Goodrich & Rosati, Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Larry W. Sonsini
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811

     (b) if to the Company, to:

Silicon Packets, Inc.
2595 Junction Avenue
Suite 101
San Jose, California 95134
Attention: Chief Executive Officer
Telephone No.: (408) 382-6681
Facsimile No.: (408) 435-9237

with a copy to:

Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, California 94025
Attention: Christopher Dillon
Telephone No.: (650) 321-2400
Facsimile No.: (650) 321-2800

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     (c) if to the Securityholder Agent:

Robert C. Marshall
2460 Sand Hill Road, Suite 200
Menlo Park, California 94025
Telephone No.(650) 854-7399
Facsimile No.: (650) 854-7039

     (d) if to the Escrow Agent:

U.S. Bank Trust, N.A.
Escrow Services
One California Street, 25th Floor
San Francisco, CA 94111
Attention: Ann Gadsby
Telephone No.: (415) 273-4532
Facsimile No.: (415) 273-4591

     9.2 Interpretation.

     (a) As used herein:

     (i) the term “reasonable best efforts” shall mean the efforts that a prudent person desirous of achieving a result would use in similar circumstances to ensure that such result is achieved as expeditiously as possible, and the term “commercially reasonable efforts” shall mean reasonable best efforts, provided however, that the person subject to the obligation to take such efforts is not required to take actions that would result in a materially adverse change in the benefits to such person of this Agreement and the transactions contemplated hereby.

     (ii) the term “Contract” shall mean any agreement, contract, license, obligation, commitment, promise, or undertaking (whether written or oral and whether express or implied) that is legally binding.

     (iii) the terms “include,” “includes” and “including” shall be deemed in each case to be followed by the words “without limitation.”

     (iv) the term “knowledge” shall mean, with respect to the Company or Parent, what is within the actual knowledge of any of the officers of the Company or Parent, as the case may be, after a reasonable investigation.

     (v) the term “Law” shall mean any federal, state, local, municipal, foreign, international, multinational, or other administrative statute, regulation, order, rule, ordinance, constitution, principle of common law, or treaty.

     (vi) the term “Material Adverse Effect” shall mean a material adverse effect on the business, assets (including intangible assets), financial condition, or results of operations of the specified entity and its Subsidiaries, taken as a whole; except to the extent that the Company is able to demonstrate that any such effect results from any change, event, violation, inaccuracy, circumstance or effect that results directly and primarily from changes affecting the industry in which the Company operates that do not disproportionately affect the Company.

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     (vii) the term “Order” shall mean any award, decision, injunction, judgment, order, decree, ruling, subpoena, or verdict entered, issued, made, or rendered by any court, administrative agency, or other governmental body or by any arbitrator.

     (viii) the term “ordinary course of business consistent with past practice” shall refer, with respect to the entity in question, to actions that:

     (1) are taken in the ordinary course of the normal day-to-day operations of the entity, consistent with past operations;

     (2) do not require authorization by the board of directors of such entity; and

     (3) are similar in nature and magnitude to actions customarily taken, without any authorization by the board of directors (or by any group or persons exercising similar authority), in the ordinary course of the normal day-to-day operations of other entities that are in the same line of business as the entity in question.

     (ix) the term “Permit” shall include any concession, franchise or license.

     (x) the term “Proceeding” shall mean any action, claim, arbitration, audit, hearing, known investigation, litigation, suit, writ (whether civil, criminal, administrative, investigative or informal) commenced, brought, conducted or heard by or before, or otherwise involving, any governmental body or arbitrator.

     (xi) the term “threatened” shall mean, with respect to any Proceeding or other matter, the fact that any demand or statement has been made (orally or in writing) or any notice has been given (orally or in writing), or that any other event has occurred or any other circumstances exist, that would lead a prudent person to conclude that such a Proceeding or other matter is likely to be asserted, commenced, taken, or otherwise pursued in the future.

     (b) The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

     9.3 Counterparts.  This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart.

     9.4 Entire Agreement; Assignment.  This Agreement, the Schedules and Exhibits hereto, and the documents and instruments and other agreements among the parties hereto referenced herein: (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) other than as specifically set forth herein, are not intended to confer upon any other person any rights or remedies hereunder; and (c) shall not be assigned by operation of Law or otherwise, except that Parent and Merger Sub may assign their respective rights and delegate their respective obligations hereunder to their respective affiliates.

     9.5 Severability.  If any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to negotiate in good faith to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision.

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     9.6 Other Remedies.  Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by Law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy.

     9.7 Governing Law; Forum.  This Agreement shall be governed by and construed in accordance with the Laws of the State of California, regardless of the Laws that might otherwise govern under applicable principles of conflicts of laws thereof. In any dispute between the parties hereto arising out of or relating to this Agreement or any of the transactions contemplated by this Agreement, each of the parties hereto (i) irrevocably and unconditionally consents and submits to the exclusive jurisdiction and venue of either the state courts located in Santa Clara County, California or the United States District Court for the Northern District of California, and (ii) agrees that process may be served upon them in any manner authorized by the Laws of the State of California for such persons and waives and covenants not to assert or plead any objection which they might otherwise have to such jurisdiction and such process.

     9.8 Rules of Construction.  The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any Law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.

     9.9 Specific Performance.  The parties hereto agree that irreparable damage would occur if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at Law or in equity.

(Remainder of page intentionally left blank.)

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     IN WITNESS WHEREOF, Parent, Merger Sub, the Company, the Escrow Agent (with respect to Article VII only) and the Securityholder Agent (with respect to Article VII only) have caused this Agreement to be signed by their duly authorized respective officers, all as of the date first written above.

CYPRESS SEMICONDUCTOR CORPORATION


By: /s/ Emmanuel Hernandez
——————————————
Name: Emmanuel Hernandez
——————————————
Title: Chief Financial Officer
——————————————
SILICON PACKETS, INC.


By: /s/ Nader Raygani
——————————————
Name: Nader Raygani
——————————————
Title: President and CEO
——————————————

SECURITYHOLDER AGENT:


By: /s/ Robert C. Marshall
——————————————
Robert C. Marshall STEELERS ACQUISITION CORPORATION


By: /s/ Emmanuel Hernandez
——————————————
Name: Emmanuel Hernandez
——————————————
Title: Chief Financial Officer
——————————————

ESCROW AGENT:

U.S. BANK TRUST, N.A.


By: /s/ Ann Gadsby
——————————————
Name: Ann Gadsby
——————————————
Title: Vice President
——————————————

EX-3.2

     Exhibit 3.2

BY-LAWS

OF

CYPRESS SEMICONDUCTOR CORPORATION

TABLE OF CONTENTS

Page

ARTICLE I CORPORATE OFFICES 1

1.1 REGISTERED OFFICE 1

1.2 OTHER OFFICES 1

ARTICLE II MEETINGS OF STOCKHOLDERS 1

2.1 PLACE OF MEETINGS 1

2.2 ANNUAL MEETING 1

2.3 SPECIAL MEETING 1

2.4 NOTICE OF STOCKHOLDERS’ MEETINGS 2

2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE 2

2.6 QUORUM 2

2.7 ADJOURNED MEETING; NOTICE 2

2.8 CONDUCT OF BUSINESS 3

2.9 VOTING 3

2.10 WAIVER OF NOTICE 3

2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING 4

2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS 4

2.13 PROXIES 5

2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE 5

ARTICLE III DIRECTORS 5

3.1 POWERS 5

3.2 NUMBER OF DIRECTORS 6

3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS 6

3.4 RESIGNATION AND VACANCIES 6

3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE 7

3.6 REGULAR MEETINGS 7

3.7 SPECIAL MEETINGS; NOTICE 7

3.8 QUORUM 8

3.9 WAIVER OF NOTICE 8

3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING 8

3.11 FEES AND COMPENSATION OF DIRECTORS 8

3.12 APPROVAL OF LOANS TO OFFICERS 9

3.13 REMOVAL OF DIRECTORS 9

ARTICLE IV COMMITTEES 9

4.1 COMMITTEES OF DIRECTORS 9

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TABLE OF CONTENTS
(continued)

Page

4.2 COMMITTEE MINUTES 10

4.3 MEETINGS AND ACTION OF COMMITTEES 10

ARTICLE V OFFICERS 10

5.1 OFFICERS 10

5.2 APPOINTMENT OF OFFICERS 11

5.3 SUBORDINATE OFFICERS 11

5.4 REMOVAL AND RESIGNATION OF OFFICERS 11

5.5 VACANCIES IN OFFICES 11

5.6 CHAIRMAN OF THE BOARD 11

5.7 PRESIDENT 11

5.8 VICE PRESIDENTS 12

5.9 SECRETARY 12

5.10 CHIEF FINANCIAL OFFICER 12

5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS 13

5.12 AUTHORITY AND DUTIES OF OFFICERS 13

ARTICLE VI INDEMNITY 13

6.1 THIRD PARTY ACTIONS 13

6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION 14

6.3 SUCCESSFUL DEFENSE 14

6.4 DETERMINATION OF CONDUCT 14

6.5 PAYMENT OF EXPENSES IN ADVANCE 15

6.6 INDEMNITY NOT EXCLUSIVE 15

6.7 INSURANCE INDEMNIFICATION 15

6.8 THE CORPORATION 15

6.9 EMPLOYEE BENEFIT PLANS 16

6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES 16

ARTICLE VII RECORDS AND REPORTS 16

7.1 MAINTENANCE AND INSPECTION OF RECORDS 16

7.2 INSPECTION BY DIRECTORS 17

7.3 ANNUAL STATEMENT TO STOCKHOLDERS 17

ARTICLE VIII GENERAL MATTERS 17

8.1 CHECKS 17

8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS 17

8.3 STOCK CERTIFICATES; PARTLY PAID SHARES 17

8.4 SPECIAL DESIGNATION ON CERTIFICATES 18

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TABLE OF CONTENTS
(continued)

Page

8.5 LOST CERTIFICATES 18

8.6 CONSTRUCTION; DEFINITIONS 19

8.7 DIVIDENDS 19

8.8 FISCAL YEAR 19

8.9 SEAL 19

8.10 TRANSFER OF STOCK 19

8.11 STOCK TRANSFER AGREEMENTS 19

8.12 REGISTERED STOCKHOLDERS 20

ARTICLE IX AMENDMENTS 20

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BY-LAWS

OF

CYPRESS SEMICONDUCTOR CORPORATION

ARTICLE I

CORPORATE OFFICES

     1.1   REGISTERED OFFICE

     The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company.

     1.2   OTHER OFFICES

     The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business.

ARTICLE II

MEETINGS OF STOCKHOLDERS

     2.1   PLACE OF MEETINGS

     Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders’ meetings shall be held at the registered office of the corporation.

     2.2   ANNUAL MEETING

     The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. At the meeting, directors shall be elected and any other proper business may be transacted.

     2.3   SPECIAL MEETING

     A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, or by the president or vice president, or by one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent of the votes at that meeting.

     If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president, or the secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5, that a meeting will be held at the time requested by the person or persons called the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after the receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the board of directors may be held.

     2.4   NOTICE OF STOCKHOLDERS’ MEETINGS

     All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these by-laws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called.

     2.5   MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE

     Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

     2.6   QUORUM

     The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the Chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed.

     2.7   ADJOURNED MEETING; NOTICE

     When a meeting is adjourned to another time or place, unless these by-laws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

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     2.8   CONDUCT OF BUSINESS

     The Chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of business.

     2.9   VOTING

     The stockholders’ entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.12 of these by-laws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements).

     The stockholders’ vote may be by voice vote or by written ballot; provided, however, that the stockholders’ vote in an election of directors must be by written ballot if any shareholder so demands at any meeting before the voting has begun.

     Except as provided in the last paragraph of this Section 2.9 or as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder.

     At a stockholders’ meeting at which directors are to be elected, each stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such stockholder normally is entitled to cast) if the candidates’ names have been properly placed in nomination (in accordance with these by-laws) prior to commencement of the voting and the stockholder requesting cumulative voting has given notice prior to commencement of the voting of the stockholder’s intention to cumulate votes. If cumulative voting is properly requested, each holder of stock, or of any class or classes or of a series or series thereof, who elects to cumulate votes shall be entitled to as many votes as equals the number of votes which (absent this provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected by him, and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them, as he may see fit.

     2.10    WAIVER OF NOTICE

     Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these by-laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these by-laws.

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     2.11    STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING

     Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders of a corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote of a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.

     Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware.

     2.12    RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS

     In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action.

     If the board of directors does not so fix a record date:

(i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held.

(ii) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed.

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(iii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto.

     A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting.

     2.13    PROXIES

     Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder’s name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder’s attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware.

     2.14    LIST OF STOCKHOLDERS ENTITLED TO VOTE

     The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them.

ARTICLE III

DIRECTORS

     3.1   POWERS

     Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these by-laws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors.

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     3.2   NUMBER OF DIRECTORS

     The Board of Directors shall consist of four (4) persons until changed by a proper amendment of this Section 3.2.

     No reduction of the authorized number of directors shall have the effect of removing any director before that director’s term of office expires.

     3.3   ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS

     Except as provided in Section 3.4 of these by-laws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these by-laws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his successor is elected and qualified or until his earlier resignation or removal.

     Elections of directors need not be by written ballot.

     3.4   RESIGNATION AND VACANCIES

     Any director may resign at any time upon written notice to the attention of the Secretary of the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies.

     Unless otherwise provided in the certificate of incorporation or these by-laws:

(i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director.

(ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected.

     If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these by-laws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware.

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     If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable.

     3.5   PLACE OF MEETINGS; MEETINGS BY TELEPHONE

     The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware.

     Unless otherwise restricted by the certificate of incorporation or these by-laws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.

     3.6   REGULAR MEETINGS

     Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board.

     3.7   SPECIAL MEETINGS; NOTICE

     Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two (2) directors.

     Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director’s address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation.

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     3.8   QUORUM

     At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present.

     A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting.

     3.9   WAIVER OF NOTICE

     Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these by-laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these by-laws.

     3.10    BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING

     Unless otherwise restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee.

     3.11    FEES AND COMPENSATION OF DIRECTORS

     Unless otherwise restricted by the certificate of incorporation or these by-laws, the board of directors shall have the authority to fix the compensation of directors.

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     3.12    APPROVAL OF LOANS TO OFFICERS

     The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute.

     3.13    REMOVAL OF DIRECTORS

     Unless otherwise restricted by statute, by the certificate of incorporation or by these by-laws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors.

     No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director’s term of office.

ARTICLE IV

COMMITTEES

     4.1   COMMITTEES OF DIRECTORS

     The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the by-laws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation’s property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the by-laws of the corporation; and, unless the board resolution establishing the committee, the by-laws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware.

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     4.2   COMMITTEE MINUTES

     Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required.

     4.3   MEETINGS AND ACTION OF COMMITTEES

     Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these by-laws, Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting), with such changes in the context of those by-laws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these by-laws.

ARTICLE V

OFFICERS

     5.1   OFFICERS

     The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these by-laws. Any number of offices may be held by the same person.

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     5.2   APPOINTMENT OF OFFICERS

     The officers of the corporation, except such officers as may be appointed in accordance with the provisions of sections 5.3 or 5.5 of these by-laws, shall be appointed by the board of directors, subject to the rights, if any, of an officer under any contract of employment.

     5.3   SUBORDINATE OFFICERS

     The board of directors may appoint, or empower the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these by-laws or as the board of directors may from time to time determine.

     5.4   REMOVAL AND RESIGNATION OF OFFICERS

     Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors.

     Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party.

     5.5   VACANCIES IN OFFICES

     Any vacancy occurring in any office of the corporation shall be filled by the board of directors.

     5.6   CHAIRMAN OF THE BOARD

     The chairmen of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these by-laws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these by-laws.

     5.7   PRESIDENT

     Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these by-laws.

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     5.8   VICE PRESIDENTS

     In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these by-laws, the president or the chairman of the board.

     5.9   SECRETARY

     The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors’ meetings or committee meetings, the number of shares present or represented at stockholders’ meetings, and the proceedings thereof.

     The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation’s transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation.

     The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these by-laws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these by-laws.

     5.10    CHIEF FINANCIAL OFFICER

     The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director.

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     The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all his transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or the by-laws.

     5.11    REPRESENTATION OF SHARES OF OTHER CORPORATIONS

     The chairman of the board, the president, any vice president, the treasurer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority.

     5.12    AUTHORITY AND DUTIES OF OFFICERS

     In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders.

ARTICLE VI

INDEMNITY

     6.1   THIRD PARTY ACTIONS

     The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, and may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or contemplated action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was an employee or agent of the corporation, or is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

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     6.2   ACTIONS BY OR IN THE RIGHT OF THE CORPORATION

     The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, and may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was an employee or agent of the corporation, or is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper.

     6.3   SUCCESSFUL DEFENSE

     To the extent that a director or officer of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith and to the extent that an employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 6.1 and 6.2, or in defense of any claim, issue or matter therein, he may be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith.

     6.4   DETERMINATION OF CONDUCT

     Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that the indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall be made (1) by the Board of Directors or the Executive Committee by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding or (2) or if such quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders.

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     6.5   PAYMENT OF EXPENSES IN ADVANCE

     Expenses incurred by a director or officer of the corporation in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding and expenses incurred by an employee or agent in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article VI.

     6.6   INDEMNITY NOT EXCLUSIVE

     The indemnification and advancement of expenses provided or granted pursuant to the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office.

     6.7   INSURANCE INDEMNIFICATION

     The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI.

     6.8   THE CORPORATION

     For purposes of this Article VI, references to “the corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, office, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under and subject to the provisions of this Article VI (including, without limitation the provisions of Section 6.4) with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued.

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     6.9   EMPLOYEE BENEFIT PLANS

     For purposes of this Article VI, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to “serving at the request of the corporation” shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the corporation” as referred to in this Article VI.

     6.10    CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES

     The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

ARTICLE VII

RECORDS AND REPORTS

     7.1   MAINTENANCE AND INSPECTION OF RECORDS

     The corporation shall, either at its principal executive officer or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these by-laws as amended to date, accounting books, and other records.

     Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation’s stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person’s interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business.

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     7.2   INSPECTION BY DIRECTORS

     Any director shall have the right to examine the corporation’s stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper.

     7.3   ANNUAL STATEMENT TO STOCKHOLDERS

     The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation.

ARTICLE VIII

GENERAL MATTERS

     8.1   CHECKS

     From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments.

     8.2   EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS

     The board of directors, except as otherwise provided in these by-laws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.

     8.3   STOCK CERTIFICATES; PARTLY PAID SHARES

     The shares of the corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.

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     The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only -upon the basis of the percentage of the consideration actually paid thereon.

     8.4   SPECIAL DESIGNATION ON CERTIFICATES

     If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests of the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

     8.5   LOST CERTIFICATES

     Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.

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     8.6   CONSTRUCTION; DEFINITIONS

     Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these by-laws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term “person” includes both a corporation and a natural person.

     8.7   DIVIDENDS

     The directors of the corporation, subject to any restrictions contained in (i) the General Corporation Law of Delaware or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may he paid in cash, in property, or in shares of the corporation’s capital stock.

     The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies.

     8.8   FISCAL YEAR

     The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors.

     8.9   SEAL

     The corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced.

     8.10    TRANSFER OF STOCK

     Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books.

     8.11    STOCK TRANSFER AGREEMENTS

     The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware.

-19-

     8.12    REGISTERED STOCKHOLDERS

     The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

ARTICLE IX

AMENDMENTS

     The by-laws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal by-laws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal by-laws.

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CERTIFICATE OF ADOPTION OF BY-LAWS

OF

CYPRESS SEMICONDUCTOR CORPORATION

Adoption by Incorporation

     The undersigned person appointed in the Certificate of Incorporation to act as the Incorporator of Cypress Semiconductor Corporation hereby adopts the foregoing by-laws, comprising twenty-five (25) pages, as the By-Laws of the corporation.

     Executed this 29th day of September 1986.

/s/ Barry E. Taylor
——————————————
Barry E. Taylor, Incorporator

Certificate by Assistant Secretary of Adoption by Incorporator

     The undersigned hereby certifies that he is the duly elected, and acting Assistant Secretary of Cypress Semiconductor Corporation and that the foregoing By-Laws, comprising twenty-five (25) pages, were adopted as the By-Laws of the corporation on September 29, 1986, by the person appointed in the Certificate of incorporation to act as the Incorporator of the corporation.

     IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this 19th day of February 1987.

/s/ Stanley J. Meresman
——————————————
Stanley J. Meresman,
Assistant Secretary

CERTIFICATE OF AMENDMENT OF BYLAWS

OF

CYPRESS SEMICONDUCTOR CORPORATION

     The undersigned hereby certifies that he is the duly elected and acting Secretary of Cypress Semiconductor Corporation, a Delaware corporation (the “Corporation”), and that the following amendment to the Corporation’s Bylaws was approved by the Corporation’s Board of Directors effective as of July 22, 1993:

     1. Section 3.2 of the Bylaws of the Corporation is hereby amended and restated to read in its entirety as follows:

     “3.2    NUMBER OF DIRECTORS

     The Board of Directors shall consist of five (5) persons until changed by a proper amendment of this Section 3.2. No reduction of the authorized number of directors shall have the effect of removing any director before that director’s term of office expires.”

     IN WITNESS WHEREOF, the undersigned has executed this Certificate as of January 24, 1994.

/s/ Emmanuel Hernandez
——————————————
Emmanuel Hernandez, Secretary

CERTIFICATE OF AMENDMENT OF BYLAWS

OF

CYPRESS SEMICONDUCTOR CORPORATION

     The undersigned, being the corporate Secretary of Cypress Semiconductor Corporation, hereby certifies that Article III, Section 3.2 of the Bylaws of this corporation was amended, effective October 26, 2000 by the Board of Directors, to read in its entirety as follows:

     “3.2    NUMBER OF DIRECTORS

     The Board of Directors of the corporation shall consist of six (6) persons, until changed by a certificate amending this Section 3.2, duly adopted by the board of directors or by the shareholders.

     No reduction of the authorized number of directors shall have the effect of removing any director before that director’s term of office expires.”

     Dated: October 26, 2000

/s/ Emmanuel Hernandez
——————————————
Emmanuel Hernandez,
Secretary

EX-21

EXHIBIT 21.1

LIST OF SUBSIDIARIES

Name	Jurisdiction of Incorporation
Cypress Semiconductor (Minnesota) Inc. (CMI)	Delaware
Cypress Semiconductor (Texas) Inc. (CTI)	Delaware
Cypress Semiconductor Technology, Ltd.	Cayman Islands
Cypress Semiconductor Philippines Inc. (CSPI)	Philippines

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-95011 and 333-95711) and in the Registration Statements on Form S-8 (Nos. 333-32898, 333-44264, 333-48712, 333-48714, 333-48716, 333-76667, 333-76665, 333-93719, 333-93839, 333-79997, 333-68703, 333-52035, 333-57542, 333-24831, 333-00535, 033-59153, 333-58896, 333-59428, 333-65512, 333-66076, 333-66074, 333-71530, 333-71528, and 333-81398) of Cypress Semiconductor Corporation of our report dated January 23, 2002, except as to Notes 15 and 18, which are as of February 28, 2002, relating to the financial statements, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
——————————————

PricewaterhouseCoopers LLP
San Jose, California
March 25, 2002

EX-24.1

EXHIBIT 24.1

POWER OF ATTORNEY

     Each of the officers and directors of Cypress Semiconductor Corporation whose signature appears below hereby constitutes and appoints T.J. Rodgers and Emmanuel Hernandez and each of them, their true and lawful attorneys-in-fact and agents, with full power of substitution, each with power to act alone, to sign and execute on behalf of the undersigned any amendment or amendments to this report on Form 10-K, and to perform any acts necessary to be done in order to file such amendment, and each of the undersigned does hereby ratify and confirm all that said attorneys-in-fact and agents, or their or his substitutes, shall do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated:

SIGNATURE TITLE DATE

/s/ T.J. Rodgers
——————————
T.J. Rodgers President, Chief Executive
Officer and Director
(Principal Executive Officer) March 25, 2002

/s/ Emmanuel Hernandez
——————————
Emmanuel Hernandez Chief Financial Officer
Vice President, Finance and
Administration (Principal
Financial and Accounting
Officer) March 25, 2002

/s/ Eric Benhamou
——————————
Eric Benhamou Chairman of the Board of
Directors March 25, 2002

/s/ Fred B. Bialek
——————————
Fred B. Bialek Director March 25, 2002

/s/ John C. Lewis
——————————
John C. Lewis Director March 25, 2002

/s/ James R. Long
——————————
James R. Long Director March 25, 2002

/s/ Al Shugart
——————————
Al Shugart Director March 25, 2002