<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                            ------------------------
 
(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 29, 1997
 
      [ ]   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)
 

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<S>                                                   <C>
                      DELAWARE                                             94-2885898
           (STATE OR OTHER JURISDICTION OF                              (I.R.S. EMPLOYER
           INCORPORATION OR ORGANIZATION)                              IDENTIFICATION NO.)
</TABLE>

 
            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:
 

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                 TITLE OF EACH CLASS                        NAME OF EACH EXCHANGE ON WHICH REGISTERED
                 -------------------                        -----------------------------------------
<S>                                                   <C>
            Common Stock, $.01 par value                             New York Stock Exchange
</TABLE>

 
          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. [ ]
 
     At March 16, 1998, registrant had outstanding 91,264,961 shares of Common
Stock. The market value of voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 16,
1998 on the New York Stock Exchange, was approximately $784,047,813. 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 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 1998 Annual Meeting of
Stockholders are incorporated by reference in Items 9, 10, 11 and 12 of Part III
of this 10-K Report.
 
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<PAGE>   2
 

                                     PART I
 

ITEM 1. 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. Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth in "Risk
Factors" and elsewhere in this Report.
 
GENERAL
 
     Cypress Semiconductor Corporation ("Cypress" or the "Company") 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, computers, and instrumentation systems. The
Company currently offers approximately 557 products from its Memory Products,
Programmable Logic, Computer Products, and Data Communications Divisions.
Cypress's products are marketed worldwide through a network of 22 North American
sales offices, 5 North American distributors, 23 U.S. sales representative
firms, 8 European sales offices, 2 Japanese sales offices, an office in
Singapore, an office in Korea, an office in Taiwan, and 45 international sales
representative firms. The Company sells its products to a wide range of
customers, including Ascend, Cisco Systems, IBM, Lucent Technologies, Motorola,
NEC, Northern Telecom, Seagate, and 3Com Corporation. In 1997, international
sales accounted for 36% of the Company's total sales.
 
     The Company's initial strategy, upon its founding in 1982, was to provide
innovative high-performance CMOS (complementary metal-oxide silicon) integrated
circuits to niche markets, which were believed to be too small to warrant the
considerable investment which would be required for the major established
international semiconductor manufacturers to target those markets. The Company
modified its strategy during 1992 to focus on selected high-volume products,
particularly in the static RAM market, to bring those products to market quickly
and at reduced cost and to achieve significant market acceptance of those
targeted products. Because of the highly competitive nature of the semiconductor
industry, its cyclicality and anticipated pressure on average selling prices
over the life of any particular product, the Company's ability to successfully
implement this strategy and achieve its revenue, earnings and gross margin goals
will depend upon a number of factors, including its ability to maintain its
position in the high-performance markets, to increase its presence in the more
competitive high-volume markets, to continue to successfully design and develop
new products utilizing advanced semiconductor design and process technologies in
a timely fashion, to improve manufacturing yields and reduce manufacturing costs
and cycle time, and to effectively market and sell its products in light of
significant domestic and international competition.
 
     The Company was incorporated in California in December 1982. The Company's
initial public offering of Common Stock occurred in May 1986 at which time the
Company's Common Stock commenced trading on the Nasdaq National Market. In
February 1987, the Company reincorporated in Delaware. The Company listed its
Common Stock on the New York Stock Exchange on October 17, 1988.
 
PRODUCTS
 
     To facilitate its response to market opportunities, Cypress has four
business units -- two focused on core technologies (Memory Products Division and
Programmable Logic Division) and two on end-market segments (Data Communications
Division and Computer Products Division). Because the semiconductor industry is
characterized by rapid technological change, resulting in products with
continually higher speeds, densities and performance capabilities and the
continuing evolution of process technologies, the Company's success will
continue to depend upon the timely development, introduction and market
acceptance of new products in these areas.
 
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<PAGE>   3
 
MEMORY PRODUCTS DIVISION (MPD)
 
     Static RAMs (Static Random Access Memories). Static RAMs are used for
storage and retrieval of data in computers, data communication,
telecommunication and other electronic systems. Because a computer is required
to read from or write to its memory several times to complete an operation,
high-performance system designers are very sensitive to memory access time,
which can be a major bottleneck in overall system performance. Fast static RAMs
are used for functions such as "cache memory" to store the data being processed
by the computer's central processing unit (CPU).
 
     The static RAM market is characterized by the requirements 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) and "power
consumption" (low power and ultra low power being required for portable battery
operated equipment). This differentiation of the static RAM market -- when
combined with the different RAM features incorporated by various manufacturers,
the need for military, industrial and commercial grade products, the need for
different package types, and the grading of product by speed and
power -- produces a complex market structure.
 
     The Company introduced a new static RAM technology in the latter half of
1996 that combines the benefits of fast static RAMs with the ultra low power of
a full CMOS six transistor RAM memory cell. This combination fueled growth in
the portable computing (battery operated) marketplace in 1997. This static RAM
technology platform will be scaled down in feature size in 1998 resulting in
substantial silicon cost reduction and performance improvement. The Company's
continued progress in lowering its manufacturing costs has allowed the Memory
Product Division to compete effectively in the high volume data communication,
telecommunications, personnel computer and workstation markets.
 
     Multichip Modules. The Company's high-density memory and logic modules are
assembled from high-performance devices in a single surface mount package in
order to create custom or standard enhanced single circuit equivalents such as
multi-megabyte static RAMs and complete cache memories used within many
high-performance personal computers. These modules can provide the solution to
many of the advanced circuit "building blocks" required by modern systems
designers. The multichip modules allow the Company increased visibility into
customer trends and future needs for single chip memory products and an
additional means to satisfy the present needs of customer systems already
incorporating Cypress products.
 
     EPROMs (Erasable Programmable Read-Only Memories). EPROMs are the memory
elements used in computers, peripherals, and telecommunication systems which
store fixed data that is not to be altered during normal machine operations.
Customers purchase blank EPROMS which are then programmed for their specific
application needs. Cypress has been a supplier of high performance CMOS EPROMS
since 1984. These early devices were the first to combine the fast memory access
of PROMS with the low power consumption of CMOS technology. The Company offers a
broad family of high-performance EPROM products ranging in density from 4K bits
to 1 MEG bits which are available with a variety of standard and proprietary
user-interfaces.
 
     In December 1997, the Company announced its plan to exit the commodity
EPROM business. The remaining, high-margin EPROM business was merged with the
Company's Memory Products Division.
 
PROGRAMMABLE LOGIC DIVISION (PLD)
 
     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. This
constitutes a significant portion of the circuitry in most systems. The Company
manufactures several logic circuits, which are programmable by the user. The
Company's PLD products allow the user to replace many standard logic devices
with a single device, thus reducing package count and cost, improving
performance and allowing miniaturization. The Company's PLD portfolio consists
of a wide variety of devices ranging from the Flash 16V8 to the very high
density CPLD (complex PLDs). All Cypress products are supported by the WARP(TM)
software tool set, which is based on VHDL (very high-speed integrated circuit
hardware description language), an industry standard.
 
                                        2

<PAGE>   4
 
     In March 1997, the Company and QuickLogic executed a definitive agreement
terminating an existing joint development, licensing, and foundry agreement for
antifuse Field Programmable Gate Array ("FPGA") products and executed a new
foundry agreement. Under the agreement, Cypress ceased to develop, market and
sell antifuse-based FPGA products. In return, the Company's equity position in
the privately held QuickLogic increased to greater than 20%. The Company also
entered into a five-year wafer supply agreement to provide FPGA products to
QuickLogic.
 
DATA COMMUNICATIONS DIVISION (DCD)
 
     The Company's Data Communications Division provides a range of products for
telecom, networking, mass storage and high-end video. In 1997, the division
continued its expansion of new product offerings in the Specialty Memory
business segment which the Company believes will provide a broadened product
portfolio and an increased revenue stream in 1998. Data Communications
Division's family of synchronous FIFOs has been expanded and has established
Cypress as the leader in Deep Synchronous FIFOs with the industry's first 1
Megabit FIFO. All of these new Deep Synchronous FIFOs conform to industry
standard pinouts and architecture.
 
     Data Communications Division's first PLL (Phase Locked Loop) based
products, RoboClock(TM) and HOTLink(TM), have been in production for several
years and revenues attributed to such products have continued to increase. The
Company's ATM product portfolio expanded in 1997 with the addition of a Bellcore
compliant clock and data separator, and an integrated framer and clock recovery
device.
 
     The VME business segment provides complete solutions to PC and industrial
systems requiring connections across multiple industry standard interfaces.
 
     The combination of these products serving different applications represent
the broad offering of products to the large and expanding data communications
market. They illustrate the commitment of the Data Communications Division to
provide a multiplicity of products and solutions to the complex problem of data
transfer between systems.
 
COMPUTER PRODUCTS DIVISION (CPD)
 
     The Company's Computer Products Division products provide a range of
integrated circuits serving the frequency control and peripheral control
markets.
 
     The Clocks business unit is a leader in the timing technology device
market. Clocks' PLL (Phase Lock Loop) frequency synthesizers integrate
essentially all clock requirements of a microprocessor based system, thus
reducing size, power, consumption and cost. These devices are widely used in
personal computers, disk drives, modems and video games.
 
     The FCT (Fast CMOS Technology) logic business unit offers a full complement
of standard logic and bus interface functions. FCT devices are used in a wide
variety of applications whenever the need arises for very high-speed logic
functions.
 
     The Universal Serial Bus business unit is targeting the USB market. The
universal serial bus is a four-wire connection between a PC and its peripherals,
facilitating an easy-to-use architecture known as "plug and play". The new
standard is a cooperative effort by Compaq, Digital Equipment Corporation, IBM,
Intel, Microsoft, NEC and Northern Telecom. The Company has entered into a
strategic alliance with Microsoft to produce the Company's first USB product, an
8-bit, RISC-based microcontroller for Microsoft's new Internet mouse.
 
     During 1997, the Company announced that it will discontinue design efforts
on personal computer chipsets. The Company's chipset was technically successful,
and it had been designed into multiple projects, but the basic architecture
incorporating SRAMs into personal computers has been changed by Intel, limiting
the commercial viability of the Company's product.
 
                                        3

<PAGE>   5
 
RESEARCH AND DEVELOPMENT
 
     The Company places great emphasis on research and development. This is
partially reflected by significant management time committed to continuously
improve process and product design development cycle time. The Company's current
product strategy requires rapid development of new products using emerging
process technologies while minimizing research and development costs. The
Company performs research and development at two levels. Research and
development relating to process technology is managed at the corporate level,
while research and development relating to new product design is managed at the
operating level by each of the Company's product divisions, in cooperation with
the Company's new product development organization.
 
     The major focus of process technology research is development of .25-micron
and .18-micron fabrication technologies. The Company expects to begin sales of
 .25-micron SRAM products by the end of 1998.
 
     The Company's Fab I wafer fabrication facility is primarily utilized for
research and development programs focusing on improving process technology.
Development and qualification programs for .25-micron and .18-micron
technologies are currently in progress in Fab I.
 
     The Company considers development of new products to be critical to its
future success. The Company has a central design group which focuses on new
product design and improvement of design methodologies. This group has ongoing
efforts to reduce design cycle time including re-use of standard cells via an
intellectual property library, development of computer-aided design tools and
improved design business processes. The Company currently has 37 design teams in
place working on new product designs. Design work primarily occurs at design
centers located at Colorado Springs, Colorado; San Jose, California;
Woodinville, Washington; Bloomington, Minnesota; Austin, Texas; Starkville,
Mississippi; Bangalore, India; Basingstoke, United Kingdom; and Cork, Ireland.
 
     The Company's research and development expenditures in 1997 were $93.8
million (17% of revenues), compared with $84.3 million (16% of revenues) in 1996
and $71.7 million (12% of revenues) in 1995. The Company expects to continue to
increase spending in research and development in order to maintain its
competitiveness in new product design and process technology development.
 
     The Company's future success depends on its ability to develop and
introduce new products which compete effectively on the basis of price and
performance and which address customer requirements. In addition, if the
development and implementation of new process technologies is not completed in a
timely and cost-effective basis, the Company's business, financial condition and
results of operations could be materially and adversely affected.
 
MANUFACTURING
 
     The Company manufactures its products at four submicron wafer fabrication
facilities using its proprietary 0.35, 0.5, 0.65 and 0.8-micron CMOS, 0.8 and
0.5-micron BiCMOS, and 0.65-micron Flash technologies. To enhance its
competitive position, the Company has programs to reduce manufacturing cycle
times, improve labor productivity, improve efficient use of capital resources,
manufacturing step-elimination, improved defect densities, improve yields and
ultimately lower manufacturing costs. The Company invested $69 million in 1997
to increase the capacity and capability of its primary wafer fabrication plants,
Fabs II, III and IV.
 
     In March 1998, the Company announced that it is planning to shut down Fab
III, which is a six-inch, 0.6 micron wafer fabrication plant, and move all of
its production to Fab IV, an eight-inch wafer, .35-micron plant. The Company
will use much of the equipment from Fab III -- after upgrading it from six-inch
to eight-inch wafers -- to build out Fab IV, thereby reducing the need for new
capital purchases. In addition, the Company announced that it is downsizing its
six-inch Fab II facility to eliminate SRAM production and also to reduce
manufacturing costs on high-margin non-SRAM products.
 
     Assembly and Test operations of the Company are performed by the Company's
highly automated assembly and test facility in the Philippines which accounted
for 37% of the Company's 1997 output, and
 
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<PAGE>   6
 
through a network of offshore subcontractors. The Philippine facility focuses
its investments in high volume products and packages where the ability of the
Company to significantly lower manufacturing costs is high. The Philippine plant
currently has capability for SOJ, TSOP, QSOP/SSOP, and SOIC packages and will be
developing capability for BGAs, TSSOPII, and STSOP packages in the near future.
In 1997, the Company invested $24 million in capital to expand its Philippines'
manufacturing capability. When fully utilized, this plant is expected to
increase the Company's assembly and test manufacturing capacity by 300 million
units per year.
 
     The complicated nature of the wafer fabrication process of the Company
often times result in certain wafers to be rejected or individual die on each
wafer to be non-functional, which result in the so called "Yield" problem that
is indigenous to the industry. Similar yield losses may be experienced in the
assembly and test phase of manufacturing. The Company's philosophy is to prevent
the yield loss and/or quality problems to the extent possible through analytical
manufacturing controls. The Company tests its products at various stages in the
fabrication, assembly and test processes, performs high temperature burn-in
qualifications as well as continuous reliability monitoring on all products, and
conducts numerous quality control inspections throughout the entire production
flow using quality-control analytic equipment. The Company has, on occasion,
experienced delayed product shipments due to lower than expected production
yields. Accordingly, to the extent the Company does not achieve acceptable
product yields, its operating results may be adversely affected.
 
MARKETING AND SALES
 
     The Company uses four channels to sell its products: direct OEM (original
equipment manufacturer) sales by the Cypress sales force, direct OEM sales by
manufacturing representative firms, sales through domestic distributors, and
sales through international trading companies and representative firms. The
Company's marketing and sales effort is organized around four regions: North
America, Europe, Japan and Asia/Pacific. The Company also has a strategic
accounts group which is responsible for specific customers with worldwide
operations. The Company augments its sales effort with FAEs (field application
engineers), who are specialists in the Company's product portfolio and work with
customers to "design in" Cypress products for their systems. FAEs also help the
Company identify emerging markets and new products.
 
     International revenues accounted for 36% of the Company's total revenues in
1997 compared to 27% in 1996 and 34% in 1995, respectively.
 
     The Company warrants its 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.
 
BACKLOG
 
     Cypress's sales are typically made pursuant to standard purchase orders for
delivery of catalog products. Generally, the Company's customer relationships
are not subject to long-term contracts. Quantities of the Company's products to
be delivered and delivery schedules, under purchase orders outstanding from time
to time, are frequently revised to reflect changes in customer needs. For these
reasons, the Company's backlog as of any particular date is not representative
of actual sales for any succeeding period and the Company believes that backlog
is not a good indicator of future revenue.
 
COMPETITION
 
     The Company faces 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
which the Company operates in.
 
     In the low to medium density static RAM area (16Kbit density or less), the
Company competes against equivalent products of a few manufacturers. There is
more significant price competition in the higher-volume 256Kbit and 1Mbit static
RAM area, in which the Company's competitors include Integrated Device
Technology (IDT), Motorola, Micron Technology, Alliance Semiconductor,
Integrated Silicon Solution, Inc.,
 
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Samsung, Hitachi and other Japanese and Korean manufacturers, as well as several
smaller niche oriented semiconductor start ups.
 
     There are few CMOS competitors in the relatively small high-speed PROM
market. In the CMOS EPROM market, the Company competes with Advanced Micro
Devices (AMD), SGS Thompson, Texas Instruments, Fujitsu, Atmel and Waferscale
Integration. The Company also competes extensively against bipolar PROM circuit
manufacturers such as Philips Corporation and AMD.
 
     The Company's PLD competition consists of bipolar products from companies
such as Vantis and Texas Instruments, and from CMOS PLDs from larger
competitors, including AMD, Actel, Altera, Lattice Semiconductor Corporation and
Xilinx. Additionally, the sale of PLDs is, in part, dependent on the
availability of user design software. Like the Company's Warp product, the
Company's PLD competitors have such software packages.
 
     The Company's data communications and logic products compete against
bipolar products of similar functionality from established companies such as
AMD, as well as CMOS versions of these products from companies such as IDT,
Samsung and Sharp.
 
     The Company competes against companies such as ICS/Avasem and ICW with
respect to timing technology products; IDT, Quality Semiconductor and Pericom
with respect to FCT products; and IDT, among others, with respect to module
products.
 
PATENTS AND LICENSES
 
     The Company currently has 138 patents and approximately 330 additional
patent applications on file with the United States Patent Office and is
preparing to file more patent applications. In addition to factors such as
innovation, technological expertise and experienced personnel, the Company
believes that patents are becoming increasingly important to remain competitive
in the industry and the Company has an active program to acquire additional
patent and other intellectual property protection.
 
     The Company has, and in the future may continue to, enter into technology
license agreements with third parties which give those parties the right to use
patents and other technology developed by the Company. Some of these agreements
also give the Company the right to use patents and other technologies developed
by such other parties, some of which involve payment of royalties.
 
     There can be no assurance that patents owned by the Company will not be
invalidated, circumvented or challenged, or that the rights granted thereunder
will provide competitive advantage to the Company. The Company is and may in the
future be involved in litigation with respect to alleged infringement or in
litigation to enforce its intellectual property rights. There can also be no
assurance that license agreements will continue to be available to the Company
on commercially reasonable terms in the future.
 
RISK FACTORS
 
     Except for the historical information contained herein, the discussion in
this 10-K report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, including, but not
limited to, statements as to the future operating results and business plans of
the Company, that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, general economic
conditions, the cyclical nature of both the semiconductor industry and the
markets addressed by the Company's products such as networking, computer, and
telecommunications markets, slower than expected growth in demand for
semiconductor products, the availability and extent of utilization of
manufacturing capacity, fluctuation in manufacturing yields, price erosion,
competitive factors, the successful development and timing and market acceptance
of new product introductions, product obsolescence, costs associated with future
litigation, costs associated with protecting the Company's intellectual
property, the successful ramp up of the Company's Philippines back-end
manufacturing plant, and the ability to develop and implement new technologies
including the continued transition to full commercial production of the
Company's new 0.5, 0.35 and 0.25 micron processes.
 
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  a.) Fluctuation in operating results.
 
     The Company's quarterly and annual results of operations are affected by a
variety of factors that could materially and adversely affect revenues, gross
profit and income from operations. These factors include, among others, demand
for the Company's products; changes in product mix; competitive pricing pressure
(particularly in the static RAM market); fluctuations in manufacturing yields;
cost and availability of raw materials; unanticipated delays or problems in the
introduction or performance of the Company's new products; the Company's ability
to introduce new products that meet customer requirements; market acceptance of
the Company's products; product introduction by competitors; availability and
extent of utilization of manufacturing capacity; product obsolescence; the
successful ramp up of the Company's Philippines back-end manufacturing plant,
resolution of Alphatec's financial situation; the ability to develop and
implement new technologies, including the transition of the Company's new 0.5,
0.35 and 0.25 micron process and continued migration to smaller geometries; the
conversion and upgrade of existing equipment base to these technologies
including transfer of equipment and capability among sites; the conversion and
upgrade of the existing equipment set from 6-inch to 8-inch capability; the
level of expenditures for research and development and sales, general and
administrative functions of the Company; costs associated with future
litigation; and costs associated with protecting the Company's intellectual
property. Any one or more of these factors could result in the Company failing
to achieve its expectations as to future revenues, gross profit and income from
operations. Additionally, risks inherent in the cyclical nature of the
semiconductor industry may cause the Company's quarterly and annual results of
operations to vary significantly. Moreover, as is common in the semiconductor
industry, the Company frequently ships more products in the third month of each
quarter than in either of the first two months of the quarter, and shipments in
the third month are higher at the end of that month. The concentration of sales
in the last month of the quarter contributes to the difficulty in predicting the
Company's quarterly revenues and results of operations.
 
     Since the Company recognizes revenues from sales to domestic distributors
only upon the distributors' sale to end customers, the Company is highly
dependent on the accuracy of distributors' estimates on their resale, which
could be materially different from the actual amounts finally reported. These
factors also contribute to the difficulty in predicting the Company's quarterly
revenue and results of operations, particularly in the last month of the
quarter.
 
  b.) Cyclical nature of semiconductor industry.
 
     The semiconductor industry has historically been characterized by wide
fluctuations in product supply and demand. From time to time, the industry has
also experienced significant downturns, often in connection with, or in
anticipation of, maturing product cycles and declines in general economic
conditions. These downturns have been characterized by diminished product
demand, production over-capacity and subsequent accelerated erosion of average
selling prices ("ASPs"). In some cases, such downturns have lasted more than a
year. In the past, the Company's operating results have been adversely affected
by industry-wide fluctuations in the demand for semiconductors, which resulted
in under-utilization of the Company's manufacturing capacity. The Company's
results from operations for 1996 and 1997 were adversely affected as a result of
a significant downturn in the semiconductor industry, which particularly
affected memory related products. A continuation of these conditions would
materially and adversely affect the Company's business, financial condition and
results of operations. In addition, the Company's business, financial condition
and results of operations could be materially and adversely affected by
industry-wide fluctuations in the future.
 
  c.) Dependence on growth of end markets.
 
     The Company's continued success will depend in large part on the continued
growth of various electronics industries that use semiconductors, including data
communications and telecommunications equipment, computers and computer related
peripherals, automotive electronics, industrial controls, customer electronics
equipment and military equipment. A significant portion of the products across
the Company's product divisions are incorporated into data communications and
telecommunication end-products. Any decline in the demand for networking
applications, mass storage, telecommunications, cellular base stations, cellular
handsets and other personal communication devices which incorporate the
Company's products could
 
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<PAGE>   9
 
adversely affect the Company's business, financial condition and operating
results. Certain of the Company's products, including Universal Serial Bus
("USB") micro-controllers, high frequency clocks and static RAMs, are
incorporated into computer and computer-related products, which have
historically been characterized by significant fluctuations in demand. Any
decline in the demand for advanced microprocessors, which utilizes these
products could materially and adversely affect the Company's operating results.
Further, any slowdown in the computer and related peripherals markets could also
materially and adversely affect the Company's operating results. There can be no
assurance that the Company will not be materially and adversely affected by
slower growth in the markets serviced by the Company's products.
 
  d.) Product price fluctuations.
 
     The ASPs of the Company's products historically have decreased over the
product's lives and are expected to continue to do so. To offset such ASP
decreases, the Company relies primarily on cost reductions in the manufacture of
such products, increased unit demand to absorb fixed costs and the introduction
of new, higher priced products that incorporate advanced features. To the extent
that such cost reductions, increased unit demand or new product introductions do
not occur in a timely manner or newly introduced products do not gain market
acceptance, the Company's business, financial condition and results of
operations could be materially and adversely affected. See "New Product
Development and Technological Change."
 
     The selling prices for the Company's products, particularly the static RAM
products, fluctuate significantly with real and perceived changes in the balance
of supply and demand for these commodity products. Growth in worldwide supply of
static RAMs in recent periods resulted in a significant decrease in average
selling prices for the Company's static RAM products. During 1997 and 1996, the
Company's static RAM products (which represent approximately 38% and 47%, of the
Company's revenues, respectively) declined at a rate substantially in excess of
historical rates. In the event that ASPs continue to decline at a faster rate
than that at which the Company is able to decrease per unit manufacturing costs,
the Company's business, financial condition and results of operations will be
materially and adversely affected. The amount of capacity to be placed into
production and future yield improvements by the Company's competitors could
dramatically increase worldwide supply of static RAM products and increase
downward pressure on pricing. Further, the Company has no firm information with
which to determine inventory levels of its competitors and customers, or to
determine the likelihood that substantial inventory liquidation may occur,
causing further downward pressure on pricing.
 
  e.) Intellectual property matters; Impact of litigation.
 
     The semiconductor industry has experienced a substantial amount of
litigation regarding patent and other intellectual property rights. The Company
is currently and may in the future be involved in litigation with respect to
alleged infringement by the Company of another party's patents, or may in the
future be involved in litigation to enforce its patents or other intellectual
property rights, to protect its trade secrets and know-how, to determine the
validity or scope of the proprietary rights of others, or to 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
and payment of substantial damages and/or royalties or prohibitions against
utilization of essential technologies, and could have a material adverse effect
on the Company's business, financial condition and results of operations. From
time to time the Company has received, and may receive in the future,
communications alleging that its products or its processes may infringe on
product or process technology rights held by others.
 
     In June 1997, the Company commenced a declaratory judgement action in the
United States District Court for the District of Nevada against the Li Second
Family Trust (the "Trust") asking for declaratory relief to the effect that a
U.S. patent relating to a portion of the process for manufacturing
semiconductors is unenforceable, invalid and not infringed by the Company. The
Trust has counterclaimed for patent infringement on the same patent alleging
such patent covers oxide-isolated integrated circuits. In correspondence,
attorneys for the Trust have argued that such patent "is applicable to NMOS,
CMOS, Bipolar, BiCMOS and other technologies". In December 1997, the Federal
Court for the Eastern District of Virginia preliminarily ruled that Dr. Li's
patent is unenforceable due to unequitable conduct by Dr. Li and his
 
                                        8

<PAGE>   10
 
attorneys in obtaining the patent. Dr. Li has the right to file an appeal,
although no such appeal as been filed as of March 17, 1998. The Company believes
it has meritorious defenses to the counterclaim and intends to defend itself
vigorously. However, should the outcome of this action be unfavorable, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
 
     Although the Company does not believe that its products or processes
infringe the proprietary rights of any third parties, there can be no assurance
that infringement or invalidity claims or actions (or claims for indemnification
resulting from infringement claims) will not be asserted against the Company or
that any such assertions (including the above-described counterclaim by the
Trust) will not materially and adversely affect the Company's business,
financial condition or results of operations. Irrespective of the validity or
the successful assertion of such claims or actions (including the
above-described counterclaim by the trust), the Company could incur significant
costs with respect to the defense thereof which could have a material adverse
affect on the Company's business, financial condition and results of operations.
Moreover, although the Company may seek to obtain a license under a third
party's intellectual property rights with respect to any such claims or actions
asserted against the Company, there can be no assurance that, under such
circumstances, a license would be available under reasonable terms at all.
 
     The Company entered into technology license agreements with third parties
which give those parties the right to use patents and other technology developed
by the Company and which give the Company the right to use patents and other
technology developed by such other parties, some of which involve payment of
royalties and some of which involve access to technology used in the Company's
operations. The Company anticipates that it will continue to enter into such
licensing arrangements in the future. There can be no assurance that such
licenses will continue to be available to the Company on commercially reasonable
terms in the future. The loss of or inability to obtain licenses to key
technology in the future could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
     The Company intends to continue to pursue patent, trade secret and mask
work protection for its semiconductor process technologies. To that end, the
Company has obtained certain patents and patent licenses and intends to continue
to seek patents on its inventions and manufacturing processes, as appropriate.
The process of seeking patent protection can be long and expensive, and there is
no assurance that patents will be issued from currently pending or future
applications or that, if patents are issued, they will be of sufficient scope or
strength to provide meaningful protection or any commercial advantage to the
Company. In particular, there can be no assurance that any patents held by the
Company will not be challenged, invalidated or circumvented. Furthermore, there
can be no assurance that others will not develop technologies that are similar
or superior to the Company's technology, duplicate the Company's technology or
design around the patents owned by the Company. The Company also relies on trade
secret protection for its technology, in part through confidentiality agreements
with its employees, consultants and third parties. There can be no assurance
that these agreements will not be breached, that the Company will have adequate
remedies for any breach or that the Company's trade secrets will not otherwise
become known to or independently developed by others. In addition, the laws of
certain territories in which the Company's products are or may be developed,
manufactured or sold may not protect the Company's products and intellectual
property rights to the same extent, as do the laws of the United States.
 
  f.) New product development and technological change.
 
     The Company's future success depends on its ability to develop and
introduce new products which compete effectively on the basis of price and
performance and which address customer requirements. The Company is continually
in the process of designing and commercializing new and improved products to
maintain its competitive position. The success of new product introductions is
dependent upon several factors, including timely completion and introduction of
new product designs, achievement of acceptable fabrication yields and market
acceptance. The development of new products by the Company and their design-in
to customers' systems can take several years, depending upon the complexity of
the device and the application. Accordingly, new product development requires a
long-term forecast of market trends and customer needs, and the successful
introduction of the Company's products may be adversely affected by competing
products or technologies serving markets addressed by the Company's products.
 
                                        9

<PAGE>   11
 
     The Company is currently developing new products with smaller feature
sizes, the fabrication of which will be substantially more complex than
fabrication of the Company's current products. The successful introduction of
these products and other new products will depend on the Company's development
and implementation of new process technologies. For example, the Company is
currently transitioning to its 0.5 and 0.35 micron process and will continue to
migrate to 0.25 micron and smaller geometries in the future. The transition
process may be coupled with the conversion and upgrade of existing equipment
base to support the required capability, the transfer of equipment and
capability among sites and the conversion of equipment base from 6-inch to
8-inch capability. If the implementation of such process changes is not
completed in a timely and cost-effective basis, the Company's business,
financial condition and results of operations could be materially and adversely
affected. In addition, as the Company develops its integrated solution products,
it will require more technically sophisticated sales and marketing personnel to
market these products successfully to its customers, which personnel may not be
available at affordable rates or at all. If the Company is unable to design,
develop, manufacture, market and sell new products successfully, its business,
financial condition and results of operations would be materially and adversely
affected.
 
  g.) Dependence on limited sources of supply, equipment and independent
assembly and test subcontractors.
 
     Raw materials and equipment utilized by the Company's manufacturing and R&D
operations generally must meet exacting product specifications. The Company
generally uses multiple sources of supply, but there are only a limited number
of suppliers capable of delivering certain raw materials and equipment that meet
the Company's specifications. Any change in the Company's suppliers would
require the qualification by the Company of the new supplier. Additionally, the
availability of raw materials and equipment may decline due to the overall
increase in worldwide semiconductor demand. Although shortages have occurred
from time to time in the past and lead times in the industry have been extended
on occasion, to date the Company has not experienced any significant
interruption in operations as a result of difficulties in obtaining raw
materials or equipment for its semiconductor manufacturing operations. However,
interruption of any one raw material or equipment source could have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
     A portion of the Company's products are assembled, packaged and tested at
the Company's back-end manufacturing facility located in the Philippines. The
Company relies on independent subcontractors to assemble, package and test the
balance of its products. This reliance involves significant risk, including
reduced control over quality and delivery schedules, capacity and discontinuance
or phase-out of such subcontractors' assembly processes. There can be no
assurance that the Company's subcontractors will continue to assemble, package
and test products for the Company.
 
     During the second quarter of 1997, Alphatec Electronics Pcl ("Alphatec"),
one of the Company's primary back-end manufacturing subcontract vendors, missed
its deadline to repay $43.7 million of third party international bonds. Although
Alphatec has experienced recent financial difficulties, the Company has
experienced no disruption in supply from Alphatec's assembly and test
operations. The Company has consigned capital assets to Alphatec which had a net
book value of approximately $15.3 million at December 29, 1997 and Alphatec's
production represents approximately 17% of the Company's back-end manufacturing
capacity.
 
     In March 1998 the Company announced that it will shut down its Alphatec
test facility and consolidate these test manufacturing operations into the
Company's Philippines plant.
 
  h.) Risk in manufacturing and Excess capacity.
 
     The fabrication of integrated circuits is a highly complex and precise
process, requiring production in a tightly controlled, clean environment. Minute
impurities, difficulties in the 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 die on each wafer to be nonfunctional. The
Company may experience problems in achieving acceptable yields in the
manufacture of wafers, particularly in connection with the expansion of its
capacity and related transitions. The interruption of wafer fabrication or the
failure to achieve acceptable
 
                                       10

<PAGE>   12
 
manufacturing yields at any of the Company's facilities would have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
     The Company has made, and will continue to make, substantial capital
expenditures to increase its wafer fabrication, assembly and test manufacturing
capacity and capability. Should the need for such additional capacity and
capability not materialize because of factors such as, insufficient loading of
the wafer fabs, or a significant shift in mix of wafer fab loading, or
insufficient loading of the Philippines back-end manufacturing plant and the
network of subcontractors, to the extent that they use the Company's equipment,
or a significant shift in package mix loading, anticipated cost savings may not
be realized. Should the need for more advanced technologies require accelerated
conversion to 0.35 and 0.25 micron or smaller geometries, or the transfer of
equipment and capability among fabs, or the conversion from 6-inch to 8-inch
equipment set, higher operating expenses and the need to write-off capital
equipment made obsolete by the technology conversion may result. There can be no
assurance that market conditions will permit the Company to fully utilize this
increased capacity and capability or that the increases in fixed costs and
operating expenses related to this expansion of capacity and capability will not
materially and adversely affect the Company's business, financial condition and
results of operations.
 
     Additionally, the Company's headquarters and some manufacturing facilities
are located near major earthquake faults. In the event of a major earthquake,
the Company could suffer damages that could materially and adversely affect the
Company's business, financial condition and results of operations.
 
  i.) Competition
 
     The semiconductor industry is intensely competitive and is characterized by
price erosion, rapid technological change and heightened foreign competition in
many markets. The industry consists of major domestic and international
semiconductor companies, many of which have substantially greater financial,
technical, marketing, distribution and other resources than the Company, as well
as emerging companies attempting to obtain a share of the existing market. The
Company faces 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 CMOS and BiCMOS
market sector. The ability of the Company to compete successfully in a rapidly
evolving high performance end of the integrated circuit technology spectrum
depends on elements both within and outside of its control, including success in
developing new products and process technologies, product quality and price,
diversity of product line, cost effectiveness, the pace at which customers
incorporate the Company's products into their systems, the number and nature of
its competitors and general economic conditions. The Company believes it
competes favorably with respect to developing new products and process
technologies, product quality and price, diversity of product line and cost
effectiveness. Price competition in the future could further erode average
selling prices and adversely affect revenues and operating results.
 
  j.) Inventory risk; Shortened customer lead times.
 
     The Company must order wafers and packaging materials and build inventory
well in advance of product shipments. Because the Company's markets are volatile
and subject to rapid technology and price changes, there is a risk that the
Company will forecast incorrectly and produce excess or insufficient inventories
of products. This inventory risk is heightened because many of the Company's
customers place orders with short lead times. These factors increase not only
the inventory risk but also the difficulty of forecasting quarterly operating
results. Failure to predict accurately the inventory required to meet customer
demand could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
  k.) Liquidity and Future Capital Needs.
 
     Semiconductor manufacturers generally have substantial ongoing capital
requirements to maintain or increase manufacturing capacity. Due to the
capital-intensive nature of the semiconductor industry and the Company's need to
continue to invest in advanced manufacturing and test equipment, the Company
expects to spend approximately $100.0 million in capital expenditures in 1998
and anticipates significant continuing
 
                                       11

<PAGE>   13
 
capital expenditures in the next several years. Historically, the Company has
reinvested a substantial portion of its cash flow from operations in capacity
expansion and improvement programs. The Company's cash flows from operations
depend primarily on average selling prices and the per unit cost of the
Company's products. In the event that the Company is unable to decrease costs
for its products at a rate equal to the rate of decline in selling prices for
such products, the Company may not be able to generate sufficient cash flow from
operations to maintain or increase manufacturing capacity. There can be no
assurance that the Company will not be required to seek financing from external
sources to satisfy its cash and capital needs or that such financing will be
available on terms deemed satisfactory to the Company, the Company's business,
financial condition and results of operations will be adversely impacted.
 
  l.) Dependence on Key Personnel.
 
     The Company is dependent upon a limited number of key management and
technical personnel. In addition, the Company's future success will depend in
part upon its ability to attract and retain highly qualified personnel,
particularly product design engineers. The Company competes for such personnel
with other companies, academic institutions, government entities and other
organizations. There can be no assurance that the Company will be successful in
hiring or retaining qualified personnel, or that any of the Company's personnel
will remain employed by the Company. Any loss of key personnel or the inability
to hire or retain qualified personnel could have a material adverse effect on
the Company's business, financial condition and results of operations.
 
m.) Risk of International Operations.
 
     International sales represented 36% and 27% of the Company's revenues in
1997 and 1996, respectively. The Company's offshore assembly and test operations
and export sales are subject to risks associated with foreign operations,
including currency exchange fluctuations, political instability, changes in
local economic conditions, the devaluation of local currencies, import and
export controls, as well as changes in tax laws, tariffs and freight rates. To
the extent any such risks materialize, the Company's business, financial
condition and results of operations could be materially and adversely affected.
 
  n.) Environmental Regulations
 
     The Company is subject to a variety of federal, state and local
governmental regulations related to the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
process. Increasing public attention has been focused on the environmental
impact of semiconductor manufacturing operations. There can be no assurance that
changes in environmental regulations will not impose the need for additional
capital equipment or other requirements. Any failure by the Company to control
the use of, or to adequately restrict the discharge of, hazardous substances
under present or future regulations could subject the Company to substantial
liability or could cause its manufacturing operations to be suspended. Such
liability or suspension of manufacturing operations could have a material
adverse effect on the Company's business, financial conditions and results of
operations.
 
EMPLOYEES
 
     As of December 29, 1997, the Company and its subsidiaries had 2,770
employees, compared with 2,171 at the end of fiscal 1996. The majority of this
increase resulted from expansion of the Company's Philippines assembly and test
operations, which at year-end had 614 employees. None of the Company's employees
is represented by a collective bargaining agreement, nor has the Company ever
experienced any work stoppage.
 

I
TEM 2. PROPERTIES
 
     The Company's executive offices, engineering and research and development
facilities are located in an approximately 60,000 square-foot building at 195
Champion Court, San Jose, California, under a lease that will expire in 1999.
Located immediately adjacent to the Company's executive offices is one of the
Company's wafer fabrication facilities (Fab I), which is primarily utilized for
R & D operations. This facility is located in
 
                                       12

<PAGE>   14
 
an approximately 61,000 square-foot leased building at 3901 North First Street,
San Jose, California. The current lease expires in 1999. 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 7 of the Consolidated
Financial Statements).
 
     Research and development and other Company staff functions also are located
at the San Jose site. This office space is composed of approximately 75,000
square feet in a building located at 4001 North First Street, San Jose,
California under a lease which expires in 2001. In addition, Cypress has leased
75,000 square feet of additional office space at 3939 North First Street, San
Jose, California. This building was occupied in 1997 and is currently leased
until 2001. As described above, the lease rates for these facilities are subject
to variations based on LIBOR and Cypress is required to sell, extend the lease
or acquire the property at the end of the lease term.
 
     In December 1988, the Company purchased the two undeveloped industrial lots
on either side of its headquarters building. These similarly sized lots,
comprising a total of approximately 8.5 acres, will be retained for future
expansion of the San Jose building complex. In the third quarter of 1996, the
Company began operations in a new 162,000-square foot highly automated assembly
and test manufacturing plant in Cavite, the Philippines. The Company owns an
approximately 100,000 square foot wafer fabrication facility (Fab II) in Round
Rock, Texas. In 1995, the Company began construction of a new fab, Fab V,
adjacent to Fab II. Fab V construction will result in a 225,000-square-foot
facility, with a 35,000-square-foot clean room. This facility's construction is
currently on hold. In addition, the Company also owns approximately 170,000
square foot wafer fabrication facility (Fab III) and leases approximately
100,000 square foot wafer fabrication facility (Fab IV) on 18 acres of land in
Bloomington, Minnesota. The Fab IV lease rate 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 March 2001 (see Note 7 of the Consolidated
Financial Statements).
 
     In November 1997, the Company purchased land and building comprised of
approximately 3.5 acres of land and 58,000-sq. ft. of building in Woodinville,
Washington. The property is the new headquarters of our Computer Products
Division (CPD), previously located in a leased facility in Kirkland, WA.
 
     The Company leases additional space for domestic sales and design centers
in Huntsville, Alabama; Irvine, San Diego, San Jose, and Woodland Hills,
California; Denver and Colorado Springs, Colorado; Clearwater, Altamonte
Springs, and Pompano Beach, Florida; Roswell, Georgia; Palatine, Illinois;
Lexington, Kentucky; Columbia, Maryland; Minnetonka, Minnesota; Starkville,
Mississippi; Nashua, New Hampshire; Laurence Harbor, New Jersey; Raleigh, North
Carolina; Beaverton, Oregon; Trevose, Pennsylvania; and Austin, Houston and
Richardson, Texas. The Company leases international sales, representative and
design centers in Antwerp and Waterloo, Belgium; Toronto, Ontario, Canada; Le
Ulis Cedex, France; Cork, Ireland; Milan and Orbassano, Italy; Tokyo and Osaka,
Japan; Taby, Sweden; Cheshire, Basingstoke and Hertfordshire, United Kingdom;
Zorneding, Germany; Singapore; Taipei, Taiwan; Seoul, Korea; and Bangalore,
India.
 

ITEM 3. LEGAL PROCEEDINGS
 
     In January and February 1992, the Company and certain of its officers were
named defendants in three purported class-action suits filed in the U.S.
District Court for the Northern District of California. The suits filed are for
alleged violations of the Securities Exchange Act of 1934 and certain provisions
of state law regarding disclosure of short-term business prospects. In 1992, the
three securities class-action complaints were consolidated by the U.S. District
Court for the Northern District of California. In June 1995, the U.S. District
Court for the Northern District of California dismissed this lawsuit by a
summary judgment. The plaintiffs appeal with the Ninth Circuit has been denied.
In October 1997, the Company filed a lawsuit against two attorneys and their
associated law firms for malicious prosecution to recover losses incurred in the
Company's defense in these class-action suits.
 
     In June 1997, the Company filed suit against the Li Second Family Limited
Partnership ("Li"), owner of a U.S. patent alleged to be infringed by every
company in the semiconductor and integrated circuit industries. The Company
sought to invalidate the patent and/or have the Company's processes declared
non-infringing. In December 1997, the Federal Court for the Eastern District of
Virginia preliminarily ruled that Dr. Li's
 
                                       13

<PAGE>   15
 
patent is unenforceable due to inequitable conduct by Dr. Li and his attorneys
in obtaining the patent. The Company's suit is stayed indefinitely pending Li's
appeal.
 
     In January 1998, the Company was contacted by the attorneys representing
the estate of Mr. Jerome Lemelson charging that the Company infringed on certain
patents registered by Mr. Lemelson. The attorneys for the estate have not filed
suit, but have urged the Company to enter into a licensing agreement with the
estate in order to avoid litigation. The Company is in the process of reviewing
the charges to determine the validity of the suit. Should the estate file suit,
the Company would vigorously defend itself in this matter. However, because of
the inherent uncertainties of litigation, the outcome of this action could be
unfavorable, in which event the Company might be required to pay damages and
other expenses, which could have a material adverse effect on the Company's
financial position and results of operations.
 
     The Company will vigorously defend itself in these matters and, subject to
the inherent uncertainties of litigation and based upon discovery completed to
date, management believes that the resolution of these matters will not have a
material adverse impact on the Company's financial position or results of
operations. However, should the outcome of any of the actions be unfavorable,
Cypress may be required to pay damages and other expenses, which could have a
material adverse effect on the Company's financial position or results of
operations. In addition, the Company could be required to alter certain of its
production processes or products as a result of these matters.
 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     None
 
                                       14

<PAGE>   16
 
                      EXECUTIVE OFFICERS OF THE REGISTRANT
 
     Certain information regarding each of the Company's current executive
officers is set forth below:
 

<TABLE>
<CAPTION>
                                                                              EXECUTIVE
                                                                               OFFICER
             NAME                AGE                 POSITION                   SINCE
             ----                ---                 --------                 ---------
<S>                              <C>   <C>                                    <C>
T. J. Rodgers                    50    President and Chief Executive Officer    1982
Antonio R. Alvarez               41    Executive Vice President, Memory         1993
                                       Products Division and Research and
                                       Development
Emmanuel Hernandez               42    Executive Vice President, Finance and    1993
                                       Administration, Chief Financial
                                       Officer
J. Daniel McCranie               54    Executive Vice President, Marketing      1993
                                       and Sales
Lothar Maier                     43    Executive Vice President, Worldwide      1994
                                       Manufacturing,
James Kupec                      43    Executive Vice President, Business       1997
                                       Development
</TABLE>

 
     Except as set forth below, each of the Company's executive officers has
been engaged in his principal occupation described above during the past five
years. There is no family relationship between any director or executive officer
of the Company.
 
     T.J. RODGERS is a co-founder of the Company and has been its president and
chief executive officer since 1982. Mr. Rodgers serves as a director of Vitesse
Semiconductor Corporation and C-Cube Corporation.
 
     ANTONIO R. ALVAREZ joined the Company in May 1987 as a senior technical
engineer. Mr. Alvarez was transferred to the Company's subsidiary, Aspen
Semiconductor Corporation, in April 1988 as the manager of BiCMOS technology. In
October 1989, Mr. Alvarez returned to the Company as Vice President, Research
and Development. In February 1993, Mr. Alvarez also became responsible for Fab I
when it was merged with the research and development department. Prior to
joining the Company in 1987, Mr. Alvarez worked in various engineering and
management positions at Motorola Corporation from September 1979 through July
1987. His last position at Motorola was as a senior member of the technical
staff.
 
     EMMANUEL HERNANDEZ joined the Company in June 1993 as corporate Controller.
In January 1994, Mr. Hernandez was promoted to Vice President, Finance and
Administration, and Chief Financial Officer. Prior to joining the Company, from
1976 to 1993, Mr. Hernandez held various financial positions with National
Semiconductor Corporation.
 
     J. DANIEL MCCRANIE joined the Company in October 1993 as Vice President of
Marketing and Sales. Prior to joining the Company, from 1989 to 1993, Mr.
McCranie was President and CEO of SEEQ Technology. Mr. McCranie also held the
position of Vice President of Sales and Marketing for SEEQ for five years prior
to becoming President and CEO. Previously, he held marketing and sales positions
at Harris Semiconductor, AMD, American Microsystems and Signetics.
 
     LOTHAR MAIER joined the Company in July 1983 as Manufacturing Engineering
Manager. Mr. Maier assumed full responsibility for Fab I in February of 1988,
and held this position until the end of December 1990. Mr. Maier was transferred
to the Company's subsidiary, Cypress Semiconductor (Minnesota) , Inc. in January
1991 as subsidiary President. In addition, Mr. Maier was promoted to Vice
President of Wafer Fabrication of the Company in September 1994 and relocated
back to San Jose in the first half of 1996. In 1997, Mr. Maier became Vice
President of Worldwide Manufacturing and assumed responsibility for wafer
fabrication, assembly and test operations.
 
     JAMES KUPEC joined the Company in 1983 as Product Engineering Manager. In
1988, he transferred to the Company's subsidiary Aspen Semiconductor as Director
of Operations. In 1992, Mr. Kupec became Vice President of Cypress's Memory
Product Division. In 1996 he was promoted to Vice President of Product Divisions
responsible for all of Cypress's product divisions. In 1997, Mr. Kupec assumed
responsibility for the Company's business development programs. Prior to joining
Cypress, Mr. Kupec worked in engineering and management positions at Mostek and
United Technologies.
 
                                       15

<PAGE>   17
 

                                    PART II
 

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
 
     The Company's 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. The Company has
not paid cash dividends and has no present plans to do so. At December 29, 1997
there were approximately 3,032 holders of record of the Company's Common Stock.
 

<TABLE>
<CAPTION>
                                                    PRICE RANGE OF COMMON STOCK($)
                                                   --------------------------------
                                                     LOW         HIGH       CLOSE
                                                   --------    --------    --------
<S>                                                <C>         <C>         <C>
Fiscal Year ended December 29, 1997:
  First Quarter..................................   $11.62      $15.25      $12.50
  Second Quarter.................................    11.62       15.88       14.50
  Third Quarter..................................    14.19       18.94       15.50
  Fourth Quarter.................................     7.37       15.94        8.63
Fiscal year ended December 30, 1996:
  First Quarter..................................    10.00       16.25       11.75
  Second Quarter.................................    11.38       15.00       12.25
  Third Quarter..................................     9.13       13.63       12.63
  Fourth Quarter.................................    10.50       16.63       14.50
</TABLE>

 

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 

<TABLE>
<CAPTION>
                                                           YEAR ENDED(1)
                                      --------------------------------------------------------
                                        1997        1996        1995        1994        1993
                                      --------    --------    --------    --------    --------
                                          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                   <C>         <C>         <C>         <C>         <C>
OPERATING RESULTS:
  Revenues..........................  $544,356    $528,385    $596,071    $406,359    $304,512
  Acquisition-related non-recurring
     charges........................        --          --          --          --      18,271
  Restructuring and other
     non-recurring costs
     (benefits).....................        --      (7,018)     17,800          --        (408)
  Operating income..................    18,313      81,594     159,171      77,792      10,686
  Income before income taxes........    24,032      83,505     161,384      80,115      12,567
  Net income........................    18,419      53,029     102,477      50,472       8,043
  Net income per share
     Basic..........................  $   0.21    $   0.66    $   1.25    $   0.67    $   0.11
     Diluted........................  $   0.21    $   0.62    $   1.09    $   0.60    $   0.11
  Weighted average common and common
     equivalent shares outstanding
     Basic..........................    87,888      80,241      81,748      75,618      71,785
     Diluted........................    94,648      91,604      97,309      88,311      76,241
BALANCE SHEET DATA:
  Cash and short-term investments...  $201,561    $ 93,786    $161,618    $193,275    $ 80,590
  Working capital...................   305,027     126,006     190,580     225,952     124,651
  Total assets......................   956,270     794,047     750,728     555,699     340,648
  Long term debt and capital lease
     obligations (excluding current
     portion).......................   219,741     127,895     117,572     111,538       7,776
  Stockholders' equity..............   643,476     510,746     472,099     352,999     271,685
</TABLE>

 
- ---------------
(1) The Company operates on a 52- or 53-week fiscal year, ending on the Monday
    closest to December 31.
 
                                       16

<PAGE>   18
 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
        CONDITION
 
     The "Management's Discussion and Analysis" may contain forward-looking
statements about the prospects for Cypress as well as the semiconductor industry
more generally including without limitation statements about profitability
goals, revenue goals, growth rate goals, market share goals, market size and
growth projections, new product introductions, planned manufacturing capacity,
and efficiency and cost goals. Actual results could differ materially from those
described in the forward-looking statements as a result of various factors
including, but not limited to, the factors identified in the Management's
Discussion and Analysis section, particularly "Factors Affecting Future
Results," as well as the following: (i) increased competition which could result
in lost sales or price erosion; (ii) changes in product demand by the
electronics and semiconductor industries, which are noted for rapidly changing
needs, coupled with an inability by Cypress to generate product enhancements or
new product introductions which will keep pace with or meet those rapidly
changing needs; (iii) failure by Cypress to develop or introduce successfully
new products in areas of expected new or increased demand, or development and
introduction of superior new products serving those areas by others; (iv)
failure of expected growth in demand for, or areas of expected new demand for,
semiconductor products to materialize; (v) failure to successfully bring on line
and utilize additional manufacturing capacity, or to transition existing
capacity to new uses; (vi) inability to develop and/or adopt more advanced
manufacturing technology; (vii) inability of the Company's patents or other
proprietary rights to ensure adequate protection against encroachment on the
Company's technology by competitors; and (viii) changes in the market for
semiconductor stocks.
 
     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. Actual results could differ materially from those
projected in the forward-looking statements as a result of the factors set forth
in "Factors Affecting Future Results" and elsewhere.
 
OVERVIEW
 
     In 1997, the Company's revenues increased to $544.4 million compared to the
$528.4 million recorded in 1996, but decreased in comparison to the $596.1
million recorded in 1995. Revenues increased 3.0% over last year, but were 8.7%
lower than in 1995. Even with the increase in revenues comparing 1997 to 1996,
profits in 1997 decreased to $18.4 million, or $0.21 per share, on a diluted
basis, compared to $53.0 million, or $0.62 per share in 1996. Earnings Per Share
("EPS") have been restated for all periods presented in compliance with
Statement of Financial Accounting Standard No. 128 ("FAS 128"), "Earnings Per
Share". Profits in 1995 were significantly higher than in 1997 as the Company
recorded profits of $102.5 million, or $1.09 per share. The Company continued to
be adversely affected by decreasing average selling prices ("ASPs"),
particularly in its largest product line, Memory Products, which includes Static
Random Access Memory products ("SRAMs"). Also in the latter part of the year,
the Company was adversely impacted by lower yields caused by the conversion of
certain capacity to 0.35 micron resulting in shortage in manufacturing output
and missed sales opportunities. As a result of lower ASPs, the Company's gross
margin decreased to 34.4% in 1997, compared to 42.2% in 1996 and 53.7% in 1995.
ASPs in 1998 are expected to continue to decrease, but at a reduced rate from
that experienced in 1997. In order to offset the effects of lower ASPs, the
Company will continue its efforts to introduce new products with higher margins
and to lower manufacturing costs by redesigning its existing products and
transition its manufacturing processes from 0.65 micron to 0.5, 0.35 and 0.25
micron geometries.
 
     In February 1997, the Company called for redemption of all of the 3.15%
Convertible Subordinated Notes which was effective as of March 26, 1997. At the
time of conversion, approximately 85% of the holders elected to convert their
notes into the Company's common stock, increasing the amount of common stock
outstanding by 6,789,013 shares. As a result of holders electing the cash
settlement, the Company paid out $14.3 million.
 
     In March 1997, the Company signed a definitive agreement with QuickLogic
Corporation ("QuickLogic") involving the termination of an existing joint
development, licensing and foundry agreement for antifuse Field Programmable
Gate Array ("FPGA") products and the execution of a new foundry
 
                                       17

<PAGE>   19
 
agreement. Under the new agreement, the Company will cease to develop, market
and sell antifuse-based FPGA products. In return, Quicklogic paid $4.5 million,
which represented $3.5 million of Non-Recurring Engineering ("NRE") revenue
related to the sale of technology rights and $1.0 million of compensation for
inventory and other assets, and issued shares of Quicklogic common stock that
increased the Company's equity position in the privately-held QuickLogic to
greater than 20%. The $4.5 million cash consideration represented the payment
the Company received in June 1996. The Company also entered into a five-year
wafer-supply agreement to provide FPGA products to QuickLogic. Revenues and net
income contributed by the FPGA product line during 1997, 1996 and 1995 were not
significant. The Company is using the equity method of accounting to record its
investment in Quicklogic. The loss recorded in 1997 was not significant.
 
     In September 1997, the Company completed a $175.0 million private placement
of 5-year Convertible Subordinated Notes. The notes are due in the year 2002,
with a coupon rate of 6.00% and an initial conversion premium of 48.2%. The
notes are convertible into approximately 7,408,000 shares of common stock and
are callable by the Company three years after the date of issuance. Net proceeds
were $170.2 million, after issuance costs of $4.8 million.
 
     In October 1997, the Board of Directors authorized the repurchase of up to
2.0 million shares of the Company's common stock. In December 1997, the Board of
Directors authorized the repurchase of an additional 2.0 million shares. As of
December 29, 1997, the Company had repurchased 515,800 shares of its common
stock for $5.3 million. The shares purchased are expected to be issued in
conjunction with the Company's 1994 Stock Option Plan and ESPP. In conjunction
with the authorized stock repurchase program, the Company sold put warrants
through private placements for which it received $2.8 million. The Company has a
maximum potential obligation to purchase 3.0 million shares of its common stock
at an aggregate price of $32.4 million as of December 29, 1997. The puts have
various expiration periods from January 1998 through October 1998. The Company
has the right to settle the put warrants with cash or settle the difference
between the exercise price and the fair market value at the exercise date with
stock or cash. The intent of the Company is to settle these put warrants with
stock, and therefore, no amount was classified out of stockholders' equity in
the accompanying consolidated balance sheet.
 
     In December 1997, the Company announced its plans to exit the commodity
Erasable Programmable Read-Only Memory business ("EPROM"). The remaining,
high-margin EPROM business was merged with the Company's memory products
division in order to serve the Company's EPROM customers in the future without
the heavy cost of maintaining a product line. The Company also announced plans
to discontinue its Chipset business, which was served by the Company's PC Logic
product line. This included the closure of the Company's Germany Design Center,
which specialized in designing chipsets. Costs associated with the change in the
Company's business described above, were not material and were taken as period
expenses in 1997.
 
     In December 1997, the Company announced it was shutting down its San Jose
test facility. In 1992, the Company moved a majority of its backend
manufacturing to Bangkok, Thailand, but maintained a small test area in San Jose
to support new products. In 1996 the Company began operations in its new
assembly and test facility located in the Philippines. In 1997, as the Company
began ramping up production in the Philippines plant, it was decided that the
Company no longer needed to maintain the small, but expensive test facility in
San Jose. As such, the plant was shut down. Costs associated with this shutdown
were not material and were taken as period expenses in 1997.
 
     In January 1998, substantially all outstanding stock options with an
exercise price in excess of $9.75 per share were cancelled and replaced with new
options having an exercise price of $9.75 per share, the fair market value on
the date that the employees accepted the repricing. A total of 10,463,688 shares
were repriced. This repricing excluded the Board of Directors, the Chief
Executive Officer and the Executive staff of the Company.
 
     On March 9, 1998, the Company announced a restructuring plan for which it
will incur charges in the quarter ended March 30, 1998, for the write-down and
write-off of manufacturing facilities, equipment and improvements; operating
costs attributable to the closure and consolidation of manufacturing facilities;
 
                                       18

<PAGE>   20
 
consolidation of test facilities; write-down of non-usable assembly inventory in
the Thai test facility; the severance of manufacturing and other personnel and
other costs.
 
     The Company plans to shut down its six-inch, 0.6 micron wafer fabrication
plant, Fab III, in Bloomington, Minnesota and move all production to its
eight-inch, 0.35 micron fab, Fab IV, also in Minnesota. The adjustments from
this decision relate primarily to the carrying value of manufacturing assets. As
a result of developments in the semiconductor industry, such as decreasing
average selling prices, particularly in its largest product line, Memory
Products, the Company has accelerated the use of more advanced manufacturing
processes to produce its products. The use of these more advanced processes
indicated that the carrying value of these selected older assets may not be
recoverable. The fair value of such manufacturing assets was based primarily
upon third party estimates of fair value. The impairment charge relates to those
assets that cannot be upgraded to eight-inch capability for use in Fab IV.
 
     Fab II, located in Round Rock, Texas has been used in the manufacture of
wafers for the Datacommunication, Programmable Logic and Computer Products
divisions. A decision has been made to discontinue producing SRAMs in Texas.
Costs associated with this decision include severance payments for approximately
100 employees, a write-down in the valuation of equipment which cannot be used
elsewhere and related costs.
 
     The Company uses a third party subcontractor, located in Thailand, for a
portion of its test manufacturing. The Company plans to consolidate the Thai
test manufacturing operation into its subsidiary operation located in the
Philippines. Costs associated with this include severance payments, write-off of
non-usable assembly inventory and the write-down of equipment that the Company
will not be able to use in its Manila plant.
 
     The decision to centralize most of the wafer production in an eight-inch
fab caused the Company to make a decision to upgrade its R&D wafer fab, Fab I,
located in San Jose, California, from six-inch to eight-inch to ensure
compatibility. The charges associated with this move include facility
write-downs and disposal of certain six-inch manufacturing equipment.
 
     Costs associated with all the above decisions amount to approximately $63.0
million.
 
     Separately, the Company will record charges of approximately $22.0 million
relating to the write-off of certain equity investments and additional inventory
reserves relating to the ongoing industry over-supply and continued inventory
corrections by end user customers.
 
RESULTS OF OPERATIONS
 
     In 1997, the Company recorded revenues of $544.4 million, an increase of
3.0% compared to the $528.4 million recorded in 1996, but an 8.7% decrease in
comparison to the $596.1 million recorded in 1995. Even though revenues in 1997
increased slightly compared to 1996, ASPs continued to decline, particularly in
the Memory Products Division ("MPD"), which includes the Static Random Access
Memory ("SRAM") line of products. The ASPs for SRAM products continued to
decline dropping 38.9% during 1997. The Company expects SRAM ASPs to decrease in
1998, but at a rate slower than experienced in the two previous years. The
revenue decline in SRAM products caused by decreasing ASPs in 1997 was primarily
in the 1 meg family of products where the ASPs at the end of 1997 dropped 37.6%
in comparison to the end of 1996. Although unit sales volume of SRAM products
increased significantly, growing 36.6% comparing 1997 to 1996, the increase in
unit sales volume was not significant enough to offset the decline in ASPs.
Consequently, SRAM revenues decreased 16.4% from 1996. In 1997, the Company
moved its Non-volatile Memory ("NVM") line of products from the Programmable
Products Division ("PPD") to MPD. Revenues generated from the sale of NVM
products decreased 20.0% in 1997 compared to 1996, due to lower revenues
recorded for EPROM products. As a result of the continued decline in the EPROM
business, management decided to exit the commodity EPROM business and
concentrate its efforts on products expected to yield higher margins. MPD's
percentage of the Company's total revenues decreased 11.9% largely due to the
decline in SRAM revenues and the revenue growth in the Company's other
divisions.
 
     Revenues generated by the Data Communications Division ("DCD") grew 34.3%
comparing 1997 to 1996. Similar to last year, the growth in DCD's revenues was
primarily the result of increased revenues in the
 
                                       19

<PAGE>   21
 
division's Channel line of products, which recorded 45.7% more revenue in 1997
than in 1996. Significant contributions to revenue were made by the product
line's two primary products, HOTLink point-to-point communication devices and
Programmable Skew Clock Buffers ("RoboClock"). While ASPs decreased 9.7% during
1997, the 61.5% increase in unit sales volume more than offset the decline.
Revenues in the Specialty Memory line of products, which include Clocked
First-in, First-out ("FIFOs") and Dual Port products, also increased 27.4%
comparing 1997 to 1996. The 42.3% increase in unit sales volume comparing 1997
to 1996 more than offset the 10.7% decrease in ASPs comparing the same time
periods. As a result of the increase in revenues, DCD's percentage of the
Company's total revenues increased 4.7%, growing to 20.0% in 1997.
 
     Revenues for the Programmable Logic Division ("PLD") increased 21.9%
comparing 1997 to 1996. PLD, along with NVM, formed the Company's Programmable
Products Division in 1996. PLD revenues in 1997 benefited by $3.5 million from
non-recurring engineering revenue ("NRE") related to the sale of its FPGA
technology rights to QuickLogic. Without the $3.5 million NRE, revenues for PLD
products grew 14.7% year to year. The increase in revenues was primarily due to
increased sales volume which grew 26.9% in 1997. This increased sales volume
more than offset the decline in ASPs comparing 1997 to 1996. During that period,
PLD's percentage of the Company's total revenues increased 1.7% growing to
10.9%.
 
     The Computer Products Division ("CPD"), the primary products of which
include the Company's Clock line of products, the VME Communication-bus Device
line of products, the Universal Serial Bus ("USB") line of products and the Fast
CMOS Technology ("FCT") Logic Device line of products increased revenues by
30.9% when comparing 1997 to 1996. The increase in revenues was experienced
across all of CPD's product lines, particularly in the Division's Clock line of
products. In the second half of 1997, the sale of Clock products increased
significantly due to sales generated from its 227X family of clocks which
service Intel Corporation and other personal computer-related manufacturers.
Revenues generated from the sale of Clock products increased 32.1% comparing
1997 to 1996. Although the average selling price of Clock products decreased
25.4% comparing 1997 to 1996, the 86.1% increase in unit sales volume more than
offset the effects of lower ASPs. With the increase in revenues, CPD's
percentage of the Company's total revenue increased 3.3% to 15.7%.
 
     As noted above, the Company continued to experience reductions in ASPs
during 1997, particularly in its SRAM products. The decrease in ASPs continued
to be caused by industry over-supply and continued inventory corrections by end
user customers, particularly evident in the telecommunication and data
communication markets that the Company principally serves. Even though ASPs in
several markets continued to decline throughout 1997, the rate of decline was
for the most part less than the rate of decline experienced throughout 1996.
ASPs in 1998 are expected to continue to decline, but at a reduced rate from
that experienced in 1997.
 
     The Company's cost of revenues as a percentage of revenues for 1997
increased to 65.6% compared to 57.8% in 1996 and 46.3% in 1995. As occurred in
1996, the increase in manufacturing costs as a percentage of revenues in 1997
continued to be a reflection of falling ASPs, particularly in the SRAM market.
Unit volume increased significantly throughout a majority of the Company's
product lines in 1997 even though revenues increased only slightly compared to
1996. Unit volume increased to 252.4 million units in 1997, a 42.4% increase
over 1996. Continued ASP erosion in the future could have a material adverse
effect on the Company's gross margin, and drive cost of revenues as a percentage
of revenues higher. In 1997, cost of revenues benefited from certain changes in
accounting estimates, primarily related to excess inventory reserves no longer
required. The Company continues to introduce new products and new methods to
reduce manufacturing costs in order to mitigate the effects of declining ASPs.
In the fourth quarter of 1996, the Company began production in its new assembly
and test manufacturing plant in the Philippines. The Philippines plant is
expected to generate cost savings for the Company in the future, however in
1997, the cost savings were not fully realized due to the ramping of the
facility. At the end of 1997, the Philippines facility produced over 40.0% of
the Company's backend manufacturing production compared to approximately 20.0%
in 1996. The Company plans to continue to ramp up production at the Philippines
plant in 1998 in order to lower its fixed cost per unit produced and take
further advantage of potential cost savings including related tax holidays. Once
fully-utilized, the Philippines plant is expected to increase assembly and test
manufacturing capacity by 300 million units per year.
 
                                       20

<PAGE>   22
 
     Alphatec Electronics Pcl ("Alphatec"), one of the Company's primary backend
manufacturing subcontract vendors, missed a number of deadlines to repay debt
through 1997, including a repayment of $43.7 million of third party
international bonds during the second quarter of 1997. Although Alphatec has
experienced recent financial difficulties, the assembly and test operations,
with which the Company currently does business, continue to operate under normal
operating conditions. At December 29, 1997, the Company has consigned
approximately $15.3 million, net book value, of capital assets to Alphatec and
Alphatec's production represents approximately 17% of the Company's backend
manufacturing capacity. In March 1998, the Company decided to exit Alphatec's
test manufacturing facility and to move all of its equipment to its Philippines
plant.
 
     Research and development ("R&D") expenses increased to 17.2% of revenues
compared to 16.0% in 1996 and 12.0% in 1995. Actual spending in R&D increased
significantly in 1997, growing to $93.8 million compared to $84.3 million and
$71.7 million in 1996 and 1995, respectively. The increase in R&D expenses in
1997 was in process technology and to a larger extent in new product development
resources. The Company expects to continue to allocate resources to R&D in an
effort to accelerate the development of new products and develop its 0.35 and
0.25 micron process technologies. With the Company's commitment to increase
design capabilities in its design centers and the transformation of the San Jose
wafer manufacturing facility into a research and development wafer facility,
actual R&D spending is projected to grow in the future as the Company explores
new markets and improves its design and process technologies in an effort to
increase revenues and lower costs.
 
     Selling, general and administrative ("SG&A") expenses in 1997 were 13.8% of
revenues. This was an increase from the 12.2% and 12.0% recorded in 1996 and
1995, respectively. Actual spending in SG&A expenses was $75.3 million in 1997,
an $11.0 million increase over the $64.3 million recorded in 1996 and a $4.0
million increase over the $71.3 million recorded in 1995. Selling and marketing
expenses increased primarily as a result of additional headcount and increased
expenditures resulting from increased efforts in strategic marketing and
customer service. In 1997, the Company added headcount, particularly Field
Application Engineers, in order to enhance its ability to expand its market
share in existing markets and explore other opportunities in new markets.
General and administrative expenses also increased from 1996 primarily as a
result of increased headcount and the implementation of system enhancements. The
Company plans to continue its efforts to control general and administrative
expenditures in the future.
 
     In the third quarter of 1996, the Company recorded a one-time, pre-tax
restructuring and other non-recurring benefit of $7.0 million. A majority of the
benefit was derived from the reversal of the $17.8 million reserve established
in March 1995 related to the Texas Instruments ("TI") patent infringement
lawsuit. In July 1996, the Federal Circuit Court of Appeals affirmed the earlier
decision of the trial court that the Company did not infringe on either of the
patents filed by Texas Instruments. As a result of this decision, the Company
reversed the $17.8 million reserve (See Note 7) in the third quarter of 1996.
Also during the third quarter of 1996, the Company announced a restructuring of
its San Jose wafer fabrication facility. As a result, the Company recorded a
one-time, pre-tax charge of $9.1 million principally related to the write-down
of certain excess equipment and the transfer of certain other equipment to its
Texas and Minnesota production wafer fabrication plants. The Company also
recorded a one-time, pre-tax credit of $3.3 million related to the reimbursement
of defense costs incurred in conjunction with the securities class-action
lawsuit. This credit was approximately offset by other non-recurring charges
related to agreements with certain companies regarding cross-licensing and other
matters. In 1997, substantially all the reserve was used for the purpose for
which they were originally intended resulting in a remaining balance of $1.7
million at December 29, 1997. There was no restructuring or other one-time,
non-recurring costs charged to the Company in 1997.
 
     Income from operations in 1997 was significantly lower in comparison to
1996 and 1995. Operating income in 1997 was $18.3 million compared to $81.6
million in 1996 and $159.2 million in 1995. The decrease in operating income in
1997 can be attributed to a significant increase in cost of revenues and
declining ASPs throughout 1997. The Company is continuing its efforts to develop
new products that typically command higher margins and to reduce manufacturing
costs through the development of and the conversion to new manufacturing
processes and the redesign of existing products in order to improve gross margin
and operating income.
 
                                       21

<PAGE>   23
 
     Net interest and other income in 1997 was $5.7 million, an increase from
the $1.9 million and $2.2 million recorded in 1996 and 1995, respectively.
Interest and other income increased by $4.1 million to $12.9 million in 1997
from the $8.8 million recorded in 1996 and was $4.4 million higher than the $8.5
million recorded in 1995. The majority of the increase can be attributed to the
$3.8 million gain recorded from the sale of the Company's remaining investment
in Vitesse Corporation in 1997. Interest expense in 1997 was $7.2 million, a
slight increase in comparison to the $6.9 million and $6.2 million recorded in
1996 and 1995, respectively. In 1997, interest expense was primarily from the
convertible bond that was redeemed in March 1997, the new convertible bond
issued in September 1997 and the Company's revolving line of credit.
 
     The Company recorded income tax expense of $5.6 million in 1997, compared
to $30.5 million in 1996 and $58.9 million in 1995. The effective tax rate for
1997 was 23.4% compared to 36.5% in both 1996 and 1995. In 1997, the decrease in
the effective tax rate was primarily a result of R&D tax credits and certain tax
benefits related to the Company's operations in the Philippines.
 
     The Company's net income decreased significantly in 1997 in comparison to
1996 and 1995. In 1997, net income recorded was $18.4 million, compared to $53.0
million in 1996 and $102.5 million in 1995.
 
FACTORS AFFECTING FUTURE RESULTS
 
RISK FACTORS
 
     Except for the historical information contained herein, the discussion in
this annual report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, including, but not
limited to, statements as to the future operating results and business plans of
the Company, that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, general economic
conditions, the cyclical nature of both the semiconductor industry and the
markets addressed by the Company's products such as networking, computer, and
telecommunications markets, the effects of competition, characterized by price
erosion, rapid technological change and heightened foreign competition in many
markets, slower than expected growth in demand for semiconductor products, the
availability and extent of utilization of manufacturing capacity, dependence on
independent subcontract vendors, dependence on limited sources of supplies,
fluctuation in manufacturing yields, the successful development and timing and
market acceptance of new product introductions, product obsolescence, costs
associated with future litigation, costs associated with protecting the
Company's intellectual property, the successful ramp up of the Company's
Philippines back-end manufacturing plant, the ability to develop and implement
new technologies including the continued transition to full commercial
production of the Company's new 0.5, 0.35 and 0.25 micron processes, dependence
on key personnel, risk of international operations and the effects of
environmental regulations.
 
     The Company's quarterly and annual results of operations are affected by a
variety of factors that could materially and adversely affect revenues, gross
profit and income from operations. These factors include, among others, demand
for the Company's products; changes in product mix; competitive pricing pressure
(particularly in the static RAM market); fluctuations in manufacturing yields;
cost and availability of raw materials; unanticipated delays or problems in the
introduction or performance of the Company's new products; the Company's ability
to introduce new products that meet customer requirements; market acceptance of
the Company's products; product introduction by competitors; availability and
extent of utilization of manufacturing capacity; product obsolescence;
successful ramp up of the Company's Philippines back-end manufacturing plant,
resolution of Alphatec's financial situation; ability to develop and implement
new technologies, including the transition of the Company's new 0.5, 0.35 and
0.25 micron process and continued migration to smaller geometries; conversion
and upgrade of existing equipment base to these technologies including transfer
of equipment and capability among sites; conversion and upgrade of the existing
equipment set from 6-inch to 8-inch capability; level of expenditures for
research and development and sales, general and administrative functions of the
Company; costs associated with future litigation; and costs associated with
protecting the Company's intellectual property. Any one or more of these factors
could result in the Company failing to achieve its expectations as to future
revenues, gross profit and income from
 
                                       22

<PAGE>   24
 
operations. Additionally, risks inherent in the cyclical nature of the
semiconductor industry may cause the Company's quarterly and annual results of
operations to vary significantly. Moreover, as is common in the semiconductor
industry, the Company frequently ships more products in the third month of each
quarter than in either of the first two months of the quarter, and shipments in
the third month are higher at the end of that month. The concentration of sales
in the last month of the quarter contributes to the difficulty in predicting the
Company's quarterly revenues and results of operations.
 
     Since the Company recognizes revenues from sales to domestic distributors
only upon the distributors' sale to end customers, the Company is highly
dependent on the accuracy of distributors' estimates on their resale which could
be materially different from the actual amounts finally reported. This also
contributes to the difficulty in predicting the Company's quarterly revenue and
results of operations, particularly in the last month of the quarter.
 
     Additionally, the Company's headquarters and some manufacturing facilities
are located near major earthquake faults. In the event of a major earthquake,
the Company could suffer damages that could materially and adversely affect the
Company's business, financial conditions and results of operations.
 
YEAR 2000 DISCLOSURE
 
     In the next two years, most companies will face a potentially serious
information systems problem because many software application and operational
programs written in the past may not properly recognize calendar dates beginning
in the year 2000. This problem could force computers to either shut down or
provide incorrect data or information. The Company began the process of
identifying the changes required to its computer programs and hardware, in
consultation with software and hardware providers in late 1996. Efforts are
being made to modify or replace any non-compliant software, systems and
equipment by the year 1999. In 1997, the Company began the process of replacing
certain software by implementing a new accounting software system that is year
2000 compliant. Further, the Company is aware of the risks to third parties and
the potential adverse impact on the Company resulting from the failure by these
parties to adequately address the year 2000 problem. In response to this, the
Company is inquiring of strategic suppliers and large customers to determine the
extent to which the Company is vulnerable to these third parties failure to
remediate their own year 2000 issues. The Company has expended and will continue
to expend appropriate resources to address this issue on a timely basis.
However, no estimate of the expected total cost of this effort can be made at
this time, nor can any assurance be given that the year 2000 problem will not
have an adverse impact on the Company's earnings. The Company has determined it
has no exposure to contingencies related to the year 2000 issue for the products
it has sold.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company's cash, cash equivalents and short-term investments totaled
$201.6 million at the end of fiscal year 1997, a $107.8 million increase from
the end of 1996.
 
     In February 1997, the Company called for redemption of all of the 3.15%
Convertible Subordinated Notes which was effective as of March 26, 1997. At the
time of conversion, approximately 85% of the holders elected to convert their
notes into the Company's common stock, increasing the amount of common stock

outstanding by 6,789,013 shares. As a result of holders electing the cash
settlement, the Company paid out $14.3 million.
 
     In April 1997, the Company sold capital equipment located in its Minnesota
wafer fabrication facility to Fleet Capital Leasing ("Fleet") in a
sale-leaseback agreement. In October 1997, the Company entered into a similar
agreement with Comdisco, Inc. ("Comdisco") for other capital equipment located
in Minnesota. The Company received a total of $28.2 million from Fleet and
Comdisco in exchange for the capital equipment and as a result of the
transactions, recorded an immaterial gain that will be amortized over the life
of the leases.
 
     In September 1997, the Company completed a $175.0 million private placement
of 5-year Convertible Subordinated Notes. The notes are due in the year 2002,
with a coupon rate of 6.00% and an initial conversion
 
                                       23

<PAGE>   25
 
premium of 48.2%. The notes are convertible into approximately 7,408,000 shares
of common stock and are callable by the Company three years after the date of
issuance. Net proceeds were $170.2 million, after issuance costs of $4.8
million.
 
     In October 1997, the Board of Directors authorized the repurchase of up to
2.0 million shares of the Company's common stock. In December 1997, the Board of
Directors authorized the repurchase of an additional 2.0 million shares. As of
December 29, 1997, the Company had repurchased 515,800 shares of its common
stock for $5.3 million. The shares purchased are expected to be issued in
conjunction with the Company's 1994 Stock Option Plan and ESPP. In conjunction
with the authorized stock repurchase program, the Company sold put warrants
through private placements for which the Company received $2.8 million. The
Company has a maximum potential obligation to purchase 3.0 million shares of its
common stock at an aggregate price of $32.4 million as of December 29, 1997. The
Company sold additional put warrants through private placements through February
26, 1998. As of March 17, 1998, the Company has a maximum potential obligation
to purchase 4.5 million shares of its common stock at an aggregate price of
$44.9 million. The puts have various expiration periods from January 1998
through October 1998. The Company has the right to settle the put warrants with
cash or settle the difference between the exercise price and the fair market
value at the exercise date with stock or cash. The intent of the Company is to
settle these put warrants with stock, and therefore, no amount was classified
out of stockholders' equity in the accompanying consolidated balance sheet.
 
     In July 1996, the Company established a three-year, $100-million unsecured
revolving credit facility with Bank of America National Trust and Savings
Association as agent on behalf of certain banks. The applicable interest rate
for usage under this agreement is a graduated scale of LIBOR, plus a spread. The
agreement contains certain financial and other covenants including limitation on
indebtedness, liens, disposition of assets, consolidations and mergers,
investments and contingent obligations, and maintenance of a specified leverage
ratio, consolidated tangible net worth, quick ratio and adjusted EBIT/fixed
charge coverage ratio. In December 1997, the Company repaid the $49.0 million it
borrowed from the revolving line of credit in September 1996.
 
     In 1997, the Company purchased $142.3 million in capital equipment, a
significant decrease from the $195.3 million purchased in 1996. The Company
continued to purchase capital equipment for its domestic wafer fabrication
plants to improve wafer manufacturing capacity and capabilities as the Company
implements new technologies, including its 0.5, 0.35 and 0.25 micron processes.
Equipment purchased for the Company's Philippines plant and its offshore
subcontractors was used to improve backend manufacturing capacity and tool
certain packaging capabilities. Capital equipment was also purchased for the
Company's technology group in order to enhance its research and development
capabilities. Capital expenditures in 1998 are expected to be approximately
$100.0 million as the Company continues its efforts to increase its
manufacturing capabilities and capacity and to enhance its research and
development capabilities.
 
     In 1994 and 1995, the Company entered into three operating lease agreements
with respect to its office and manufacturing facilities in San Jose and
Minnesota, respectively. In April 1996, the Company entered into an additional
lease agreement for two office facilities in San Jose. These agreements require
that the Company maintain a specific level of restricted cash or investments to
serve as collateral for these leases and maintain compliance with certain
financial covenants. The Company's restricted investment balance as of December
29, 1997 and December 30, 1996 was $60.1 million and $60.6 million,
respectively, and is recorded as Other Assets on the balance sheet.
 
     The Company believes that existing cash, cash from operations and
borrowings under its revolving line of credit agreement, will be sufficient to
meet present and anticipated working capital requirements and other cash needs
for at least the next twelve months. In the event that ASPs continue to decline
at rates above normal industry levels and demand continues to be insufficient to
offset the effects of such declines, the Company may be required 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 the Company or available at terms the Company deems satisfactory.
 
                                       24

<PAGE>   26
 

I
TEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                       CYPRESS SEMICONDUCTOR CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
 
                                     ASSETS
 

<TABLE>
<CAPTION>
                                                              DECEMBER 29,    DECEMBER 30,
                                                                  1997            1996
                                                                --------        --------
<S>                                                           <C>             <C>
Current assets:
  Cash and cash equivalents.................................    $151,725        $ 20,119
  Short-term investments....................................      49,836          73,667
                                                                --------        --------
     Total cash, cash equivalents and short-term
      investments...........................................     201,561          93,786
  Accounts receivable, net of allowances for doubtful
     accounts and customer returns of $3,524 in 1997 and
     $3,887 in 1996.........................................      67,854          71,440
  Inventories...............................................      76,925          53,107
  Other current assets......................................      51,740          63,079
                                                                --------        --------
     Total current assets...................................     398,080         281,412
Property, plant and equipment, net..........................     442,661         437,566
Other assets, including restricted investments of $60,112
  and long-term marketable securities of $42,146 in 1997 and
  restricted investments of $61,612 in 1996.................     115,529          75,069
                                                                --------        --------
                                                                $956,270        $794,047
                                                                ========        ========
                           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................    $ 60,857        $ 72,309
  Accrued compensation and employee benefits................      15,967          14,374
  Other accrued liabilities.................................       5,505           4,821
  Line of credit............................................          --          49,000
  Deferred income on sales to distributors..................       9,636          14,902
  Income taxes payable......................................       1,088              --
                                                                --------        --------
     Total current liabilities..............................      93,053         155,406
Convertible subordinated notes..............................     175,000          98,241
Deferred income taxes.......................................      36,070          21,288
Other long-term liabilities, including minority interest....       8,671           8,366
                                                                --------        --------
     Total liabilities......................................     312,794         283,301
                                                                --------        --------
Commitments and contingencies (Note 7)
Stockholders' equity:
  Preferred stock, $.01 par value, 5,000,000 shares
     authorized; none issued and outstanding................          --              --
  Common stock, $.01 par value, 250,000,000 shares
     authorized; 98,147,000 and 91,358,000 issued;
     90,684,000 and 81,098,000 outstanding..................       1,015             914
  Additional paid-in capital................................     430,682         311,184
  Retained earnings.........................................     333,910         315,491
                                                                --------        --------
                                                                 765,607         627,589
  Less shares of common stock held in treasury, at cost;
     7,463,000 shares at December 29, 1997 and 10,260,000
     shares at December 30, 1996............................    (122,131)       (116,843)
                                                                --------        --------
     Total stockholders' equity.............................     643,476         510,746
                                                                --------        --------
                                                                $956,270        $794,047
                                                                ========        ========
</TABLE>

 
          See accompanying notes to Consolidated Financial Statements.
 
                                       25

<PAGE>   27
 
                       CYPRESS SEMICONDUCTOR CORPORATION
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
 

<TABLE>
<CAPTION>
                                                                          YEAR ENDED
                                                          ------------------------------------------
                                                          DECEMBER 29,    DECEMBER 30,    JANUARY 1,
                                                              1997            1996           1996
                                                          ------------    ------------    ----------
<S>                                                       <C>             <C>             <C>
Revenues................................................    $544,356        $528,385       $596,071
                                                            --------        --------       --------
Cost of revenues........................................     356,919         305,174        276,160
Research and development................................      93,842          84,334         71,667
Selling, general and administrative.....................      75,282          64,301         71,273
Restructuring and other non-recurring costs
  (benefits)............................................          --          (7,018)        17,800
                                                            --------        --------       --------
Total operating costs and expenses......................     526,043         446,791        436,900
                                                            --------        --------       --------
 
Operating income........................................      18,313          81,594        159,171
Interest expense........................................      (7,197)         (6,895)        (6,239)
Interest income and other...............................      12,916           8,806          8,452
                                                            --------        --------       --------
Income before income taxes..............................      24,032          83,505        161,384
Provision for income taxes..............................      (5,613)        (30,476)       (58,907)
                                                            --------        --------       --------
Net income..............................................    $ 18,419        $ 53,029       $102,477
                                                            ========        ========       ========
 
Net income per share:
  Basic.................................................    $   0.21        $   0.66       $   1.25
                                                            ========        ========       ========
  Diluted...............................................    $   0.21        $   0.62       $   1.09
                                                            ========        ========       ========
 
Weighted average common and common equivalent shares
  outstanding:
  Basic.................................................      87,888          80,241         81,748
  Diluted...............................................      94,648          91,604         97,309
</TABLE>

 
          See accompanying notes to Consolidated Financial Statements.
 
                                       26

<PAGE>   28
 
                       CYPRESS SEMICONDUCTOR CORPORATION
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                       COMMON STOCK     ADDITIONAL                              TOTAL
                                      ---------------    PAID-IN     RETAINED   TREASURY    STOCKHOLDERS'
                                      SHARES   AMOUNT    CAPITAL     EARNINGS     STOCK        EQUITY
                                      ------   ------   ----------   --------   ---------   -------------
<S>                                   <C>      <C>      <C>          <C>        <C>         <C>
Balances at January 2, 1995.........  77,821   $  826    $238,272    $159,985   $ (46,084)    $352,999
Issuance of common stock under
  employee stock plans and other....   6,330       63      31,460                               31,523
Tax benefit resulting from stock
  option transactions...............                       22,981                               22,981
Repurchase of common stock under
  share repurchase program..........  (2,650)                                     (37,881)     (37,881)
Net income for the year.............                                  102,477                  102,477
                                      ------   ------    --------    --------   ---------     --------
Balances at January 1, 1996.........  81,501      889     292,713     262,462     (83,965)     472,099
Issuance of common stock under
  employee stock plans and other....   2,434       25      14,577                               14,602
Tax benefit resulting from stock
  option transactions...............                        3,894                                3,894
Repurchase of common stock under
  share repurchase program..........  (2,837)                                     (32,878)     (32,878)
Net income for the year.............                                   53,029                   53,029
                                      ------   ------    --------    --------   ---------     --------
Balances at December 30, 1996.......  81,098      914     311,184     315,491    (116,843)     510,746
Issuance of common stock under
  employee stock plans and other....   3,313       33      29,503                               29,536
Tax benefit resulting from stock
  option transactions...............                        6,959                                6,959
Issuance of common stock from the
  conversion of the convertible
  debt..............................   6,789       68      83,036                               83,104
Repurchase of common stock under
  share repurchase program..........    (516)                                      (5,288)      (5,288)
Net income for the year.............                                   18,419                   18,419
                                      ------   ------    --------    --------   ---------     --------
Balances at December 29, 1997.......  90,684   $1,015    $430,682    $333,910   $(122,131)    $643,476
                                      ======   ======    ========    ========   =========     ========
</TABLE>

 
          See accompanying notes to Consolidated Financial Statements.
 
                                       27

<PAGE>   29
 
                       CYPRESS SEMICONDUCTOR CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                                         YEAR ENDED
                                                         ------------------------------------------
                                                         DECEMBER 29,    DECEMBER 30,    JANUARY 1,
                                                             1997            1996           1996
                                                         ------------    ------------    ----------
<S>                                                      <C>             <C>             <C>
Cash flow from operating activities:
  Net income...........................................   $  18,419       $  53,029      $ 102,477
  Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation and amortization.....................     111,361          97,606         64,733
     Non-cash interest and amortization of debt
       issuance costs..................................       3,978           2,774          2,639
     Restructuring and other non-recurring costs
       (benefits)......................................          --         (12,943)        17,800
     Deferred income taxes.............................      14,782           6,216         (8,464)
     Changes in operating assets and liabilities:
       Receivables.....................................       9,035          36,811        (46,733)
       Inventories.....................................     (23,818)        (24,129)          (606)
       Other assets....................................     (50,385)         (7,130)       (20,407)
       Accounts payable and accrued liabilities........     (11,946)        (28,604)        32,644
       Deferred income.................................      (5,266)          1,712          3,502
       Income taxes payable and deferred income
          taxes........................................      15,870         (13,117)        42,738
                                                          ---------       ---------      ---------
Net cash flow generated from operating activities......      82,030         112,225        190,323
                                                          ---------       ---------      ---------
Cash flow from investing activities:
  Decrease in short-term investments...................      23,831          78,464          7,836
  Acquisition of property, plant, and equipment........    (142,305)       (195,280)      (194,878)
  Sale of equipment....................................      28,183              --             --
                                                          ---------       ---------      ---------
Net cash flow used for investing activities............     (90,291)       (116,816)      (187,042)
                                                          ---------       ---------      ---------
Cash flow from financing activities:
  Borrowing from (repayment of) line of credit.........     (49,000)         49,000             --
  Issuance of convertible subordinated notes, net of
     issuance costs....................................     170,187              --             --
  Redemption of convertible debt.......................     (14,331)             --             --
  Restricted investments related to building lease
     agreements........................................          --         (22,355)       (20,744)
  Repurchase of common stock...........................      (5,288)        (32,878)       (37,881)
  Issuance of capital stock............................      36,495          18,496         31,523
  Other long-term liabilities, including minority
     interest..........................................       1,804           2,960             --
                                                          ---------       ---------      ---------
Net cash flow generated (used) for financing
  activities...........................................     139,867          15,223        (27,102)
                                                          ---------       ---------      ---------
Net increase (decrease) in cash and cash equivalents...     131,606          10,632        (23,821)
Cash and cash equivalents, beginning of year...........      20,119           9,487         33,308
                                                          ---------       ---------      ---------
Cash and cash equivalents, end of year.................   $ 151,725       $  20,119      $   9,487
                                                          =========       =========      =========
Supplemental disclosures:
  Cash paid during the year for:
     Interest..........................................   $   4,585       $   4,982      $   4,014
     Income taxes......................................   $   1,550       $  45,271      $  30,744
</TABLE>

 
          See accompanying notes to Consolidated Financial Statements.
 
                                       28

<PAGE>   30
 
                       CYPRESS SEMICONDUCTOR CORPORATION
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1: THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
 
  The Company
 
     Cypress Semiconductor Corporation (the "Company" or "Cypress") was
incorporated in California in December 1982, commenced business activities on
April 7, 1983, and reincorporated in Delaware in February 1987. The Company
designs, develops, and manufactures a broad range of high-performance integrated
circuits. The Company sells to the networking, military, computer,
telecommunications, and instrumentation application markets.
 
     The Company's operations outside the U.S. expanded in 1996 with the
addition of its new test and assembly plant in the Philippines. The Company's
other foreign operations include several sales offices and design centers
located in various parts of the world. Export revenues to international
customers were 36%, 27%, and 34% of total revenues in 1997, 1996, and 1995,
respectively. As of December 29, 1997, all of the Company's subsidiaries are
wholly owned, except for Cypress Semiconductor (Texas), Inc. ("CTI"), the
Company's wafer fabrication facility in Texas, which is approximately 17% owned
by Altera Corporation ("Altera"). Altera receives a fixed amount of wafer fab
capacity for its investment.
 
     No one end user accounted for greater than 10% of revenues in 1997, 1996,
or 1995. Sales to one distributor accounted for 10% of total revenues in 1997.
No one distributor accounted for greater than 10% of revenues in 1996 or 1995.
 
  Summary Of Significant Accounting Policies
 
     Fiscal Year-Fiscal years 1997, 1996, and 1995 ended December 29, 1997,
December 30, 1996, and January 1, 1996, respectively. The Company operates on a
52- or 53-week fiscal year, ending on the Monday closest to December 31. Fiscal
years 1997, 1996 and 1995 each comprised 52 weeks. Certain prior year amounts
have been adjusted to conform to current year presentation.
 
     MANAGEMENT ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
 
     PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
 
     INVESTMENTS -- Investments where the Company has an equity position of
greater than 20% are accounted for using the equity method.
 
     REVENUE RECOGNITION -- Revenue from product sales direct to customers is
recognized upon shipment. Certain of the Company's sales to domestic
distributors are made under agreements allowing certain rights of return and
price protection on merchandise unsold by the domestic distributors.
Accordingly, the Company defers recognition of sales and profit on such sales
until the merchandise is sold by domestic distributors. The Company sells to
certain European distributors on certain select parts, under agreements having
price protection. Revenue from sales to European distributors is recognized upon
shipment. The Company reserves all anticipated price adjustments stemming from
its European distributors.The Company also has inventory at certain customers on
a consignment basis. Revenue is not recorded until the time the title transfers
per the consignment agreement.
 
     FAIR VALUE OF FINANCIAL INSTRUMENTS -- For certain of the Company's
financial instruments, including cash and cash equivalents, short-term
investments, restricted investments, trade accounts
 
                                       29

<PAGE>   31
                       CYPRESS SEMICONDUCTOR CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
receivable, accounts payable, and accrued expenses, the carrying amounts
approximate fair value. The amounts shown for long-term marketable securities
and long-term debt also approximate fair value.
 
     CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS -- All highly liquid
investments purchased with an original maturity of three months or less are
considered to be cash equivalents. The Company classifies all investments as
available for sale, based upon the Company's intention to use these investments
to fund working capital requirements. The investments, which all have
contractual maturities of less than one year, are carried at cost plus accrued
interest, which approximated market for the entire fiscal year. Cash and cash
equivalents and short-term investments included the following debt and equity
securities at December 29, 1997 and December 30, 1996:
 

<TABLE>
<CAPTION>
                                                     DECEMBER 29,    DECEMBER 30,
                                                         1997            1996
                                                     ------------    ------------
                                                            (IN THOUSANDS)
<S>                                                  <C>             <C>
Corporate debt securities..........................    $ 75,634        $ 2,000
State and municipal obligations....................      78,084         50,171
Other..............................................      47,843         41,615
                                                       --------        -------
          Total....................................    $201,561        $93,786
                                                       ========        =======
</TABLE>

 
     CONCENTRATION OF CREDIT RISK -- Financial instruments that potentially
subject the Company to significant concentration of credit risk consist
principally of cash equivalents, short-term and long-term investments, long-term
restricted cash, and trade accounts receivable. The Company places its cash
equivalents, short-term and long-term investments and long-term restricted cash
in a variety of financial instruments such as, corporate bonds, municipal
securities and U.S. Government securities. The Company further limits its
exposure to these investments by placing such investments with various issuers
and financial institutions.
 
     The Company sells its product to original equipment manufacturers and
distributors throughout the world. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The Company maintains an allowance for
uncollectible accounts receivable based upon expected collectibility of all
accounts receivable.
 
     INVENTORIES -- Inventories are valued at standard costs that approximate
actual costs, but not in excess of market. Cost is determined on a first-in,
first-out basis. Market is based on estimated net realizable value. The
components of inventories are as follows:
 

<TABLE>
<CAPTION>
                                                     DECEMBER 29,    DECEMBER 30,
                                                         1997            1996
                                                     ------------    ------------
                                                            (IN THOUSANDS)
<S>                                                  <C>             <C>
Raw materials......................................    $17,900         $12,214
Work-in-process....................................     35,281          27,765
Finished goods.....................................     23,744          13,128
                                                       -------         -------
          Total....................................    $76,925         $53,107
                                                       =======         =======
</TABLE>

 
                                       30

<PAGE>   32
                       CYPRESS SEMICONDUCTOR CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     PROPERTY, PLANT, AND EQUIPMENT -- Property, plant, and equipment are stated
at cost. Depreciation and amortization are computed for financial reporting
purposes using the straight-line method over the estimated useful lives of the
assets, or lease term if less than useful life. Accelerated methods of computing
depreciation are used for tax purposes. The components of property, plant, and
equipment are as follows:
 

<TABLE>
<CAPTION>
                                          USEFUL
                                           LIVES      DECEMBER 29,    DECEMBER 30,
                                         IN YEARS         1997            1996
                                         ---------    ------------    ------------
                                                             (IN THOUSANDS)
<S>                                      <C>          <C>             <C>
Land...................................                $  12,922       $  12,546
Equipment..............................     3 to 5       726,363         641,612
Buildings and leasehold improvements...    7 to 10        69,340          70,673
Furniture and fixtures.................          5         6,543           7,568
                                                       ---------       ---------
                                                         815,168         732,399
Accumulated depreciation and
  amortization.........................                 (372,507)       (294,833)
                                                       ---------       ---------
          Total........................                $ 442,661       $ 437,566
                                                       =========       =========
</TABLE>

 
     LONG-LIVED ASSETS -- Long-lived assets held and used by the Company are
reviewed for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition, all long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
market value, less selling costs.
 
     INCOME TAXES -- The Company follows the liability method of accounting for
income taxes which requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities.
 
     EARNINGS PER SHARE -- The Company adopted Statement of Accounting Standard
No. 128 ("FAS 128), Earnings Per Share ("EPS"), which was issued in February
1997. FAS 128 requires presentation of both basic and diluted EPS on the income
statement. For all periods presented, basic EPS is computed by dividing net
income available to common stockholders (numerator) by the weighted average
number of common shares outstanding (denominator) during the period. In
computing diluted EPS, the average stock price for the period is used in
determining the number of shares assumed to be purchased from the exercise of
stock options. Diluted EPS is computed using the weighted average number of
common and potential common stock equivalent shares outstanding during the
period.
 
     TRANSLATION OF FOREIGN CURRENCIES -- The Company uses the U.S. dollar as
its functional currency for all foreign subsidiaries. Sales to customers are
primarily denominated in U.S. dollars, and foreign currency translation gains
and losses have not been material in any year.
 
     ACCOUNTING FOR STOCK-BASED COMPENSATION -- The Company accounts for stock-
based compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. The Company's policy is to grant options with an
exercise price equal to the quoted market price of the Company's stock on the
grant date. Accordingly, no compensation cost has been recognized in the
Company's statements of operations. The Company provides additional pro forma
disclosures as required under Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation." See Note 5.
 
     RECENT ACCOUNTING PRONOUNCEMENTS -- In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130 ("FAS
130"), "Reporting Comprehensive Income". FAS 130 establishes standards for the
reporting of comprehensive income and its components in a full set of
general-purpose financial statements for periods beginning after December 15,
1997. Comprehensive income as defined includes all changes in equity (net
assets) during the period from
 
                                       31

<PAGE>   33
                       CYPRESS SEMICONDUCTOR CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
non-owner sources. Reclassification of financial statements for earlier periods
for comparative purposes is required. The Company will adopt FAS 130 in its 1998
annual report.
 
     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("FAS 131"), "Disclosure About Segments
of An Enterprise and Related Information". FAS 131 revises information regarding
the reporting of certain operating segments for periods beginning after December
15, 1997. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company will adopt FAS
131 in its 1998 annual report.
 
NOTE 2: RESTRUCTURING AND OTHER NON-RECURRING COSTS
 
     In the third quarter of 1996, the Company recorded a pre-tax restructuring
and other non-recurring benefit of $7.0 million. A majority of the benefit was
derived from the reversal of the $17.8 million reserve established in 1995
related to the Texas Instruments ("TI") patent infringement lawsuit. In July
1996, the Federal Circuit Court of Appeals affirmed the earlier decision of the
trial court that the Company did not infringe on either of the patents in the
suit. In September 1996, the Court decided that it would not hear any appeal
filed by the plaintiff regarding this matter and as a result of this ruling, the
Company reversed the $17.8 million reserve it established in 1995. In December
1996, TI filed a petition of certiorari in the United States Supreme Court. In
June 1997, the United States Supreme Court denied TI's petition of certiorari.
Accordingly, adjudication of the case is now final. During the third quarter of
1996, the Company also announced a restructuring of its San Jose wafer
fabrication facility, from a production wafer fabrication plant to predominantly
a research and development wafer fabrication facility. As a result of this
restructuring, the Company recorded a pre-tax charge of $9.1 million, $5.9
million relating to the write-down of certain excess equipment and the transfer
of certain other equipment to its Texas and Minnesota production wafer
fabrication facilities, and $3.2 million relating to severance and other cash
related restructuring charges. In September 1996, the Company also recorded a
one-time, pre-tax credit of $3.3 million related to the insurance reimbursement
of defense costs incurred in conjunction with the securities class-action
lawsuit. This credit was approximately offset by other non-recurring charges
related to agreements with certain companies regarding cross-licensing and other
matters. In 1997, substantially all the reserve was used for the purpose for
which they were originally intended resulting in a remaining balance of $1.7
million at December 29, 1997. For discussion of restructuring activity
subsequent to year end, see Note 9.
 
NOTE 3: CONVERTIBLE SUBORDINATED NOTES
 
     In February 1997, the Company called for redemption of all of the 3.15%
Convertible Subordinated Notes which was effective as of March 26, 1997. At the
time of conversion, approximately 85% of the holders elected to convert their
notes into the Company's common stock, increasing the amount of common stock
outstanding by 6,789,013 shares. As a result of holders electing the cash
settlement, the Company paid out $14.3 million.
 
     In September 1997, the Company completed a $175.0 million private placement
of 5-year Convertible Subordinated Notes. The notes are due in the year 2002,
with a coupon rate of 6.0% and an initial conversion premium of 48.2%. The notes
are convertible into approximately 7,408,000 shares of common stock and are
callable by the Company three years after the date of issuance. Net proceeds
were $170.2 million, after issuance costs of $4.8 million.
 
                                       32

<PAGE>   34
                       CYPRESS SEMICONDUCTOR CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 4: EARNINGS PER SHARE
 
     FAS 128 requires the reconciliation of the numerators and the denominators
of the basic and diluted per share computation as follows:
 

<TABLE>
<CAPTION>
                                                  1997                           1996                           1995
                                      ----------------------------   ----------------------------   -----------------------------
                                                         PER-SHARE                      PER-SHARE                       PER-SHARE
                                      INCOME    SHARES    AMOUNT     INCOME    SHARES    AMOUNT      INCOME    SHARES    AMOUNT
                                      -------   ------   ---------   -------   ------   ---------   --------   ------   ---------
                                                               (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<S>                                   <C>       <C>      <C>         <C>       <C>      <C>         <C>        <C>      <C>
Basic EPS:
  Net income........................  $18,419   87,888     $0.21     $53,029   80,241     $0.66     $102,477   81,748     $1.25
                                                           =====                          =====                           =====
Effects of Dilutive Securities:
  Stock Options.....................             4,885                          3,423                           7,621
  Convertible Debentures............    1,130    1,875                 3,700    7,940                  3,614    7,940
                                      -------   ------               -------   ------               --------   ------
Diluted EPS:
  Net income........................  $19,549   94,648     $0.21     $56,729   91,604     $0.62     $106,091   97,309     $1.09
                                      =======   ======     =====     =======   ======     =====     ========   ======     =====
</TABLE>

 
     Options to purchase 5,696,000 shares of common stock were outstanding at
December 29, 1997, but were not included in the computation of diluted EPS as
their average exercise price was higher than the average market price of the
stock. Convertible debentures outstanding at December 29, 1997 convertible to
7,408,000 shares of common stock were also excluded from diluted EPS as their
effect was anti-dilutive.
 
NOTE 5: COMMON STOCK OPTION AND OTHER EMPLOYEE BENEFIT PLANS
 
  1994 Stock Option Plan
 
     In 1994, the Company adopted the 1994 Stock Option Plan, which replaced the
Company'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 the Company 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 typically equal to the fair market value of the common
stock at the date of grant. The 1994 Stock Option Plan includes shares that
remained available under the Terminated Plans and provides for an annual
increase in shares available for issuance pursuant to non-statutory stock
options equal to 4.5% of the Company's outstanding common stock at the end of
each fiscal year.
 
     In October 1996, substantially all outstanding options with a share price
in excess of $11.00 per share were cancelled and replaced with new options
having an exercise price of $11.00 per share. A total of 7,083,312 options were
repriced. In January 1998, substantially all outstanding stock options with an
exercise price in excess of $9.75 per share were cancelled and replaced with new
options having an exercise price of $9.75 per share, the fair market value on
the date that the employees accepted the repricing. A total of 10,463,688 shares
were repriced. This repricing excluded the Board of Directors, the Chief
Executive Officer and the Executive staff of the Company.
 
                                       33

<PAGE>   35
                       CYPRESS SEMICONDUCTOR CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The following table summarizes the Company's stock option activity and
related weighted average exercised price for each category for the years ended
December 29, 1997, December 30, 1996 and January 1, 1996. The weighted average
exercise price for each category presented is also shown in the table below.
 
                  SHARES UNDER OPTION AND AVAILABLE FOR GRANT
 

<TABLE>
<CAPTION>
                                             1997                1996                1995
                                       ----------------    ----------------    ----------------
                                       SHARES    PRICE     SHARES    PRICE     SHARES    PRICE
                                       ------    ------    ------    ------    ------    ------
                                                   (SHARE INFORMATION IN THOUSANDS)
<S>                                    <C>       <C>       <C>       <C>       <C>       <C>
Options outstanding, beginning of
  year...............................  21,013    $ 8.94    19,448    $ 9.81    18,972    $ 5.92
Options cancelled....................  (1,461)   $11.13    (8,855)   $14.71    (1,292)   $16.05
Options granted......................   5,497    $12.64    12,202    $11.23     7,504    $16.82
Options exercised....................  (2,772)   $ 7.62    (1,782)   $ 5.38    (5,736)   $ 4.81
                                       ------              ------              ------
Options outstanding, end of year.....  22,277    $ 9.86    21,013    $ 8.94    19,448    $ 9.81
                                       ======    ======    ======    ======    ======    ======
Options exercisable at December
  1997...............................  10,447    $ 7.88
                                       ======    ======
</TABLE>

 
     All options were granted at an exercise price equal to the market value of
the Company's stock at the date of grant. The weighted average estimated fair
value at the date of grant, as defined by SFAS 123, for options granted in 1997,
1996 and 1995 was $6.07, $3.14 and $7.49 per option, respectively. The estimated
grant date fair value disclosed by the Company 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 the Company'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 are included in the estimated
grant date fair value calculations for the Company's stock option awards;
 

<TABLE>
<CAPTION>
                                                   1997       1996       1995
                                                  -------    -------    -------
<S>                                               <C>        <C>        <C>
Expected life...................................  6 years    6 years    6 years
Risk-free Interest Rate.........................    6.63%      6.04%      6.28%
Volatility......................................    .5529      .5582      .5559
Dividend Yield..................................    0.00%      0.00%      0.00%
</TABLE>

 
     Significant option groups outstanding as of December 29, 1997 and the
related weighted average exercise price and contractual life information are as
follows (share information in thousands):
 

<TABLE>
<CAPTION>
  OPTIONS WITH               OUTSTANDING                 EXERCISABLE             REMAINING
    EXERCISE             --------------------        --------------------          LIFE
PRICES RANGE FROM        SHARES        PRICE         SHARES        PRICE          (YEARS)
- -----------------        ------        ------        ------        ------        ---------
<S>                      <C>           <C>           <C>           <C>           <C>
$ 1.00 - $ 6.75          4,472         $ 4.87        4,416         $ 4.85          4.23
$ 6.76 - $10.75          4,695         $ 9.10        2,725         $ 8.61          7.13
$10.76 - $11.00          7,243         $11.00        2,973         $11.00          8.04
$11.01 - $11.56          3,287         $11.56           84         $11.55          9.78
$11.57 - $17.56          2,580         $14.56          250         $14.98          9.14
</TABLE>

 
EMPLOYEE QUALIFIED STOCK PURCHASE PLAN
 
     In 1986, the Company approved an Employee Qualified Stock Purchase Plan
("ESPP"), which allows eligible employees of the Company and its subsidiaries to
purchase shares of 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
 
                                       34

<PAGE>   36
                       CYPRESS SEMICONDUCTOR CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
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 (calculated as employee's the enrollment price multiplied
by purchased shares). Of the 7,600,000 shares authorized under the ESPP,
6,430,146 shares were issued through 1997 including, 541,055, 652,157 and
582,432, shares in 1997, 1996, and 1995, respectively.
 
     Compensation costs (included in pro forma net income and net income per
share amounts) for the grant date fair value, as defined by SFAS 123, of the
purchase rights granted under the ESPP were calculated using the Black-Scholes
model. The following weighted average assumptions are included in the estimated
grant date fair value calculations for rights to purchase stock under the ESPP:
 

<TABLE>
<CAPTION>
                                              1997        1996        1995
                                            --------    --------    --------
<S>                                         <C>         <C>         <C>
Expected life.............................  6 months    6 months    6 months
Risk-free Interest Rate...................     5.80%       5.98%       5.45%
Volatility................................     .5861       .5882       .5275
Dividend Yield............................     0.00%       0.00%       0.00%
</TABLE>

 
     The weighted average estimated grant date fair value, as defined by SFAS
123, or rights to purchase stock under the ESPP granted in 1997, 1996 and 1995
were $5.49, $5.37 and $10.15 per share, respectively.
 
PRO FORMA NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
 
     Had the Company recorded compensation costs based on the estimated grant
date fair value, as defined by SFAS 123, for awards granted under its 1994 Stock
Option Plan and its Employee Stock Purchase Plan, the Company's pro forma net
income (loss) and earnings per share for the years ended December 29, 1997,
December 30, 1996 and January 1, 1996 would have been as follows:
 

<TABLE>
<CAPTION>
                                                 1997           1996           1995
                                              ----------     ----------     ----------
                                              (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<S>                                           <C>            <C>            <C>
Pro forma net income (loss):
  Basic.....................................   $(6,431)       $32,490        $92,814
  Diluted...................................   $(6,431)       $36,190        $96,427
Pro forma net income (loss) per share:
  Basic.....................................   $ (0.07)       $  0.40        $  1.14
  Diluted...................................   $ (0.07)       $  0.40        $  1.01
</TABLE>

 
     The pro forma effect on net income (loss) and net income (loss) per share
for 1997, 1996 and 1995 is not representative of the pro forma effect on net
income in the future years because it does not take into consideration pro forma
compensation expense related to grants prior to 1995.
 
TREASURY STOCK
 
     In October 1997, the Board of Directors authorized the repurchase of up to
2.0 million shares of the Company's common stock. In December 1997, the Board of
Directors approved the repurchase of an additional 2.0 million shares. As of
December 29, 1997, the Company repurchased 515,800 shares of its common stock
for $5.3 million. The shares purchased are expected to be issued in conjunction
with the Company's 1994 Stock Option Plan and ESPP.
 
     In conjunction with the authorized stock repurchase program, the Company
sold put warrants through private placements for which the Company received $2.8
million which has been recorded as additional paid in capital. The Company has a
maximum potential obligation to purchase 3.0 million shares of its common stock
at an aggregate price of $32.4 million as of December 29, 1997. The puts have
various expiration periods from January 1998 through October 1998. The Company
has the right to settle the put warrants with cash or settle
 
                                       35

<PAGE>   37
                       CYPRESS SEMICONDUCTOR CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
the difference between the exercise price and the fair market value at the
exercise date with stock or cash. The intent of the Company is to settle these
put warrants with stock, and therefore, no amount was classified out of
stockholders' equity in the accompanying consolidated balance sheet.
 
     In November 1995, the Board of Directors authorized the repurchase of $50.0
million of the Company's common stock. In the first quarter of 1996, the Board
approved to increase the amount authorized to approximately $70.0 million. The
Company completed the stock purchase program by purchasing 2.8 million shares
for $32.9 million in 1996 and 2.7 million shares for $37.9 million in 1995. The
shares purchased are being used in conjunction with the Company's 1994 Stock
Option Plan and ESPP.
 
OTHER EMPLOYEE BENEFIT PLANS
 
     The Company also maintains a Section 401(k) Plan, New Product Bonus Plan,
and Key Employee Bonus Plan. The 401(k) Plan provides participating employees
with an opportunity to accumulate funds for retirement and hardship. Eligible
participants may contribute up to 20% of their eligible earnings to the Plan
Trust.
 
     Under the New Product Bonus Plan effective for 1997, all qualified
employees are provided bonus payments, which are based on the Company attaining
certain levels of new product revenue, plus attaining certain levels of
profitability. In 1997, $475,000 was charged to operations in connection with
the New Product Bonus Plan. In 1996 and 1995, under the Profit Sharing Plan, all
qualified employees were provided an equal share of bonus payments which were
based on the Company achieving a targeted level of earnings per share. In 1995,
$7,575,000 was charged to operations in connection with the Profit Sharing Plan.
There were no charges to operations in connection with the Profit Sharing Plan
in 1996.
 
     In 1994, a Key Employee Bonus Plan was established, which provides for
bonus payments to selected employees upon achievement of certain Company and
individual performance targets. In 1995, $4,937,000 was charged to operations in
connection with this Plan. In 1997 and 1996, there were no charges to operations
in connection with this Plan.
 
NOTE 6: INCOME TAXES
 
     The components of the provision for income taxes are summarized below.
Income before taxes is principally attributed to domestic operations.
 

<TABLE>
<CAPTION>
                                                              YEAR ENDED
                                              ------------------------------------------
                                              DECEMBER 29,    DECEMBER 30,    JANUARY 1,
COMPONENTS OF THE PROVISION FOR INCOME TAXES      1997            1996           1996
- --------------------------------------------  ------------    ------------    ----------
                                                            (IN THOUSANDS)
<S>                                           <C>             <C>             <C>
Income before provision for taxes.........      $ 24,032        $83,505        $161,384
Current tax expense:
  U.S. Federal............................       (10,483)        21,481          60,163
  State and local.........................         1,418          1,706           6,988
  Foreign.................................           500          1,073             220
                                                --------        -------        --------
          Total current...................        (8,565)        24,260          67,371
Deferred tax expense (benefit):
  U.S. Federal............................        16,033          5,559          (7,849)
  State and local.........................        (1,855)           657            (615)
Total deferred............................        14,178          6,216          (8,464)
                                                --------        -------        --------
          Total...........................      $  5,613        $30,476        $ 58,907
                                                ========        =======        ========
</TABLE>

 
                                       36

<PAGE>   38
                       CYPRESS SEMICONDUCTOR CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The tax provision differs from the amounts obtained by applying the
statutory U.S. Federal Income Tax Rate to income before taxes as shown below.
 

<TABLE>
<CAPTION>
                                                          YEAR ENDED
                                          ------------------------------------------
                                          DECEMBER 29,    DECEMBER 30,    JANUARY 1,
        TAX PROVISION DIFFERENCE              1997            1996           1996
        ------------------------          ------------    ------------    ----------
                                                        (IN THOUSANDS)
<S>                                       <C>             <C>             <C>
Statutory rate..........................        35%             35%            35%
                                            -------         -------        -------
Tax at U.S. statutory rate..............    $ 8,411         $29,227        $56,487
Foreign Earnings........................     (1,151)             --             --
State income taxes, net of federal
  benefit...............................        922           1,536          4,142
Tax credits.............................     (2,274)             --         (1,013)
Net Foreign Sales Corporation (FSC)
  benefit...............................        (78)         (1,548)          (479)
Benefit of tax free investments.........       (482)           (998)        (2,259)
Other, net..............................        265           2,259          2,029
                                            -------         -------        -------
          Total.........................    $ 5,613         $30,476        $58,907
                                            =======         =======        =======
</TABLE>

 
     The components of the net deferred tax assets at December 29, 1997 and
December 30, 1996, under SFAS 109 were as follows:
 

<TABLE>
<CAPTION>
                                                     DECEMBER 29,    DECEMBER 30,
                                                         1997            1996
                                                     ------------    ------------
                                                            (IN THOUSANDS)
<S>                                                  <C>             <C>
Deferred tax assets:
Deferred income on sales to distributors...........    $  9,773        $  9,667
Inventory reserves and basis differences...........      12,596          13,794
Restructuring and legal reserves...................           9           1,167
Asset valuation and other reserves.................      12,670          13,511
State tax, net of federal tax......................         421             522
R & D tax credits..................................       4,177              --
Other, net.........................................       1,122           1,472
                                                       --------        --------
          Total deferred tax assets................      40,768          40,133
                                                       --------        --------
Deferred tax liabilities:
Excess of tax over book depreciation...............     (40,355)        (25,568)
Other, net.........................................      (1,210)         (1,184)
          Total deferred tax liabilities...........     (41,565)        (26,752)
                                                       --------        --------
Net deferred tax assets (liabilities)..............    $   (797)       $ 13,381
                                                       ========        ========
</TABLE>

 
     Other current assets include current deferred tax assets of $35,573,000 at
December 29, 1997, and $34,900,000 at December 30, 1996, respectively.
 
     The tax benefits associated with disqualifying dispositions of stock
options or employee stock purchase plan shares reduced taxes currently payable
by $7.0 million in 1997.
 
NOTE 7: COMMITMENTS AND CONTINGENCIES
 
  Operating Lease Commitments
 
     The Company leases most of its manufacturing and office facilities under
non-cancelable operating lease agreements that expire at various dates through
2004. These leases require the Company to pay taxes,
 
                                       37

<PAGE>   39
                       CYPRESS SEMICONDUCTOR CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
insurance, and maintenance expenses, and provide for renewal options at the then
fair market rental value of the property.
 
     In April 1997, the Company sold capital equipment located in its Minnesota
wafer fabrication facility to Fleet Capital Leasing ("Fleet") in a
sale-leaseback agreement. In October 1997, the Company entered into a similar
agreement with Comdisco, Inc. ("Comdisco") for other capital equipment located
in Minnesota. The Company received a total of $28.2 million from Fleet and
Comdisco in exchange for the capital equipment and as a result of the
transactions, recorded an immaterial gain that will be amortized over the life
of the leases.
 
     In 1994 and 1995, the Company entered into three operating lease agreements
with respect to its office and manufacturing facilities in San Jose and
Minnesota, respectively. In April 1996, the Company entered into an additional
lease agreement related to two office facilities in San Jose. These agreements
require quarterly payments that vary based on the London interbank offering rate
("LIBOR"), plus a spread. All leases provide the Company with the option of
either acquiring the property at its original cost or arranging for the property
to be acquired at the end of the respective lease terms. The Company is
contingently liable under certain first-loss clauses for up to $52.9 million at
December 29, 1997. Based on management's estimate of the fair value of the
properties, no liability was recorded at December 29, 1997. Furthermore, the
Company is required to maintain a specific level of restricted cash or
investments to serve as collateral for these leases and maintain compliance with
certain financial covenants. As of December 29, 1997, the amount of restricted
cash or investments recorded was $60.1 million, which is in compliance with
these agreements. These restricted cash or investments are classified as
non-current assets on the balance sheet.
 
     The aggregate annual rental commitments under non-cancelable operating
leases as of December 29, 1997, are:
 

<TABLE>
<CAPTION>
           FISCAL YEAR
           -----------            (IN THOUSANDS)
<S>                               <C>
1998.............................    $16,251
1999.............................     14,734
2000.............................      8,274
2001.............................      4,165
2002.............................      3,232
2003 and thereafter..............      7,420
                                     -------
     Total.......................    $54,076
                                     =======
</TABLE>

 
     Rental expense was approximately $13,936,000 in 1997, $7,708,000 in 1996,
and $5,995,000 in 1995.
 
  Line of Credit
 
     In July 1996, the Company established a three-year, $100-million unsecured
revolving credit facility with Bank of America National Trust and Savings
Association as agent on behalf of certain banks. The applicable interest rate
for usage under this agreement is a graduated scale of LIBOR, plus a spread. The
agreement contains certain financial and other covenants including limitation on
indebtedness, liens, disposition of assets, consolidations and mergers,
investments and contingent obligations, and maintenance of a certain leverage
ratio, consolidated tangible net worth, quick ratio and adjusted EBIT/fixed
charge coverage ratio. In September 1996, the Company borrowed $49.0 million
against the line of credit that remained outstanding until November 1997. At
December 29, 1997 there were no borrowings against the line of credit. Any
balance borrowed will be due three years from the date of the agreement.
 
                                       38

<PAGE>   40
                       CYPRESS SEMICONDUCTOR CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 Litigation And Asserted Claims
 
     The semiconductor industry has experienced a substantial amount of
litigation regarding patent and other intellectual property rights. The Company
is currently and may in the future be involved in litigation with respect to
alleged infringement by the Company of another party's patents, or may in the
future be involved in litigation to enforce its patents or other intellectual
property rights, to protect its trade secrets and know-how, to determine the
validity or scope of the proprietary rights of others, or to 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
and payment of substantial damages and/or royalties or prohibitions against
utilization of essential technologies, and could have a material adverse effect
on the Company's business, financial condition and results of operations. From
time to time the Company has received, and may receive in the future,
communications alleging that its products or its processes may infringe on
product or process technology rights held by others.
 
     In June 1997, the Company commenced a declaratory judgement action in the
United States District Court for the District of Nevada against the Li Second
Family Trust (the "Trust") asking for declaratory relief to the effect that a
U.S. patent relating to a portion of the process for manufacturing
semiconductors is unenforceable, invalid and not infringed by the Company. The
Trust has counterclaimed for patent infringement on the same patent alleging
such patent covers oxide-isolated integrated circuits. In correspondence,
attorneys for the Trust have argued that such patent "is applicable to NMOS,
CMOS, Bipolar, BiCMOS and other technologies". In December 1997, in a related
case, the Federal Court for the Eastern District of Virginia preliminarily ruled
that Dr. Li's patent is unenforceable due to unequitable conduct by Dr. Li and
his attorneys in obtaining the patent. Dr. Li has the right to file an appeal,
although no such appeal as been filed as of March 17, 1998. The Company believes
it has meritorious defenses to the counterclaim and intends to defend itself
vigorously. However, should the outcome of this action be unfavorable, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
 
     In May 1995, in a case before the U.S. District Court in Dallas, Texas, a
jury delivered a verdict of $17.8 million against the Company in a patent
infringement lawsuit filed by Texas Instruments ("TI"). In August 1995, the
judge reversed the decision, stating TI failed to prove that the Company
infringed on TI's patents covering the plastic encapsulation process used to
package semiconductor devices. In July 1996, the Federal Circuit Court of
Appeals affirmed the decision of the trial court that the Company did not
infringe on either of the patents in the suit. In September 1996, the Court
denied TI's motion for reconsideration, and as a result of that ruling, the
Company reversed the $17.8 million reserve recorded in March 1995 with respect
to this lawsuit. In December 1996, TI filed a petition of certiorari with the
United States Supreme Court. In June 1997, the United States Supreme Court
denied TI's petition of Certiorari. Accordingly, adjudication of the case is now
final.In January 1998, the Company was contacted by the attorneys representing
the estate of Mr. Jerome Lemelson charging that the Company infringed on certain
patents registered by Mr. Lemelson. The attorneys for the estate have not filed
suit, but have urged the Company to enter into a licensing agreement with the
estate in order to avoid litigation. The Company is in the process of reviewing
the charges to determine the validity of the suit. Should the estate file suit,
the Company will vigorously defend itself in this matter and based upon the
inherent uncertainties of litigation, should the outcome of this action be
unfavorable, the Company may be required to pay damages and other expenses,
which could have a material adverse effect on the Company's financial position
and results of operations.
 
  Purchase Commitments
 
     At December 29, 1997, the Company had purchase commitments aggregating
$71.4 million, principally for manufacturing equipment and facilities. These
commitments were made for purchases in 1998.
 
                                       39

<PAGE>   41
                       CYPRESS SEMICONDUCTOR CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 8: RELATED PARTIES
 
     During 1990, the Company made a cost-basis investment of $1.0 million in
Vitesse Semiconductor ("Vitesse") stock. In February 1997, the Company sold its
remaining investment and recorded a gain of $3.8 million in other income. The
Company's chairman, a board member, and its president are members of the Vitesse
Board of Directors.
 
     Between 1992 and 1995, the Company made cost-basis investments in
QuickLogic Corporation ("QuickLogic") Series D and E preferred stock. In June
1996, the Company received $4.5 million from Quicklogic, the original intent of
which was to obtain a minority interest in CTI and to secure guaranteed fab
capacity. The Company classified the $4.5 million as other long-term liabilities
in 1996 awaiting final negotiation of the terms and transaction approval from
Altera, an existing minority interest shareholder. In March 1997, the Company
signed a definitive agreement with QuickLogic Corporation involving termination
of an existing joint development, licensing and foundry agreement for antifuse
Field Programmable Gate Array ("FPGA") products and the execution of a new
foundry agreement. Under the new agreement, the Company ceased development,
marketing and selling of antifuse-based FPGA products. In return, QuickLogic
paid $4.5 million, which represented $3.5 million of NRE revenue related to the
sale of technology rights and $1.0 million of compensation for inventory and
other assets, increased the Company's equity position in the privately-held
QuickLogic to greater than 20%. The $4.5 million cash consideration represented
the payment the Company received in June 1996. The Company also entered into a
five-year wafer-supply agreement to provide FPGA products to QuickLogic.
Revenues and net income contributed by the FPGA product line during 1997, 1996
and 1995 were not significant. The Company is using the equity method of
accounting to record its investment in QuickLogic. The Company's share of
QuickLogic's loss recorded in 1997 was not significant.
 
     The Company recorded sales to QuickLogic of $11.7 million, $8.2 million,
and $5.8 million in 1997, 1996, and 1995, respectively, and at fiscal years-end
1997, 1996, and 1995, the Company had a receivable due from QuickLogic of $1.5
million, $1.4 million, and $0.7 million, respectively. Under certain
circumstances, the Company may make additional investments in QuickLogic. The
Company's chairman's venture capital firm is an investor in QuickLogic and is
represented on the Board of Directors.
 
NOTE 9: SUBSEQUENT EVENTS
 
     On March 9, 1998, the Company announced a restructuring plan for which it
will incur charges in the quarter ended March 30, 1998, for the write-down and
write-off of manufacturing facilities, equipment and improvements; operating
costs attributable to the closure and consolidation of manufacturing facilities;
consolidation of test facilities; write-down of non-usable assembly inventory in
the Thai test facility; the severance of manufacturing and other personnel and
other costs.
 
     The Company plans to shut down its six-inch, 0.6 micron wafer fabrication
plant, Fab III, in Bloomington, Minnesota and move all production to its
eight-inch, 0.35 micron fab, Fab IV, also in Minnesota. The adjustments from
this decision relate primarily to the carrying value of manufacturing assets. As
a result of developments in the semiconductor industry, such as decreasing
average selling prices, particularly in its largest product line, Memory
Products, the Company has accelerated the use of more advanced manufacturing
processes to produce its products. The use of these more advanced processes
indicated that the carrying value of these selected older assets may not be
recoverable. The fair value of such manufacturing assets was based primarily
upon third party estimates of fair value. The impairment charge relates to those
assets that cannot be upgraded to eight-inch capability for use in Fab IV.
 
     Fab II, located in Round Rock, Texas has been used in the manufacture of
wafers for the Datacommunication, Programmable Logic and Computer Products
divisions. A decision has been made to discontinue
 
                                       40

<PAGE>   42
                       CYPRESS SEMICONDUCTOR CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
producing SRAMs in Texas. Costs associated with this decision include severance
payments for approximately 100 employees, a write-down in the valuation of
equipment which cannot be used elsewhere and related costs.
 
     The Company uses a third party subcontractor, located in Thailand, for a
portion of its test manufacturing. The Company plans to consolidate the Thai
test manufacturing operation into its subsidiary operation located in the
Philippines. Costs associated with this include severance payments, write-off of
non-usable assembly inventory and the write-down of equipment that the Company
will not be able to use in its Manila plant.
 
     The decision to centralize most of the wafer production in an eight-inch
fab caused the Company to make a decision to upgrade its R&D wafer fab, Fab I,
located in San Jose, California, from six-inch to eight-inch to ensure
compatibility. The charges associated with this move include facility
write-downs and disposal of certain six-inch manufacturing equipment.
 
     Costs associated with all the above decisions amount to approximately $63.0
million.
 
     Separately, the Company will record charges of approximately $22.0 million
relating to the write-off of certain equity investments and additional inventory
reserves relating to the ongoing industry over-supply and continued inventory
corrections by end user customers.
 
     The Company sold additional put warrants through private placements through
February 26, 1998. As of March 17, 1998, the Company has a maximum potential
obligation to purchase 4.5 million shares of its common stock at an aggregate
price of $44.9 million.
 
                                       41

<PAGE>   43
 
 
                      REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Stockholders and Board of Directors
CYPRESS SEMICONDUCTOR CORPORATION:
 
     In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 44 present fairly, in all material
respects, the financial position of Cypress Semiconductor Corporation and its
subsidiaries at December 29, 1997 and December 30, 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 29, 1997, in conformity with generally accepted accounting principles.
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
generally accepted auditing standards 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 the opinion expressed
above.
 
PRICE WATERHOUSE LLP
San Jose, California
January 20, 1998, except as to Note 9,

which is as of March 6, 1998
 
                                       42

<PAGE>   44
 
                      QUARTERLY FINANCIAL DATA (UNAUDITED)
 

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                              ------------------------------------------------------
                                              DECEMBER 29,    SEPTEMBER 29,    JUNE 30,    MARCH 31,
                                                  1997            1997           1997        1997
                                              ------------    -------------    --------    ---------
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>             <C>              <C>         <C>
Revenues....................................    $134,134        $146,081       $138,142    $125,999
Gross profit................................      39,596          52,736         51,455      43,650
Net income..................................         108           7,210          6,140       4,960
Net income per share
  Basic.....................................    $   0.00        $   0.08       $   0.07    $   0.06
                                                ========        ========       ========    ========
  Diluted...................................    $   0.00        $   0.08       $   0.07    $   0.06
                                                ========        ========       ========    ========
</TABLE>

 

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                              -----------------------------------------------------
                                              DECEMBER 30,    SEPTEMBER 30,    JULY 1,     APRIL 1,
                                                  1996            1996           1996        1996
                                              ------------    -------------    --------    --------
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>             <C>              <C>         <C>
Revenues....................................    $113,103        $109,647       $135,464    $170,171
Gross profit................................      37,880          28,572         63,449      93,310
Net income..................................       1,304             583         16,865      34,277
Net income per share
  Basic.....................................    $   0.02        $   0.01       $   0.21    $   0.43
                                                ========        ========       ========    ========
  Diluted...................................    $   0.02        $   0.01       $   0.19    $   0.39
                                                ========        ========       ========    ========
</TABLE>

 

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
       DISCLOSURE
 
     Not Applicable.
 

                                    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 the Company's 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 the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended December 29, 1997, except that the information
required by this item concerning the executive officers of the Company is
incorporated by reference to the information set forth in the section entitled
"Executive Officers of the Company" at the end of Part I of this Annual Report
on Form 10-K.
 

ITEM 11. EXECUTIVE COMPENSATION
 
     The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
 
                                       43

<PAGE>   45
 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
 

                                    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:
 

<TABLE>
<CAPTION>
                                                                       PAGE
                                                                       ----
    <S>  <C>                                                           <C>
    (1)  FINANCIAL STATEMENTS
 
         Consolidated Balance Sheets at December 29, 1997 and
         December 30, 1996...........................................   25
         Consolidated Statements of Operations for the three years
         ended December 29, 1997.....................................   26
         Consolidated Statements of Stockholders' Equity for the
         three years ended December 29, 1997.........................   27
         Consolidated Statements of Cash Flows for the three years
         ended December 29, 1997.....................................   28
         Notes to Consolidated Financial Statements..................   29
         Report of Independent Accountants...........................   42
 
    (2)  FINANCIAL STATEMENT SCHEDULE
 
         Schedule II -- Valuation and qualifying accounts and
         reserves....................................................   47
</TABLE>

 
     All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
 
                                       44

<PAGE>   46
 
     (3) EXHIBITS
 

<TABLE>
<CAPTION>
        EXHIBIT
        NUMBER                               DESCRIPTION
        -------                              -----------
        <S>          <C>
         3.1(1)      Restated Certificate of Incorporation, as amended.
         3.2(2)      Certificate of Amendment of Restated Certificate of
                     Incorporation, as amended.
         3.3(1)      Bylaws, as amended
         4.1(5)      Lease dated April 12, 1996 between the Company and BNP
                     Leasing Corporation.
         4.2(5)      Credit Agreement dated July 24, 1996 between the Company and
                     Bank of America National Trust.
         4.3(5)      First Amendment to Credit Agreement dated October 10, 1996
                     between the Company and Bank of America National Trust.
        4.4(5)       Second Amendment to Credit Agreement dated October 10, 1996
                     between the Company and Bank of America National Trust
         4.5(6)      Indenture dated as of September 15, 1997, between the
                     Company and State Street Bank and Trust Company of
                     California, N.A. as Trustee, including the form of note.
        10.1(1)(7)   Form of Indemnification Agreement.
        10.2(3)(7)   1994 Stock Option Plan
        10.3(4)(7)   Employee Qualified Stock Purchase Plan, as amended.
        10.4(7)      Bialek Consulting Agreement.
        10.5(7)      Cypress Semiconductor Corporation 1997 Key Employee Bonus
                     Plan Agreement.
        21.1         Subsidiaries of the Company
        23.1         Consent of Independent Accountants
        24.1         Power of Attorney (see page 46)
        27.1         Financial Data Schedule
</TABLE>

 
- ---------------
(1) Previously filed as an exhibit to Registration Statement on Form S-1 (No.
    33-12153) which became effective on March 4, 1987 and incorporated herein by
    reference.
 
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
    for the fiscal year ended December 28, 1992.
 
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
    for the fiscal year ended January 3, 1994.
 
(4) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
    for the fiscal year ended January 2, 1995.
 
(5) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
    for the fiscal year ended December 30, 1996.
 
(6) Previously filed as an exhibit to the Company's Registration Statement on
    Form S-3 dated December 19, 1997.
 
(7) Management compensatory plan, contract or arrangement.
 
                                       45

<PAGE>   47
 

                                   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
26th day of March 1998.
 
                                          CYPRESS SEMICONDUCTOR CORPORATION
 
                                          By:    /s/ EMMANUEL HERNANDEZ
                                            ------------------------------------
                                            Emmanuel Hernandez,
                                              Chief Financial Officer, Vice
                                              President, Finance and
                                              Administration
 
                               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:
 

<TABLE>
<CAPTION>
                       SIGNATURE                                      TITLE                   DATE
                       ---------                                      -----                   ----
<S>                                                       <C>                            <C>
                    /s/ T.J. RODGERS                       President, Chief Executive    March 26, 1998
- --------------------------------------------------------      Officer and Director
                      T.J. Rodgers                        (Principal Executive Officer)
 
                 /s/ EMMANUEL HERNANDEZ                      Chief Financial Officer     March 26, 1998
- --------------------------------------------------------   Vice President, Finance and
                   Emmanuel Hernandez                       Administration (Principal
                                                            Financial and Accounting
                                                                    Officer)
 
                  /s/ PIERRE R. LAMOND                      Chairman of the Board of     March 26, 1998
- --------------------------------------------------------            Directors
                    Pierre R. Lamond
 
                   /s/ FRED B. BIALEK                               Director             March 26, 1998
- --------------------------------------------------------
                     Fred B. Bialek
 
                   /s/ ERIC BENHAMOU                                Director             March 26, 1998
- --------------------------------------------------------
                     Eric Benhamou
 
                   /s/ JOHN C. LEWIS                                Director             March 26, 1998
- --------------------------------------------------------
                     John C. Lewis
</TABLE>

 
                                       46

<PAGE>   48
 
                           SEMICONDUCTOR CORPORATION
 
         SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 

<TABLE>
<CAPTION>
                                                  CHARGED TO     CHARGED TO
                                   BEGINNING        COSTS          OTHER                      ENDING
           DESCRIPTION              BALANCE      AND EXPENSES     ACCOUNTS    DEDUCTIONS     BALANCE
           -----------             ----------    ------------    ----------   ----------    ----------
<S>                                <C>           <C>             <C>          <C>           <C>
1995
Allowance for sales returns and
  doubtful accounts..............  $1,393,000     $1,400,000      $85,000     $ (50,000)    $2,828,000
1996
Allowance for sales returns and
  doubtful accounts..............  $2,828,000     $1,779,000      $    --     $(720,000)    $3,887,000
1997
Allowance for sales returns and
  doubtful accounts..............  $3,887,000     $       --      $    --     $(363,000)    $3,524,000
</TABLE>

 
                                       47





<PAGE>   1
                                                                  EXHIBIT 10.4


April 1, 1996


Mr. Fred Bialek
200 Winding Way
Woodside, CA  94062

Dear Fred:

Since your prior consulting agreement terminated April 1, 1996, this will set
forth the current terms and conditions of your consulting agreement with Cypress
(the "Company").

1)      You shall provide consulting services to perform the Company's Board of
        Directors duties, division and subsidiary duties, and whatever mergers
        and acquisitions activity that the Company's management asks of you
        until this agreement is terminated. You are expected to work generally
        on your own and to employ your own methods and to work the hours and
        schedule necessary to complete the services. You will do most of your
        work out of your own office, but when necessary, the Company will
        provide an office space, other facilities and a phone for your use.

2)      You may provide your consulting services to any non-related Company
        entity with the exception of a direct competitor to the Company.

3)      In return for the services listed above and until this agreement is
        terminated, the Company shall compensate you as follows:

        a)     You shall receive the same standard monetary compensation as the
               outside directors of the Company's Board of Directors.

        b)     You shall be granted
 stock options consistent with those granted
               to the outside directors of the Company's Board of Directors. You
               will be granted a nonstatutory option to purchase 20,000 shares
               on May 29th of each year, exercisable at the fair market value on
               the date of grant and vesting on a date four years after the date
               of grant. If the resolution Number 2 put forth to the
               stockholders for the May 3, 1996, stockholder's meeting is
               approved, the vesting of these shares will be 5 years at the rate
               of 20% per year.

        c)     You shall receive an annualized fixed retainer for your services
               of $284,160, payable on the first day of each month.

        d)     You shall be reimbursed for your out-of-pocket business expenses
               for travel, lodging, phone and administrative support upon
               receipt of invoice.

4)      This agreement is valid until April 1, 1997, unless terminated by either
        party with 30 days written notice. This agreement may be extended for
        one-year periods (subject to a 30-day right to terminate) only by an
        Extension to Consulting Agreement in the form of Exhibit A signed by you
        and Cypress.







                                       53

<PAGE>   2

Fred Bialek
April 1, 1996
Page 2

5)      This agreement supersedes all prior consulting agreements, which shall
        now be deemed terminated.

6)      In carrying out services under this agreement, you shall be and act as
        an independent contractor, and shall be subject to the Company's
        direction only as to specific areas that the Company desires your
        services and advice.

Please indicate your acceptance of this agreement by signing a copy and
returning it to me.

Sincerely,



     /s/   T.J. RODGERS
- ------------------------------------
T.J. Rodgers
President and CEO
Cypress Semiconductor Corporation






I accept the terms and conditions of this agreement.


        /s/   FRED B. BIALEK
- ------------------------------------              ---------------------------
Fred Bialek                                               Dated








                                       54


<PAGE>   3

Consulting Agreement - Exhibit A

We agree to extend the Consulting Agreement dated April 1, 1996 for an
additional year from April 1, 1997 to April 1, 1998.

Pursuant to the action of the Compensation Committee of the Board of Directors
of Cypress at the October 23, 1997 meeting, your annualized fixed retainer in
Section 3b) shall be $290,000.00, effective April 1, 1997.



Cypress Semiconductor Corporation

By:     /s/ EMMANUEL HERNANDEZ
- ------------------------------------

Dated:
     -------------------------------


Fred Bialek

By:     /s/  FRED B. BIALEK
   ---------------------------------


Dated:
     -------------------------------








                                       55




<PAGE>   1

                                                                   EXHIBIT 10.5


                        CYPRESS SEMICONDUCTOR CORPORATION
                  1997 KEY EMPLOYEE BONUS PLAN AGREEMENT (KEBP)

ARTICLE 1 - PLAN OBJECTIVE

1.1 The objective of this Key Employee Bonus Plan is to provide incentive to key
employees of the Company based on the Company's overall Sales and Earnings Per
Share (EPS) achievement, the Company's growth relative to selected competitors,
and the individual's performance against set individual Critical Success Factors
(CSFs).

ARTICLE 2 - EFFECTIVE DATE

2.1 This agreement will become effective December 31, 1996 for the plan period
of fiscal year 1997. The plan period for fiscal year 1997 covers December 31,
1996 to December 30, 1997.

ARTICLE 3 - ELIGIBILITY FOR PLAN PARTICIPATION

3.1 Prior to the commencement of each Plan Period, members of Cypress' Executive
Staff will recommend to the President/CEO for approval proposed participants for
the plan period and their incentive levels.

3.2 Prior to the commencement of each Plan Period, the CEO and his Executive
Staff's plan participation and their incentive levels will be presented to the
Compensation Committee of the Board of Directors for approval.

3.3 Participants are notified of their eligibility at the beginning of each plan
period.


3.4 Newly hired employees may be added as participants during the plan period.
Other employees who are currently not plan participants may be considered for
participation at the beginning of the plan period, provided however that they
have assumed greater responsibility or demonstrated greater contribution to the
company. Participants added during the plan period shall receive prorated awards
based on the number of months of participation in the plan with a minimum of six
months participation. Otherwise, eligibility will be deferred until the next
plan period. Exceptions are subject to CEO approval.

3.5 Changes in plan participants require the approval of the President/CEO.

ARTICLE 4 - BONUS PLANS AND  CALCULATIONS

4.1 Each plan participant will be given an incentive level expressed as a
percent of Base Salary. This represents the target bonus. There are 3 incentive
levels in this program:


<TABLE>
<CAPTION>
      -------------------------------------------------------------
          LIKELY PARTICIPANTS                      INCENTIVE LEVELS
      -------------------------------------------------------------
<S>                                                   <C>
      CEO, Senior VPs                                  80% Plan
      -------------------------------------------------------------
      VPs, Key Managers, Key Employees                 30% Plan
     -------------------------------------------------------------
      Other Key Employees                              20% Plan
      -------------------------------------------------------------
</TABLE>








                                       56



<PAGE>   2


4.2 The participant's actual bonus attainment is determined by the participants
score from the following factors:

      -------------------------------------------------------------------
                              BONUS PLAN FACTORS
      -------------------------------------------------------------------
      a. Total Company Sales performance for 1997 (Sales factor)
      -------------------------------------------------------------------
      b. Total Company EPS performance for 1997 (EPS factor)
      -------------------------------------------------------------------
      c. Cypress' revenue growth vs. a select list of Competitors (Growth
      Factor)
      -------------------------------------------------------------------
      d. Performance against individual CSFs (Avg of score for 4 quarters)
      -------------------------------------------------------------------

NO BONUS WILL BE AWARDED UNLESS THE COMPANY ACHIEVES 90% OF IT'S EPS TARGET FOR
1997 PER THE 9612 PLAN.

4.3 The weight assigned to each of the plan factors depends on the participant's
bonus plan, as listed below:


<TABLE>
<CAPTION>
      -------------------------------------------------------------------
                PLAN FACTORS              80%PLAN    30%PLAN    20%PLAN
      -------------------------------------------------------------------
<S>                                       <C>        <C>        <C>
      Total CY 1997 Sales (Sales            25%        20%        10%
      factor)
      -------------------------------------------------------------------
      Total CY 1997 EPS   (EPS factor)      25%        20%        10%
      -------------------------------------------------------------------
      Individual CSFs                       50%        60%        80%
      -------------------------------------------------------------------
        Total Plan Factors Weights         100%       100%       100%
      -------------------------------------------------------------------
</TABLE>



4.4 Sales Factor: Scoring for the sales factor will be dependent on Cypress'
performance against the 9612 plan. Sales below 90% of the plan yields a sales
factor of zero. Sales at 90% of the plan, yields a sales factor of 0.9. Sales at
100% of the plan, yields a sales factor 1.0. Sales performance between 90%-100%
of the plan is ratably scored between .9 and 1.0. Sales at 120% or greater of
the 9612 plan yields a sales factor of 2.0. Performance between 100%-120% is
ratably scored between 1.0 and 2.0. The graph below depicts the sales factor at
different sales levels. The 9612 Sales Plan is $626.8M. Sales factor is zero if
1997 sales is lower than $564.1M.

4.5 EPS Factor: Scoring for the EPS factor will be dependent on Cypress'
performance against the 9612 plan. EPS below 90% of the plan yields an EPS
factor of zero. EPS at 90% of the plan, yields an EPS factor of 0.9. EPS at 100%
of the plan, yields an EPS factor 1.0. EPS performance between 90%-100% of the
plan is ratably scored between .9 and 1.0. EPS at 120% or greater of the 9612
plan yields an EPS factor of 2.0. Performance between 100%-120% is ratably
scored between 1.0 and 2.0. The graph in para 4.4 also depicts the EPS factor at
different EPS levels. The 9612 EPS plan is $0.60. EPS factor is zero if EPS is
lower than $0.54.

4.6 The factor of Cypress' revenue growth versus the select list of competitors
shall be calculated as Cypress' 1997 Sales versus 1996 and shall use the
competitor's equivalent fiscal quarters for 1997 and 1996 to match those of
Cypress'. The list of select competitors is shown in Exhibit A. The growth
factor shall be applied to the participant's Sales and EPS scores only as a
gross up or discount factor and won't apply to the participant's CSF attainment.
The revenue growth factor is calculated as:


<TABLE>
<CAPTION>
       CY 1997 Sales                                Competitors' 1997 Sales           2
<S>                                               <C>   
     -------------------------     divided by     -------------------------- = Growth Factor
        CY 1996 Sales                                Competitors' 1996 Sales
</TABLE>



4.7     The overall bonus calculation shall be as follows for the different
        bonus plans, where:

      B = base salary    E = EPS Factor    CSF = average for 4 qtrs
      S = Sales Factor   G = Growth Factor

     80%KEBP = B x [(((S x 25%) + (E x 25%)) x G) + (CSF x 50%)]

     30%KEBP = B x [(((S x 20%) + (E x 20%)) x G) + (CSF x 60%)]

     20%KEBP = B x [(((S x 10%) + (E x 10%)) x G) + (CSF x 80%)]







                                       57

<PAGE>   3




ARTICLE 5 - BONUS PLAN TERMS

5.1 For the purpose of the KEBP, EPS is defined as Earnings Per Share reported
by the company adjusted for extraordinary events not included in the fiscal
year's Plan, i.e. 96.12 Plan.

5.2 Plan payout will be based on the plan participant's base salary at the end
of the plan period.

5.3 Should an employee change jobs during the plan period, and the change result
in a change in incentive level either as a result of a promotion or demotion,
the new incentive level will be determined immediately and the employee will be
notified in writing. The final incentive level will be the one used to calculate
the employee's incentives for that year. In any case, changes in incentive level
require the approval of the CEO.

ARTICLE 6 -  CSF ACHIEVEMENT

6.1 Quarterly, VPs will present their CSF achievement at the Executive Staff.
The CSF achievement of the direct reports to the VPs will be presented and
discussed at the first Operations Review of each quarter. Results for the prior
quarter and CSF plans for the current quarter are presented.

6.2 A 0% threshold will be defined for each CSF. This threshold, which could be
timing and/or deliverable-based, is a point at which CSF score starts to be
earned. If a participant does not reach/complete the minimum threshold, the CSF
will be scored 0% (zero). Progress beyond the threshold earns the participant a
pro-rated score up to 100%. Score for a particular CSF cannot exceed 110%.














                                       58


<PAGE>   4

ARTICLE 7 -  PAYMENT OF BONUS EARNED

7.1 At the end of the plan period, the CEO will present the calculated bonus to
the Compensation Committee of the Board for their approval.

7.2 Actual bonuses for each participant will be calculated using the formulas in
para 4.7.

7.3 Actual bonuses will be paid in three installments, defined as follows:

              50% of bonus earned at the end of the plan period will be paid
              after financial results are made public from the fiscal year
              concluded, including competitive data used for growth factor
              calculation. (Tentatively January 31st)

              25% of bonus earned will be paid 6 months after the first
              installment. (Tentatively July 31st)

              25% of bonus earned will be paid in the following year coinciding
              with that plan year's first 50% payout. (Tentatively January 31st)

              On the basis of this schedule, 1st payout for 1997 plan period is
              tentatively January 31, 1998.

ARTICLE 8 -  ELIGIBILITY FOR PAYMENT

8.1 To be eligible for bonus payment, the participant must be employed by the
company at the scheduled payment date. A participant who terminates employment
prior to the payment date will forfeit the bonus including all future payment
schedules, except as otherwise provided in this article.

8.2 Disability: If a participant is disabled, i.e. inability to perform any
services for the company and eligible to receive disability benefits under the
standards used by the company's disability benefit plan, the participant will
receive an award representing a proration for each month of employment in the
plan period.

8.3 Retirement: If a participant retires, i.e. permanent termination of
employment with the company in accordance with the company's retirement
policies, the participant will receive an award representing a proration for
each month of employment in the plan period.

8.4 Death: If a participant dies, awards will be paid to the beneficiary
designated by the participant, otherwise, to the persons entitled thereto as
determined by a court of competent jurisdiction. The award will be a proration
of each month of employment in the plan period.

8.5 Lay-off: If a participant is terminated by lay-off during the plan period,
no bonus will be awarded. If a participant is terminated by lay-off after the
plan period but prior to a scheduled bonus payment, it will be the discretion of
the CEO to pay bonus in full or on a prorate basis. No bonus will be paid to
employees who are terminated for cause.

8.6 All qualified bonus payments including future schedule pursuant to para 8.2,
8.3 and 8.5 will be paid in lump-sum.

8.7 The CEO reserves the right to reduce the bonus award of a participant on a
pro-rata basis to reflect a participant's leave of absence during the plan
period.

ARTICLE 9 - MISCELLANEOUS

9.1 Unless as defined in article 8.4, no right or interest in this plan is
transferable or assignable except by will or laws of descent and distribution.

9.2 Participation in this plan does not guarantee any right to continued
employment with the Company.




                                       59


<PAGE>   5

9.3 Participation in the plan in a particular plan period is not a guarantee to
participation in subsequent plan periods.

9.4 Management reserves the right to discontinue participation of any
participant in this plan, at any time, and for whatever reasons.

9.5 This plan is unfunded and the company does not intend to set up a sinking
fund. Consequently, payments arising out of bonus earned shall be paid out of
the company's general assets. Accounts recognized by the company for book
purposes is not an indication of funds set aside for payment. Plan participants
are considered as general creditors of the company and the obligation of the
company is purely contractual and is not secured by any particular company
asset.

9.6 The provision of this plan shall not limit the CEO and the Compensation
Committee of the Board of Directors to modify said plan, or adopt such other
plans on matters of compensation, bonus or incentive, which in its own judgment
it deems proper, at any time.

9.7 This agreement is construed to be in accordance with the laws of the State
of Delaware.











                                       60



<PAGE>   6

ATTACHMENT A


COMPETITOR COMPANIES:

MPD business area:  (weight 44.6%)

Motorola Semiconductor 10%
Micron 10%
Alliance 25%
IDT 30%
ISSI 25%

PLD/NVM business area:  (weight 20.9%)

Xilinx 25%
Altera 25%
Atmel 10%
Lattice 45%

DCD business area:  (weight 18.8%)

IDT 40%
Vitesse 20%
National 20%
AMD 20%

CPD business area: (weight 15.7%)

Opti 15%
ICS 70%
VLSI 15%


Note: Division weighting factors are per the 9612 plan.










                                       61





<PAGE>   1

                                                                   EXHIBIT 21.1

                              List of Subsidiaries



<TABLE>
<CAPTION>
                                                                           Jurisdiction of
Name                                                                        Incorporation
- ----                                                                        -------------
<S>                                                                            <C>
Cypress Semiconductor (Minnesota) Inc. (CMI)     . . . . . . . . . . . . . . .  Delaware
Cypress Semiconductor (Texas) Inc. (CTI)     . . . . . . . . . . . . . . . . .  Delaware
Cypress Semiconductor Round Rock, Inc.   . . . . . . . . . . . . . . . . . . .  Delaware
Cypress Export, Inc.   . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Barbados
Cypress Investment Corporation . . . . . . . . . . . . . . . . . . . . . . . .  Delaware
Cypress Semiconductor International, Inc.  . . . . . . . . . . . . . . . . . .  Delaware
Cypress Semiconductor SARL . . . . . . . . . . . . . . . . . . . . . . . . . .  France
Cypress Semiconductor GmbH . . . . . . . . . . . . . . . . . . . . . . . . . .  Germany
Cypress Semiconductor India Private Limited  . . . . . . . . . . . . . . . . .  India
Cypress Semiconductor Italia S.r.l.  . . . . . . . . . . . . . . . . . . . . .  Italy
Cypress Semiconductor K.K. . . . . . . . . . . . . . . . . . . . . . . . . . .  Japan
Cypress Semiconductor AB . . . . . . . . . . . . . . . . . . . . . . . . . . .  Scandinavia
Cypress Semiconductor Limited      . . . . . . . . . . . . . . . . . . . . . .  UK
Cypress Semiconductor Singapore Pte. Ltd   . . . . . . . . . . . . . . . . . .  Singapore
Cypress Semiconductor Canada . . . . . . . . . . . . . . . . . . . . . . . . .  Canada
Cypress Semiconductor Korea    . . . . . . . . . . . . . . . . . . . . . . . .  Korea
Cypress Semiconductor Philippines Inc. (CSPI)  . . . . . . . . . . . . . . . .  Philippines
Cyland Corporation   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Philippines
Cypress Semiconductor (Thailand) Co., Ltd.   . . . . . . . . . . . . . . . . .  Thailand
Cypress Semiconductor World Trade Corporation  . . . . . . . . . . . . . . . .  Cayman Islands
</TABLE>










                                       62







<PAGE>   1

                                                                   EXHIBIT 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No. 33-54637, 33-57499, 33-59153, and No. 333-00535)
and in the Registration Statement on Form S-3 (No. 333-42829) of our report
dated January 20, 1998, except as to Note 9, which is as of March 6, 1998,
appearing on page 42 of Cypress Semiconductor Corporation Annual Report on Form
10-K for the year ended December 29, 1997.



Price Waterhouse LLP
San Jose, California
March 27, 1998


                                       63







<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements for the year ended December 29, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-29-1997
<PERIOD-START>                             DEC-31-1996
<PERIOD-END>                               DEC-29-1997
<CASH>                                         151,724
<SECURITIES>                                    91,982
<RECEIVABLES>                                   67,854
<ALLOWANCES>                                     3,524
<INVENTORY>                                     76,925
<CURRENT-ASSETS>                               398,080
<PP&E>                                         442,661
<DEPRECIATION>                                 372,507
<TOTAL-ASSETS>                                 956,270
<CURRENT-LIABILITIES>                           93,053
<BONDS>                                        175,000
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                         1,015
<OTHER-SE>                                     642,461
<TOTAL-LIABILITY-AND-EQUITY>                   956,270
<SALES>                                        544,356
<TOTAL-REVENUES>                               544,356
<CGS>                                          356,919
<TOTAL-COSTS>                                  356,919
<OTHER-EXPENSES>                                93,842
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                               7,197
<INCOME-PRETAX>                                 24,032
<INCOME-TAX>                                     5,613
<INCOME-CONTINUING>                             18,419
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                    18,419
<EPS-PRIMARY>                                     0.21
<EPS-DILUTED>                                     0.21
        

</TABLE>






<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIODS ENDED MARCH 31,
1997, JUNE 30, 1997 AND SEPTEMBER 29, 1997.
</LEGEND>
<MULTIPLIER>1,000
       
<S>                             <C>                     <C>                     <C>
<PERIOD-TYPE>                   3-MOS                   3-MOS                   3-MOS
<FISCAL-YEAR-END>                          DEC-29-1997             DEC-29-1997             DEC-29-1997
<PERIOD-START>                             DEC-31-1996             APR-01-1997             JUL-01-1997
<PERIOD-END>                               MAR-31-1997             JUN-30-1997             SEP-29-1997
<CASH>                                           1,930                  22,625                  12,110
<SECURITIES>                                   129,295                 100,508                 290,287
<RECEIVABLES>                                   81,085                  74,888                  77,027
<ALLOWANCES>                                     3,177                   3,430                   4,677
<INVENTORY>                                     60,173                  67,509                  70,671
<CURRENT-ASSETS>                               328,008                 320,843                 496,532
<PP&E>                                         751,568                 424,790                 442,210
<DEPRECIATION>                                 310,882                 330,252                 353,234
<TOTAL-ASSETS>                                 839,525                 816,038               1,013,001
<CURRENT-LIABILITIES>                          211,665                 169,653                 167,804
<BONDS>                                              0                       0                 175,000
<PREFERRED-MANDATORY>                                0                       0                       0
<PREFERRED>                                          0                       0                       0
<COMMON>                                           987                     995                   1,012
<OTHER-SE>                                     601,879                 614,448                 636,233
<TOTAL-LIABILITY-AND-EQUITY>                   839,525                 816,038               1,013,001
<SALES>                                        125,999                 138,142                 410,222
<TOTAL-REVENUES>                               125,999                 138,142                 410,222
<CGS>                                           82,349                  86,687                  93,345
<TOTAL-COSTS>                                   82,349                  86,687                  93,345
<OTHER-EXPENSES>                                21,023                  24,426                  24,560
<LOSS-PROVISION>                                     0                       0                       0
<INTEREST-EXPENSE>                               2,316                     779                     948
<INCOME-PRETAX>                                  7,573                   9,353                  11,007
<INCOME-TAX>                                     2,613                   3,213                   3,797
<INCOME-CONTINUING>                              4,960                   6,140                   7,210
<DISCONTINUED>                                       0                       0                       0
<EXTRAORDINARY>                                      0                       0                       0
<CHANGES>                                            0                       0                       0
<NET-INCOME>                                     4,960                   6,140                   7,210
<EPS-PRIMARY>                                     0.06                    0.07                    0.08<F1>
<EPS-DILUTED>                                     0.06                    0.07                    0.08
<FN>
<F1>For Purposes of this Exhibit, Primary means Basic.
</FN>
        

</TABLE>




WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.


<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 30, 1996 AND
JANUARY 1, 1996.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                          <C>                        <C>
<PERIOD-TYPE>                YEAR                       YEAR
<FISCAL-YEAR-END>                       DEC-30-1996             JAN-01-1996
<PERIOD-START>                          JAN-02-1996             JAN-03-1995
<PERIOD-END>                            DEC-30-1996             JAN-01-1996
<CASH>                                       20,119                   9,487
<SECURITIES>                                 73,667                 152,131
<RECEIVABLES>                                71,440                 108,587
<ALLOWANCES>                                  3,887                   2,828
<INVENTORY>                                  53,107                  28,978
<CURRENT-ASSETS>                            281,412                 351,637
<PP&E>                                      732,399                 554,432
<DEPRECIATION>                              294,833                 217,639
<TOTAL-ASSETS>                              794,047                 750,728
<CURRENT-LIABILITIES>                       155,406                 161,057
<BONDS>                                      98,241                  95,879
<PREFERRED-MANDATORY>                             0                       0
<PREFERRED>                                       0                       0
<COMMON>                                        914                     889  
<OTHER-SE>                                  509,832                 471,210
[TOTAL-LIABILITIES-AND-EQUITY]              794,047                 750,728
<SALES>                                     528,385                 596,071
<TOTAL-REVENUES>                            528,385                 596,071
<CGS>                                       305,174                 276,160
<TOTAL-COSTS>                               305,174                 276,160
<OTHER-EXPENSES>                             84,334                  71,667
<LOSS-PROVISION>                                  0                       0
<INTEREST-EXPENSE>                            6,895                   6,239
<INCOME-PRETAX>                              83,505                 161,384
<INCOME-TAX>                                 30,476                  58,907
<INCOME-CONTINUING>                          53,029                 102,477
<DISCONTINUED>                                    0                       0
<EXTRAORDINARY>                                   0                       0
<CHANGES>                                         0                       0
<NET-INCOME>                                 53,029                 102,477
<EPS-PRIMARY>                                  0.66                    1.25<F1>
<EPS-DILUTED>                                  0.62                    1.09
<FN>
<F1> For Purposes of this Exhibit, Primary means Basic.
</FN>
        

</TABLE>






<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIODS ENDED APRIL 1,
1996, JULY 1, 1996 AND SEPTEMBER 30, 1996.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>                     <C>                     <C>
<PERIOD-TYPE>                   3-MOS                   3-MOS                   3-MOS
<FISCAL-YEAR-END>                          DEC-30-1996             DEC-30-1996             DEC-30-1996
<PERIOD-START>                             JAN-02-1996             APR-02-1996             JUL-02-1996
<PERIOD-END>                               APR-01-1996             JUL-01-1996             SEP-30-1996
<CASH>                                           1,090                   4,481                     201
<SECURITIES>                                   109,983                  60,972                  95,356
<RECEIVABLES>                                  101,536                  85,886                  79,432
<ALLOWANCES>                                     2,479                   2,341                   2,358
<INVENTORY>                                     36,858                  45,165                  43,730
<CURRENT-ASSETS>                               307,861                 251,815                 274,204
<PP&E>                                         616,288                 682,545                 715,780
<DEPRECIATION>                                 228,832                 247,969                 271,259
<TOTAL-ASSETS>                                 763,692                 770,946                 803,331
<CURRENT-LIABILITIES>                          167,842                 150,313                 177,750
<BONDS>                                         96,452                  97,043                  97,633
<PREFERRED-MANDATORY>                                0                       0                       0
<PREFERRED>                                          0                       0                       0
<COMMON>                                           898                     903                     908
<OTHER-SE>                                     476,966                 496,812                 502,231
<TOTAL-LIABILITY-AND-EQUITY>                   763,692                 770,946                 803,331
<SALES>                                        170,171                 135,464                 109,647
<TOTAL-REVENUES>                               170,171                 135,464                 109,647
<CGS>                                           76,861                  72,015                  81,075
<TOTAL-COSTS>                                   76,861                  72,015                  81,075
<OTHER-EXPENSES>                                21,416                  21,989                  19,826
<LOSS-PROVISION>                                     0                       0                       0
<INTEREST-EXPENSE>                               1,647                   1,482                   1,617
<INCOME-PRETAX>                                 53,980                  26,551                     918
<INCOME-TAX>                                    19,703                   9,686                     335
<INCOME-CONTINUING>                             34,277                  16,865                     583
<DISCONTINUED>                                       0                       0                       0
<EXTRAORDINARY>                                      0                       0                       0
<CHANGES>                                            0                       0                       0
<NET-INCOME>                                    34,277                  16,865                     583
<EPS-PRIMARY>                                     0.43                    0.21                    0.01
<EPS-DILUTED>                                     0.39                    0.19                    0.01
        

</TABLE>