The Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report of Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, which are discussed in the "Forward-Looking Statements" section under Part I of this Quarterly Report on Form 10-Q.

EXECUTIVE SUMMARY

General

Our mission is to transform Cypress Semiconductor Corporation ("Cypress") from a traditional, broad-line semiconductor company into a leading supplier of proprietary and programmable solutions in systems everywhere. We deliver high-performance, mixed-signal, programmable solutions that provide customers with integration, rapid time-to-market and system value. Our offerings include Programmable System-on-Chip ("PSoC ®") products, capacitive sensing and touchscreen solutions, universal serial bus ("USB") controllers, and general-purpose programmable clocks and memories. Cypress also provides wired and wireless connectivity solutions, including, respectively, West Bridge® controllers, which enhance performance in multimedia handsets, and the CyFi low-power RF solution, offering reliability, simplicity and power-efficiency. Cypress also offers a wide portfolio of static random access memories, nonvolatile memories and image sensor products. Cypress serves numerous markets, including consumer, computation, data communications, automotive, medical, industrial and white goods.

Our organization included the following business segments as of the end of the third quarter of fiscal 2009:

Business Segments                          Description
Consumer and Computation Division          a product division focusing on PSoC,
                                           USB and timing solutions

Data Communications Division               a product division focusing on data
                                           communication devices for wireless
                                           handset and professional / personal
                                           video systems

Memory and Imaging Division                a product division focusing on static
                                           random access memories, nonvolatile
                                           memories and image sensor products

Emerging Technologies and other            includes Cypress Envirosystems, and
                                           AgigaTech, Inc., both majority-owned
                                           subsidiaries of Cypress, the ONS and
                                           China business units and certain
                                           foundry-related services and corporate
                                           expenses

Spin-Off of SunPower Corporation ("SunPower")

On September 29, 2008, the first day of our fourth quarter of fiscal 2008, we completed the distribution of all of our 42.0 million shares of SunPower Class B common stock to our stockholders (the "Spin-Off"). The distribution was made pro rata to our stockholders of record as of the close of trading on September 17, 2008. As a result of the Spin-Off, each stockholder received approximately 0.274 of a share of SunPower Class B common stock for each share of Cypress's common stock held by such stockholder. The market value of the distribution was approximately $2.6 billion based on the closing price of SunPower common stock on September 29, 2008.

We received a favorable ruling from the Internal Revenue Service in April 2008 with respect to certain tax issues arising under Section 355 of the Internal Revenue Code in connection with the Spin-Off. The distribution was structured to be tax-free to us and our stockholders for U.S. federal income tax purposes, except in respect to cash received in lieu of fractional shares.

See Note 3 of Notes to Condensed Consolidated Financial Statements for a detailed discussion of the Spin-Off. Unless otherwise indicated, this Quarterly Report on Form 10-Q includes discussion of our continuing operations.

Adjustments to Cypress's Stock Plans:

On August 1, 2008, the Board of Directors (the "Board") approved certain adjustments to our 1994 and 1999 Stock Plans (together, the "Plans") and outstanding employee equity awards in anticipation of the Spin-Off. These adjustments were consistent with and similar to the provisions in the Plans providing for automatic adjustment of service provider equity awards and share pools pursuant to a stock split or similar change in capitalization effected without receipt of consideration by us.

On September 30, 2008, following the Spin-Off, outstanding employee equity awards under the Plans were adjusted by a conversion ratio of 4.12022 (the "Conversion Ratio"). Specifically, the number of shares issuable pursuant to the outstanding awards was multiplied by the Conversion Ratio and rounded down to the nearest whole share. In addition, the per-share exercise price of outstanding options was divided by the Conversion Ratio and rounded up to the nearest whole cent. Also, the number of authorized but unissued shares reserved for issuance under the Plans and the ESPP and the numerical provisions under the Plans' annual grant limits and automatic option grant provisions, including automatic grants to Board members, were multiplied by the Conversion Ratio and rounded down to the nearest whole share.

Stock-Based Compensation:

The modification of the outstanding employee equity awards and the ESPP approved by the Board on August 1, 2008 resulted in additional non-cash stock-based compensation. The amount was measured based upon the difference between the fair value of the awards immediately before and after the modification. Of the total additional non-cash stock-based compensation, $10.9 million was recognized in the third quarter of fiscal 2009 and $36.0 million will be recognized over the remaining vesting periods on an accelerated basis.

Manufacturing Strategy

Our core manufacturing strategy-"flexible manufacturing"-combines capacity from leading foundries with output from our internal manufacturing facilities. This initiative allows us to meet rapid swings in customer demand while lessening the burden of high fixed costs, a capability that is particularly important in high-volume consumer markets that we serve with our leading programmable product portfolio.

Consistent with this strategy, our Board approved a plan in December 2007 to exit our manufacturing facility in Texas and transfer production to our more cost-competitive facility in Minnesota and outside foundries. We substantially completed our exit plan by the end of fiscal 2008.

Revision of Prior Period Financial Statements

Certain prior year balances have been revised to conform to current year presentation, including the retrospective application of adopting FSP APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)", ("FSP APB 14-1"), now referred to as ASC 470. Under FSP APB 14-1, the liability and equity components of convertible debt instruments that may be settled wholly or partially in cash upon conversion must be accounted for separately in a manner reflective of our nonconvertible debt borrowing rate. Previous guidance provided for accounting for this type of convertible debt instrument entirely as debt. We have retrospectively applied this change in accounting to affected accounts for all periods presented. Refer to Note 2 for more information

During the third quarter of 2009, we identified historically immaterial errors related to the value of our raw material inventory balances located in the Philippines. We assessed the materiality of these errors on prior periods financial statements in accordance with the SEC's Staff Accounting Bulletin No. 99 ("SAB 99"), and concluded that the errors were not material to any prior annual or interim periods but the cumulative error would be material to the three months ended September 27, 2009, if the entire correction was recorded in the current period. Accordingly, we have revised certain prior year balances for the three and nine months ended September 28, 2008 and as of December 28, 2008 to allow for the correct recording of these transactions in accordance with SEC's Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statement

Results of Operations

Revenues

The following table summarizes our consolidated revenues by segments:



                                             Three Months Ended                     Nine Months Ended
                                      September 27,       September 28,      September 27,      September 28,
(In thousands)                             2009               2008               2009               2008
Consumer and Computation Division    $         78,789    $       100,301    $       193,117    $       246,030
Data Communications Division                   25,095             37,636             71,010            100,410
Memory and Imaging Division                    71,706             84,107            203,951            247,610
Emerging Technologies                           3,129                637              5,733              6,593

Total revenues                       $        178,719    $       222,681    $       473,811    $       600,643

Consumer and Computation Division:

Revenues from the Consumer and Computation Division decreased approximately $21.5 million in the third quarter of fiscal 2009, or approximately 21.4%, compared to the same prior-year period. The decrease was primarily attributable to a decrease of approximately $11.6 million in sales of our USB products mainly due to the economic slowdown impacting demand in PC applications and consumer devices and increased competition in the consumer market. The decrease was also attributable to a decrease of $4.5 million in sales of our timing solutions business unit ("TSBU") resulting from reduced demand from certain large consumer and personal computer customers. Despite the current challenging economic environment, our PSOC product families, including our touchscreen family, continued to gain new design wins, expand their customer base and increase market penetration in a variety of end-market applications.

Revenues from the Consumer and Computation Division decreased approximately $52.9 million in the first three quarters of fiscal 2009, or approximately 21.5%, compared to the same prior-year period. The decrease was primarily attributable to a decrease of approximately $29.5 million in sales of our USB products mainly due to the economic slowdown impacting demand in PC applications and consumer devices and increased competition in the consumer market. The decrease was also attributable to a decrease of $14.9 million in sales of our TSBU resulting from reduced demand from certain large consumer and personal computer customers. Despite the current challenging economic environment, our PSOC product families, including our touchscreen family, continued to gain new design wins, expand their customer base and increase market penetration in a variety of end-market applications.

Data Communications Division:

Revenues from the Data Communications Division decreased $12.5 million in the third quarter of fiscal 2009, or approximately 33.3%, compared to the same prior-year period. The decrease was primarily attributable to a decrease of $9.9 million in sales of 1) our specialty memory products due to the continued slow down in demand in the base-station market and 2) our programmable logic devices primarily due to the decline in military shipments.

Revenues from the Data Communications Division decreased $29.4 million in the first three quarters of fiscal 2009, or approximately 29.3%, compared to the same prior-year period. The decrease was primarily attributable to a decrease of $18.1 million in sales related to certain end of life programmable logic device products, primarily due to the decline in military shipments and our specialty memory products due to a continued decline in end consumer demand.

Memory and Imaging Division:

Revenues from the Memory and Imaging Division decreased $12.4 million in the third quarter of fiscal 2009, or approximately 14.7%, compared to the same prior-year period. The decrease was primarily attributable to the economic slowdown impacting us by reducing sales by $9.2 million of our SRAM products in networking, consumer and communications applications.

Revenues from the Memory and Imaging Division decreased $43.7 million in the first three quarters of fiscal 2009, or approximately 17.6%, compared to the same prior-year period. The decrease was primarily attributable to the economic slowdown impacting us by reducing sales by $39.2 million of our SRAM products in networking, consumer and communications applications.

Emerging Technologies:

Revenues from Emerging Technologies increased $2.5 million in the third quarter of fiscal 2009, or compared to the third quarter of fiscal 2008. The increased in revenues was primarily attributable to an increase in demand.

Revenues from Emerging Technologies decreased $0.9 million in the first three quarters of fiscal 2009, compared to the same period of fiscal 2008. The decrease in revenues was primarily attributable to a decrease of $4.5 million in sales related to Silicon Light Machines which we divested in fiscal 2008 which was offset by an increase in demand for certain of our other products.

Cost of Revenues/Gross Margins



                                              Three Months Ended                        Nine Months Ended
                                      September 27,        September 28,        September 27,        September 28,
(In thousands, except percentages)        2009                 2008                 2009                 2008
Cost of revenues                     $        94,184      $       124,165      $       298,150      $       321,684
Gross margin                                    47.3 %               44.2 %               37.1 %               46.4 %

Gross margin percentage increased from 44.2% in the third quarter of fiscal 2008 to 47.3% in the third quarter of fiscal 2009. The gross margin increase is primarily due to a higher stock compensation of $5.5 million in the third quarter of fiscal 2008 compared to the third quarter of 2009. Gross margin percentage decreased from 46.4% in the first three quarters of fiscal 2008 to 37.1% in the first three quarters of fiscal 2009. The gross margin percentage decrease was primarily due to the stock-based compensation expense allocated to cost of revenue which increased by $11.8 million during the first three quarters of fiscal 2009. This increase in stock-based compensation was mainly due to the modification of the outstanding employee equity awards approved by the Board in connection with the Spin-Off. Additionally, the gross margin percentage was also unfavorably impacted by inventory write-downs, under absorbed costs and reduced revenue in 2009.

Research and Development ("R&D") Expenses

                                              Three Months Ended                        Nine Months Ended
                                      September 27,        September 28,        September 27,        September 28,
(In thousands, except percentages)        2009                 2008                 2009                 2008
R&D expenses                         $        43,162      $        54,395      $       141,504      $       143,937
As a percentage of revenues                     24.2 %               24.4 %               29.9 %               24.0 %

R&D expenditures decreased $11.2 million in the third quarter of fiscal 2009 compared to same prior-year period. The decrease was primarily attributable to a decrease of $8.3 million in stock-based compensation expense mainly due to the modification of the outstanding employee equity awards approved by the Board in connection with the Spin-Off. In addition, the decrease was also due to the reduction in employee related labor and other costs associated with the implementation of our Fiscal 2008/9 Restructuring Plan.

R&D expenditures decreased $2.4 million in the first three quarters of fiscal 2009 compared to same prior-year period. The decrease was primarily attributable to the reduction in employee related labor and other costs associated with the implementation of our Fiscal 2008/9 Restructuring Plan. This decrease was partially offset by an increase of $5.0 million in stock-based compensation expense mainly due to the modification of the outstanding employee equity awards approved by the Board in connection with the Spin-Off.

Selling, General and Administrative ("SG&A") Expenses

                                              Three Months Ended                        Nine Months Ended
                                      September 27,        September 28,        September 27,        September 28,
(In thousands, except percentages)        2009                 2008                 2009                 2008
SG&A expenses                        $        55,116      $        79,495      $       168,900      $       197,774
As a percentage of revenues                     30.8 %               35.7 %               35.6 %               32.9 %

SG&A expenses decreased $24.4 million in the third quarter of fiscal 2009 compared to the same prior-year period. The decrease was primarily attributable to a reduction of $13.2 million in stock-based compensation expense mainly due to the modification of the outstanding employee equity awards approved by the Board in connection with the Spin-Off coupled with a decrease in employee related labor and other costs associated with the implementation of our Fiscal 2008/2009 Restructuring Plan as well as other cost reduction efforts.

SG&A expenses decreased $28.9 million in the first three quarters of fiscal 2009 compared to the same prior-year period. The decrease was primarily attributable to the non-achievement of certain bonus programs in several quarters of 2009 in addition to the reduction in employee related labor costs and other costs associated with the implementation of our Fiscal 2008/2009 Restructuring Plan as well as other cost reduction efforts. The decrease was offset by an increase of $6.8 million in stock-based compensation expense mainly due to the modification of the outstanding employee equity awards approved by the Board in connection with the Spin-Off.

Amortization of Acquisition-Related Intangible Assets

For the three months ended September 27, 2009, amortization decreased approximately $0.1 million as compared to the corresponding fiscal 2008 period. The decrease in amortization was primarily due to certain intangible assets that had been fully amortized during fiscal 2008 offset by the increase in intangibles acquired as part of the Simtek acquisition.

Restructuring

We recorded restructuring charges of $14.5 million and $12.2 million during the nine months ended September 27, 2009 and September 28, 2008, respectively. The amount recorded during the three months ended September 27, 2009 included a provision of $6.4 million for the Fiscal 2008/9 Restructuring Plan and $1.0 million for the Fiscal 2007 Restructuring Plan. During the nine months ended September 27, 2009 the savings from our actions taken to date was approximately $14.6 million. Upon completion of all of our actions we anticipate our savings in fiscal year 2010 to be approximately $13.6 million per quarter. We estimate the savings will proportionately impact sales general and administrative expense by 25%, cost of goods sold by 41% and research and development expense by 32% although there can be no assurance of this.

Fiscal 2008/9 Restructuring Plan:

The charges in 2009 relate to a restructuring plan which was initiated during the third quarter of fiscal 2008 and was part of a company-wide cost saving initiative aimed to reduce operating costs in response to the economic downturn ("Fiscal 2008/9 Restructuring Plan"). We recorded a total of $26.2 million under the Fiscal 2008/9 Restructuring Plan, of which $22.6 million was related to personnel costs and $3.6 million was related to other exit costs. The determination of when we accrue for severance costs, and which standard applies, depends on whether the termination benefits are provided under a one-time benefit arrangement as defined by SFAS No. 146 or under an on-going benefit arrangement as described by SFAS No. 112. Restructuring activities related to personnel cost, are summarized as follows:

                (In thousands)
                Balance as of December 28, 2008          $  7,374
                Provision                                   7,741
                Non-cash forgiveness of employee loans        (73 )
                Cash payments                              (3,214 )

                Balance as of March 29, 2009               11,828
                Provision                                     327
                Cash payments                              (6,311 )

                Balance as of June 28, 2009                 5,844
                Provision                                   2,954
                Cash payments                              (4,233 )

                Balance as of September 27, 2009         $  4,565

Upon completion of our restructuring activities we expect to eliminate approximately 967 positions of which approximately 619 positions are manufacturing related and 348 are corporate and other related positions.

As of September 27, 2009, 862 of the employees to be terminated in these restructurings have been terminated and the majority of the remaining 105 employee terminations are expected to be completed by the second quarter 2010.

Fiscal 2007 Restructuring Plan:

During the fourth quarter of fiscal 2007, we implemented a restructuring plan to exit our manufacturing facility located in Round Rock, Texas ("Fiscal 2007 Restructuring Plan"). Under the Fiscal 2007 Restructuring Plan, we transitioned production from the Texas facility to our more cost-effective facility in Bloomington, Minnesota as well as outside third-party foundries. The Fiscal 2007 Restructuring Plan included the termination of employees and the disposal of assets, primarily consisting of land, building and manufacturing equipment, located in the Texas facility. The Fiscal 2007 Restructuring Plan did not involve the discontinuation of any material product lines or other functions.

To date, we recorded total restructuring charges of $10.5 million related to the Fiscal 2007 Restructuring Plan. We recorded $9.9 million of expense in fiscal 2008 and $0.6 million of expense in fiscal 2007. We also recorded a $1.3 million credit in fiscal 2009 which relates to the $2.4 million net gain on the sale of equipment located at our Texas facility partially offset by the $0.5 million workforce reserve. Of the total restructuring charges, $8.0 million was related primarily to personnel costs and $2.5 million was related to property, plant and equipment and other exit costs.

Personnel Costs:

Restructuring activities related to personnel costs are summarized as follows:



                   (In thousands)
                   Balance as of December 28, 2008    $  2,721
                   Additional provision                    518
                   Cash payments                        (2,476 )

                   Balance as of March 29, 2009            763
                   Additional provision                     60
                   Cash payments                          (629 )

                   Balance as of June 28, 2009             194
                   Additional provision                     49
                   Cash payments                          (243 )

                   Balance as of September 27, 2009   $     -

We completed the termination of the remaining employees in the first quarter of fiscal 2009. These employees were primarily in manufacturing functions.

Property, Plant and Equipment:

The Texas facility ceased operations in the fourth quarter of fiscal 2008. As management has committed to a plan to dispose of the assets associated with the facility by sale, we have classified the assets as held for sale and valued the assets at the lower of their carrying amount or fair value. Fair value was determined by prices to be received from buyers of the assets or by market prices estimated by third parties that specialize in sales of such assets. Based on this analysis in fiscal 2008, we recorded a write-down of $1.9 million related to the assets and $1.2 million of related disposal and other facility costs.

The following table summarizes the net book value of the remaining restructured assets that were classified as held for sale and included in "Other current assets" in the Consolidated Balance Sheet as of September 27, 2009:

                                                  September 27,    December 28,
                                                      2009             2008
                                                         (In thousands)
      Land                                       $           994   $         994
      Equipment                                              373           1,112
      Buildings and leasehold improvements                 6,430           6,430

      Total property, plant and equipment, net   $         7,797   $       8,536

We expect to complete the disposal of the restructured assets by the fourth quarter of fiscal 2009; however, there can be no assurance of this and our ability to complete the sale of any restructured assets may be impacted by the current economic and credit conditions.

Interest Income

Interest income decreased $18.6 million in the first three quarters of fiscal 2009 compared to the first three quarters of fiscal 2008. The decrease was primarily driven by lower average interest rates as we shifted our portfolio to more liquid and safe investments such as U.S. treasuries, coupled with lower average cash and investment balances.

Interest Expense

Interest expense was $1.3 million in the first three quarters of fiscal 2009 compared to $30.6 million in the first three quarters of fiscal 2008. The decrease was primarily attributable to the conversion element of the outstanding . . .