FAIRCHILD SEMICONDUCTOR INTERNATIONAL INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE YEAR ENDED DECEMBER 30, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 001-15181
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 04-3363001
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
82 RUNNING HILL ROAD, SOUTH PORTLAND, ME 04106
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(207) 775-8100

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Class A Common Stock, par value $.01 per share

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 this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 12, 2002 was $1,951,073,730.

The number of shares outstanding of the Registrant's Class A and Class B
Common Stock as of March 12, 2002 was 100,428,121 and -0- respectively.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 8, 2002 are incorporated by reference into Part
III.
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PART I

ITEM 1. BUSINESS

Throughout this Annual Report on Form 10-K, the terms "we," "our,"
"Fairchild" and "Fairchild International" refer to Fairchild Semiconductor
International, Inc. and its consolidated subsidiaries, including Fairchild
Semiconductor Corporation, our principal operating subsidiary. We refer to
specific subsidiaries where appropriate.

During 1999, we changed our fiscal year-end from the last Sunday in May to
the last Sunday in December. Our last fiscal year under our old accounting
calendar was the year ended May 30, 1999, which we refer to as "Fiscal 1999."
Our first fiscal year following this change was the year ended December 31,
2000, which we refer to as "Calendar 2000." We sometimes refer to the transition
period from May 31, 1999 to December 26, 1999 as "Stub Year 1999."

GENERAL

We are one of the largest independent semiconductor companies focused
solely on developing, manufacturing and selling high performance semiconductors
critical to multiple end markets. We design, develop and market analog,
discrete, interface and logic, non-volatile memory and optoelectronic
semiconductors. Within our broad product portfolio, we focus on providing
discrete and analog power management and interface solutions. Over half of our
trade sales in Calendar 2001 were from discrete and analog products used
directly in power applications such as voltage conversion, power regulation,
power distribution, and power and battery management. With the acquisition in
Calendar 2001 of the discrete power products business from Intersil Corporation,
which we refer to as DPP, we believe that we are now the world's leading
supplier of power analog and power discrete products. Our products are used as
building block components in a wide variety of electronic applications,
including sophisticated computers and internet hardware; communications;
networking and storage equipment; industrial power supply and instrumentation
equipment; portable digital consumer cameras, displays, audio/video devices,
household appliances; and automotive ignition applications. Because of their
basic functionality, our products provide customers with greater design
flexibility than more highly integrated products and improve the performance of
more complex devices or systems. Given these characteristics, our products have
a wide range of applications. Our products are sold to customers in the personal
computer, industrial, communications, consumer electronics and automotive
markets.

With a history dating back more than 40 years, the original Fairchild was
one of the founders of the semiconductor industry. Established in 1959 as a
provider of memory and logic semiconductors, the Fairchild Semiconductor
business was acquired by Schlumberger Limited in 1979 and by National
Semiconductor Corporation in 1987. In March 1997, as part of its
recapitalization, much of the Fairchild Semiconductor business was sold to a
new, independent company -- Fairchild Semiconductor Corporation. At the time of
the recapitalization, our company consisted of the discrete, logic and
non-volatile memory businesses of National Semiconductor. On December 31, 1997,
we acquired Raytheon Company's semiconductor business for approximately $117.0
million in cash. That business designs, manufactures and markets
high-performance analog and mixed signal semiconductors for the personal
computer, communications, broadcast video and industrial markets.

On April 13, 1999, we purchased the power device business of Samsung
Electronics Co., Ltd. for approximately $414.9 million in cash, including fees
and expenses. The power device business designs, manufactures and markets power
discrete semiconductors and standard analog integrated circuits serving the
personal computer, industrial, communications and consumer electronics markets.
The acquisition of the power device business not only enhanced our analog and
power discrete product offerings, but also provided us with a greater market
presence in South Korea. In connection with the acquisition of the power device
business, the Korean government granted a ten-year tax holiday. The exemption
from corporate income tax was 100% for the first seven years of the holiday and
50% for the remaining three years of the holiday. During Calendar 2000, the tax
holiday was extended such that the exemption amounts were increased to 75% in
the eighth year and a 25% exemption was added for the eleventh year.

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On May 28, 2000, we purchased QT Optoelectronics, Inc. for approximately
$92.0 million in cash and common stock. QT Optoelectronics designs, manufactures
and markets LED lamps and displays, infrared components, custom optoelectronics
and optocouplers and is the world's largest independent company solely focused
on optoelectronics. This acquisition gave us a position in a $4.2 billion
market. Revenue opportunities exist in being able to offer these products to
existing Fairchild customers who were purchasing from competitors.

On September 8, 2000, we purchased the power management business of Micro
Linear for approximately $11.0 million in cash. That business consists of analog
products including offline power switches, low power battery management, video
filters and bus terminators. This acquisition expanded the breadth of our
overall position in the power management analog business.

On September 8, 2000, we purchased KOTA Microcircuits, Inc., or KOTA, for
approximately $12.1 million in cash. That business designs, manufactures and
markets high-performance operational amplifiers and other standard linear
products. This acquisition positioned us with leading technology in the
operational amplifier market, and expanded our penetration into markets that
include cellular phones, CD-ROM drives and portable applications.

On March 16, 2001 we acquired substantially all of the assets of, and
assumed certain liabilities of DPP for approximately $344.2 million in cash. DPP
designs, manufactures and markets power discrete semiconductors serving the
personal computer, industrial power supply and automotive ignition control
markets. The acquisition of this business enhanced our power discrete product
portfolio and gave us greater market presence in the U.S. and European
automotive and industrial markets.

On September 5, 2001, we acquired Impala Linear Corporation for
approximately $4.6 million paid in common stock. That business designs analog
power management semiconductors for a wide range of portable devices including
laptops, MP3 players, cell phones, portable test equipment and PDAs.

PRODUCTS AND TECHNOLOGY

We are a global company focused on designing, manufacturing and marketing
high performance building block semiconductors critical for multiple end
markets, with a focus on developing leading edge power and interface solutions.
Our products are used in consumer, communications, computer, industrial and
automotive applications. Our products are organized into the following three
principal product groups that are reportable segments: Analog and Mixed Signal
Products, Discrete Products and Interface and Logic Products. Other products
include non-volatile memory and optoelectronics.

ANALOG AND MIXED SIGNAL PRODUCTS

We design, manufacture and market high-performance analog and mixed signal
integrated circuits for computing, consumer, communications and industrial
applications. These products are manufactured using leading-edge Bipolar, CMOS,
BiCMOS and BCDMOS technologies. Analog and mixed signal products represent a
significant long-term growth area of the semiconductor industry.

We offer over 2,600 different analog and mixed signal device products in a
fast growing number of proprietary part types. The development of proprietary
parts is largely driven by evolving end-system requirements and needs for higher
integration, which in turn is driven by trends toward smaller form factors at
higher performance levels. Our product offering also includes the top 100 best
selling multi-sourced product types. Major competitors include Analog Devices,
Linear Technology, Maxim, Intersil, National Semiconductor and Texas
Instruments.

Analog products monitor, interpret and control continuously variable
functions such as light, color, sound and energy. Frequently, they form the
interface with the digital world. We provide a wide range of analog products
relating to power conversion, temperature sensing, system management, battery
chargers and motor controls. Our power switch products, also called FPS for
Fairchild Power Switch, are a series of proprietary, multichip or monolithic
devices with integrated MOSFETs (Metal Oxide Semiconductor Field Effect
Transmittors), which provide complete off-line (AC-DC) power converter designs
for use in power supplies
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and battery chargers. These products are used in a variety of computing,
communications and consumer applications.

In addition to power related analog circuits, we offer signal path products
like operational amplifiers and comparators, data conversion products, video
encoders/decoders, video filters, and micro-controller based system management
integrated circuits.

We believe our analog and mixed signal product portfolio is further
enhanced by a broad offering of packaging solutions that we have developed.
These solutions include surface mount, tiny packages, and leadless carriers.

DISCRETE PRODUCTS

We design, manufacture and market discrete devices for computing,
automotive, communications and industrial applications. Discrete devices are
individual diodes or transistors that perform basic signal amplification and
switching functions in electronic circuits. Driving the long-term growth of
discretes is the increasing need to power the latest electronic equipment as
well as needs to conserve power. We participate in both the power and small
signal discrete markets using our DMOS and Bipolar technologies, manufacturing
semiconductors that condition power or signals for use by other devices. The
acquisition of DPP gives us an expanded presence in the automotive and
industrial markets. Major competitors are Philips, Infineon, International
Rectifier and Siliconix/Vishay.

Power MOSFETs. Power MOSFETs are used in applications to switch, shape or
transfer electricity under varying power requirements. We are the world's No. 2
supplier of discrete power MOSFETs, according to the Gartner Group. These
products are used in a variety of high-growth applications including computers,
communications, automotive and industrial supplies, which require low-voltage
solutions. We produce advanced MOSFETs under our PowerTrench(R) and UltraFET(R)
brands. MOSFETs enable computers, automobiles, handsets, power supplies and
other products to operate under harsh conditions while providing efficient
operation.

Isolated-Gate Bipolar Transistors. IGBTs are high-voltage discrete
devices. They are used in switching applications for motor control, power
supplies, and automotive ignition systems. We are a leading supplier of IGBTs.
We feature the SMPS IGBT for power supplies offering the fastest, most
cost-effective operation in some applications. We also manufacture modules for
air conditioners -- an application that is growing with the worldwide need to
conserve power.

Rectifiers. Rectifier products work with IGBTs and MOSFETs in many
applications to provide signal conditioning. Our premier product is the
Stealth(TM) rectifier, providing industry leading performance and efficiencies
in power supply and motor applications.

INTERFACE AND LOGIC PRODUCTS

We design, develop, manufacture and market high-performance interface and
logic devices utilizing three wafer fabrication processes: CMOS, BiCMOS and
Bipolar. Within each of these production processes, we manufacture products that
possess advanced performance characteristics, as well as mature products that
provide high performance at low cost to customers.

Interface Products. Interface products generally connect signals from one
part of a system to another part of a system. Typical interface applications
include backplane driving, bus driving, clock driving and 'box-to-box' or
system-to-system interconnects. These applications all require high speed, high
current drive and low noise attributes. These types of products are mixed signal
in nature and require a high level of analog wave shaping techniques on the
output structures, reducing the number of suppliers with the capability to
develop them. We believe we have developed some unique competencies and patented
circuit techniques along with a broad range of process technologies, which
facilitate our expansion in the interface market.

The interface market is divided into two categories: "building block
interface" and "standards-specific interface products." Current building block
products include our FST and GTL product families and our

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recent expansion into Low Voltage Differential Swing (LVDS) input/output (I/O)
products. Standards-specific products are normally based on industry standards,
which are developed by consortiums of hardware suppliers, software suppliers,
end segment customers and industry experts. We are an active participant on many
committees where industry standards are developed, and have product offerings in
printer interface, dual inline memory module drivers and Universal Serial Bus
applications. Our product roadmap will expand beyond our current switch, GRLP
and LVDS building blocks to Switch Fabric Interface (SFI) physical layer I/O.
Major competitors include Texas Instruments, National Semiconductor, Maxim and
Linear Technology.

Logic Products. Logic products perform a variety of functions in a system
mostly in the interface between larger application-specific integrated circuits,
microprocessors, memory components or connectors. Products are typically
categorized into mature segments and advanced logic segments. Mature products
are generally more than five years old, while advanced products tend to be
newer. Since market adoption rates of new standard logic families have
historically spanned several years, we continue to generate significant revenues
from our mature products. Customers are typically slow to move from an older
product to a newer one. Further, for any given product, standard logic customers
use several different generations of logic products in their designs. As a
result, typical life cycles for logic families are often between 20 and 25
years.

Investments in mature products tend to focus on cost reductions and
manufacturing improvements. Our investments in new products are in the advanced
logic area and focuses on power minimization, low voltage and packaging
innovations. Some of the targeted products are TinyLogic(TM)and low voltage
products. Many of these investments have established our logic devices as key
components for the personal computer and portable markets, including cell
phones, PDAs and similar battery-based products. Major competitors include Texas
Instruments, ON Semiconductor and Philips.

OTHER PRODUCTS

Included within the "Other" reporting segment are non-volatile memory
products and optoelectronic products.

Non-Volatile Memory Products

We design, manufacture and market non-volatile memory integrated circuits,
which are storage devices that retain data after power to the device has been
shut off. We offer an extensive portfolio of high performance serial EEPROM and
EPROM products. EEPROMs are electrically erasable programmable read-only
memories. EPROMs are electrically programmable read-only memories. These
non-volatile memory devices are used in computing, communications, consumer,
automotive and industrial applications. Major competitors include ST
Microelectronics, Advanced Micro Devices, Atmel and Microchip Technology.

EEPROMs. EEPROMs are used primarily to store changing information in
consumer products and automotive applications such as cellular handsets,
microwave ovens, televisions and automotive controls. Our standard EEPROM
products serve each of the three serial bus interface protocols used with all
industry standard microcontrollers.

EPROMs. EPROMs are field programmable non-volatile memories for storage of
codes and data. EPROMs are a lower cost alternative to FLASH memories and enable
shorter time-to-market cycles for new products. Today, EPROMs are primarily
utilized in applications where storage of the instruction set for
microcontrollers requires less than 2Mb in density, which is virtually all
segments of the low-end consumer electronic market (for example, answering
machines, garage door openers and washing machines). The EPROM market is
declining as FLASH becomes cost-effective at lower densities. As a result, we
are incurring minimal research and development expenditures in this product
line. We currently sell EPROMs in densities ranging from 64K to 4Mb.

Optoelectronic Products

Optoelectronics covers a wide range of semiconductor devices that emit,
sense and display both visible and infrared light. Of the six segments of the
optoelectronics market, we participate in four: optocouplers,

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infrared, LED lamps and displays. Our focus in optoelectronics is aligned with
our analog business. We address the same applications and can combine functions
in an optimal way to provide real system solutions. One such solution is an
optically isolated error amplifier that combines the function of an analog
voltage reference and an error amplifier with the function of an optocoupler.
This creates an ideal single chip component solution for isolated AC-DC
converter applications.

Optocouplers. Optocouplers incorporate infrared emitter and detector
combinations in a single package. These products are used to transmit signals
between two electronic circuits while maintaining electrical isolation between
them. Major applications for these devices include power supplies, modems, motor
controls and power modules.

Infrared Products. These devices emit and detect infrared energy instead
of visible energy. This product line offers a wide variety of products including
plastic emitters and detectors, metal can emitters and detectors, slotted
switches and reflective switches. In addition, custom products address specific
types of customer applications. Typical applications for infrared products
include object detection (for example, paper sensing in printers and copiers and
garage door safety sensors), data transmission (for example, remote controls in
televisions, stereos, VCRs and wireless data links between computers and other
electronic devices), and motor control.

LED Lamps and Displays. These devices are replacing general illumination
applications currently served by incandescent and fluorescent lighting products.
The main advantages are power savings and longer life. This product line
includes stick and frame displays, which are used in a broad range of consumer
electronics products as well as T-1 and T-1 3/4 lamps that are used in consumer,
industrial/instrument and signage industries.

SALES, MARKETING AND DISTRIBUTION

In Calendar 2001, we derived approximately 36.6%, 6.9% and 56.5% of our net
trade sales from original equipment manufacturers, electronic manufacturing
services customers and distributors, respectively, through our regional sales
organizations. We operate regional sales organizations in Europe, headquartered
in Wootton-Bassett, England; the Americas, headquartered in San Jose,
California; the Asia/Pacific region, with offices in Hong Kong; the Japan
region, with offices in Tokyo, Japan; and the Korea region, with its office in
Bucheon, South Korea. Each of the regional sales organizations is supported by
logistics organizations, which manage independently operated free-on-board
warehouses. Product orders flow to our manufacturing facilities, where products
are made. Products are then shipped either directly to customers or indirectly
to customers through independently operated warehouses in Hong Kong, the United
States and the United Kingdom.

We have dedicated direct sales organizations operating in Europe, the
Americas, the Asia/Pacific region, Japan and Korea that serve our major original
equipment manufacturer and electronic manufacturing services customers. We also
have a large network of distributors and independent manufacturer's
representatives to distribute and sell our products around the world. We believe
that maintaining a small, highly focused, direct sales force selling products
for each of our businesses, combined with an extensive network of distributors
and manufacturer's representatives, is the most efficient way to serve our
multi-market customer base. Fairchild also maintains a dedicated marketing
organization, which consists of marketing organizations in each product group,
including tactical and strategic marketing and applications, as well as
marketing personnel located in each of the sales regions.

Typically, distributors handle a wide variety of products, including
products that compete with our products, and fill orders for many customers.
Some of our sales to distributors, primarily in North America, are made under
agreements allowing for market price fluctuations and/or the right of return on
unsold merchandise, subject to time and volume limitations. The majority of
these distribution agreements contain a standard stock rotation provision
allowing for minimum levels of inventory returns. In our experience, these
inventory returns can usually be resold. Manufacturer's representatives
generally do not offer products that compete directly with our products, but may
carry complementary items manufactured by others. Manufacturer's representatives
do not maintain a product inventory; instead, their customers place large
quantity orders directly with us and are referred to distributors for smaller
orders.
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RESEARCH AND DEVELOPMENT

Our expenditures for research and development in Calendar 2001, Calendar
2000, Stub Year 1999, and Fiscal 1999 were $83.0 million, $83.9 million, $35.0
million, and $39.3 million, respectively. These expenditures represented 6.2%,
5.0%, 4.9% and 6.0% of trade sales in Calendar 2001, Calendar 2000, Stub Year
1999, and Fiscal 1999, respectively. Manufacturing technology is a key
determinant in the improvement of semiconductor products. Each new generation of
process technology has resulted in products with higher speed and greater
performance, produced at lower cost. We expect infrastructure investments made
in recent years to enable us to continue to achieve high volume, high
reliability and low-cost production using leading edge process technology. Our
research and development efforts are also focused on innovative packaging
solutions such as Micropak(TM) and FLMP (Flipped Leaded Molded Package), making
use of new assembly methods and new high performance packaging materials, which
enhance the overall performance and value of both our new and existing products
for our customers.

Each of our product groups maintains independent research and development
organizations. We work closely with our major customers in many research and
development situations in order to increase the likelihood that our products
will be designed directly into the customers' products and achieve rapid and
lasting market acceptance.

MANUFACTURING

We operate ten manufacturing facilities, five of which are front-end wafer
fabrication plants in the United States, South Korea and Singapore, and five of
which are back-end assembly and test facilities in the United States and Asia.
In addition, in 2001 we acquired land in Suzhou, Jiangsu Province, China, where
construction of an assembly and test facility is scheduled to begin in 2002.

Our products are manufactured and designed using a broad range of
manufacturing processes and proprietary design methods. We use all of the
prevalent function-oriented process technologies for wafer fabrication,
including CMOS, Bipolar, BiCMOS, DMOS and non-volatile memory technologies. We
use primarily through-hole and mature and advanced surface mount technologies in
our assembly and test operations, in lead counts from two to 114 leads.

The table below sets forth information with respect to our manufacturing
facilities, products and technologies.

MANUFACTURING FACILITIES

We subcontract a minority of our wafer fabrication needs, primarily to
Advanced Semiconductor Manufacturing Corporation of Shanghai, Chartered
Semiconductor, Torex Semiconductor and New Japan Radio Corporation. In order to
maximize our production capacity, some of our back-end assembly and testing
operations are also subcontracted. Primary back-end subcontractors include
Carsem, Amkor, NS Electronics (Bangkok) Ltd., Samsung Electronics and ChipPAC.
The power device business also subcontracts other manufacturing services from
Samsung Electronics.

Our manufacturing processes use many raw materials, including silicon
wafers, copper lead frames, mold compound, ceramic packages and various
chemicals and gases. We obtain our raw materials and supplies from a large
number of sources on a just-in-time basis. Although supplies for the raw
materials used by us are currently adequate, shortages could occur in various
essential materials due to interruption of supply or increased demand in the
industry.

BACKLOG

Backlog at the end of Calendar 2001 was approximately $310 million, down
from approximately $426 million at the end of Calendar 2000. We define backlog
as firm orders or customer-provided forecasts with a customer requested delivery
date within 26 weeks. While backlog has declined primarily as a result of the
lower demand for our products from the year earlier period, it has also been
impacted by the tendency of customers to rely on shorter lead times available
from suppliers, including us, in periods of depressed demand. In periods of
increased demand, there is a tendency towards longer lead times that has the
effect of increasing backlog and, in some instances, we may not have
manufacturing capacity sufficient to fulfill all orders. As is customary in the
semiconductor industry, we allow orders to be canceled or deliveries delayed by
customers without penalty. Accordingly, our backlog at any time should not be
used as an indication of future revenues.

SEASONALITY

Generally, we are affected by the seasonal trends of the semiconductor and
related industries. Typically, we see revenues higher in the second and fourth
quarters, lower in the first quarter due to holidays around the world and lower
in the third quarter due to the historically slow summer months. In Stub Year
1999 and throughout most of Calendar 2000, however, typical seasonality was
offset by the effects of the recovery of the overall semiconductor market, as we
recorded sequential revenue increases in each quarter. At the end of Calendar
2000 and throughout Calendar 2001, we saw atypical quarterly revenue trends as a
result of the weakened economic conditions within the semiconductor industry and
technology sector.

COMPETITION

Markets for our products are highly competitive. Although only a few
companies compete with us in all of our product lines, we face significant
competition within each of our product lines from major international
semiconductor companies. Some of our competitors may have substantially greater
financial and other resources with which to pursue engineering, manufacturing,
marketing and distribution of their products.

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Competitors include manufacturers of standard semiconductors,
application-specific integrated circuits and fully customized integrated
circuits, as well as customers who develop their own integrated circuit
products.

We compete in different product lines to various degrees on the basis of
price, technical performance, product features, product system compatibility,
customized design, availability, quality and sales and technical support. Our
ability to compete successfully depends on elements both within and outside of
our control, including successful and timely development of new products and
manufacturing processes, product performance and quality, manufacturing yields
and product availability, customer service, pricing, industry trends and general
economic trends.

TRADEMARKS AND PATENTS

Our corporate policy is to protect proprietary products by obtaining
patents for such products when practicable. Under a technology licensing and
transfer agreement with National Semiconductor entered into in connection with
the recapitalization of the Fairchild Semiconductor business, we acquired
approximately 150 U.S. patents and obtained perpetual, royalty-free,
non-exclusive licenses on approximately 250 of National Semiconductor's patents.
We acquired over 60 patents as part of our acquisition of the Raytheon
semiconductor business, as well as licensing rights (similar to those granted to
Fairchild by National Semiconductor), for other semiconductor-related
intellectual property of Raytheon not directly related to its semiconductor
business. Similarly, in our acquisition of the power device business, we
acquired from Samsung Electronics a significant number of licenses and patents,
including approximately 76 U.S. patents and over 1,000 Korean patents. We also
received all relevant trademarks. From the acquisitions of QT Optoelectronics,
KOTA and Micro Linear, we added in excess of 50 U.S. and five foreign patents
and patent applications to our intellectual property portfolio. Finally, from
the DPP acquisition, we obtained over 500 patents or patent applications
worldwide. We believe that we have the right to use all technology used in the
production of our products.

ENVIRONMENTAL MATTERS

Our operations are subject to environmental laws and regulations in the
countries in which we operate that regulate, among other things, air and water
emissions and discharges at or from our manufacturing facilities; the
generation, storage, treatment, transportation and disposal of hazardous
materials by our company; the investigation and remediation of environmental
contamination; and the release of hazardous materials into the environment at or
from properties operated by our company and at other sites. As with other
companies engaged in like businesses, the nature of our operations exposes our
company to the risk of liabilities and claims, regardless of fault, with respect
to such matters, including personal injury claims and civil and criminal fines.

Our facilities in South Portland, Maine, and, to a lesser extent, Salt Lake
City, Utah, have ongoing remediation projects to respond to releases of
hazardous materials that occurred prior to our separation from National
Semiconductor. National Semiconductor has agreed to indemnify Fairchild for the
cost of these projects, subject to limitations. Based on the historical costs of
these projects, we do not believe that future remediation costs will be
material, even without the indemnification from National Semiconductor.

Our facility in Mountaintop, Pennsylvania has an ongoing remediation
project to respond to releases of hazardous materials that occurred prior to our
acquisition of the DPP business. Intersil Corporation has agreed to indemnify us
for specific environmental issues.

A property we previously owned in Mountain View, California is listed on
the National Priorities List under the Comprehensive Environmental Response,
Compensation, and Liability Act. We acquired that property as part of the
acquisition of the Raytheon semiconductor business. Under the terms of the
acquisition agreement with Raytheon, Raytheon retained responsibility for, and
has agreed to indemnify us with respect to, remediation costs or other
liabilities related to pre-acquisition contamination. The purchaser of the
Mountain View, California property received an environmental indemnity from us
similar in scope to the one we received from Raytheon.

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Although we believe that the power device business has no significant
environmental liabilities, Samsung Electronics agreed to indemnify Fairchild for
environmental liabilities arising out of the power device business, including
the Bucheon, South Korean plant, subject to limitations.

We believe that our operations are in substantial compliance with
applicable environmental laws and regulations. Our costs to comply with
environmental regulations were immaterial in Calendar 2001, Calendar 2000, Stub
Year 1999 and Fiscal 1999. Future laws or regulations and changes in existing
environmental laws or regulations, however, may subject our operations to
different, additional or more stringent standards. While historically the cost
of compliance with environmental laws has not had a material adverse effect on
our results of operations, business or financial condition, we cannot predict
with certainty our future costs of compliance because of changing standards and
requirements.

EMPLOYEES

Our worldwide workforce consisted of 9,798 full and part-time employees as
of December 30, 2001. Of the total number of employees, 8,103 were engaged in
manufacturing, 570 were engaged in marketing and sales, 777 were engaged in
corporate and product line administration and 348 were engaged in research and
development. We believe that our relations with our employees are satisfactory.

At December 30, 2001, 311 of our employees were covered by a collective
bargaining agreement. These employees are members of the Communication Workers
of America/International Union of Electronic, Electrical, Salaried Machine and
Furniture Workers, AFL-CIO, Local 88177. The current agreement with the union
ends December 1, 2002 and provides for guaranteed wage and benefit levels as
well as employment security for union members. A strike or work stoppage could
impact our ability to operate if we were unable to negotiate a new agreement
with our represented employees when the existing agreement expires. Also, our
profitability could be adversely affected if increased costs associated with any
future contracts are not recoverable through productivity improvements or price
increases. We believe that relations with our unionized employees are
satisfactory.

Our wholly owned Korean subsidiary, which we refer to as Fairchild Korea,
sponsors a Power Device Business Labor Council consisting of seven
representatives from the non-management workforce and seven members of the
management workforce. The Labor Council, under Korean law, is recognized as a
representative of the workforce for the purposes of consultation and
cooperation. The Labor Council has no right to take a work action or to strike
and is not party to any labor or collective bargaining agreements with Fairchild
Korea. We believe that relations with Fairchild Korea employees and the Labor
Council are satisfactory.

EXECUTIVE OFFICERS OF FAIRCHILD INTERNATIONAL

The following table sets forth information with respect to the executive
officers of our company.

Kirk P. Pond, Chairman of the Board of Directors, President and Chief
Executive Officer. Mr. Pond has been the President of Fairchild Semiconductor
since June 1996. He has 30 years of experience in the semiconductor industry.
Since 1987, Mr. Pond had held several executive positions with National
Semiconductor, most recently Executive Vice President and Chief Operating
Officer. Prior executive management positions were with Fairchild Semiconductor
Corporation, Texas Instruments and Timex Corporation.

Joseph R. Martin, Executive Vice President, Chief Financial Officer and
Director. Mr. Martin has been the Executive Vice President and Chief Financial
Officer of Fairchild Semiconductor since June 1996. He has 23 years of
experience in the semiconductor industry. Mr. Martin had held several senior
financial positions with National Semiconductor since 1989, most recently as
Vice President of Finance, Worldwide Operations. Prior to joining National
Semiconductor, Mr. Martin was Senior Vice President and Chief Financial Officer
of VTC Incorporated.

Daniel E. Boxer, Executive Vice President and Chief Administrative Officer,
General Counsel and Secretary. Mr. Boxer joined our company in March 1997. He
has practiced law for 32 years and since 1975 had been a partner at the law firm
of Pierce Atwood, Portland, Maine. His practice at Pierce Atwood included
advising many large manufacturing companies, including our company, on business,
governmental, legal compliance and environmental issues. He was most recently a
senior partner and Chairman of the firm's Management Committee.

Keith Jackson, Executive Vice President and General Manager, Analog, Mixed
Signal, and Configurable Products Group. Mr. Jackson joined our company in
March 1998. He has over 20 years of semiconductor industry experience. Most
recently, Mr. Jackson was President of TriTech Microelectronics in Singapore, a
manufacturer of analog and mixed signal products, which he joined in 1996. Prior
to that, he worked for National Semiconductor for 10 years, most recently as
Vice President and General Manager of the Analog and Mixed Signal division. He
has also held various marketing and engineering positions at National
Semiconductor and Texas Instruments.

Hans Wildenberg, Executive Vice President, Worldwide Sales and Marketing.
Mr. Wildenberg joined our company in July 2001. He has over 20 years of
semiconductor industry experience. Prior to joining our company he had been with
Motorola for sixteen years in various executive and management positions in
Motorola's Semiconductor Product Sector, most recently as Corporate Vice
President and Director of the order fulfillment organization.

Deok J. Kim, Senior Vice President, President, Fairchild Korea
Semiconductor Ltd. Mr. Kim became Senior Vice President, President of Fairchild
Korea Semiconductor Ltd. when we acquired the power device business from Samsung
Electronics in April 1999. He has over 26 years of experience in the
semiconductor industry. Mr. Kim joined Samsung Electronics' power device
business in 1990 as director of power product development and later became
managing director and vice president and general manager of the power device
business prior to its acquisition by Fairchild International. Before joining
Samsung Electronics, Mr. Kim held engineering and development positions with
Goldstar Semiconductor, AMI and General Electric.

W.T. Greer, Jr., Senior Vice President and General Manager, Interface and
Logic Products Group. Mr. Greer has been Senior Vice President and General
Manager, Interface and Logic Products Group since February 2000. Mr. Greer has
over 30 years of engineering and management experience in the semiconductor and
electronics industries. Prior to joining our company in 1997 as Vice President
of Logic Products, he served

11

for ten years as Vice President and Director of Motorola Semiconductor's
Advanced Technologies Division and Military Products Operation. Prior to that,
he held various management positions at Texas Instruments.

Izak Bencuya, Senior Vice President and General Manager, Discrete Products
Group. Mr. Bencuya has been Senior Vice President and General Manager, Discrete
Products Group since February 2000. Mr. Bencuya has worked in the semiconductor
and electronics field for 26 years. Prior to his current assignment, Mr. Bencuya
spent six years as Director of Power MOSFET Products. Mr. Bencuya also worked at
GTE Laboratories and Siliconix in various research and management roles.

Ernesto J. D'Escoubet, Senior Vice President, Chief Technology and Quality
Officer. Mr. D'Escoubet has been Senior Vice President, Technology and Quality,
since February 2000. Mr. D'Escoubet has over 30 years of experience in the
semiconductor industry. Prior to assuming his current role, Mr. D'Escoubet spent
eight years as Vice President of Operations for the Interface and Logic Products
Group. Prior to that, he held various management positions at National
Semiconductor and Harris Corporation.

John M. Watkins, Jr., Senior Vice President, Chief Information
Officer. Mr. Watkins joined our company in March 2000. Prior to joining our
company, Mr. Watkins spent five years as Chief Information Officer of Pratt and
Whitney. In 1995, Mr. Watkins retired as a General after eleven years in the
United States Army. His most recent assignment was as Director of the Defense
Information Systems Agency in Washington, D.C.

Laurenz Schmidt, Senior Vice President, Global Operations. Mr. Schmidt has
been Senior Vice President, Global Operations since October 2001. He has over 25
years of experience in the semiconductor industry. Prior to assuming his current
role, he held various management positions over the preceding eight years,
including Vice President of Wafer Fabrication Manufacturing, Vice President of
Operations for Discrete Products Group and Managing Director of the South
Portland, Maine wafer fabrication facility. Prior to joining Fairchild in 1983,
he spent six years with Texas Instruments.

David A. Henry, Vice President, Corporate Controller. Mr. Henry has been
Corporate Controller of the Fairchild Semiconductor business since December
1996. Previously, he held various financial management positions with National
Semiconductor, most recently as Director of Financial Planning and Analysis for
its Fairchild Semiconductor business. Mr. Henry previously worked for Amfac,
Inc. as well as Ernst and Whinney.

Matthew W. Towse, Vice President, Treasurer. Mr. Towse became Treasurer in
March 1997. He had been with National Semiconductor for six years and held
various financial management positions, most recently as Controller for the
Fairchild Semiconductor plant in South Portland, Maine. Mr. Towse previously
worked for Ernst & Young and is a certified public accountant.

BUSINESS RISKS

Our business is subject to a number of risks and uncertainties. The risks
described below are not the only ones facing our company. Additional risks not
currently known to us or that we currently deem immaterial also may impair our
business operations:

DOWNTURNS IN THE HIGHLY CYCLICAL SEMICONDUCTOR INDUSTRY OR CHANGES IN END
USER MARKET DEMANDS COULD REDUCE THE VALUE OF OUR BUSINESS.

The semiconductor industry is highly cyclical, and the value of our
business may decline during the "down" portion of these cycles. During 1998 and
into 1999, we, as well as many others in our industry, experienced significant
declines in the pricing of our products as customers reduced demand forecasts
and manufacturers reduced prices to keep capacity utilization high. We believe
these trends were due primarily to the Asian financial crisis during that period
and excess personal computer inventories. Beginning in the fourth quarter of
2000 and throughout 2001, we and the rest of the semiconductor industry
experienced backlog cancellations and reduced demand for our products, resulting
in revenue declines, due to excess inventories at computer and communications
equipment manufacturers and general economic conditions, especially in the
technology sector. Although we believe that we reached the bottom of this cycle
during the third quarter of

12

2001, we may experience renewed, possibly more severe and prolonged, downturns
in the future as a result of such cyclical changes. Even as demand increases
following such downturns, our profitability may not increase because of price
competition that historically accompanies recoveries in demand. In addition, we
may experience significant changes in our profitability as a result of
variations in sales, changes in product mix, changes in end user markets and the
costs associated with the introduction of new products. The markets for our
products depend on continued demand for personal computers, cellular telephones
and consumer electronics and automotive and industrial goods, and these end user
markets may experience changes in demand that will adversely affect our results
and future prospects.

WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS TO SATISFY CHANGES IN CONSUMER
DEMANDS.

Our failure to develop new technologies, or react to changes in existing
technologies, could materially delay development of new products, which could
result in decreased revenues and a loss of market share to our competitors.
Rapidly changing technologies and industry standards, along with frequent new
product introductions, characterize the semiconductor industry. Our financial
performance depends on our ability to design, develop, manufacture, assemble,
test, market and support new products and enhancements on a timely and
cost-effective basis. We may not successfully identify new product opportunities
and develop and bring new products to market in a timely and cost-effective
manner. Products or technologies developed by other companies may render our
products or technologies obsolete or noncompetitive. A fundamental shift in
technologies in our product markets could have a material adverse effect on our
competitive position within our industry.

OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD ADVERSELY
AFFECT OUR FUTURE PERFORMANCE AND GROWTH.

Failure to protect our existing intellectual property rights may result in
the loss of valuable technologies or having to pay other companies for
infringing on their intellectual property rights. We rely on patent, trade
secret, trademark and copyright law to protect such technologies. Some of our
technologies are not covered by any patent or patent application, and we cannot
assure that:

- any of the patents owned by us or numerous other patents which third
parties license to us will not be invalidated, circumvented,
challenged or licensed to other companies; or that

- any of our pending or future patent applications will be issued
within the scope of the claims sought by us, if at all.

In addition, effective patent, trademark, copyright and trade secret
protection may be unavailable, limited or not applied for in some foreign
countries.

We also seek to protect our proprietary technologies, including
technologies that may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventors' rights agreements with our
collaborators, advisors, employees and consultants. We cannot assure you that
these agreements will not be breached, that we will have adequate remedies for
any breach or that such persons or institutions will not assert rights to
intellectual property arising out of such research. Some of our technologies
have been licensed on a non-exclusive basis from National Semiconductor, Samsung
Electronics, Intersil Corporation and other companies which may license such
technologies to others, including, in the case of National Semiconductor
commencing on March 11, 2002, our competitors. In addition, under a technology
licensing and transfer agreement, National Semiconductor has limited
royalty-free, worldwide license rights (without right to sublicense) to some of
our technologies. If necessary or desirable, we may seek licenses under patents
or intellectual property rights claimed by others. However, we cannot assure you
that we will obtain such licenses or that the terms of any offered licenses will
be acceptable to us. The failure to obtain a license from a third party for
technologies we use could cause us to incur substantial liabilities and to
suspend the manufacture or shipment of products or our use of processes
requiring the technologies.

13

OUR FAILURE TO OBTAIN OR MAINTAIN THE RIGHT TO USE CERTAIN TECHNOLOGIES MAY
NEGATIVELY AFFECT OUR FINANCIAL RESULTS.

Our future success and competitive position depend in part upon our ability
to obtain or maintain proprietary technologies used in our principal products,
which is achieved in part by defending claims by competitors of intellectual
property infringement. The semiconductor industry is characterized by litigation
regarding patent and other intellectual property rights. We have been involved
in lawsuits, could become subject to other lawsuits and receive claims from time
to time in which it is alleged that we have infringed upon the patent or other
intellectual property rights of other companies. Our involvement in existing and
future intellectual property litigation could result in significant expense to
our company, adversely affecting sales of the challenged product or technologies
and diverting the efforts of our technical and management personnel, whether or
not such litigation is resolved in our favor. In the event of an adverse outcome
as a defendant in any such litigation, we may be required to:

- pay substantial damages;

- indemnify our customers for damages they might suffer if the products
they purchase from us violate the intellectual property rights of others;

- stop our manufacture, use, sale or importation of infringing products;

- expend significant resources to develop or acquire non-infringing
technologies;

- discontinue processes; or

- obtain licenses to the intellectual property we are found to have
infringed.

We cannot assure you that we would be successful in such development or
acquisition or that such licenses would be available under reasonable terms. Any
such development, acquisition or license could require the expenditure of
substantial time and other resources.

WE MAY NOT BE ABLE TO CONSUMMATE FUTURE ACQUISITIONS OR SUCCESSFULLY
INTEGRATE ACQUISITIONS INTO OUR BUSINESS.

We have made seven acquisitions since we became an independent company in
1997, and we plan to pursue additional acquisitions of related businesses. We
believe the semiconductor industry is going through a period of consolidation,
and we expect to participate in this development. The expense incurred in
consummating the future acquisition of related businesses, or our failure to
integrate such businesses successfully into our existing businesses, could
result in our company incurring unanticipated expenses and losses. In addition,
we may not be able to identify or finance additional acquisitions or realize any
anticipated benefits from acquisitions we do complete.

We are constantly pursuing acquisition opportunities and consolidation
possibilities and are in various stages of due diligence or preliminary
discussions with respect to a number of potential transactions, some of which
would be significant. No material potential transactions is subject to a letter
of intent or otherwise so far advanced as to make the transaction reasonably
certain.

Should we successfully acquire another business, the process of integrating
acquired operations into our existing operations may result in unforeseen
operating difficulties and may require significant financial resources that
would otherwise be available for the ongoing development or expansion of
existing operations. Some of the risks associated with acquisitions include:

- unexpected losses of key employees, customers or suppliers of the
acquired company;

- conforming the acquired company's standards, processes, procedures and
controls with our operations;

- coordinating new product and process development;

- hiring additional management and other critical personnel;

- negotiating with labor unions; and

14

- increasing the scope, geographic diversity and complexity of our
operations.

In addition, we may encounter unforeseen obstacles or costs in the
integration of other businesses we acquire.

Possible future acquisitions could result in the incurrence of additional
debt, contingent liabilities and amortization expenses related to goodwill and
other intangible assets, all of which could have a material adverse effect on
our financial condition and operating results.

PRODUCTION TIME AND THE OVERALL COST OF PRODUCTS COULD INCREASE IF WE WERE
TO LOSE ONE OF OUR PRIMARY SUPPLIERS OR IF A PRIMARY SUPPLIER INCREASED THE
PRICES OF RAW MATERIALS.

Our manufacturing operations depend upon obtaining adequate supplies of raw
materials on a timely basis. Our results of operations could be adversely
affected if we were unable to obtain adequate supplies of raw materials in a
timely manner or if the costs of raw materials increased significantly. We
purchase raw materials such as silicon wafers, lead frames, mold compound,
ceramic packages and chemicals and gases from a limited number of suppliers on a
just-in-time basis. From time to time, suppliers may extend lead times, limit
supplies or increase prices due to capacity constraints or other factors. In
addition, we subcontract a portion of our wafer fabrication and assembly and
test operations to other manufacturers, including Carsem, Amkor, NS Electronics
(Bangkok) Ltd., Samsung Electronics, Korea Micro Industry and ChipPAC. Our
operations and ability to satisfy customer obligations could be adversely
affected if our relationships with these subcontractors were disrupted or
terminated.

DELAYS IN BEGINNING PRODUCTION AT NEW FACILITIES, EXPANDING CAPACITY AT
EXISTING FACILITIES, IMPLEMENTING NEW PRODUCTION TECHNIQUES, OR IN CURING
PROBLEMS ASSOCIATED WITH TECHNICAL EQUIPMENT MALFUNCTIONS, ALL COULD ADVERSELY
AFFECT OUR MANUFACTURING EFFICIENCIES.

Our manufacturing efficiency is an important factor in our profitability,
and we cannot assure you that we will be able to maintain our manufacturing
efficiency or increase manufacturing efficiency to the same extent as our
competitors. Our manufacturing processes are highly complex, require advanced
and costly equipment and are continuously being modified in an effort to improve
yields and product performance. Impurities or other difficulties in the
manufacturing process can lower yields.

In addition, we are currently engaged in an effort to expand capacity at
some of our manufacturing facilities. As is common in the semiconductor
industry, we have from time to time experienced difficulty in beginning
production at new facilities or in effecting transitions to new manufacturing
processes. As a consequence, we have suffered delays in product deliveries or
reduced yields. We may experience delays or problems in bringing planned new
manufacturing capacity to full production. We may also experience problems in
achieving acceptable yields, or experience product delivery delays in the future
with respect to existing or planned new capacity as a result of, among other
things, capacity constraints, construction delays, upgrading or expanding
existing facilities or changing our process technologies, any of which could
result in a loss of future revenues. Our operating results could also be
adversely affected by the increase in fixed costs and operating expenses related
to increases in production capacity if revenues do not increase proportionately.

A SIGNIFICANT PORTION OF OUR SALES ARE MADE TO DISTRIBUTORS WHO CAN
TERMINATE THEIR RELATIONSHIPS WITH US WITH LITTLE OR NO NOTICE. THE TERMINATION
OF A DISTRIBUTOR COULD REDUCE SALES AND RESULT IN INVENTORY RETURNS.

Distributors accounted for 56.5% of our net trade sales for the year ended
December 30, 2001. Our five domestic distributors accounted for 7.6% of our net
trade sales for the year ended December 30, 2001. As a general rule, we do not
have long-term agreements with our distributors and they may terminate their
relationships with us with little or no advance notice. Distributors generally
offer competing products. The loss of one or more of our distributors, or the
decision by one or more of them to reduce the number of our products they offer
or to carry the product lines of our competitors, could have a material adverse
effect on our business, financial condition and results of operations. The
termination of a significant distributor, whether at our or the distributor's
initiative, or a disruption in the operations of one or more of our
distributors, could reduce our net sales in a given quarter and could result in
an increase in inventory returns.

15

THE SEMICONDUCTOR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION
COULD REDUCE THE VALUE OF AN INVESTMENT IN OUR COMPANY.

The semiconductor industry is, and the multi-market semiconductor product
markets in particular are, highly competitive. Competition is based on price,
delivery terms, product performance, quality, reliability and customer service.
In addition, even in strong markets, price pressures may emerge as competitors
attempt to gain a greater market share by lowering prices. Competition in the
various markets in which we participate comes from companies of various sizes,
many of which are larger and have greater financial and other resources than we
have and thus are better able to pursue acquisition candidates and can better
withstand adverse economic or market conditions. In addition, companies not
currently in direct competition with us may introduce competing products in the
future.

OUR INTERNATIONAL OPERATIONS SUBJECT OUR COMPANY TO RISKS NOT FACED BY
DOMESTIC COMPETITORS.

Through our subsidiaries we maintain significant operations in the
Philippines, Malaysia and South Korea and also operate facilities in China and
Singapore. We also have sales offices and customers around the world. The
following are risks inherent in doing business on an international level:

- economic and political instability;

- foreign currency fluctuations;

- transportation delays;

- trade restrictions;

- work stoppages; and

- the laws, including tax laws of, and the policies of the United States
toward, countries in which we manufacture our products.

THE POWER DEVICE BUSINESS SUBJECTS OUR COMPANY TO RISKS INHERENT IN DOING
BUSINESS IN KOREA, INCLUDING LABOR RISK, POLITICAL RISK AND CURRENCY RISK.

As a result of the acquisition of the power device business in 1999, we
have significant operations in South Korea and are subject to risks associated
with doing business in that country.

In addition to other risks disclosed relating to international operations,
some businesses in South Korea are subject to labor unrest. Also, relations
between South Korea and North Korea have been tense over most of South Korea's
history. We cannot assure you as to whether or when this situation will be
resolved or change abruptly as a result of current or future events. An adverse
change in economic or political conditions in South Korea or in its or the
United States' relations with North Korea could have a material adverse effect
on our Korean subsidiary and our company.

The power device business' sales are denominated primarily in U.S. dollars
while a significant portion of its costs of goods sold and its operating
expenses are denominated in South Korean won. Although we have taken steps to
fix the costs subject to currency fluctuations and to balance won revenues and
won costs, a significant change in this balance, coupled with a significant
change in the value of the won relative to the dollar, could have a material
adverse effect on our financial performance and results of operations. In
addition, an unfavorable change in the value of the won could require us to
write down our won-denominated assets.

WE ENTERED INTO A NUMBER OF LONG-TERM SUPPLY AND SUPPORT CONTRACTS WITH
SAMSUNG ELECTRONICS IN CONNECTION WITH OUR ACQUISITION OF ITS POWER DEVICE
BUSINESS IN 1999. ANY DECREASE IN THE PURCHASE REQUIREMENTS OF SAMSUNG
ELECTRONICS OR ITS INABILITY TO MEET ITS CONTRACTUAL OBLIGATIONS COULD
SUBSTANTIALLY REDUCE OUR FINANCIAL PERFORMANCE.

As a result of the acquisition of Samsung Electronics' power device
business in 1999, we have numerous arrangements with Samsung Electronics,
including arrangements relating to product sales, designation as a vendor to
affiliated Samsung companies and other services. The terms of these agreements
terminate beginning in April 2002. Any material adverse change in the purchase
requirements of Samsung Electronics,

16

in its ability to supply the agreed-upon services or in its ability to fulfill
its other obligations could have a material adverse effect on our results of
operations. Although historically the power device business generated
significant revenues from the sale of products to affiliated Samsung companies,
we cannot assure you that we will be able to sell products to affiliated Samsung
companies or that the designation of the power device business as a vendor to
those affiliated Samsung companies will generate any revenues for our company.
Furthermore, under the Korean Fair Trade Law, the Fair Trade Commission may
issue an order requiring a change in the terms and conditions of the agreements
between us and Samsung Electronics if it concludes that Samsung Electronics has
provided us with undue support or discriminated against our competitors.

A CHANGE IN FOREIGN TAX LAWS OR A DIFFERENCE IN THE CONSTRUCTION OF CURRENT
FOREIGN TAX LAWS BY RELEVANT FOREIGN AUTHORITIES COULD RESULT IN US NOT
RECOGNIZING THE BENEFITS WE ANTICIPATED IN CONNECTION WITH THE TRANSACTION
STRUCTURE USED TO CONSUMMATE THE ACQUISITION OF THE POWER DEVICE BUSINESS.

The transaction structure we used for the acquisition of the power device
business is based on assumptions about the various tax laws, including
withholding tax, and other relevant laws of foreign jurisdictions. In addition,
our Korean subsidiary was granted a ten-year tax holiday under Korean law in
1999. The first seven years are tax-free, followed by three years of income
taxes at 50% of the statutory rate. In 2000, the tax holiday was extended such
that the exemption amounts were increased to 75% in the eighth year and a 25%
exemption was added to the eleventh year. If our assumptions about tax and other
relevant laws are incorrect, or if foreign taxing jurisdictions were to change
or modify the relevant laws, or if our Korean subsidiary were to lose its tax
holiday, we could suffer adverse tax and other financial consequences or lose
the benefits anticipated from the transaction structure we used to acquire that
business.

WE PLAN TO SIGNIFICANTLY EXPAND OUR MANUFACTURING OPERATIONS IN CHINA AND,
AS A RESULT, WILL BE INCREASINGLY SUBJECT TO RISKS INHERENT IN DOING BUSINESS IN
CHINA, WHICH MAY ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.

In 2001 we acquired land in Suzhou, Jiangsu Province, People's Republic of
China and in February 2002 began construction of the first phase of an 800,000
square foot assembly and test facility there. We are hopeful that a significant
portion of our future revenue will result from the Chinese markets in which our
products are sold, and from demand in China for goods that include our products.
We also plan to export products out of China from the new Suzhou facility. In
addition, since 2000 we have operated an optoelectronics manufacturing facility
in Wuxi, China. Our ability to operate in China may be adversely affected by
changes in that country's laws and regulations, including those relating to
taxation, import and export tariffs, environmental regulations, land use rights,
property and other matters. In addition, our results of operations in China are
subject to the economic and political situation there. We believe that our
operations in China are in compliance with all applicable legal and regulatory
requirements. However, there can be no assurance that China's central or local
governments will not impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures. Changes in the
political environment or government policies could result in revisions to laws
or regulations or their interpretation and enforcement, increased taxation,
restrictions on imports, import duties or currency revaluations. In addition, a
significant destabilization of relations between China and the United States
could result in restrictions or prohibitions on our operations or the sale of
our products in China. The legal system of China relating to foreign trade is
relatively new and continues to evolve. There can be no certainty as to the
application of its laws and regulations in particular instances. Enforcement of
existing laws or agreements may be sporadic and implementation and
interpretation of laws inconsistent. Moreover, there is a high degree of
fragmentation among regulatory authorities resulting in uncertainties as to
which authorities have jurisdiction over particular parties or transactions.

WE ARE SUBJECT TO MANY ENVIRONMENTAL LAWS AND REGULATIONS THAT COULD AFFECT
OUR OPERATIONS OR RESULT IN SIGNIFICANT EXPENSES.

Increasingly stringent environmental regulations restrict the amount and
types of pollutants that can be released from our operations into the
environment. While historically the cost of compliance with environmental laws
has not had a material adverse effect on our results of operations, compliance
with these and any future regulations could require significant capital
investments in pollution control equipment or changes in
17

the way we make our products. In addition, because we use hazardous and other
regulated materials in our manufacturing processes, we are subject to risks of
liabilities and claims, regardless of fault, resulting from accidental releases,
including personal injury claims and civil and criminal fines, any of which
could be material to our cash flow or earnings. For example:

- we currently are remediating contamination at some of our operating plant
sites;

- we have been identified as a potentially responsible party at a number of
superfund sites where we (or our predecessors) disposed of wastes in the
past; and

- significant regulatory and public attention on the impact of
semiconductor operations on the environment may result in more stringent
regulations, further increasing our costs.

Although most of our known environmental liabilities are covered by
indemnities from Raytheon Company, National Semiconductor, Samsung Electronics
and Intersil, these indemnities are limited to conditions that occurred prior to
the consummation of transactions with those companies. Moreover, we cannot
assure you that their indemnity obligations to us for the covered liabilities
will be adequate to protect us.

WE MAY NOT BE ABLE TO ATTRACT OR RETAIN THE TECHNICAL OR MANAGEMENT
EMPLOYEES NECESSARY TO REMAIN COMPETITIVE IN OUR INDUSTRY.

Our continued success depends on the retention and recruitment of skilled
personnel, including technical, marketing, management and staff personnel. In
the semiconductor industry, the competition for qualified personnel,
particularly experienced design engineers and other technical employees, is
intense. There can be no assurance that we will be able to retain our current
personnel or recruit the key personnel we require. In addition, we do not have
employment agreements with most members of our senior management team.

A SUBSTANTIAL NUMBER OF SHARES OF OUR COMPANY'S COMMON STOCK ARE OWNED BY A
LIMITED NUMBER OF PERSONS, AND THEIR INTERESTS MAY CONFLICT WITH YOUR INTERESTS.

As of December 30, 2001 affiliates of Citigroup Inc. owned approximately
25.3% and our directors and executive officers together owned approximately 4.0%
of our outstanding shares of our Class A Common Stock. By virtue of such stock
ownership, such persons have the power to significantly influence our affairs
and are able to influence the outcome of matters required to be submitted to
stockholders for approval, including the election of directors and the amendment
of our corporate charter and bylaws. Such persons may exercise their influence
over us in a manner detriment to the interests of our stockholders or
bondholders.

WE ARE A LEVERAGED COMPANY WITH A DEBT TO EQUITY RATIO OF 1.4 TO 1, WHICH
COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND LIMIT OUR ABILITY TO GROW AND
COMPETE.

At December 30, 2001, we had total long-term debt of $1,138.6 million and a
ratio of debt to equity of 1.4 to 1.

Our substantial indebtedness could have important consequences. For
example, it could:

- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other general
corporate purposes;

- increase the amount of our interest expense, because certain of our
borrowings (namely borrowings under our senior credit facility, which was
undrawn as of December 30, 2001 and is currently undrawn) are at variable
rates of interest, which, if interest rates increase, could result in
higher interest expense;

- increase our vulnerability to general adverse economic and industry
conditions;

- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;

18

- restrict us from making strategic acquisitions, introducing new
technologies or exploiting business opportunities;

- make it more difficult for us to satisfy our obligations with respect to
the instruments governing our indebtedness;

- place us at a competitive disadvantage compared to our competitors that
have less indebtedness; and

- limit, along with the financial and other restrictive covenants in our
debt instruments, among other things, our ability to borrow additional
funds, dispose of assets or pay cash dividends. Failing to comply with
those covenants could result in an event of default which, if not cured
or waived, could have a material adverse effect on our business,
financial condition and results of operations.

DESPITE CURRENT INDEBTEDNESS LEVELS, WE MAY STILL BE ABLE TO INCUR
SUBSTANTIALLY MORE INDEBTEDNESS. INCURRING MORE INDEBTEDNESS COULD EXACERBATE
THE RISKS DESCRIBED ABOVE.

We may be able to incur substantial additional indebtedness in the future.
The indenture governing our outstanding 5% Convertible Senior Subordinated Notes
Due 2008 does not limit the amount of additional debt that we may incur.
Although the terms of the indentures governing our outstanding 10 1/8% Senior
Subordinated Notes, our outstanding 10 3/8% Senior Subordinated Notes, our
outstanding 10 1/2% Senior Subordinated Notes and the credit agreement relating
to the senior credit facility contain restrictions on the incurrence of
additional indebtedness, these restrictions are subject to a number of
qualifications and exceptions and, under certain circumstances, additional
indebtedness incurred in compliance with these restrictions could be
substantial. The senior credit facility permits borrowings of up to $300.0
million. As of December 30, 2001, excluding standby letters of credit, we had
$299.2 million available under this revolving credit facility. If new debt is
added to our current debt levels, the substantial risks described above would
intensify.

WE MAY NOT BE ABLE TO GENERATE THE NECESSARY AMOUNT OF CASH TO SERVICE OUR
INDEBTEDNESS, WHICH MAY REQUIRE US TO REFINANCE OUR INDEBTEDNESS OR DEFAULT ON
OUR SCHEDULED DEBT PAYMENTS. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY
FACTORS BEYOND OUR CONTROL.

Our historical financial results have been, and our future financial
results are anticipated to be, subject to substantial fluctuations. We cannot
assure you that our business will generate sufficient cash flow from operations,
that currently anticipated cost savings and operating improvements will be
realized on schedule or at all, or that future borrowings will be available to
us under our senior credit facility in an amount sufficient to enable us to pay
our indebtedness or to fund our other liquidity needs. In addition, because our
senior credit facility has variable interest rates, the cost of those borrowings
will increase if market interest rates increase. If we are unable to meet our
expenses and debt obligations, we may need to refinance all or a portion of our
indebtedness on or before maturity, sell assets or raise equity. We cannot
assure you that we would be able to refinance any of our indebtedness, sell
assets or raise equity on commercially reasonable terms or at all, which could
cause us to default on our obligations and impair our liquidity.

RESTRICTIONS IMPOSED BY THE CREDIT AGREEMENT RELATING TO OUR SENIOR CREDIT
FACILITY, THE INDENTURES GOVERNING OUR 10 1/8% SENIOR SUBORDINATED NOTES, OUR
10 3/8% SENIOR SUBORDINATED NOTES, AND OUR 10 1/2% SENIOR SUBORDINATED NOTES
RESTRICT OR PROHIBIT OUR ABILITY TO ENGAGE IN OR ENTER INTO SOME BUSINESS
OPERATING AND FINANCING ARRANGEMENTS, WHICH COULD ADVERSELY AFFECT OUR ABILITY
TO TAKE ADVANTAGE OF POTENTIALLY PROFITABLE BUSINESS OPPORTUNITIES.

The operating and financial restrictions and covenants in most of our debt
instruments, such as the credit agreement relating to our senior credit
facility, the indenture governing our 10 1/2% Senior Subordinated Notes, the
indenture governing our 10 1/8% Senior Subordinated Notes and the indenture
governing our 10 3/8% Senior Subordinated Notes may limit our ability to finance
our future operations or capital needs or engage in other business activities
that may be in our interests. These debt instruments impose significant
operating and financial restrictions on us that affect our ability to incur
additional indebtedness or create liens on our assets, pay dividends, sell
assets, engage in mergers or acquisitions, make investments or engage in other
business activities. These restrictions could place us at a disadvantage
relative to competitors not subject to such limitations.

19

In addition, the credit agreement governing our senior credit facility
contains other and more restrictive covenants and limits us from prepaying our
other indebtedness. The senior credit facility also requires us to maintain
specified financial ratios. These financial ratios become more restrictive over
the life of the senior credit facility. Our ability to meet those financial
ratios can be affected by events beyond our control, and we cannot assure you
that we will meet those ratios. Provided there are no outstanding balances under
our senior credit facility, compliance with these covenants in the credit
agreement is not required until March 31, 2003. After that date, or earlier if
we borrow money under the credit facility, a breach of any of these covenants,
ratios or restrictions could result in an event of default under the senior
credit facility. Upon the occurrence of an event of default under the senior
credit facility, the lenders could elect to declare all amounts outstanding
under the senior credit facility, together with accrued interest, to be
immediately due and payable. If we were unable to repay those amounts, the
lenders could proceed against the collateral granted to them to secure the
indebtedness. If the lenders under the senior credit facility accelerate the
payment of the indebtedness, we cannot assure you that our assets would be
sufficient to repay in full that indebtedness and our other indebtedness.

ITEM 2. PROPERTIES

In the United States, our corporate headquarters are located in
approximately 120,000 square feet of leased space in South Portland, Maine.
Additionally, we have wafer fabrication operations currently located in
approximately 240,000 square feet of space in properties that we own in South
Portland, Maine. Additional manufacturing, warehouse and office facilities are
housed in approximately 300,000 square feet of space in properties that we own
in Salt Lake City, Utah. As part of the acquisition of DPP, we obtained a
450,000 square foot manufacturing facility in Mountaintop, Pennsylvania. We have
manufacturing, warehouse and office facilities located in approximately 55,000
square feet of leased space in Loveland, Colorado. Additional office space is
located in leased facilities in South Portland, Maine, Irving, Texas, and San
Jose and Carlsbad, California.

In Asia, we own or lease approximately 35,000 square feet, 70,000 square
feet, 397,000 square feet, 170,000 square feet, 766,000 square feet, and 160,000
square feet of manufacturing, office and warehouse space in Wuxi, China, Kuala
Lumpur, Malaysia, Penang, Malaysia, Cebu, the Philippines, Bucheon, South Korea,
and Whasung City, South Korea, respectively. Leases affecting the Penang and
Cebu facilities are generally in the form of long-term ground leases, while we
own improvements on the land. The initial terms of these leases will expire
beginning in 2014. In some cases we have the option to renew the lease term,
while in others we have the option to purchase the leased premises. We lease
additional warehouse space in Singapore.

During 2001, we acquired land in Suzhou, Jiangsu Province, China.
Construction of an 800,000 square foot assembly and test facility is scheduled
to begin in 2002.

We maintain regional sales offices in leased space in Wootton-Bassett,
England, Kowloon, Hong Kong, and Tokyo, Japan. In addition, we maintain smaller
sales offices in leased space around the world.

We believe that our facilities around the world, whether owned or leased,
are well maintained. Our manufacturing facilities contain sufficient productive
capacity to meet our needs for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

We have recently reached an agreement in principle to settle the patent
infringement lawsuit filed against us by Siliconix Incorporated in 1999 in the
United States District Court for the Northern District of California. The terms
of the settlement are not material to our financial position and are not
expected to have a material effect on our future results of operations.

During 2001, we settled the patent infringement lawsuit filed against us
and other defendants in 1999 by U.S. Philips Corporation in the United States
District Court for the Southern District of New York. The terms of the
settlement are not material to our financial position and are not expected to
have a material effect on our future results of operations.

20

From time to time we are involved in legal proceedings in the ordinary
course of business. We believe that there is no such ordinary course litigation
pending that could have, individually or in the aggregate, a material adverse
effect on our business, financial condition, results of operations or cash
flows.

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

There were no matters submitted to a vote of security holders during the
period beginning October 1, 2001 and ending on December 30, 2001.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Class A Common Stock trades on the New York Stock Exchange ("NYSE")
under the trading symbol "FCS". There is no established public trading market
for our Class B Common Stock. The following table sets forth, for the periods
indicated, the high and low sales prices per share of Fairchild Semiconductor
International, Inc. Class A Common Stock, as reported by the NYSE:

As of March 12, 2002 there were approximately 348 holders of record of our
Class A Common Stock and no holders of our Class B Common Stock. We have not
paid dividends on our common stock and have no present intention of doing so.
Certain agreements, pursuant to which we have borrowed funds, contain provisions
that limit the amount of dividends and stock repurchases that we may make.

21

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth our selected historical consolidated
financial data. The historical consolidated financial data as of December 30,
2001 and December 31, 2000 and for the years ended December 30, 2001, December
31, 2000, the seven months ended December 26, 1999 and the fiscal year ended May
30, 1999 is derived from our audited consolidated financial statements which is
included in Item 8 of this Annual Report on Form 10-K. The historical
consolidated financial data for the year ended December 26, 1999 and the seven
months ended December 27, 1998 is derived from our unaudited consolidated
financial statements which are not included in this Annual Report on Form 10-K.
We believe that such unaudited consolidated financial statements include all
adjustments necessary for the fair presentation of our financial condition and
the results of operations for such periods and as of such dates. The historical
consolidated financial data as of December 26, 1999, May 30, 1999, May 31, 1998
and May 25, 1997 and for the years ended May 31, 1998 and May 25, 1997 are
derived from our audited consolidated financial statements which are not
included in this Annual Report on Form 10-K. This information should be read in
conjunction with our audited consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

22

- ---------------

(1) Prior to March 11, 1997, the amounts presented include all revenues and
costs attributable to the Fairchild Semiconductor business including an
allocation of the costs of shared facilities and overhead of National
Semiconductor. In addition, certain costs incurred at Fairchild plants for
the benefit of other National Semiconductor product lines were allocated
from Fairchild to National Semiconductor. All of the allocations and
estimates were based on assumptions that management believes were reasonable
under the circumstances. However, these allocations and estimates are not
necessarily indicative of the costs that would have resulted if the
Fairchild Semiconductor business had been operated on a stand-alone basis.

(2) Excludes other (income) expense and is adjusted for the (gains) and charges
detailed below:

- ---------------

EBIT as defined is not stated in accordance with generally accepted
accounting principals and is presented because we believe it is useful as an
alternative measure of our operating results.

(3) EBITDA is computed using EBIT as defined in Note 2.

(4) Pro forma net income (loss) is net income (loss) excluding restructuring and
other unusual gains and charges impacting EBIT, as defined above, and
amortization of acquisition related intangibles, net of tax. For the year
ended December 30, 2001, it also excludes the write-off of an equity
investment of $4.0 million. For the year ended December 31, 2000, it also
excludes the one-time reduction of deferred tax asset valuation allowances
of $26.3 million and the write-off of deferred financing fees of $3.6
million. For the year ended December 26, 1999, it also excludes the
write-off of deferred financing fees of $12.4 million. For the seven months
ended December 26, 1999 it also excludes the write-off of deferred financing
fees of $7.2 million. This data is provided for informational purposes and
is not intended to present results of operations in accordance with
generally accepted accounting principles.

23

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

BACKGROUND

We are a leading designer, manufacturer and supplier of analog, discrete,
interface and logic, non-volatile memory and optoelectronic semiconductors
serving the personal computer, industrial, communications, consumer electronics
and automotive markets. The original Fairchild Semiconductor was renowned as one
of the pioneering companies of the semiconductor industry. It invented the
planar process of manufacturing semiconductors, regarded as one of the most
significant achievements in the semiconductor industry since the invention of
the transistor. These early innovations form the base of a rich company history.

FISCAL YEAR CHANGE

During 1999, we changed our fiscal year-end from the last Sunday in May to
the last Sunday in December. Our last fiscal year under our old accounting
calendar was the year ended May 30, 1999, which we refer to as "Fiscal 1999."
Our first fiscal year following this change was the year ended December 31,
2000, which we refer to as "Calendar 2000." We sometimes refer to the transition
period from May 31, 1999 to December 26, 1999 as "Stub Year 1999."

SEGMENT INFORMATION

The following table sets forth the composition of trade revenue by
reportable segments and contract manufacturing services as a percentage of total
revenues, excluding one-time charges in Fiscal 1999 and the twelve months ended
December 26, 1999, which we refer to as Calendar 1999, totaling $5.5 million in
Other revenues. Excluded from Other revenues in Calendar 2000 is a gain of $2.1
million resulting from the adjustment of distributor reserves originally
recorded in connection with the 1999 memory division restructuring.

24

YEAR ENDED DECEMBER 30, 2001 COMPARED TO YEAR ENDED DECEMBER 30, 2000

Results of Operations. We generated a net loss of $(41.7) million for the
year ended December 30, 2001, which we refer to as Calendar 2001, compared to
net income of $273.1 million in Calendar 2000. Excluding unusual charges (gains)
and amortization of acquisition-related intangibles, net of tax effects, pro
forma net income was as follows for Calendar 2001 and Calendar 2000,
respectively:

For Calendar 2001, restructuring and impairments included $13.1 million of
employee separation costs related to severance and other costs associated with
work force reduction actions, and an $8.3 million charge for asset impairments
relating to the consolidation of the five-inch wafer fabrication line in South
Portland, Maine. Purchased in-process research and development was recorded in
connection with our acquisitions. Non-recurring (gains) charges of $2.5 million
relate to inventory charges associated with the discontinuance of the digitizer
product line in our Analog group. Additionally, we took a charge of $4.0 million
for the write-off of an equity investment included in other (income) expense.
For Calendar 2000, restructuring and impairments were associated with an
adjustment to reserves recorded in connection with the Memory restructuring
action in Fiscal 1999, and a one-time gain on the sale of our former Mountain
View, California facility. Purchased in-process research and development was
recorded in connection with our acquisitions. Non-recurring (gains) charges
included a $3.6 million write-off of deferred financing fees, included in
interest expense, associated with the refinancing of our senior credit facility
offset by a $(5.4) million adjustment to other reserves associated with the
Memory restructuring. Finally, we adjusted our deferred tax valuation reserves
in Calendar 2000 as we determined that it was more likely than not that we would
utilize our deferred tax assets.

Operating income was $28.5 million in Calendar 2001, compared to $327.9
million in Calendar 2000. Excluding unusual charges (gains) detailed above
impacting operating income, operating income was $66.2 million in Calendar 2001,
compared to $325.9 million in Calendar 2000. The decrease in operating income is
primarily due to soft market conditions in the semiconductor industry during
2001, resulting in lower prices, unit volumes and underutilization of our
factories, as well as from lower contract manufacturing revenue. Despite the
current industry conditions, we have continued to invest in our research and
development effort to drive new product introductions.

Excluding depreciation and amortization of $179.1 million and $151.1
million in Calendar 2001 and Calendar 2000, respectively, unusual charges
(gains) and other (income) expense, earnings before interest, taxes,
depreciation and amortization ("EBITDA") as defined were $245.3 in Calendar
2001, compared to $477.0 million in Calendar 2000. EBITDA is presented because
we believe that it is a widely accepted financial indicator of an entity's
ability to incur and service debt. EBITDA should not be considered as an
alternative to net income, operating income, or other consolidated operations
and cash flow data prepared in accordance with accounting principles generally
accepted in the United States of America, as an indicator of our operating
performance, or as an alternative to cash flows as a measure of liquidity.

25

Revenues. Our revenues consist of trade sales to unaffiliated customers
(95.1% and 94.3% of total revenues in Calendar 2001 and Calendar 2000,
respectively) and revenues from contract manufacturing services provided
primarily to National Semiconductor and Samsung Electronics (together, 4.9% and
5.7% of total revenues in Calendar 2001 and Calendar 2000, respectively).

Trade sales decreased 20.4% to $1,338.9 million in Calendar 2001 compared
with $1,681.6 million in Calendar 2000. Additional revenue from DPP and other
acquisitions that occurred in the latter part of 2000 and in 2001 partially
offset lower revenue in our continuing businesses due to the industry-wide
market slowdown. The lower revenue in our continuing business was the result of
lower unit volumes and, to a lesser extent, decreases in average selling price.

As a percentage of trade sales, geographic trade sales for North America,
Europe, Asia/Pacific (which for our geographic reporting purposes excludes
Korea) and Korea were as follows for the Calendar 2001 and Calendar 2000:

North American trade sales decreased 32.2% in Calendar 2001 from Calendar
2000. Our trade sales in the North American region were adversely impacted more
than any other region by decreased sales across a broad range of end market
segments as customers adjusted their inventories to respond to weakening
economic conditions in the U.S. European revenues decreased 20.3% in Calendar
2001 from Calendar 2000. They have been impacted by the same factors affecting
North America. Revenues in our Asia/Pacific sales region decreased 16.7% in
Calendar 2001 from Calendar 2000. The decrease in Asia/Pacific sales was driven
by the slow down in the computing segment, including peripherals, as many of the
manufacturers for this market segment are located in this region. Sales in our
Korean region decreased 14.2% in Calendar 2001 from Calendar 2000. This decrease
was due to the impact of a weaker Korean economy as the financial restructuring
in this country continues.

Contract manufacturing revenues decreased 32.3% to $68.8 million in
Calendar 2001 compared to $101.6 million in Calendar 2000. The decrease in
contract manufacturing revenues was due primarily to diminishing demand from
both National Semiconductor and Samsung Electronics.

Gross Profit. Gross profit was as follows for Calendar 2001 and Calendar
2000:

Excluding unusual charges in 2001 associated with an inventory charge as a
result of the discontinuance of the digitizer product line in our Analog group
($2.5 million), total gross profit was $356.6 million, or 25.3% of total
revenues. Excluding an unusual gain in Calendar 2000 associated with revisions
to estimated charges for the 1999 Memory restructuring action ($5.4 million),
total gross profit was $633.8 million, or 35.5% of total revenues. The decrease
in gross profit was primarily due to adverse pricing, and a shift in product mix
to lower margin products and lower capacity utilization.

Research and Development. Research and development expenses ("R&D") were
$83.0 million, or 6.2% of trade sales, in Calendar 2001, compared to $83.9
million, or 5.0% of trade sales, in Calendar 2000. The
26

decrease in R&D was due to spending reductions in response to softer market
conditions, offset by the incremental R&D spending of the DPP business.

Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses were $154.3 million, or 11.5% of trade sales, in Calendar
2001, compared to $186.4 million, or 11.1% of trade sales, in Calendar 2000. The
decrease in SG&A was due to spending reductions in response to softer market
conditions.

Amortization of Acquisition-Related Intangibles. Amortization of
acquisition-related intangibles was $53.1 million in Calendar 2001, compared to
$37.6 million in Calendar 2000. The increase in amortization was due to
acquisitions that occurred in the latter part of 2000 and new acquisitions in
2001.

Purchased In-process Research and Development. Purchased in-process
research and development ("IPR&D") was $13.8 million for Calendar 2001, compared
to $9.0 million for Calendar 2000. In Calendar 2001, IPR&D resulted from the
acquisition of DPP and Impala. IPR&D for 2000 represents amounts from the
acquisitions of QT Optoelectronics, KOTA, and Micro Linear. Further information
regarding our IPR&D for significant acquisitions including significant
assumptions, is addressed below under "In-Process Research and Development."

Restructuring and Impairments. Restructuring and impairments of $21.4
million were recorded in Calendar 2001. These charges include an $8.3 million
charge for asset impairments relating to the consolidation of the five-inch
wafer fabrication line in South Portland, Maine, and $13.1 million for employee
separation costs. In Calendar 2000, we incurred a pre-tax restructuring gain of
$5.6 million. The gain is a result of proceeds from the sale of our former
Mountain View, California facility ($3.5 million) and the adjustment to
restructuring reserves recorded in Fiscal 1999 ($2.1 million) based upon final
execution of several prior year plans.

Interest Expense. Interest expense was $103.9 million in Calendar 2001,
compared to $81.3 million in Calendar 2000. Interest expense in Calendar 2000
includes $3.6 million for the write-off of deferred financing fees associated
with the refinancing of our senior bank facilities in Calendar 2000. Excluding
this charge, interest expense was $77.7 million in Calendar 2000. The increase,
excluding the unusual charge, is principally the result of additional interest
associated with $350.0 million in principal of 10 1/2% Notes issued during the
first quarter of 2001 and $200 million in principal of 5.0% Convertible Notes
issued during the fourth quarter of 2001.

Interest Income. Interest income was $15.3 million in Calendar 2001,
compared to $23.3 million in Calendar 2000. The decrease is due to lower average
cash balances coupled with lower rates of return.

Other (Income) Expense, Net. In Calendar 2001, we recorded a loss of $4.0
million related to the write-off of an equity investment. In Calendar 2000, we
recorded a $0.8 million gain on the buy-back of $15.0 million of our 10 1/8%
senior subordinated notes.

Income Taxes. Income tax benefit was $22.4 million in Calendar 2001,
compared to a tax benefit of $2.4 million in Calendar 2000. Included in Calendar
2000 is a one-time tax benefit of $26.3 million related to a reduction in the
deferred tax asset valuation allowance. Management believed that it is more
likely than not these assets will be realizable and, accordingly, reduced the
valuation allowance on those deferred tax assets. Without the effect of the
one-time benefit, our tax expense would have been $23.9 million, or an effective
tax rate of 8.8% in Calendar 2000, compared to an effective tax rate of 35.0% in
Calendar 2001. The increase in the effective tax rate is due principally to the
fact that the effective tax rate in Calendar 2000 reflected the utilization of
valuation allowances.

Comparative disclosures of selected operating results of our reportable
segments is as follows:

Analog and Mixed Signal Products Group. Our Analog and Mixed Signal
Products Group designs, manufactures and markets a broad line of products
relating to power conversion, temperature sensing, system management, battery
chargers and motor controls. Product offerings include standard linear products
such as operational amplifiers, low drop out regulators and ground fault
interrupters, motor control integrated circuits, smart power switches and D/C to
D/C converters. Analog revenues decreased 20.4% to $302.9 million in
27

Calendar 2001 from $380.6 million in Calendar 2000. The decrease in Analog
revenue was driven by soft market conditions, particularly in the industrial and
computing markets.

Analog had operating income of $0.5 million in Calendar 2001 as compared to
$40.6 million in Calendar 2000. The decrease in Analog's operating income was
primarily due to decreases in gross margins due to decreased revenues coupled
with lower factory utilization.

Discrete Products Group. Our Discrete Products Group designs, manufactures
and markets a broad line of power MOSFETs, IGBT's, power bipolar transistors for
both high and low voltage applications, small signal transistors and diodes. An
increasing volume of power MOSFETs are manufactured using our leading edge
Trench technology. Discrete revenues decreased 11.3% to $664.6 million in
Calendar 2001, compared to $749.0 million in Calendar 2000. The decrease was
driven by soft market conditions in the communications and computing markets,
offset by revenues attained through the acquisition of DPP.

Discrete had operating income of $28.5 million in Calendar 2001 as compared
to $129.7 million in Calendar 2000. The decrease in Discrete operating income
was primarily due to decreases in gross margins driven by lower revenues and
lower factory utilization, coupled with increases in operating expenses,
including amortization of acquisition related intangibles, due to the
acquisition of DPP.

Interface and Logic Products Group. Our Interface and Logic Products Group
designs, manufactures and markets a broad line of high-performance interface and
standard logic products. Its interface products include building block products
such as FST and GTL, and LVDS. Its logic products focus on the growing CMOS
logic market, from industry standard FACT and HCMOS to new products such as
TinyLogic(TM), Micropack(TM), and LVT. Logic revenues decreased 37.2% to $266.3
million in Calendar 2001, compared to $424.2 million in Calendar 2000. The
decrease in Interface and Logic revenues was due to soft market conditions,
particularly in the communications and computing markets.

Interface and Logic had operating income of $26.6 million in Calendar 2001,
compared to $106.5 million in Calendar 2000. The decrease in Interface and
Logic's operating income was due to decreases in gross margin driven by lower
revenues and lower factory utilization.

28

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 26, 1999

Comparative financial information for Calendar 2000 and Calendar 1999 is as
follows:

Results of Operations. We generated net income of $273.1 million in
Calendar 2000, compared to a net loss of $(52.6) million in Calendar 1999.
Excluding unusual charges (gains) and amortization of acquisition-related
intangibles, net of tax effects, pro forma net income was as follows for
Calendar 2000 and Calendar 1999, respectively:

For Calendar 2000, restructuring and impairments were associated with an
adjustment to reserves, recorded in connection with the Memory restructuring,
and a one-time gain on the sale of our former Mountain View, California
facility. Purchased in-process research and development was recorded in
connection with our acquisitions. Non-recurring (gains) charges included a $3.6
million write-off of deferred

29

financing fees, included in interest expense, associated with the refinancing of
our senior credit facility offset by a $(5.4) million adjustment to other
reserves associated with the Memory restructuring action in 1999. Finally, we
adjusted our deferred tax valuation reserves in Calendar 2000 as we determined
that it was more likely than not that we would utilize our deferred tax assets.
For Calendar 1999, restructuring and impairments were recorded in connection
with our Analog and Memory restructuring actions. Purchased in-process research
and development was recorded in connection with the acquisition of our power
device business. Non-recurring charges included $15.4 million for other reserves
associated with our Memory restructuring action, $12.4 million for the write-off
of deferred financing fees, included in interest expense, and an $8.3 million
charge for forgiveness of certain management tax loans in connection with our
initial public offering.

Operating income was $327.9 million in Calendar 2000, compared to $39.1
million in Calendar 1999. Excluding unusual charges (gains) detailed above
impacting operating income, operating income was $325.9 million in Calendar
2000, compared to $113.6 million in Calendar 1999. The increase in operating
income is due to higher revenues and gross profits due to improved pricing, new
product introductions and improved business conditions, resulting in higher
factory utilization. In addition, operating income improved due to a full year
of power device results in Calendar 2000, compared to approximately nine months
in Calendar 1999, and the effect on operating income from the acquisitions
consummated in Calendar 2000.

Excluding depreciation and amortization of $151.1 million and $130.8
million in Calendar 2000 and Calendar 1999, respectively, unusual charges
(gains) and other (income) expense, EBITDA as defined was $477.0 million in
Calendar 2000 compared to $244.4 million in Calendar 1999.

Revenues. Trade sales to unaffiliated customers were 94.3% and 89.9% of
total revenues in Calendar 2000 and Calendar 1999, respectively and revenues
from contract manufacturing services provided to National Semiconductor and
Samsung Electronics together were 5.7% and 10.1% of total revenues in Calendar
2000 and Calendar 1999, respectively.

Trade sales increased 62.1% to $1,681.6 million in Calendar 2000 compared
with $1,037.6 million in Calendar 1999. The increase in our trade sales resulted
from higher sales volume reflecting strength in end markets, the effect of
acquisitions, higher average selling prices and an improved sales mix due to new
product introductions.

As a percentage of trade sales, geographic trade sales for North America,
Europe, Asia/Pacific and Korea were as follows for the Calendar 2000 and
Calendar 1999:

North American revenues increased 57.9% in Calendar 2000 from Calendar
1999. This increase was due to strong distribution sales in both the industrial
and consumer markets and improvements in communications and computing, as well
as the effect of acquisitions. Revenues in the Europe region increased 61.5% in
Calendar 2000 from Calendar 1999. The increase in Europe was due to improvements
in the communications, consumer and distribution markets, as well as the effect
of acquisitions. Asia/Pacific region revenues increased 63.7% in Calendar 2000
from Calendar 1999. The increase is due to strength in the consumer segment,
improved regional economic conditions, expansion into the China markets, the
expansion of customers using Asian contract manufacturing locations and the
effect of acquisitions. Our Korean region increased 60.5% in Calendar 2000 from
Calendar 1999. This was primarily the result of the effect of a full year of
power device business revenues in Calendar 2000.

30

Contract manufacturing revenues decreased 13.1% to $101.6 million in
Calendar 2000 compared to $116.9 million in Calendar 1999. The decrease in
contract manufacturing revenues was due primarily to diminishing demand from
National Semiconductor.

Gross Profit. Gross profit was as follows for Calendar 2000 and Calendar
1999:

Excluding non-recurring charges (gains) associated with the Memory
restructuring of $(5.4) million and $15.4 million in Calendar 2000 and Calendar
1999, respectively, gross profit increased 97.3% to $633.8 million in Calendar
2000 as compared to $321.2 million in Calendar 1999, and trade gross profits
increased 107.0% to $597.5 million in Calendar 2000 from $288.6 million in
Calendar 1999. The increase in trade gross profit on both an historical and
adjusted basis was due in part to a better sales mix resulting from new product
introductions and slightly higher average selling prices, as well as the
favorable effect of increased factory utilization.

The increase in contract manufacturing gross profit was due to favorable
pricing adjustments and improved factory utilization, as well as incremental
business with Samsung Electronics as a result of the acquisition of the power
device business.

Research and Development. R&D expenses were $83.9 million, or 5.0% of
trade sales, in Calendar 2000, compared to $53.1 million, or 5.1% of trade
sales, in Calendar 1999. The increase in R&D spending was primarily due to
spending on new product development and spending from our acquired businesses in
Calendar 2000 which was not included in Calendar 1999.

Selling, General and Administrative. SG&A expenses were $186.4 million, or
11.1% of trade sales, in Calendar 2000, compared to $136.8 million, or 13.2% of
trade sales, in Calendar 1999. SG&A expenses for Calendar 1999 include an
unusual charge of $8.3 million for the forgiveness of certain loans made to
management investors for payment of individual income tax liabilities resulting
from their ownership of our common stock. Excluding this unusual charge, SG&A
was $128.5 million, or 12.4% of trade sales, in Calendar 1999. The increase in
SG&A expenses (excluding the unusual charge) is primarily the result of higher
selling expenses in support of higher sales volumes and the incremental SG&A
associated with our acquired businesses.

Amortization of Acquisition-Related Intangibles. Amortization of
acquisition-related intangibles was $37.6 million in Calendar 2000, compared to
$26.0 million in Calendar 1999. The increase in amortization was due to
acquisitions that occurred in the latter part of 2000.

Purchased In-process Research and Development. IPR&D was $9.0 million for
Calendar 2000. This was derived from the acquisitions of QT Optoelectronics,
KOTA, and Micro Linear. IPR&D for Calendar 1999 of $34.0 million represents the
amount derived from the acquisition of the power device business of Samsung
Electronics. Further information regarding our IPR&D for significant
acquisitions, including significant assumptions, is addressed below under
"In-Process Research and Development."

Restructuring and Impairments. We incurred a pre-tax restructuring gain of
$5.6 million in Calendar 2000. The gain is a result of proceeds from the sale of
our former Mountain View, California facility ($3.5 million) and the adjustment
to restructuring reserves ($2.1 million) based upon final execution of several
prior year plans. Restructuring and impairments of $16.8 million were recorded
in Calendar 1999. We recorded charges taken in connection with the transfer of
assembly and test activities from our former Mountain View, California facility
to Penang, Malaysia ($2.7 million) and its wafer production to South

31

Portland, Maine ($10.0 million). In addition, we recorded a charge related to
the 1999 Memory restructuring action ($4.1 million).

Interest Expense. Interest expense was $81.3 million in Calendar 2000,
compared to $94.6 million in Calendar 1999. Interest expense in Calendar 2000
and Calendar 1999 includes unusual charges of $3.6 million and $12.4 million,
respectively, for the write-off of deferred financing fees associated with the
refinancing of our senior bank facilities in Calendar 2000 and Calendar 1999, as
well as a write-off associated with the repayment of long-term debt in Calendar
1999. Excluding these charges, interest expense was $77.7 million in Calendar
2000 compared to $82.2 million in Calendar 1999. The decrease, excluding the
unusual charges, is principally the result of reduced indebtedness, which was
retired with the proceeds of the initial public offering of our common stock in
August 1999, and the refinancing of our senior credit facilities in June 2000.

Interest Income. Interest income was $23.3 million in Calendar 2000,
compared to $0.7 million in Calendar 1999. The increase is due to higher cash
balances in Calendar 2000 due in part from proceeds received from our January
2000 secondary stock offering.

Other (Income) Expense. In Calendar 2000 we recorded a gain of $0.8
million on the buy-back of $15.0 million of our 10 1/8% senior subordinated
notes.

Income Taxes. Income tax benefit was $2.4 million in Calendar 2000,
compared to a tax benefit of $2.2 million in Calendar 1999. Included in Calendar
2000 is a one-time tax benefit of $26.3 million, related to a reduction in the
deferred tax asset valuation allowance. Management now believes that it is more
likely than not these assets will be realizable and, accordingly, reduced the
valuation allowance on those deferred tax assets. Without the effect of the
one-time benefit, our tax expense would have been $23.9 million, or an effective
tax rate of 8.8%, compared to an effective tax rate of 4.0% in Calendar 1999.
The increase in our effective tax rate, excluding the one-time benefit in
Calendar 2000, is due to a tax provision recorded in the United States in
Calendar 2000 which was not recorded in Calendar 1999.

Comparative disclosures of selected operating results of our reportable
segments is as follows:

Analog and Mixed Signal Products Group. In Calendar 2000, our Analog Group
expanded due to the acquisitions of KOTA and Micro Linear. Analog revenues
increased 62.7% to $380.6 million in Calendar 2000 from $233.9 million in
Calendar 1999. The increase in Analog revenue reflects improved business
conditions resulting in both higher sales volumes and increased prices, the
benefit of a full year of analog power device revenues, the introduction of new
products, and incremental sales from the KOTA and Micro Linear acquisitions.

Analog had operating income of $40.6 million in Calendar 2000 as compared
to $22.9 million in Calendar 1999. The increase in Analog's operating income was
due to higher revenues, the beneficial effect of moving wafer manufacturing to
South Portland, Maine, the benefit of a full year of operating income from
analog power device products and incremental operating income generated by the
addition of KOTA and Micro Linear, offset by higher costs on certain
subcontracted wafers.

Discrete Products Group. Discrete revenues increased 71.0% to $749.0
million in Calendar 2000, compared to $437.9 million in Calendar 1999. The
increase was across all product lines, as both volume and prices increased over
the comparable prior year period. The increase was also a result of a full year
of discrete power device revenues.

Discrete had operating income of $129.7 million in Calendar 2000 as
compared to $25.8 million in Calendar 1999. The increase in Discrete operating
income was due to higher revenues and improved gross profits due to a better
sales mix resulting from new product introductions, including Power MOSFET
products, improved factory utilization and the benefit of a full year of
operating income from discrete power device products.

Interface and Logic Products Group. Logic revenues increased 37.9% to
$424.2 million in Calendar 2000, compared to $307.7 million in Calendar 1999.
The increase in Interface and Logic revenues was due to volume increases
resulting from strengthened demand, average selling price increases and improved
mix due to new product introductions.
32

Interface and Logic had operating income of $106.5 million in Calendar
2000, compared to $33.4 million in Calendar 1999. The increase in operating
income was due to higher revenues and improved gross profits due to improved
pricing, a better sales mix resulting from new product introductions,
particularly Interface and Tiny Logic, and improved factory utilization.

SEVEN MONTHS ENDED DECEMBER 26, 1999 COMPARED TO SEVEN MONTHS ENDED DECEMBER 27,
1998

Comparative financial information for the Stub Year 1999 and the seven
months ended December 27, 1998, which we refer to as the first seven months of
Fiscal 1999, was as follows:

Results of Operations. We generated net income of $21.3 million in Stub
Year 1999, compared to a net loss of $30.5 million in the first seven months of
Fiscal 1999. Excluding unusual charges and amortization of acquisition-related
intangibles, net of tax effects, pro forma net income was as follows for Stub
Year 1999 and the first seven months of Fiscal 1999, respectively:

33

Non-recurring charges in Stub Year 1999 included initial public
offering-related charges of $8.3 million, recorded in SG&A for the forgiveness
of certain loans made to our management investors for payment of individual
income tax liabilities resulting from their ownership of our common stock, and
$7.2 million, recorded in interest expense, for the write-off of deferred
financing fees associated with the debt repaid with the proceeds from the
initial public offering. Restructuring and impairments in the first seven months
of Fiscal 1999 were recorded as a result of a workforce reduction. Operating
income was $82.5 million in Stub Year 1999, compared to an operating loss of
$3.9 million in the first seven months of Fiscal 1999. Excluding unusual charges
impacting operating income, operating income was $90.8 million in Stub Year
1999, compared to $0.6 million in the first seven months of Fiscal 1999. The
increase in operating income is due to the acquisition of the power device
business from Samsung Electronics and higher revenues and gross profits due to
new product introductions and improved business conditions, resulting in higher
factory utilization in Stub Year 1999 as compared to the first seven months of
Fiscal 1999.

Excluding depreciation and amortization of $82.3 million and $55.1 million
in Stub Year 1999 and the first seven months of Fiscal 1999, respectively, and
unusual charges, EBITDA as defined was $173.1 million in Stub Year 1999 compared
to $55.7 million in the first seven months of Fiscal 1999.

Revenues. Trade sales to unaffiliated customers were 90.8% and 89.5% of
total revenues in Stub Year 1999 and the first seven months of Fiscal 1999,
respectively and revenues from contract manufacturing services provided to
National Semiconductor and Samsung Electronics together were 9.2% and 10.5% of
total revenues in Stub Year 1999 and the first seven months of Fiscal 1999,
respectively.

Trade sales increased 121.5% to $714.0 million in Stub Year 1999 compared
with $322.3 million in the first seven months of Fiscal 1999. Trade sales for
Stub Year 1999 include sales from the power device business. Excluding sales
from the power device business, trade sales increased 28.9% in Stub Year 1999
over the first seven months of Fiscal 1999, as higher sales volume offset lower
average selling prices. The increase in trade sales is attributable to improved
demand due to strength in end-markets such as personal computers and
communications and an economic recovery in the Asia/Pacific region.

As a percentage of trade sales, geographic trade sales for North America,
Europe, Asia/Pacific and Korea were as follows for the Stub Year 1999 (with and
without power device ("PD") products) and the first seven months of Fiscal 1999:

Excluding sales from the power device business, Asia/Pacific region
revenues increased 58.2% in Stub Year 1999 over the first seven months of Fiscal
1999. The increase in the Asia/Pacific region is due to strength in the consumer
and personal computer markets, as well as improved economic conditions. Revenues
in the Europe region increased 22.5% in Stub Year 1999 over the first seven
months of Fiscal 1999. The increase in Europe is due to improved communications,
consumer and distribution markets. North American revenues increased 2.0% in
Stub Year 1999 over the first seven months of Fiscal 1999. The increase in North
America is the result of improved market conditions offset by the continued move
of contract manufacturers to locations outside North America.

Contract manufacturing revenues increased 90.0% to $72.2 million in Stub
Year 1999 compared to $38.0 million in the first seven months of Fiscal 1999.
Excluding contract manufacturing services provided to

34

Samsung Electronics, contract manufacturing revenues increased 42.1% in Stub
Year 1999 as compared to the first seven months of Fiscal 1999, reflecting
increased demand from National Semiconductor.

Gross Profit. Gross Profit was as follows for Stub Year 1999 and the first
seven months of Fiscal 1999:

Gross profit increased 214.0% in Stub Year 1999 compared to the first seven
months of Fiscal 1999. Excluding the gross profit derived from power device
products, gross profit increased 71.8% in Stub Year 1999 over the first seven
months of Fiscal 1999. Excluding the power device business, gross trade profits
as a percentage of trade sales were 28.4% in Stub Year 1999 compared to 21.6% in
the first seven months of Fiscal 1999. The increase in gross trade profit as a
percentage of trade sales was due to the favorable effect of increased factory
utilization and the full benefit of cost reduction actions undertaken in Fiscal
1999, offset by lower average selling prices. Average selling prices for Stub
Year 1999 were lower than the first seven months of Fiscal 1999, despite higher
average selling prices in the second half of Stub Year 1999 over the first half
of Stub Year 1999, particularly for Discrete and Logic products.

Contract manufacturing gross profit increased 307.8% in Stub Year 1999
compared to the first seven months of Fiscal 1999. The increase in contract
manufacturing gross profit is due to incremental business with Samsung
Electronics as a result of the acquisition of the power device business and
greater demand from National Semiconductor reflective of improved market
conditions. Contract manufacturing gross profit for the first seven months of
Fiscal 1999 included $13.0 million of fixed cost reimbursement under our
manufacturing agreements with National Semiconductor.

Research and Development. R&D was $35.0 million, or 4.9% of trade sales,
in Stub Year 1999, compared to $21.3 million, or 6.6% of trade sales, in the
first seven months of Fiscal 1999. The increase in R&D expenses was driven by
the dedicated R&D costs incurred by the power device business in Stub Year 1999
which we did not incur in the first seven months of Fiscal 1999.

Selling, General and Administrative. SG&A expenses were $97.9 million, or
13.7% of trade sales, in Stub Year 1999, compared to $51.0 million, or 15.8% of
trade sales, in the first seven months of Fiscal 1999. SG&A expenses for Stub
Year 1999 include an unusual charge of $8.3 million for the forgiveness of
certain loans made to our management investors for payment of individual income
tax liabilities resulting from their ownership of our common stock. Excluding
this unusual charge, SG&A was $89.6 million, or 12.5% of trade sales, in Stub
Year 1999. The increase in SG&A expenses (excluding the unusual charge) is
primarily the result of the incremental SG&A expenses of the power device
business, which we did not incur in the first seven months of Fiscal 1999, and
increased selling expenses for the pre-existing business due to higher sales
volume.

Amortization of Acquisition-Related Intangibles. Amortization of
acquisition-related intangibles was $19.5 million in Stub Year 1999, compared to
$1.9 million in the first seven months of Fiscal 1999. The increase is
attributable to the incremental amortization expense of the power device
business, which we did not incur in the first seven months of Fiscal 1999.

Restructuring and Impairments. We incurred a pre-tax restructuring charge
of approximately $4.5 million in the first seven months of Fiscal 1999. The
charge consisted of $0.8 million related to non-cash asset impairments and $3.7
million of employee separation costs related to the reduction of approximately
600 salaried, hourly and temporary positions, then representing approximately
10% of our payroll.

35

Interest Expense. Interest expense was $56.5 million in Stub Year 1999,
compared to $34.3 million in the first seven months of Fiscal 1999. Interest
expense in Stub Year 1999 includes an unusual charge of $7.2 million for the
write-off of deferred financing fees associated with debt retired with the
proceeds from the initial public offering. Excluding this charge, interest
expense was $49.3 million in Stub Year 1999. The increase, excluding the unusual
charges, is principally the result of indebtedness incurred to finance the power
device business acquisition, which occurred in the fourth quarter of Fiscal
1999.

Interest Income. Interest income was $0.3 million for Stub Year 1999
compared to $0.1 million for the first seven months of Fiscal 1999. This was due
to higher average cash balances in Stub Year 1999 compared to the first seven
months of Fiscal 1999.

Income Taxes. Income tax expense (benefit) was $5.0 million for Stub Year
1999, compared to a tax benefit of $7.6 million in the first seven months of
Fiscal 1999. The effective tax rates for Stub Year 1999 and the first seven
months of Fiscal 1999 on book pre-tax income were 19.0% and 19.9%, respectively.
In Stub Year 1999, the current tax provision is based on income generated from
our foreign operations, excluding Korea where we benefit from a tax holiday. The
decrease in deferred tax benefits is due to profits earned in Stub Year 1999 and
our limited ability to recognize the future benefit of U.S. net operating loss
carryforwards. In addition, deferred tax expense was booked in Korea to account
for future book deductions in excess of future tax deductions arising beyond the
tax holiday period.

Comparative financial information for our reportable segments is as
follows:

Analog and Mixed Signal Products Group. We formed the Analog and Mixed
Signal Products Group upon completion of the acquisition of Raytheon. This
division further expanded due to the inclusion of the analog products of the
power device business. Analog revenues increased 334.7% to $177.8 million in
Stub Year 1999 from $40.9 million in the first seven months of Fiscal 1999. Stub
Year 1999 includes the analog revenues of the power device business, which is
not included in the first seven months of Fiscal 1999. Normalized to exclude
power device products, Analog revenues were $47.2 million in Stub Year 1999, an
increase of 15.0% from the first seven months of Fiscal 1999. The increase is
due to improved business conditions and new product revenues, which more than
offset revenue decreases in mature products.

Analog had operating income of $19.5 million in Stub Year 1999 as compared
to a loss of $6.7 million in the first seven months of Fiscal 1999. Excluding
analog power device products, Analog had an operating loss of $12.5 million in
Stub Year 1999. The increase in Analog's operating loss (excluding analog power
device products) was due to an unfavorable sales mix and increased valuation
reserves in anticipation of the closure of the Mountain View, California wafer
fab, which occurred in the latter part of Stub Year 1999.

Discrete Products Group. In Stub Year 1999, Discrete expanded due to the
inclusion of the discrete products of the power device business. Discrete
revenues increased 229.8% to $316.9 million in Stub Year 1999, compared to $96.1
million in the first seven months of Fiscal 1999. Stub Year 1999 includes the
discrete revenues of the power device business, which are not included in the
first seven months of Fiscal 1999. Excluding discrete power device products,
Discrete revenues increased 54.6% to $148.6 million in Stub Year 1999 from the
first seven months of Fiscal 1999. The increase was across all product lines.
DMOS products increased 81.9% over the first seven months of Fiscal 1999.
Revenues for mature Bipolar products grew 13.7% in Stub Year 1999 over the first
seven months of Fiscal 1999.

Discrete had operating income of $24.6 million in Stub Year 1999 as
compared to $5.3 million in the first seven months of Fiscal 1999. Excluding
discrete power device products, Discrete had operating income of $13.3 million
in Stub Year 1999. The increase in Discrete operating income was due to higher
revenues and improved gross profits due to improved factory utilization and
higher average selling prices.

Interface and Logic Products Group. Interface and Logic revenues increased
27.9% to $184.0 million in Stub Year 1999, compared to $144.0 million in the
first seven months of Fiscal 1999. Revenues for interface products grew 224.4%
in Stub Year 1999 over the first seven months of Fiscal 1999, due to success of
new product introductions. Logic product revenues increased 22.8% in Stub Year
1999 over the first seven months of Fiscal 1999. The increase in logic product
revenues was across all product lines. CMOS revenues grew 34.6%, while Bipolar
revenues grew 2.5% in Stub Year 1999 over the first seven months of Fiscal 1999.
36

Logic had operating income of $20.9 million in Stub Year 1999, compared to
$6.3 million in the first seven months of Fiscal 1999. The increase in operating
income was due to higher revenues and improved gross profits due to improved
factory utilization.

YEAR ENDED MAY 30, 1999 COMPARED TO YEAR ENDED MAY 31, 1998

Comparative financial information for Fiscal 1999 and Fiscal 1998 is as
follows:

37

Results of Operations. We generated a net loss of $(114.1) million in
Fiscal 1999, compared to net income of $20.6 million in Fiscal 1998. Excluding
unusual charges (gains) and amortization of acquisition-related intangibles, net
of tax effects, pro forma net income was as follows for Fiscal 1999 and Fiscal
1998, respectively:

For Fiscal 1999, restructuring and impairments included $4.5 million of
employee separation costs related to severance and other costs associated with
work force reduction actions, $2.7 million associated with the transfer of
Analog assembly and test operations, $10.0 million for the closure of the
Mountain View facility and $4.1 million associated with the restructuring of the
Memory business. Purchased in-process research and development was recorded in
connection with our acquisition of the power device business of Samsung
Electronics. Non-recurring charges included $5.5 million and $9.9 million for
the Memory restructuring, recorded as a reduction to revenue and an increase to
cost of sales, respectively, for additional sales and inventory reserves
associated with the restructuring, as well as $5.2 million for the write-off of
deferred financing fees in connection with a refinancing of our senior credit
facilities. For Fiscal 1998, purchased in-process research and development was
recorded in connection with our acquisition of Raytheon Semiconductor, Inc.

We incurred an operating loss of $47.4 million in Fiscal 1999, compared to
operating income of $87.3 million in Fiscal 1998. Excluding unusual charges
detailed above impacting operating income, operating income was $23.3 million in
Fiscal 1999, compared to $102.8 million in Fiscal 1998. The decrease in
operating income was primarily due to soft market conditions in the
semiconductor industry that persisted for much of Fiscal 1999, which resulted in
severe price competition and factory underutilization, particularly in the first
half of Fiscal 1999, which negatively impacted gross profit.

Excluding depreciation and amortization of $103.7 million and $84.6 million
in Fiscal 1999 and Fiscal 1998, respectively, and unusual charges, EBITDA as
defined was $127.0 million in Fiscal 1999 compared to $187.4 million in Fiscal
1998.

Revenues. Trade sales to unaffiliated customers were 89.0% and 80.6% of
total revenues in Fiscal 1999 and Fiscal 1998, respectively, and contract
manufacturing services to National Semiconductor were 11.0% and 19.4% of total
revenues in Fiscal 1999 and Fiscal 1998, respectively.

Trade sales increased 2.9% to $654.1 million in Fiscal 1999 from $635.8
million in Fiscal 1998. Trade sales in Fiscal 1999 include those of the power
device business since the acquisition date of April 13, 1999, and a full-year of
Analog. Additionally, trade sales have been reduced by $5.5 million in Fiscal
1999 for one-time charges for additional sales reserves as a result of the
Memory restructuring. Trade sales in Fiscal 1998 include those of Analog since
the acquisition date of December 31, 1997. Excluding Power Device revenues, one
time charges and normalizing Analog sales for the non-comparable periods, trade
sales decreased 14.0% in Fiscal 1999 from Fiscal 1998. All segments reported
trade sales decreases from the prior year, due to industry-wide soft market
conditions that were prevalent for much of Fiscal 1999. These soft market
conditions, caused by the Asian financial crisis and excess capacity in the
semiconductor industry as a whole, resulted in severe price

38

pressures, which accounted for the majority of the revenue shortfall on a
comparable basis. Unit volume was flat for Fiscal 1999 as compared to Fiscal
1998.

As a percentage of trade sales, geographic trade sales for North America,
Europe and Asia (including Japan and Korea) were as follows for Fiscal 1999 and
Fiscal 1998:

Soft market conditions prevalent in Fiscal 1999 negatively impacted all
geographic regions. Trade sales in North America decreased 9.8% in Fiscal 1999
from Fiscal 1998. Excluding one-time charges, trade sales decreased 7.6%. Trade
sales in Europe decreased 16.1% in Fiscal 1999 from Fiscal 1998. Trade sales in
Asia increased 24.3% in Fiscal 1999 over Fiscal 1998. Asia sales include those
in Southeast Asia, Korea and Japan. The increase in trade sales is due entirely
to the acquisition of the power device business. Excluding the power device
business, Asia trade sales decreased 2.1% in Fiscal 1999 from Fiscal 1998.

Contract manufacturing revenues decreased 47.2% to $81.0 million in Fiscal
1999, compared to $153.4 million in Fiscal 1998. Contract manufacturing revenues
in Fiscal 1999 include $18.7 million of billings under the guaranteed annual
revenue and fixed cost recovery provisions of the manufacturing agreements with
National Semiconductor. The decrease was due to reduced demand from National
Semiconductor.

Gross Profit. Gross Profit was as follows for Fiscal 1999 and Fiscal 1998:

Gross trade profit in Fiscal 1999 was negatively impacted by one-time
charges of $15.4 million for additional sales and inventory reserves as a result
of the Memory restructuring action. Excluding one-time charges, gross profit
decreased 27.2% to $167.7 million in Fiscal 1999. Excluding one-time charges,
gross trade profit as a percentage of trade sales was 22.9% in Fiscal 1999. The
decrease in gross trade profit as a percentage of sales in Fiscal 1999 from
Fiscal 1998 was due to lower average trade selling prices and the negative
effects of significantly decreased demand from National Semiconductor.

Contract manufacturing gross profit decreased 54.3% in Fiscal 1999 from
Fiscal 1998. The decrease in contract manufacturing gross profit as a percent of
contract manufacturing revenues is due to the negative effects of lower factory
utilization due to reduced demand from National Semiconductor and an unfavorable
sales mix toward ABiC wafers produced in our six-inch fab in South Portland,
Maine.

Research and Development. R&D expenses were $39.3 million, or 6.0% of
trade sales in Fiscal 1999, compared to $35.7 million, or 5.6% of trade sales in
Fiscal 1998. The increase in R&D expenses is due to the addition of the R&D
expenses of the power device business and a full year of Analog R&D expenses in
Fiscal 1999, as compared to five months of Analog R&D expenses recorded in
Fiscal 1998.

Selling, General and Administrative. SG&A expenses were $96.7 million, or
14.8% of trade sales in Fiscal 1999, compared to $90.6 million or 14.2% of trade
sales in Fiscal 1998. The increase in SG&A expenses is due to the addition of
the SG&A expenses of the power device business, a full year of Analog SG&A
expenses in Fiscal 1999, as compared to five months of Analog SG&A expenses
recorded in Fiscal 1998.

39

Amortization of Acquisition-Related Intangibles. Amortization of
acquisition-related intangibles was $8.4 million in Fiscal 1999, compared to
$1.4 million in Fiscal 1998. The increase in amortization was a result of a full
year of amortization for the Raytheon acquisition in Fiscal 1999 compared to
five months in Fiscal 1998.

Purchased In-process Research and Development. IPR&D was $34.0 million in
Fiscal 1999. This was derived from the acquisition of the power device business
of Samsung Electronics. IPR&D of $15.5 million for Calendar 1998 represents the
amount derived from the acquisition of the Raytheon semiconductor business.
Further information regarding our IPR&D for significant acquisitions, including
information on our significant assumptions, is addressed below under "In-Process
Research and Development."

Restructuring and Impairments. Fiscal 1999 included restructuring charges
of $21.3 million, as we took several actions during Fiscal 1999 to reduce costs
and improve profitability in a number of areas. In the fourth quarter of Fiscal
1999, we took a pre-tax charge of $4.1 million for actions to improve the
profitability of the Memory Products Group. These actions include transferring
wafer fabrication activities in Salt Lake City, Utah to third-party
subcontractors and obsoleting Memory product lines. The charge consists of $3.9
million for non-cash asset impairments at our facilities in Salt Lake City, Utah
and Sunnyvale, California, and $0.2 million for severance and employee
separation costs. In addition, we took charges of $5.5 million and $9.9 million
recorded to revenue and cost of sales, respectively, for additional sales and
inventory reserves. Including these charges, the total charge for the Memory
restructuring was $19.5 million.

In the fourth quarter of Fiscal 1999, we took a pre-tax charge of $10.0
million for the closure of our Mountain View facility, which supports the Analog
Products Group. We transferred Analog wafer fabrication activities to our
facility in South Portland, Maine. The charge consists of $4.0 million for
severance and employee separation costs, $4.5 million for non-cash asset
impairments, including a one-time loss for the sale of the Mountain View
facility of $1.9 million and $1.5 million in other exit costs. In March 1999, we
sold the facility for $30.2 million, net of closing costs, $0.5 million in
escrow to cover demolition costs, and a $3.5 million holdback, payment of which
is contingent upon either favorable action or no action within one year of the
sale date by the City of Mountain View with respect to the buyer's application
to increase the building density on the site. We view the holdback as a
contingent gain, and as such did not record this amount in the Statement of
Operations. In the third quarter of Fiscal 1999, we took a pre-tax charge of
$2.7 million for the transfer of Analog assembly and test activities from its
Mountain View facility to our facility in Penang, Malaysia and various
third-party subcontractors. The charge consisted of $1.9 million for non-cash
asset impairments and $0.8 million for severance and employee separation costs.
Total charges for Analog restructuring activities, including the loss on sale of
the Mountain View facility, were $12.7 million in Fiscal 1999.

In the first quarter of Fiscal 1999, we took a pre-tax restructuring charge
of $4.5 million in connection with a plan to reduce costs and improve operating
efficiencies. The charge consisted of $3.7 million for severance and employee
separation costs related to the reduction of approximately 600 salaried, hourly
and temporary positions in the United States and Cebu, the Philippines,
representing approximately 10% of our payroll. In addition, $0.8 million was
recorded for the write-off of various idle assets in our Mountain View and Salt
Lake City facilities.

Interest expense. Interest expense was $72.3 million in Fiscal 1999,
compared to $56.5 million in Fiscal 1998. The increase was due to the write-off
of deferred financing fees of $5.2 million in connection with the refinancing of
its senior credit facilities as part of the acquisition of the power device
business, incremental interest expense as a result of additional indebtedness
incurred to finance the acquisition, a full year of interest expense on
borrowings to finance the Raytheon acquisition, as compared to five months in
Fiscal 1998 and interest expense on short-term borrowings in Fiscal 1999 which
did not occur in Fiscal 1998.

Interest income. Interest income was $0.5 million in Fiscal 1999, compared
to $2.0 million in Fiscal 1998. The decrease is due to lower average cash
balances in Fiscal 1999 compared to Fiscal 1998.

Income Taxes. Income tax expense (benefit) was a benefit of $(5.1) million
in Fiscal 1999, compared to income tax expense of $10.7 million in Fiscal 1998.
The effective tax rate for Fiscal 1999 was 4.3%,

40

compared to 32.6% in Fiscal 1998. The decrease in the effective rate is due to
our inability to carry back our Fiscal 1999 operating loss due to the short time
we have operated as a stand-alone entity and a tax holiday for income generated
by our Korean subsidiary, Fairchild Korea Semiconductor Ltd., formed as a result
of the acquisition of the power device business. Fairchild Korea Semiconductor
Ltd. has been granted a ten year tax holiday. The first seven years are
tax-free, followed by three years of income taxes at 50% of the statutory rate.

Comparative financial information for our reportable segments is as
follows:

Analog and Mixed Signal Products Group. Analog revenues increased 139.9%
to $99.8 million in Fiscal 1999 from $41.6 million in Fiscal 1998. Fiscal 1999
includes the analog revenues of the power device business since the date of
acquisition. Fiscal 1998 includes revenues of Analog from the acquisition date
of Raytheon. Normalized to exclude power device products and the non-comparable
period of Analog sales in Fiscal 1999, Analog revenues were $29.5 million in
Fiscal 1999, a decrease of 29.1% from Fiscal 1998. The decrease for the
comparable period in Fiscal 1999 from Fiscal 1998 is due to revenue decreases in
its mature products, combined with lower than anticipated new product revenues.

Analog generated an operating loss of $4.3 million in Fiscal 1999 excluding
restructuring charges, compared to operating income of $2.7 million in Fiscal
1998. Excluding the effect of the power device business and normalized for the
non-comparable period of Analog operating results in Fiscal 1999, Analog
generated an operating loss of $15.5 million in Fiscal 1999. The decrease in
operating income is primarily driven by the decline in revenues.

Discrete Products Group. Discrete revenues increased 19.0% to $222.8
million in Fiscal 1999, compared to $187.3 million in Fiscal 1998. Fiscal 1999
includes the discrete revenues of the power device business since the date of
acquisition. Excluding discrete power device products, Discrete revenues
decreased 3.7% in Fiscal 1999 from Fiscal 1998. The decrease is attributable to
lower revenues for its mature Bipolar products, which decreased 18.1% from
Fiscal 1998, partially offset by higher revenues for its DMOS products, which
increased 7.9% from Fiscal 1998.

Discrete generated operating income of $16.8 million in Fiscal 1999,
compared to operating income of $35.6 million in Fiscal 1998. Excluding the
effect of the power device business, Discrete generated operating income of
$14.6 million in Fiscal 1999. The decrease was due primarily to lower gross
profit as a result of unfavorable sales mix, the negative effect of
underutilization of the Salt Lake City fab, and inventory write-downs in the
Cebu, the Philippines assembly and test facility.

Interface and Logic Products Group. Price competition was particularly
intense in Interface and Logic in Fiscal 1999. Interface and Logic revenues
decreased 11.7% to $267.6 million in Fiscal 1999, compared to $303.0 million in
Fiscal 1998. Revenues for interface products grew 573% in Fiscal 1999 over
Fiscal 1998, due to success of new product introductions. This increase was more
than offset by a 14.4% decrease in logic products revenues. The decrease in
logic products revenues is primarily attributable to lower bipolar logic
revenues, which decreased 29.4% from Fiscal 1998. CMOS revenues decreased 2.9%
in Fiscal 1999 over Fiscal 1998. Overall, new product revenues doubled in Fiscal
1999 over Fiscal 1998.

Interface and Logic generated operating income of $18.8 million in Fiscal
1999, compared to $43.1 million in Fiscal 1998. The decrease in operating income
is attributable to lower average selling prices due to soft market conditions in
Fiscal 1999.

41

IN-PROCESS RESEARCH AND DEVELOPMENT

The following table summarizes the significant assumptions underlying the
valuations of IPR&D for our significant acquisitions:

Amounts charged to IPR&D represent the estimated fair value based upon
risk-adjusted cash flows related to the incomplete projects. At the respective
dates of acquisition, the development of these projects had not yet reached
technological feasibility and the research and development in progress had no
alternative future uses. Accordingly these costs were expensed at the
acquisition dates.

Acquisition of DPP. The acquisition of DPP added breadth to our power
discrete products portfolio, including MOSFET's, IGBT's and Rectifiers. The
acquisition also gave us an expanded presence in the automotive and industrial
markets. One project, 30V N Channel Trench, out of six valued, accounted for
approximately 83% of the total IPR&D charge and was approximately 95% complete
at the date of acquisition. This project was completed on schedule in 2001.

Acquisition of the Power Device Business. The acquisition of the power
device business greatly expanded our portfolio of power discrete and analog
products, including MOSFET's, IGBT's, power transistors, standard linear
products, motor control integrated circuits and power switch modules. The
acquisition also further expanded our market presence in Asia and provided us an
entry into the Korean market. Three projects out of seven valued accounted for
approximately 84% of the total IPR&D charge. These projects: Samsung Power
Switch, Motor IC and IGBT, were 66%, 63% and 57% complete, respectively, as of
the date of acquisition. These projects have been completed.

The methodology used to assign value to purchased in-process research and
development was the income approach. The income approach focuses on the
income-producing capability of the asset, which is measured by calculating the
discounted present value of the net after-tax cash flows expected to be
generated by the asset. This approach relies on forecasts provided by management
for revenues and operating expenses such as cost of goods sold and selling,
general and administrative expenses for the in process projects. The forecasts
used by us in valuing in-process research and development were based on
assumptions we believed to be reasonable at the dates of acquisition, but which
are inherently uncertain and unpredictable. We cannot assure you that the
underlying assumptions used to estimate expected project sales or profits, or
events associated with such projects will transpire as estimated. Our
assumptions may be incomplete or inaccurate, and unanticipated events and
circumstances are likely to occur. For these reasons, actual results may vary
from projected results.

As of December 30, 2001, revenue for the major DPP project was ahead of
forecast. Revenues for the major power device projects were lower than forecast.
Overall, the power device business' revenues are meeting projections, due to
higher than forecast revenues from products already developed at the acquisition
date. The lower revenues on in-process power device products as compared to
forecast have not had, nor are expected to have, any material adverse effect on
our results of operations or our financial position, including the
recoverability of intangible assets.

42

LIQUIDITY AND CAPITAL RESOURCES

We have a borrowing capacity of $300.0 million on a revolving basis for
working capital and general corporate purposes, including acquisitions, under
our senior credit facility. At December 30, 2001, adjusted for outstanding
letters of credit, we had $299.2 million available under this senior credit
facility.

In connection with the financing of the DPP acquisition, on January 31,
2001, we completed a private offering of $350 million of 10 1/2% Senior
Subordinated Notes at face value. Interest on these notes is paid semi-annually
on February 1 and August 1 of each year, and the first interest payment was made
August 1, 2001. We may redeem the notes on or after February 1, 2005. Prior to
February 1, 2004, we may redeem up to 35% of the notes from the proceeds of
certain equity offerings.

On October 31, 2001 we sold $200 million aggregate principal amount of 5.0%
Convertible Senior Subordinated Notes Due November 1, 2008. The notes are
unsecured obligations, and are convertible into common stock at a conversion
price of $30.00 per share, subject to certain adjustments. The notes rank on a
parity with our existing senior subordinated debt and are and will be
subordinated to all existing and future senior indebtedness, including any
indebtedness incurred under the senior credit facility. The notes are issued by
Fairchild Semiconductor Corporation and are guaranteed on a senior subordinated
basis by Fairchild International and its other U.S. subsidiaries and are
convertible into the common stock of Fairchild International.

Our senior credit facility, the indentures governing our 10 1/8% Senior
Subordinated Notes, 10 3/8% Senior Subordinated Notes and 10 1/2% Senior
Subordinated Notes and other debt instruments we may enter into in the future,
may impose on us various restrictions and covenants which could potentially
limit our ability to respond to market conditions, to provide for unanticipated
capital investments or to take advantage of business opportunities. The
restrictive covenants include limitations on consolidations, mergers and
acquisitions, restrictions on creating liens, restrictions on paying dividends
or making other similar restricted payments, restrictions on asset sales,
restrictions on capital expenditures and limitations on incurring indebtedness,
among other restrictions. The covenants in the senior credit facility relating
to financial ratios also include a minimum interest coverage ratio and a maximum
senior leverage ratio. Provided there are no further outstanding balances under
the senior credit facility, compliance with these ratios is not required until
March 31, 2003. The senior credit facility also limits our ability to modify our
certificate of incorporation and bylaws, or enter into shareholder agreements,
voting trusts or similar arrangements. Under our debt instruments, the
subsidiaries of Fairchild Semiconductor Corporation cannot be restricted, except
to a limited extent, from paying dividends or making advances to Fairchild
Semiconductor Corporation. We believe that funds generated from operations,
together with existing cash, will be sufficient to meet our debt obligations
over the next twelve months. We expect that existing cash and available funds
from our senior credit facility and funds generated from operations will be
sufficient to meet our anticipated operating requirements and to fund our
research and development and capital expenditures for the next twelve months. We
had capital expenditures of approximately $117.8 million in 2001 to expand
capacity primarily in support of in-sourcing and our e-business initiatives. We
frequently evaluate opportunities to sell additional equity or debt securities,
obtain credit facilities from lenders or restructure our long-term debt to
further strengthen our financial position. The sale of additional equity or
convertible securities could result in additional dilution to our stockholders.
Additional borrowing or equity investment may be required to fund future
acquisitions.

As of December 30, 2001, our cash and cash equivalents balance was $504.4
million, an increase of $102.6 million from December 31, 2000.

During Calendar 2001, our operations provided $155.8 million in cash
compared to $381.1 million of cash in Calendar 2000. The decrease in cash
provided by operating activities primarily reflects the decrease in net income
in Calendar 2001 compared to Calendar 2000. Cash used in investing activities
during Calendar 2001 totaled $466.3 million, compared to $346.7 million in
Calendar 2000. The increase in cash used in investing activities was the result
of a decrease in capital expenditures, offset by an increase in cash used for
acquisitions. Cash provided by financing activities of $413.1 million for
Calendar 2001 was primarily from the issuance of $350 million 10 1/2% Notes
during the first quarter and $200.0 million of 5.0% Notes during the

43

fourth quarter of 2001. Cash provided by financing activities of $228.7 million
in Calendar 2000 was primarily from the issuance of common stock in our
follow-on public offering in January 2000.

It is customary practice in the semiconductor industry to enter into
guaranteed purchase commitments or "take or pay" arrangements for purchases of
certain equipment and raw materials. At December 30, 2001, obligations under
these arrangements were not material to our consolidated financial statements.
The table below summarizes aggregate maturities of long-term debt and future
minimum lease payments under noncancelable operating leases as of December 30,
2001.

LIQUIDITY AND CAPITAL RESOURCES OF FAIRCHILD INTERNATIONAL, EXCLUDING OUR
SUBSIDIARIES

Fairchild International is a holding company, the principal asset of which
is the stock of its sole subsidiary, Fairchild Semiconductor Corporation.
Fairchild International on a stand-alone basis has no cash flow from operations.
Fairchild International on a stand-alone basis has no cash requirements for the
next twelve months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. The U.S. Securities and Exchange Commission has defined critical
accounting policies as those that are both most important to the portrayal of
our financial condition and results and which require our most difficult,
complex or subjective judgments or estimates. Based in this definition, we
believe our critical accounting policies include the policies of revenue
recognition, sales reserves, inventory valuation and the impairment of
long-lived assets. For all financial statement periods presented, there have
been no material modifications to the application of these critical accounting
policies.

On an on-going basis, we evaluate the judgments and estimates underlying
all of our accounting policies, including those related to customer sales
allowances, product returns, bad debts, inventories, impairment of long-lived
assets, deferred tax valuation allowances, restructuring reserves and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Materially different results in the amount and timing of our
actual results for any period could occur if our management made different
judgements or utilized different estimates.

Revenue from the sale of semiconductor products is recognized when title
transfers to the customer, including distributors, which is generally upon
shipment. No revenue is recognized unless there is persuasive evidence of an
arrangement, the price to the buyer is fixed or determinable, and the
collectibility of the sales price is reasonably assured. Contract manufacturing
revenues are recognized upon completion of the contracted service.

Sales reserves generally fall into four categories: customer material
return reserves, distributor contract sales debit reserves, prompt payment
discount reserves, and other distribution reserves. Customer material returns
result from product quality, administrative or other defect issues. Distributor
contract sales debits are credits given to distributors to ensure distributor
profitability on individual resale transactions. Prompt payment discounts are
enticements given to customers to ensure payment is made in a timely manner.
Customer material reserves, distributor contract sales debit reserves and prompt
payment discount reserves are based upon historical rates of return or claim and
any known, specifically identified unusual returns. Other

44

sales reserves are recorded based upon individual contracts with distributors
that may call for reimbursement of product scrapped or reimbursement of price
changes that affect the distributors inventory carrying value. Historically, we
have not experienced material differences between our estimated sales reserves
and actual results.

In determining the net realizable value of our inventories, we review the
valuations of inventory considered excessively old and therefore subject to
obsolescence and inventory in excess of customer backlog. We also adjust the
valuation of inventory when estimated actual cost is significantly different
than standard cost and to value inventory at the lower of cost or market.

We assess the impairment of long lived assets on an ongoing basis and
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable based upon an estimate of future undiscounted cash flows.
Factors we consider that could trigger an impairment review include the
following:

- significant underperformance relative to expected historical or projected
future operating results

- significant changes in the manner of our use of the acquired assets or
the strategy for our overall business

- significant negative industry or economic trends

- significant decline in our stock price for a sustained period

- our market capitalization relative to net book value

- significant technological changes, which would render equipment and
manufacturing process, obsolete.

When we determine that the carrying value of any long lived asset may not
be recoverable based upon the existence of one or more of the above indicators
of impairment, we measure impairment based on the difference between an asset's
carrying value and an estimate of fair value, which may be determined based upon
quotes or a projected discounted cash flow, using a discount rate determined by
our management to be commensurate with our cost of capital and the risk inherent
in our current business model.

FORWARD LOOKING STATEMENTS

This annual report includes "forward-looking statements" as that term is
defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements can be identified by the use of forward-looking terminology such as
"we believe," "we expect," "we intend," "may," "will," "should," "seeks,"
"approximately," "plans," "estimates," "anticipates," or "hopeful," or the
negative of those terms or other comparable terms, or by discussions of our
strategy, plans or future performance. For example, the Outlook section below
contains numerous forward-looking statements. All forward-looking statements in
this report are made based on management's current expectations and estimates,
which involve risks and uncertainties, including those described below and more
specifically in the Business Risks section in Item 1, above. Among these factors
are the following: changes in regional or global economic or political
conditions (including as a result of terrorist attacks and responses to them);
changes in demand for our products; changes in inventories at our customers and
distributors; technological and product development risks; availability of
manufacturing capacity; availability of raw materials; competitors' actions;
loss of key customers; order cancellations or reduced bookings; changes in
manufacturing yields or output; and significant litigation. Factors that may
affect our operating results are described in the Business Risks section in the
quarterly and annual reports we file with the Securities and Exchange
Commission. Such risks and uncertainties could cause actual results to be
materially different from those in the forward-looking statements. Readers are
cautioned not to place undue reliance on forward-looking statements in this
report. It is our current policy to update our business outlook at least twice
each quarter. The first update is near the beginning of each quarter, within the
press release that announces the previous quarter's results. The second update
is within a press release issued approximately two months into each quarter. The
business outlook below is consistent with the outlook included in our February
20, 2002 press release announcing our first quarter update. The current business
outlook is accessible at the Investor Relations section of our website at
investor.fairchildsemi.com. Toward the end of each quarter, we observe a "quiet
period," when the outlook is not updated to reflect management's current
expectations.
45

The quiet period for the first quarter of 2002 will be from March 18, 2002 to
April 23, 2002, when we plan to release our first quarter 2002 results. Except
during quiet periods, the business outlook posted on our website reflects
current guidance unless and until updated through a press release, SEC filing or
other public announcement. During quiet periods, our business outlook, as posted
on our website, announced in press releases and provided in quarterly, annual
and special reports or other filings with the SEC, should be considered to be
historical, speaking as of prior to the quiet period only and not subject to
update by the company. During quiet periods, Fairchild Semiconductor
representatives will not comment about the business outlook or the company's
financial results or expectations.

OUTLOOK

We believe that we reached the bottom of this market slowdown sometime
during the third quarter of 2001 and we expect improving market conditions
throughout 2002. We entered 2002 with our backlog levels roughly equal to our
beginning backlog entering the fourth quarter and have experienced seasonally
strong bookings so far in the first quarter of 2002. We expect our first quarter
revenues to be roughly flat from fourth quarter 2001 levels. As with the fourth
quarter, we expect our foundry revenue to drop more than our trade revenues.
Because our backlog pricing for first quarter is slightly lower than fourth
quarter due the results of annual contract negotiations and aggressive pricing
for mature products, we expect gross margins to be sequentially down as much as
100 to 150 basis points in the first quarter. We expect to hold inventories flat
for the first quarter.

For the remainder of 2002, we expect moderate revenue growth to resume at
historical seasonal rates and expect to increase our gross margins gradually as
we improve factory utilization and continue selling our new products into the
market. While our overall pricing seems to be bottoming, we believe that
currently available industry capacity levels will delay significant price
increases for several more quarters.

We are continuing to cut costs where we can, but we believe we have taken
most of the major cost reduction steps at this point. Cost reduction in 2002
will be mainly due to yield improvements, margin and mix management, exerting
purchasing power with our vendors and overall improvements in productivity.

We expect total R&D and SG&A expenses, excluding amortization of
intangibles, to be flat with fourth quarter 2001 levels. Interest expense will
be in the range of $26 to $27 million per quarter. We expect our depreciation
and amortization to be roughly $33 million for the first quarter and to grow
slowly throughout 2002. We have adopted SFAS 142 and beginning in 2002 will no
longer amortize our goodwill. We expect our amortization of intangibles going
forward to drop to approximately $9.6 million per quarter.

Our capital expenditure plans remain at approximately 10% to 12% of sales
for 2002. Our focus will be on cost reduction and the expansion of our in house
assembly and test capacity for new power products.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Statement (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. SFAS No. 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that an assembled workforce may no longer be accounted for as an identifiable
intangible asset. SFAS No. 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 will also require that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of.

We were required to adopt the provisions of SFAS No. 141, effective in the
third quarter, and are required to adopt SFAS No. 142 effective December 31,
2001. Furthermore, any goodwill and any intangible

46

asset determined to have an indefinite useful life that are acquired in a
purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS No. 142.

Upon adoption of SFAS No. 142, SFAS No. 141 will require us to evaluate our
existing intangible assets and goodwill that were acquired in prior purchase
business combinations, and to make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. Accordingly, we will be required to reassess the useful lives and
residual values of all identifiable intangible assets acquired in purchase
business combinations, and make any necessary amortization period adjustments by
the first quarter of 2002. In addition, to the extent an intangible asset is
then determined to have an indefinite useful life, we will be required to test
the intangible asset for impairment in accordance with the provisions of SFAS
No. 142 during the first quarter of 2002. Any impairment loss will be measured
as of the date of adoption and recognized as the cumulative effect of a change
in accounting principle.

SFAS No. 142 will require us to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this we must identify our reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. We will then have up to six months from the date of adoption
to determine the fair value of each reporting unit and compare it to the
reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and we must perform the second step of the transitional
impairment test. In the second step, we must compare the implied fair value of
the reporting unit's goodwill, determined by allocating the reporting unit's
fair value to all of its assets (recognized and unrecognized) and liabilities in
a manner similar to a purchase price allocation in accordance with SFAS No. 141,
to its carrying amount, both of which would be measured as of the date of
adoption. This second step is required to be completed as soon as possible, but
no later than the end of the year of adoption. Any transitional impairment loss
for goodwill will be recognized as the cumulative effect of a change in
accounting principle in the Company's statement of operations.

As of December 30, 2001, we had unamortized goodwill of $226.5 million,
unamortized assembled workforce of $3.5 million and other unamortized
identifiable intangible assets of $249.8 million, all of which will be subject
to the transition provisions of SFAS No. 141 and SFAS No. 142. Amortization
expense related to goodwill and assembled workforce was $14.3 million and $2.7
million for the year ended December 30, 2001, respectively. Because of the
extensive effort needed to comply with adopting SFAS No. 141 and SFAS No. 142,
it is not practicable to reasonably estimate the impact of adopting these
statements on the Company's financial statements at the date of this report,
including whether any transitional impairment losses will be required to be
recognized as the cumulative effect of a change in accounting principle. We
expect to complete this analysis by April 15, 2002.

SFAS No. 143, Accounting For Asset Retirement Obligations, issued in August
2001, addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and for the associated
retirement costs. SFAS No. 143, which applies to all entities that have a legal
obligation associated with the retirement of a tangible long-lived asset, is
effective for fiscal years beginning after June 15, 2001. We do not expect the
implementation of SFAS No. 143 to have a material impact on our financial
condition or results of operations.

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, issued in October 2001, addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. SFAS No. 144, which applies to
all entities, is effective for fiscal years beginning after December 15, 2001.
We do not expect the implementation of SFAS No. 144 to have a material impact on
our financial condition or results of operations.

47

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. To mitigate these risks, we utilize
derivative financial instruments. We do not use derivative financial instruments
for speculative or trading purposes. All of the potential changes noted below
are based on sensitivity analyses performed on our financial position at
December 30, 2001. Actual results may differ materially.

We use currency forward and combination option contracts to hedge firm
commitments and currency option contracts to hedge anticipated transactions.
Beginning in 2001, similar instruments were also used to hedge a portion of our
forecasted foreign exchange denominated revenues. Gains and losses on these
foreign currency exposures would generally be offset by corresponding losses and
gains on the related hedging instruments, resulting in negligible net exposure
to us. A majority of our revenue, expense and capital purchasing activities are
transacted in U.S. dollars. However, we do conduct these activities by way of
transactions denominated in other currencies, primarily the Korean won,
Malaysian ringgit, Philippine peso, Japanese yen, British pound, and the Euro.
Exposures in the Korean won are minimal as won-denominated revenues and costs
generally offset one another. To protect against reductions in value and the
volatility of future cash flows caused by changes in other foreign exchange
rates, we have established hedging programs. We utilize currency forward
contracts and currency option contracts in these hedging programs. Our hedging
programs reduce, but do not always entirely eliminate, the short-term impact of
foreign currency exchange rate movements. For example, during the twelve months
ended December 30, 2001, an adverse change in any one exchange rate (defined as
20%) over the course of the year would have resulted in an adverse impact on
income before taxes of less than $5.0 million.

We have no interest rate exposure due to rate changes for the 10 1/8%
Senior Subordinated Notes, the 10 3/8% Senior Subordinated Notes, the 10 1/2%
Senior Subordinated Notes or the 5% Convertible Senior Subordinated Notes.
However, we do have interest rate exposure with respect to the revolving credit
facility due to its variable LIBOR pricing. While there was no outstanding
balance on the revolving credit facility at December 30, 2001, we had
outstanding balances during Calendar 2001. For example, a 50 basis point
increase in interest rates would result in increased annual interest expense of
$1.5 million, assuming all borrowing capability was utilized. From time to time,
we may enter into interest rate swaps or interest rate caps, primarily to reduce
interest rate exposure. As of December 30, 2001, we had no such instruments in
place.

48

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

49

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Fairchild Semiconductor International, Inc.:

We have audited the accompanying consolidated balance sheets of Fairchild
Semiconductor International, Inc. and subsidiaries (the "Company") as of
December 30, 2001 and December 31, 2000, the related consolidated statements of
operations, stockholders' equity (deficit), comprehensive income (loss) and cash
flows for the years ended December 30, 2001 and December 31, 2000, the seven
months ended December 26, 1999, and for the year ended May 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the accompanying financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
December 30, 2001 and December 31, 2000 and the results of its operations and
its cash flows for the years ended December 30, 2001 and December 31, 2000, the
seven months ended December 26, 1999 and for the year ended May 30, 1999, in
conformity with accounting principles generally accepted in the United States of
America.

As discussed in Note 2 to the consolidated financial statements, effective
July 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations," and certain
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," as required
for goodwill and intangible assets resulting from business combinations
consummated after June 30, 2001.

KPMG LLP

January 25, 2002
Boston, Massachusetts

50

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.
51

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.
52

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

See accompanying notes to consolidated financial statements.
53

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements
54

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

See accompanying notes to consolidated financial statements.
55

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION

BACKGROUND

Fairchild Semiconductor International, Inc. ("Fairchild International" or
the "Company") designs, develops and markets analog, discrete, interface and
logic, non-volatile memory and optoelectronic semiconductors through its
wholly-owned subsidiary Fairchild Semiconductor Corporation ("Fairchild"). The
Company is focused solely on multi-market products. Multi-market products are
building block components for virtually all electronic devices, from
sophisticated computers and internet hardware to telecommunications equipment to
household appliances. Because of their basic functionality, these products
provide customers with greater design flexibility and improve the performance of
more complex devices or systems. Given such characteristics, its products have a
wide range of applications and are sold to customers in the personal computer,
industrial, telecommunications, consumer electronics and automotive markets.

The Company is headquartered in South Portland, Maine and has manufacturing
operations in South Portland, Maine, Loveland, Colorado, West Jordan, Utah,
Mountaintop, Pennsylvania, Cebu, the Philippines, Penang, Malaysia, Kuala
Lumpur, Malaysia, Singapore, Bucheon, South Korea and Wuxi, China.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FISCAL YEAR

During 1999, the Company changed its fiscal year end from the last Sunday
in May to the last Sunday in December. The Company's results for the years ended
December 30, 2001 (Calendar 2001), December 31, 2000 (Calendar 2000), for the
seven months ended December 26, 1999 (Stub Year 1999) and for the fiscal year
ended May 30, 1999 (Fiscal 1999) consist of 52 weeks, 53 weeks, 30 weeks, and 52
weeks, respectively.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts and operations
of the Company and its wholly-owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated.

REVENUE RECOGNITION

Revenue from the sale of semiconductor products is recognized when title
transfers to the customer, which is generally upon shipment. No revenue is
recognized unless there is persuasive evidence of an arrangement, the price to
the buyer is fixed or determinable, and collectibility of the sales price is
reasonably assured. A provision for estimated returns and allowances is recorded
at the time of shipment. Contract manufacturing revenues (foundry services) are
recognized upon completion of the contracted services.

RESEARCH AND DEVELOPMENT COSTS

The Company's research and development expenditures are charged to expense
as incurred.

RELATED PARTY ACTIVITY

The Company was formed on March 10, 1997, for the purpose of purchasing the
discrete, logic and non-volatile memory business of National Semiconductor
Corporation (the Recapitalization). In conjunction with this transaction,
Fairchild International and National Semiconductor executed several agreements,
which governed the performance of manufacturing services by Fairchild
International on behalf of National Semiconductor and by National Semiconductor
on behalf of Fairchild International. In addition, National Semiconductor
provided a number of business support services to Fairchild International. These
agreements expired at various dates through May 2000.

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is recorded at cost and is generally
depreciated based upon the following estimated useful lives: buildings and
improvements, ten to thirty years, and machinery and equipment, three to ten
years. Depreciation is principally provided under the straight-line method.

INVESTMENTS

Investments in which the Company's interest is less than 20% and which are
not classified as available-for-sale securities are carried at the lower of cost
or net realizable value unless it is determined that the Company exercises
significant influence over the investee company, in which case the equity method
of accounting is used. For those investments in affiliates in which the
Company's voting interest is between 20% and 50%, the equity method of
accounting is generally used. Under this method, the investment balance,
originally recorded at cost, is adjusted to recognize the Company's share of net
earnings or losses of the affiliates as they occur, limited to the extent of the
Company's investment in, advances to and commitments for the investee.

The Company assesses the need to record impairment losses on investments
and record such losses when the impairment of an investment is determined to be
other than temporary in nature. These impairment losses are reflected in "other
income (expense), net" in the Company's results of operations. During Calendar
2001, the Company recorded a $4 million charge to operations for the write-off
of an equity investment.

GOODWILL AND INTANGIBLE ASSETS

Goodwill is recorded when the consideration paid for acquisitions exceeds
the fair value of net tangible and intangible assets acquired. In June 2001, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 141 Business
Combinations and SFAS No. 142 Goodwill and Other Intangible Assets. SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations completed after June 30, 2001. SFAS No. 142 requires that goodwill
and other intangible assets with indefinite useful lives no longer be amortized,
but rather be tested annually for impairment. In accordance with SFAS No. 141,
goodwill recorded in conjunction with the Company's acquisition of Impala Linear
Corporation in September 2001 was not amortized (See Note 16).

Goodwill acquired prior to June 30, 2001 and other acquisition-related
intangibles are amortized on a straight-line basis over their estimated lives,
which are generally three to fifteen years.

OTHER ASSETS

Other assets include deferred financing costs, which represent costs
incurred related to the issuance of the Company's long-term debt. The costs are
being amortized using the effective interest method over the related term of the
borrowings, which ranges from five to ten years, and are included in interest
expense. Also included in other assets are mold and tooling costs. Molds and
tools are amortized over their expected useful lives, generally one to three
years.

57

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL

The Company evaluates the recoverability of long-lived assets not held for
sale, including intangible assets, by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows of certain long-lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair values. Estimates of
fair value may be determined based upon quotes or a projected discounted cash
flow, using a discount rate determined by our management to be commensurate with
our cost of capital and the risk inherent in our current business model.
Impairment charges related to restructuring actions are more fully discussed in
Note 11.

CURRENCIES

The Company's functional currency for all operations worldwide is the U.S.
dollar. Accordingly, gains and losses from translation of foreign currency
financial statements are included in current results. In addition, cash
conversion of foreign currency and foreign currency transactions are included in
current results.

FOREIGN CURRENCY HEDGING

The Company utilizes various derivative financial instruments to manage
market risks associated with the fluctuations in foreign currency exchange
rates. It is the Company's policy to use derivative financial instruments to
protect against market risk arising from the normal course of business. The
criteria the Company uses for designating an instrument as a hedge include the
instrument's effectiveness in risk reduction and one-to-one matching of
derivative instruments to underlying transactions (See Note 17).

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of investments and trade
accounts receivable. The Company maintains cash and cash equivalents with high
credit quality financial institutions based upon the Company's analysis of that
financial institution's relative credit standing. The Company sells its products
to distributors and original equipment manufacturers involved in a variety of
industries including computing, consumer, communications, automotive and
industrial. The Company has adopted credit policies and standards to accommodate
industry growth and inherent risk. The Company performs continuing credit
evaluations of its customers' financial condition and requires collateral as
deemed necessary. Reserves are provided for estimated amounts of accounts
receivable that may not be collected.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, accounts receivable and
payable, and accrued liabilities approximate fair value due to the short-term
maturities of these assets and liabilities. Fair values of long term debt,
interest rate swaps and caps, currency forward contracts and currency options
are based on quoted market prices or pricing models using prevailing financial
market information at the date of measurement (See Note 14).

USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent 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.

58

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

NET INCOME (LOSS) PER COMMON SHARE

Basic income (loss) per share was computed by dividing net income (loss)
applicable to common stockholders by the weighted average shares of common stock
outstanding. Diluted earnings per share assume that any dilutive convertible
debt were converted from the date of issuance in 2001, with the related effect
on net income (loss) and outstanding common shares adjusted accordingly. It also
gives effect to outstanding common shares outstanding for all dilutive
outstanding stock options.

The following table reconciles basic to diluted weighted average shares
outstanding and net income (loss) to net income (loss) applicable to common
stockholders:

Options to purchase 4,547,384, 7,478,080, 82,435, and 4,282,570 shares of
common stock were outstanding at December 30, 2001, December 31, 2000, December
26, 1999, and May 30, 1999, respectively, but were not included in the
computation of diluted earnings per share because the effect of including such
options would have been anti-dilutive. In addition, at December 30, 2001, $1.2
million was not included in the computation of net income (loss) and 1,117,216
of potential common shares were not included in the computation of diluted
earnings per share as a result of the assumed conversion of the convertible
senior subordinated notes, because the effect would have been anti-dilutive.

EMPLOYEE STOCK PLANS

The Company accounts for its stock option plans and its stock purchase plan
in accordance with SFAS No. 123, Accounting for Stock-Based Compensation. As
permitted by SFAS No. 123, we measure compensation cost in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB No. 25"), and related interpretations. The pro forma impact on
earnings has been disclosed in the notes to the consolidated financial
statements as required by SFAS No. 123 (see Note 6). In March 2000, the FASB
issued Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25. FIN 44
clarifies the application of APB No. 25 for certain issues, including the
definition of an employee, the treatment of the acceleration of stock options
and the accounting treatment for options assumed in business combinations. FIN
44 became

59

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

effective on July 1, 2000, but is applicable for certain transactions dating
back to December 1998. The adoption of FIN 44 did not have a material impact on
the Company's financial position or results of operations.

RECLASSIFICATION

Certain prior year amounts have been reclassified to conform with the
current year presentation.

NOTE 3 -- FINANCIAL STATEMENT DETAILS

60

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4 -- LONG-TERM DEBT

Long-term debt consists of the following at:

REVOLVING CREDIT FACILITY

On June 6, 2000, Fairchild entered into a new Senior Credit Facilities
Agreement ("Credit Agreement") with a syndicate of financial institutions in
order to refinance the facilities under an existing credit agreement. Under this
refinancing, Fairchild converted approximately $117.8 million of outstanding
senior term debt into a new revolving credit line ("Revolving Credit Facility")
with total borrowing capacity of $300.0 million and a maturity of June 6, 2004.

In connection with the refinancing, Fairchild paid approximately $2.1
million in deferred financing costs and wrote-off $3.6 million of deferred
financing costs associated with the retired term debt. Borrowings under the
Credit Agreement accrue interest based on either the bank's rate or the
Eurodollar rate, at the option of the Company. The interest rate was 3.6% and
7.8% for the Revolving Credit Facility at December 30, 2001 and December 31,
2000, respectively. Borrowings under the Credit Agreement are secured by a
pledge of common stock of the Company and its subsidiaries. At December 30,
2001, Fairchild had outstanding letters of credit totaling $0.8 million. These
outstanding letters of credit reduce the amount available under the Revolving
Credit Facility to $299.2 million. Fairchild pays a commitment fee of 0.5% per
annum of the unutilized commitments under the Revolving Credit Facility.

CONVERTIBLE SENIOR SUBORDINATED NOTES

On October 31, 2001, Fairchild issued $200 million aggregate principal
amount of 5.0% Convertible Senior Subordinated Notes due November 1, 2008. The
notes are guaranteed by the Company and its domestic subsidiaries. The notes are
unsecured obligations and convertible, at the option of the holder, into common
stock of the Company at a conversion price of $30.00 per share, subject to
certain adjustments. The

61

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

notes and the guarantees rank pari passu in right of payment with Fairchild
Semiconductor Corporation's existing senior subordinated notes and the
guarantees thereof, and with any future senior subordinated indebtedness.

SENIOR SUBORDINATED NOTES

On January 31, 2001, Fairchild issued $350.0 million of 10 1/2% Senior
Subordinated Notes due February 1, 2009 (the "10 1/2% Notes") at face value.
Interest on the notes is paid semi-annually on February 1 and August 1 of each
year, and the first interest payment was made on August 1, 2001. The 10 1/2%
Notes are unsecured and are subordinated to all existing and future senior
indebtedness of Fairchild. Fairchild may redeem the notes on or after February
1, 2005 and, prior to February 1, 2004, it may redeem up to 35% of the 10 1/2%
Notes from the proceeds of certain equity offerings at redemption prices ranging
from 100% to approximately 105% of the principal amount.

On April 7, 1999, Fairchild issued $300.0 million of 10 3/8% Senior
Subordinated Notes (the "10 3/8% Notes") at face value. The 10 3/8% Notes pay
interest on April 1 and October 1 of each year commencing October 1, 1999 and
are due October 1, 2007. The 10 3/8% Notes are unsecured and are subordinated to
all existing and future senior indebtedness of Fairchild. Until April 1, 2002,
Fairchild can redeem an amount not to exceed 35% of the 10 3/8% Notes with
proceeds raised from certain public equity offerings. On or after April 1, 2003,
the 10 3/8% Notes are redeemable by Fairchild, in whole or in part, at
redemption prices ranging from 100% to approximately 105% of the principal
amount.

On March 11, 1997, Fairchild issued $300.0 million of 10 1/8% Senior
Subordinated Notes (the "10 1/8% Notes" and, together with the 10 3/8% Notes and
the 10 1/2% Notes, the "Notes") at face value. The 10 1/8% Notes pay interest on
March 15 and September 15 of each year commencing September 15, 1997. The
10 1/8% Notes are unsecured and are subordinated to all existing and future
senior indebtedness of Fairchild. The 10 1/8% Notes are redeemable by Fairchild,
in whole or in part, on or after March 15, 2002 at redemption prices ranging
from 100% to approximately 105% of the principal amount. Fairchild is required
to redeem $150.0 million principal amount of 10 1/8% Notes on March 15, 2005 and
$75.0 million principal amount of 10 1/8% Notes on March 15, 2006 and 2007,
respectively, in each case at a redemption price of 100% of the principal amount
plus accrued interest to the date of redemption. During December 2000, the
Company repurchased 10 1/8% Notes with a face value of $15.0 million.

The payment of principal and interest on the Credit Agreement and the Notes
is fully and unconditionally guaranteed by Fairchild International. Fairchild
International is the parent company of Fairchild and currently conducts no
business and has no significant assets other than the capital stock of
Fairchild. Fairchild has seventeen direct subsidiaries and six indirect
subsidiaries, of which four direct subsidiaries, Fairchild Semiconductor
Corporation of California ("Fairchild California"), KOTA Microcircuits, Inc., QT
Optoelectronics, Inc., and QT Optoelectronics are guarantors on the Credit
Agreement and the Notes. The remaining direct and indirect subsidiaries are
foreign-based and do not guarantee either the Credit Agreement or the Notes.

The Company's senior credit facility and the indentures under which the
notes were issued contain various restrictions and covenants. The restrictive
covenants include limitations on consolidations, mergers and acquisitions,
restrictions on creating liens, restrictions on paying dividends or making other
similar restricted payments, restrictions on asset sales, restrictions on
capital expenditures and limitations on incurring indebtedness, among other
restrictions, with which the Company was in compliance at December 30, 2001. In
addition, the senior credit facility contains covenants relating to financial
ratios including a minimum interest coverage ratio and a maximum senior leverage
ratio. Provided there are no further outstanding balances under the senior
credit facility, compliance with these ratios is not required until March 31,
2003. The senior credit facility also limits the Company's ability to modify its
certificate of incorporation, bylaws, shareholder agreements, voting trusts or
similar arrangements. In addition, the senior credit facility and the indentures

62

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

governing all senior subordinated notes, contain additional restrictions
limiting the ability of the Company's subsidiaries to pay dividends or make
advances to the Company. Aggregate maturities of long-term debt for each of the
next five years and thereafter are as follows:

At December 30, 2001, the Company also has approximately $12.0 million of
undrawn credit facilities at certain of its foreign subsidiaries.

NOTE 5 -- INCOME TAXES

In conjunction with the acquisition of the power device business, the
Korean government granted a ten year tax holiday to Fairchild Korea
Semiconductor Ltd. The original exemption was 100% for the first seven years of
the holiday and 50% for the remaining three years of the holiday. In Calendar
2000, the tax holiday was extended such that the exemption amounts were
increased to 75% in the eighth year and a 25% exemption was added to the
eleventh year. Taxes exempted include income taxes, dividend withholding taxes,
acquisition tax, registration tax, property tax and aggregate land tax. As such,
no current provision for income taxes for Korea has been provided. The tax
holiday increased net income by $3.2 million, or $0.03 per diluted common share
for Calendar 2001, $32.0 million or $0.32 per diluted common share for Calendar
2000 and $18.0 million or $0.22 per diluted common share for Stub Year 1999.

Total income tax provision (benefit) for income taxes was allocated as
follows:

63

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The provision (benefit) for income taxes attributable to income from
continuing operations for Calendar 2001, Calendar 2000, Stub Year 1999, and
Fiscal 1999 consisted of the following:

The reconciliation between the income tax rate computed by applying the
U.S. federal statutory rate and the reported worldwide tax rate on income (loss)
from continuing operations is as follows:

64

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences in the recognition of income and
expense for tax and financial reporting purposes that give rise to significant
portions of the deferred tax assets and the deferred tax liabilities at December
30, 2001 and December 31, 2000 are presented below:

The deferred tax valuation allowance increased by $2.5 million and
decreased by $79.0 million for Calendar 2001 and Calendar 2000, respectively. In
assessing the realizability of deferred tax assets, the Company considered its
current and future taxable earnings and the expected timing of the reversal of
temporary differences. During Calendar 2000, the Company reversed all of the
valuation allowance associated with its domestic deferred tax assets, with the
exception of foreign tax credits, as the Company believes that the deferred tax
assets will more likely than not be realized. Deferred tax assets and
liabilities are classified in the consolidated balance sheet based on the
classification of the related asset or liability.

Net operating loss, research and development credit and foreign tax credit
carryforwards totaled $135.3 million, $0.9 million and $2.4 million,
respectively, as of December 30, 2001. The net operating losses expire in 2018
through 2021. The research and development credits expire in varying amounts in
2012 through 2021. The foreign tax credits expire in varying amounts in 2002
through 2006. Due to the uncertainty of utilization before expiration, valuation
allowances have been recorded against the benefits associated with foreign tax
credits. The Company also has alternative minimum tax credit carryforwards of
$2.2 million, which are available to reduce future federal regular income taxes
over an indefinite period. In addition, the Company has Malaysian unabsorbed
capital allowance of approximately $4.7 million, which can be used to offset
future year's taxable income of that Malaysian subsidiary.

The Company's ability to utilize its net operating loss and credit
carryforwards may be limited in the future if the Company experiences an
ownership change. An ownership change occurs when the ownership percentage of 5%
or greater stockholders changes by more than 50% over a three year period. In
Calendar 2000, the Company experienced an ownership change as a result of the
follow-on public offering; such ownership change did not result in a material
limitation on the utilization of the loss and credit carryforwards.

Deferred income taxes have not been provided for the undistributed earnings
of the Company's foreign subsidiaries, which aggregated approximately $224.2
million at December 30, 2001. The Company plans to reinvest all such earnings
for future expansion. The undistributed earnings will be subject to U.S.
taxation

65

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

upon repatriation as dividends to the U.S. parent. The amount of taxes
attributable to these undistributed earnings is not practicably determinable.

NOTE 6 -- STOCK BASED COMPENSATION

The Company has two stock option plans. Under the Fairchild Semiconductor
Restated Stock Option Plan (Restated Plan), executives, key employees and
non-employee directors may be granted options to purchase shares of the
Company's authorized but unissued common stock. The Company also has a stock
option plan (the 2000 Executive Stock Option Plan), under which key executives,
including officers, may be granted stock options.

Under the Restated Plan, the Company may grant options for up to 23,746,327
of Class A common stock. At December 30, 2001, 15,134,000 options were
outstanding and 5,629,099 were available to be granted. Options granted under
the Plans may be either (a) options intended to constitute incentive stock
options ("ISOs") under the Internal Revenue Code or (b) non-qualified stock
options.

The establishment of an exercise price of each option granted under the
Restated Plan is determined by a Committee of the Company's Board of Directors
(the "Committee"). The maximum term of any option is ten years from the date of
grant for incentive stock options and ten years and one day from the date of
grant for non-qualified stock options. Options granted under the Plan are
exercisable at the determination of the Committee, generally vesting ratably
over approximately four years.

Under the 2000 Executive Stock Option Plan, the Company may grant options
for up to 3,500,000 shares of common stock. At December 30, 2001, 175,000 shares
were outstanding and 3,325,000 shares were available to be granted. Options
granted under the Plan are intended to be non-qualified options. The exercise
price and term of each option granted under the 2000 Executive Plan is
determined by the Committee. Options granted under the 2000 Executive Plan are
exercisable at the determination of the Committee. Individuals receiving options
under the Plan may not receive in any one year options to purchase more than
1,500,000 shares of common stock.

During 2001, the Company implemented a voluntary stock option exchange
program for the 2000 Executive Stock Option Plan. Under the program, executives
could elect to have their outstanding options cancelled on August 13, 2001. New
stock options will be issued to replace cancelled options on or after February
14, 2002 at the then fair market value. The number of replacement options that
may be issued will be equal to 55% of the options surrendered.

A summary of the status of the Company's stock option plans as of December
30, 2001, December 31, 2000, December 26, 1999, and May 30, 1999, and changes
during the periods then ended are presented in the table below:

66

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Information with respect to stock options outstanding and stock options
exercisable at December 30, 2001 is as follows:

The Company maintains the Fairchild Semiconductor International, Inc.
Employee Stock Purchase Plan, which started on April 1, 2000. The stock purchase
plan authorizes the issuance of up to 4,000,000 shares of common stock in
quarterly offerings to eligible employees at a price that is equal to 85 percent
of the lower of the common stock's fair value at the beginning or the end of a
quarterly period. During Calendar 2001, 437,362 shares were issued under the
stock purchase plan at a weighted average price of $12.05 per share.

The Company accounts for its stock-based compensation plans in accordance
with the provisions of APB No. 25. As such, compensation expense is recorded on
the date of grant only if the current market price of the underlying stock
exceeds the exercise price. During Calendar 2000, Stub Year 1999 and Fiscal
1999, the Company granted 5,000, 1,358,700 and 25,600 stock options,
respectively, with exercise prices less than the market price of the underlying
stock on the date of the grant, and recorded total deferred compensation of $0.2
million, $13.6 million and $0.3 million, respectively. No such options were
granted during Calendar 2001.

Had compensation cost for the Company's stock Plans been determined
consistent with SFAS Statement No. 123, the Company would have reported the
following pro forma information:

The Company estimates the fair value of each option as of the date of grant
using a Black-Scholes pricing model with the following weighted average
assumptions:

67

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7 -- RETIREMENT PLANS

The Company sponsors the Fairchild Personal Savings and Retirement Plan
(the "Retirement Plan"), a contributory savings plan which qualifies under
section 401(k) of the Internal Revenue Code. The Retirement Plan covers
substantially all employees in the United States. The Company provides a
matching contribution equal to 75% of employee elective deferrals up to a
maximum of 6% of an employee's annual compensation. The Company also maintains a
non-qualified Benefit Restoration Plan, under which employees who have otherwise
exceeded annual IRS limitations for elective deferrals can continue to
contribute to their retirement savings. The Company matches employee elective
deferrals to the Benefit Restoration Plan on the same basis as the Retirement
Plan. During Calendar 2001, the 401(k) match was suspended for substantially all
employees.

Total expense recognized under these plans was $4.0 million, $4.4 million,
$2.3 million, and $3.5 million for Calendar 2001, Calendar 2000, Stub Year 1999
and Fiscal 1999, respectively.

Employees in Korea who have been with the Company for over one year are
entitled by Korean law to receive lump-sum payments upon termination of their
employment. The payments are based on current rates of pay and length of service
through the date of termination. It is the Company's policy to accrue for this
estimated liability as of each balance sheet date. Amounts recognized as expense
were $5.6 million, $6.3 million, $2.4 million and $0.3 million for Calendar
2001, Calendar 2000, Stub Year 1999 and Fiscal 1999, respectively.

Employees in Malaysia participate in a defined contribution plan. The
Company has funded accruals for this plan in accordance with statutory
regulations in Malaysia. Contributions made by the Company under this plan were
$1.9 million, $2.2 million, $0.9 million, and $1.2 million for Calendar 2001,
Calendar 2000, Stub Year 1999, and Fiscal 1999, respectively.

Employees in the Philippines participate in a defined benefit plan. The
benefits are based on years of service and a multiple of the employee's final
monthly salary. The Company's funding policy is to contribute annually the
amount necessary to maintain the plan on an actuarially sound basis.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future. The
contributions made for Calendar 2001, Calendar 2000, Stub Year 1999, and Fiscal
1999 were not material to the consolidated financial statements.

Employees in England, Italy, Germany, Hong Kong, China, Singapore and Japan
are also covered by a variety of defined benefit and/or defined contribution
pension plans that are administered consistent with local statutes and
practices. The contributions made under each of the respective plans for
Calendar 2001, Calendar 2000, Stub Year 1999, and Fiscal 1999 were not material
to the consolidated financial statements.

Certain executives of the Company are eligible for post-retirement health
benefits, which are being accrued ratably over the three year term of the
related employment agreements entered into by the executives with the Company in
Calendar 2000. At December 30, 2001, the accrual for post-retirement health
benefits is not material to the consolidated financial statements.

NOTE 8 -- LEASE COMMITMENTS

Rental expense related to certain facilities and equipment of the Company's
plants was $21.9 million, $16.1 million, $8.2 million, and $12.5 million for
Calendar 2001, Calendar 2000, Stub Year 1999, and Fiscal 1999, respectively.

68

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum lease payments under noncancelable operating leases as of
December 30, 2001 are as follows:

NOTE 9 -- REDEEMABLE PREFERRED STOCK

Concurrent with the Recapitalization, the Company authorized 70,000 shares
of redeemable preferred stock at a par value of $.01, all of which were
designated as 12% Series A cumulative compounding preferred stock (the
"Redeemable Preferred Stock"). The Redeemable Preferred Stock had a stated value
of $1,000 per share and was entitled to annual dividends when, as and if
declared, which dividends were cumulative, whether or not earned or declared,
and accrued at a rate of 12%, compounding annually. On August 9, 1999, in
connection with the IPO, all of the shares of the Company's previously
authorized Redeemable Preferred Stock were converted into shares of the
Company's Class A Common Stock. Each preferred stockholder received 75.714571
shares of Class A Common Stock per share of preferred stock, reflecting the
$1,000 liquidation value of the preferred stock, plus accumulated unpaid
dividends to the date of conversion, converted into common stock on the basis of
$17.39 per share. As a result of the conversion, 70,000 shares of preferred
stock were converted into 5,300,020 shares of common stock. The total
liquidation value of the Redeemable Preferred Stock at August 9, 1999 was $92.2
million.

NOTE 10 -- STOCKHOLDERS' EQUITY

PREFERRED STOCK

Under the Company's Restated Certificate of Incorporation, the Company's
Board of Directors has the authority to issue up to 100,000 shares of $0.01 par
value preferred stock, but only in connection with the adoption of a stockholder
rights plan. At December 30, 2001, no shares were issued.

PUBLIC OFFERINGS

On January 25, 2000, the Company completed a follow-on public offering of
23,500,000 shares of its Class A Common Stock at a price of $33.4375 per share.
In addition, the Company sold 1,410,000 shares and 2,115,000 shares were sold by
an existing stockholder pursuant to the underwriter's overallotment option. The
underwriting discount was $1.50 per share. The 23,500,000 shares included
6,140,880 newly issued shares sold by the Company and 17,359,120 shares sold by
existing stockholders, including all remaining shares owned by National
Semiconductor, the Company's former parent. The Company did not receive any
proceeds from shares sold by existing stockholders. The net proceeds to the
Company after the underwriting discount and other related expenses were
approximately $240.0 million.

On August 9, 1999, the Company completed an initial public offering ("IPO")
of its Class A Common Stock and sold an aggregate of 20,000,000 shares at a
price of $18.50 per share. The underwriting discount was $1.11 per share. The
net proceeds after the underwriting discount and other IPO expenses were
approximately $345.0 million. In addition, National Semiconductor Corporation,
one of the Company's principal stockholders, sold 3,000,000 additional shares
pursuant to the underwriters' overallotment option. The Company

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

received no proceeds from this sale, which closed on August 12, 1999. Concurrent
with the IPO, all of the shares of the Company's previously authorized 12%
Series A Cumulative Compounding Preferred Stock were converted into shares of
the Company's Class A Common Stock.

COMMON STOCK

The Company has authorized 340,000,000 shares of common stock at a par
value of $.01 per share, divided into two classes consisting of 170,000,000
shares of Class A stock and 170,000,000 shares of Class B stock. The holders of
Class A stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. Except as required by law, the
holders of Class B stock have no voting rights. A holder of either class of
common stock may convert any or all of his shares into an equal number of shares
of the other class of common stock provided that in the case of a conversion
from Class B stock, which is nonvoting, into Class A stock, which is voting,
such conversion would be permitted only to the extent that the holder of shares
to be converted would be permitted under applicable law to hold the total number
of shares of Class A stock which would be held after giving effect to the
conversion.

Effective March 7, 2001, affiliates of Citigroup Inc., one of the Company's
principal stockholders, converted 17,281,000 shares of Class B Common Stock into
an equal number of shares of Class A Common Stock. As a result, no Class B
Common Stock shares were outstanding at December 30, 2001. Total common shares
outstanding were not affected by this transaction. Shares of the Company's Class
A Common Stock and Class B Common Stock are identical in all respects, except
that Class B shares have no voting rights, other than as provided by law, and
there is no public market for Class B shares.

Under a shelf registration statement filed with the Securities and Exchange
Commission on December 18, 2000, the Company may issue up to 10,000,000 shares
of additional common stock. Shares of stock covered by this shelf registration
statement may be issued from time to time by Fairchild International in
connection with strategic acquisitions of other businesses, assets or
securities, authorized by the company's board of directors. The amounts, prices
and other terms of share issuances would be determined at the time of particular
transactions.

NOTE 11 -- RESTRUCTURING AND IMPAIRMENTS

The Company assesses the need to record restructuring charges in accordance
with EITF No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring), EITF No. 95-3, Recognition of Liabilities in Connection
with a Purchase Business Combination and SAB No. 100, Restructuring and
Impairment Charges. In accordance with this guidance, management must execute an
exit plan that will result in the incurrence of costs that have no future
economic benefit. Also under the terms of EITF No. 94-3, a liability for the
restructuring charges is recognized in the period management approves the
restructuring plan.

During Calendar 2001, the Company recorded pre-tax restructuring and
impairment charges of $21.4 million. In the first quarter, the Company recorded
an $8.3 million charge for asset impairments relating to the consolidation of
the five-inch wafer fabrication line in South Portland, Maine. At December 30,
2001, substantially all of these assets have been disposed of. Employee
separation costs of $1.2 million, $3.9 million, $0.8 million and $7.2 million
were recorded in the first, second, third and fourth quarters, respectively. The
charges for employee separation arrangements provided for severance and other
benefits associated with the approximately 1,000 salaried, hourly and temporary
employees severed as a result of these actions. The affected employees, who
worked in production, engineering, sales and marketing and administration, were
located in the United States, the Philippines, Malaysia, and Europe.

Restructuring and impairments in Calendar 2000 include gains in the first
quarter resulting from additional funds received in connection with the sale of
the Company's former Mountain View, California

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facility ($3.5 million) and the adjustment of restructuring reserves upon final
execution of several prior year actions ($2.1 million).

In the first quarter of Fiscal 1999, in connection with management's plan
to reduce costs and improve operating efficiencies, the Company recorded a
pre-tax restructuring charge of approximately $4.5 million. The restructuring
charge consisted of $0.8 million related to non-cash asset impairments and $3.7
million of employee separation costs. The asset impairments relate to idle
production equipment in the Company's former Mountain View, California and West
Jordan, Utah facilities. These assets have been disposed of. The charge for
employee separation arrangements provided for severance and other benefits
associated with the approximately 600 salaried, hourly and temporary employees
severed as a result of this action. The affected employees, who worked in
production, engineering, sales and marketing and administration, were located in
the United States and the Philippines.

In the third quarter of Fiscal 1999, the Company recorded a pre-tax
restructuring charge of approximately $2.7 million related to the transfer of
all assembly and test work performed at its former Mountain View, California
facility to its Penang, Malaysia facility. The charge consisted of $1.9 million
of non-cash asset impairments and $0.8 million for severance and other benefits
for 54 production employees terminated as a result of the transfer. The asset
impairments consisted of production equipment that was idled as a result of this
action. These assets have been disposed of.

In connection with the sale of its former Mountain View, California
facility on April 2, 1999, the Company announced the transfer of all wafer
production to its South Portland, Maine facility. In the fourth quarter of
Fiscal 1999, the Company recorded a pre-tax restructuring charge of
approximately $10.0 million, which consisted of $2.6 million of non-cash asset
impairments, $4.0 million for severance and employee benefits, $1.9 million for
a loss on sale of the facility and $1.5 million for other exit costs. This
action resulted in the termination of approximately 170 salaried, hourly and
temporary employees, all of whom worked for the Company's Analog and Mixed
Signal Division in Mountain View or San Diego, California in the areas of
production, engineering, selling and marketing and administration. Other exit
costs include $1.0 million paid under a non-cancelable operating lease after
operations ceased as well as other incremental costs associated with the
facility closure. The non-cash asset impairments primarily consisted of
production equipment that was not transferred to South Portland, Maine. These
assets have all been disposed of.

During the fourth quarter of Fiscal 1999, the Company also recorded a
pre-tax charge of $4.1 million related to the restructuring of its memory
product lines, whereby the Company streamlined its operations to focus solely on
its most profitable products. The charge included $3.9 million for non-cash
asset impairments and $0.2 million for employee separation costs, all of which
were paid by May 30, 1999. The non-cash impairments consisted of production
equipment and other equipment in West Jordan, Utah, and Sunnyvale, California
that became idle as a result of the plan. The assets have been disposed of.

The Memory Division product line restructuring plan also included the
write-off of inventories ($9.9 million) as well as provisions for additional
distribution sales allowances required as a result of this action ($5.5
million). These costs have been excluded from the restructuring charge and have
been recorded as a reduction against net sales in the case of the distribution
sales allowances and as a charge to cost of sales for the inventory write-offs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the previously mentioned restructuring and
impairment charges for Calendar 2001 (in millions):

Accrual balance as of December 31, 2000..................... $ --
Accrual................................................... 21.4
Cash payments............................................. (9.7)
Non-cash items............................................ (10.4)
------
Accrual balance as of December 30, 2001..................... $ 1.3
======

The Company expects to complete payment of restructuring accruals within
the next three months.

NOTE 12 -- RELATED PARTY TRANSACTIONS

The Company provides contract manufacturing services to National
Semiconductor, which held an equity interest in the Company. On January 25,
2000, National Semiconductor sold its remaining ownership interest in the
Company and, as such, is no longer a related party.

During Stub Year 1999 and Fiscal 1999 National Semiconductor provided
business support services under a transition services agreement. The amounts for
contract manufacturing services for National Semiconductor and business support
services provided by National Semiconductor to the Company are as follows:

As a result of tax consequences associated with their stock ownership in
the Company, loans aggregating $5.0 million were made to the management
investors for payment of their individual federal and state tax liabilities in
June 1998. These loans, along with accrued and unpaid interest were cancelled
upon the Company's initial public offering of its stock. As a result of the
cancellation of these loans, the Company also paid the management investors
amounts sufficient to enable them to discharge all associated individual tax
liabilities. A total charge of $8.3 million was recorded in selling, general and
administrative expense during Stub Year 1999 as a result of these transactions.

NOTE 13 -- CONTINGENCIES

The Company's facilities in South Portland, Maine and West Jordan, Utah
have ongoing remediation projects to respond to certain releases of hazardous
substances that occurred prior to the Recapitalization. Pursuant to the Asset
Purchase Agreement, National Semiconductor has agreed to indemnify the Company
for the future costs of these projects. The costs incurred to respond to these
conditions were not material to the consolidated financial statements for any
period presented.

The Company's former Mountain View, California, facility is located on a
contaminated site under the Comprehensive Environmental Response, Compensation
and Liability Act. Under the terms of the Acquisition Agreement with Raytheon
Company, dated December 31, 1997, Raytheon Company has assumed responsibility
for all remediation costs or other liabilities related to historical
contamination.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's facility in Mountaintop, Pennsylvania has an ongoing
remediation project to respond to releases of hazardous materials that occurred
prior to acquisition of the discrete power products ("DPP") business from
Intersil Corporation ("Intersil"). Under the Asset Purchase Agreement, Intersil
indemnified us for specific environmental issues covered under the asset
purchase agreement between the previous owner, Harris Corporation, and Intersil.

The Company has recently reached an agreement in principle to settle the
patent infringement lawsuit filed by Siliconix Incorporated in the United States
District Court for the Northern District of California. The terms of the
settlement are not material to our financial position and are not expected to
have a material effect on our future results of operations.

During 2001, the Company agreed to settle the patent infringement lawsuit
filed against us and other defendants in 1999 by U.S. Philips Corporation in the
United States District Court for the Southern District of New York. The terms of
the settlement are not material to our financial position and are not expected
to have a material effect on our future results of operations.

In addition, in the normal course of business, the Company is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. All such matters are
subject to uncertainties and outcomes that are not predictable with assurance.
Consequently, the Company is unable to ascertain the ultimate aggregate amount
of monetary liability or financial impact with respect to these additional
matters at December 30, 2001. It is management's opinion that after final
disposition, any monetary liability or financial impact to the Company would not
be material to the Company's financial position, annual results of operations or
cash flows.

NOTE 14 -- FINANCIAL INSTRUMENTS

FAIR VALUE AND NOTIONAL PRINCIPAL OF DERIVATIVE FINANCIAL INSTRUMENTS

The table below shows the fair value and notional principal of the
Company's derivative financial instruments as of December 30, 2001 and December
31, 2000. The notional principal amounts for these instruments provide one
measure of the transaction volume outstanding as of year end and do not
represent the amount of the Company's exposure to credit or market loss. The
estimates of fair value are based on applicable and commonly used pricing models
using prevailing financial market information as of December 30, 2001 and
December 31, 2000. Although the following table reflects the notional principal
and fair value of amounts of derivative financial instruments, it does not
reflect the gains or losses associated with the exposures and transactions that
these financial instruments are intended to hedge. The amounts ultimately
realized upon settlement of these financial instruments, together with the gains
and losses on the underlying exposures will depend on actual market conditions
during the remaining life of the instruments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

A summary table of estimated fair values of other financial instruments is
as follows:

NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

Fairchild designs, develops, manufactures and markets high performance
multi-market semiconductors. The Company is currently organized into three
reportable segments: Analog and Mixed Signal Products Group ("Analog"), Discrete
Products Group ("Discrete") and Interface and Logic Products Group ("Interface
and Logic").

The Company has determined that its Configurable Products business unit and
its Optoelectronics Group do not meet the threshold for a separate reportable
segment under SFAS No. 131, and accordingly these segments' results are included
as part of the "Other" category for all periods presented. Management evaluates
the contract manufacturing business differently than its other operating
segments due in large part to the fact that it is predominantly driven by
contractual agreements for limited time periods entered into with National
Semiconductor and Samsung Electronics.

In addition to the operating segments mentioned above, the Company also
operates global operations, sales and marketing, information systems, finance
and administration groups that are led by vice presidents who report to the
Chief Executive Officer. The expenses of these groups are allocated to the
operating segments and are included in the operating results reported below. The
Company does not allocate income taxes to its operating segments, and while
interest expense allocations are made for informational purposes, the operating
segments are principally evaluated on operating profit before interest and
taxes.

The Company does not specifically identify and allocate all assets by
operating segment. It is the Company's policy to fully allocate depreciation and
amortization to its operating segments. Operating segments do not sell products
to each other, and accordingly, there are no inter-segment revenues to be
reported. The accounting policies for segment reporting are the same as for the
Company as a whole.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Statement of operations information on reportable segments for Calendar
2001, Calendar 2000, Stub Year 1999, and Fiscal 1999 is as follows:

- ---------------

(1) Includes $5.5 million reduction to trade sales due to the memory
restructuring action in Fiscal 1999.

(2) Other includes in Calendar 2001, $13.8 million of in-process research and
development costs associated with the Company's acquisitions of DPP and
Impala Linear Corporation, and $21.4 million for restructuring; in Calendar
2000, a $3.5 million gain resulting from additional funds received in
connection with the sale of the Company's former Mountain View, California
facility, a $2.1 million gain for the adjustment of restructuring reserves
upon final execution of several prior year actions and $9.0 million of
in-process research and development costs associated with the Company's QT
Optoelectronics, KOTA and Micro Linear acquisitions; in Stub Year 1999, an
$8.3 million charge for the forgiveness of certain loans made to the
Company's management investors for payment of individual income tax
liabilities resulting from their ownership of Fairchild International's
common stock; in Fiscal 1999, charges of $34.0 million for purchased
in-process research and development, $21.3 million for restructuring, $15.4
million for additional charges taken for asset impairments in connection
with the Memory restructuring and $1.1 million of other charges not
allocated to the operating segments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Depreciation and amortization by reportable operating segment were as
follows:

Geographic revenue information is based on the locations of the selling
entities within the indicated geographic areas. No individual foreign country
except Korea is material to total revenues.

Revenues by geographic region were as follows:

In Calendar 2001, Calendar 2000, Stub Year 1999, and Fiscal 1999, National
Semiconductor accounted for 3.9%, 4.3%, 6.9% and 11.0%, respectively, of the
Company's total revenues. In Calendar 2001, Calendar 2000 and in Stub Year 1999,
sales to Samsung Electronics accounted for 10.1%, 8.9% and 7.0%, respectively,
of the Company's total revenues.

Geographic property, plant and equipment balances as of December 30, 2001
and December 31, 2000 are based on the physical locations within the indicated
geographic areas and are as follows:

NOTE 16 -- ACQUISITIONS

On March 16, 2001, the Company completed its acquisition of DPP for a
purchase price of approximately $344.2 million in cash, including related
acquisition expenses, subject to post-closing adjustments. DPP was a

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

leading provider of silicon-based discrete power devices for the computer,
communications, industrial, automotive, and space and defense end-user markets.
The transaction was accounted for as a purchase and DPP's results of operations
since the date of acquisition have been included in the accompanying statement
of operations. The purchase price has been allocated based on estimated fair
values at the date of acquisition. In connection with the DPP acquisition, the
Company recorded a non-recurring charge of $12.8 million for in-process research
and development. This preliminary allocation has resulted in acquired goodwill
of approximately $166.1 million, with the remainder of the purchase price in
excess of the fair value of net tangible assets allocated to various other
intangible assets.

On September 5, 2001, the Company completed its acquisition of Impala
Linear Corporation (Impala) for approximately $4.6 million, subject to
post-closing adjustments, paid in the Company's common stock. Impala designs
analog power management semiconductors for a wide range of portable devices
including laptops, MP3 players, cell phones, portable test equipment and PDA's.
The transaction was accounted for as a purchase and the acquired business's
results of operations since the date of acquisition have been included in the
accompanying statement of operations. The purchase price has been allocated
based on estimated fair values at the date of acquisition. In connection with
the Impala acquisition, the Company recorded a non-recurring charge of $1.0
million for in-process research and development. This preliminary allocation has
resulted in acquired goodwill of approximately $5.1 million. In accordance with
FAS No. 141, goodwill has been estimated to have an indefinite life.

On September 8, 2000, the Company completed its acquisition of the power
management business of Micro Linear Corporation for a purchase price of
approximately $11.0 million in cash. Micro Linear's power management business
consists of analog products including offline power switches, low power battery
management, video filters and bus terminators. The transaction was accounted for
as a purchase and Micro Linear's results of operations since the date of
acquisition have been included in the accompanying statements of operations. In
connection with the Micro Linear acquisition, the Company recorded a
non-recurring charge of $3.3 million for in-process research and development.
The purchase price in excess of the fair value of net tangible and identifiable
intangible assets was recorded as goodwill in the amount of $3.2 million.

On September 8, 2000, the Company also completed its acquisition of KOTA
Microcircuits, Inc. ("KOTA") for approximately $12.1 million, paid in the
Company's common stock. For the KOTA acquisition, the Company issued 247,192
shares of common stock with 59,034 held in escrow. KOTA designs manufactures and
markets high-performance operational amplifiers and other standard linear
products. The transaction was accounted for as a purchase and KOTA's results of
operations since the date of acquisition have been included in the accompanying
statements of operations. In connection with the KOTA acquisition, the Company
recorded a non-recurring charge of $2.5 million for in-process research and
development. The purchase price in excess of the fair value of net tangible and
identifiable intangible assets was recorded as goodwill in the amount of $8.1
million.

On May 28, 2000, the Company completed its acquisition of QT
Optoelectronics, Inc. ("QTO") for approximately $92.0 million, 86.6 percent paid
in the Company's common stock (1,918,002 shares) with the remainder paid in
cash. In addition, in conjunction with the acquisition, the Company assumed and
immediately repaid $14.0 million of QTO's long-term debt. QTO designs,
manufactures and markets LED lamps and displays, infrared components, custom
optoelectronics and optocouplers and is the world's largest independent company
solely focused on optoelectronics. The transaction was accounted for as a
purchase and QTO's results of operations since the date of acquisition have been
included in the accompanying statements of operations. In connection with the
QTO acquisition, the Company recorded a non-recurring charge of $3.2 million for
in-process research and development. The remaining purchase price in excess of
the fair value of net tangible assets was recorded as goodwill in the amount of
$60.3 million and to various other intangible assets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In April 1999, the Company completed the acquisition of the power device
business of Samsung Electronics for a purchase price of approximately $414.9
million, including related acquisition expenses. The power device business
designs, manufactures and markets power discrete semiconductors and standard
analog integrated circuits serving the personal computer, industrial,
telecommunications and consumer electronics markets. The purchase includes all
of the worldwide operations and assets of the power device business, which are
comprised in part of a high volume wafer fabrication plant along with design and
development operations in Bucheon, South Korea, secured services for high volume
assembly and test operations and worldwide sales and marketing operations. The
purchase price was financed through a combination of borrowings under the
Company's Senior Credit Facilities, the 10 3/8% Notes and other borrowings (See
Note 4).

The power device business acquisition was accounted for by the purchase
method of accounting and accordingly, the results of operations of the power
device business are included in the accompanying consolidated financial
statements since the acquisition date. Assets acquired and liabilities assumed
were recorded at their estimated fair values as of the acquisition date. The
purchase price exceeded the fair value of the net tangible assets acquired by
approximately $289.5 million. Approximately $34.0 million of the purchase price
in excess of fair value of net tangible assets was allocated to purchased
in-process research and development. Accordingly, the Company recorded a
non-recurring charge for this purchased in-process research and development
concurrent with the acquisition in Fiscal 1999. The remaining purchase price in
excess of fair value of net tangible assets was allocated to various
identifiable intangible assets.

All acquisitions completed for Calendar 2001 and Calendar 2000 are
immaterial and, therefore, no pro forma results of operations are presented.

The following unaudited pro forma consolidated results of operations are
presented as if the power device business acquisition was made at the beginning
of the period presented below (in millions, except per share amounts):

The pro forma results of operations include adjustments to give effect to
the contracts the Company entered into with Samsung Electronics, additional
depreciation and amortization related to the increased value of acquired fixed
assets and identifiable intangibles, interest expense on debt assumed issued to
finance the purchases, as well as adjustments to eliminate historical expenses
which will not be incurred by the Company. The unaudited pro forma information
is not necessarily indicative of the results of operations that would have
occurred had the acquisitions been made at the beginning of the periods
presented or the future results of the combined operations.

NOTE 17 -- DERIVATIVES

Effective January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities, and SFAS No.
138 Accounting for Certain Derivatives and Hedging Activities -- An Amendment of
FASB Statement No. 133, which modified certain provisions of SFAS No. 133. All
derivatives, whether designated as hedging

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

relationships or not, are required to be recorded on the balance sheet at fair
value. The Company utilizes fair value hedges, as defined by SFAS No. 133 and
SFAS No. 138, to hedge certain foreign currency balance sheet exposures and cash
flow hedges to hedge certain foreign currency forecasted revenue streams. If the
derivative is designated as a fair value hedge, the changes in the fair value of
the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge,
the effective portions of changes in fair value of the derivative are recorded
in other comprehensive income (OCI) and are recognized in the income statement
when the hedged item affects earnings. Ineffective portions of changes in the
fair value of cash flow hedges are recognized in earnings.

The Company monitors its foreign currency exposures to maximize the overall
effectiveness of its foreign currency hedge positions. Principal currencies
hedged include the Euro and the Japanese yen. The Company's objectives for
holding derivatives are to minimize the risks using the most effective methods
to reduce the impact of these exposures.

Changes in the fair value of derivative instruments related to time value
are included in the assessment of hedge effectiveness. Hedge ineffectiveness,
determined in accordance with SFAS No. 133 and SFAS No. 138, had no impact on
earnings for Calendar 2001. No cash flow hedges were derecognized or
discontinued for Calendar 2001.

The adoption of SFAS No. 133 and SFAS No. 138 on January 1, 2001, resulted
in no cumulative adjustment to income or OCI as no cash flow derivative
instruments were outstanding at December 31, 2000.

NOTE 18 -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Fairchild International and certain of Fairchild Semiconductor
Corporation's subsidiaries are guarantors under the Senior Subordinated Notes.
Accordingly, presented below are condensed consolidating balance sheets of
Fairchild International as of December 30, 2001 and December 31, 2000 and
related condensed consolidating statements of operations and cash flows for
Calendar 2001, Calendar 2000, Stub Year 1999 and Fiscal 1999.

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CONDENSED CONSOLIDATING BALANCE SHEET

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

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CONDENSED CONSOLIDATING BALANCE SHEETS

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 -- UNAUDITED QUARTERLY FINANCIAL INFORMATION

The following is a summary of unaudited quarterly financial information for
Calendar 2001 and Calendar 2000 (in millions, except per share amounts):

- ---------------

Note: Amounts may not add due to rounding

(a) Includes a total of $13.8 million for in-process research and development
charges recorded in the first and third quarters, a total of $21.4 million
for restructuring and impairments, $2.5 million recorded in the second
quarter for the write-off of the digitizer product line in the Company's
Analog and Mixed Signal Segment and $4.0 million, recorded in the fourth
quarter for the write-off of an equity investment.

(b) In the second and third quarters of Calendar 2000, the Company recorded a
total gain of $11.0 million for the adjustment of reserves related to the
restructuring of its memory product lines and additional proceeds from the
sale of the Mountain View, California facility and total charges of $9.0
million for purchased in-process research and development and $3.6 million
for the write-off of deferred financing fees.

(c) In the fourth quarter of Calendar 2000, the Company recorded a gain of $26.3
million for the reduction of deferred tax valuation allowances.

90

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information regarding directors set forth under the caption "Proposal
1 -- Election of Directors" appearing in Fairchild International's definitive
proxy statement for the Annual Meeting of Stockholders to be held on May 8,
2002, which will be filed with the Securities and Exchange Commission not later
than 120 days after December 30, 2001 (the "2002 Proxy Statement"), is
incorporated herein by reference.

The information regarding executive officers set forth under the caption
"Executive Officers of Fairchild International" in Item 1 of this Annual Report
on Form 10-K is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information set forth under the caption "Executive Compensation" in the
2002 Proxy Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN HOLDERS AND MANAGEMENT

The information set forth under the caption "Stock Ownership by 5%
Stockholders, Directors and Certain Executive Officers" in the 2002 Proxy
Statement is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption "Certain Relationships and
Related Transactions" in the 2002 Proxy Statement is incorporated herein by
reference.

PART IV

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

(a)(2) Financial Statement Schedules. Financial statement schedules are
listed under Item 14(c) in this Annual Report.

(3) List of Exhibits. See the Exhibit Index beginning on page 95 in this
annual report.

(b) Reports on Form 8-K: On October 25, 2001, we filed a special report on
Form 8-K relating to financial information for the three and nine months ended
September 30, 2001 and forward looking statements relating to the fourth quarter
and the year ended December 30, 2001 as announced in a press release dated
October 23, 2001. The press release is incorporated in, and filed as an exhibit
to, the special report.

On October 26, 2001, we filed a special report on Form 8-K relating to (1)
the announcement of our intent to offer $200 million principal amount of
convertible subordinated notes due 2008 as announced in a press release dated
October 25, 2001, and (2) the announcement of our agreement to privately place
$200 million of our 5% Convertible Subordinated Notes due 2008, with a
conversion price of $30.00 per share, as announced in a press release dated
October 26, 2001. The press releases are incorporated in, and filed as exhibits
to, the special report.

On November 28, 2001, we filed a special report on Form 8-K relating to the
update of our forward-looking guidance for the fourth quarter of 2001, as
announced in a press release dated November 28, 2001. The press release is
incorporated in, and filed as an exhibit to the special report.

(c)Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts
91

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

The Board of Directors
Fairchild Semiconductor International, Inc.

Under date of January 25, 2002, we reported on the consolidated balance
sheets of Fairchild Semiconductor International, Inc. and subsidiaries as of
December 30, 2001 and December 31, 2000, the related consolidated statements of
operations, stockholders' equity (deficit), comprehensive income (loss) and cash
flows for the years ended December 30, 2001 and December 31, 2000, the seven
months ended December 26, 1999 and for the year ended May 30, 1999. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule listed in
Item 14(c). This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

KPMG LLP
January 25, 2002
Boston, Massachusetts

92

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

- ---------------

(1) These amounts represent valuation reserves obtained through the acquisition
of the power device business.

(2) For returns and allowances, these amounts represent reserves obtained
through the acquisition of QT Optoelectronics, Inc. For deferred tax
valuation allowance, these amounts represent income taxes credited directly
to stockholders' equity, and $1.3 million in valuation reserves obtained
through the QT Optoelectronics, Inc. acquisition.

(3) For returns and allowances, these amounts represent reserves obtained
through the acquisition of Intersil Corporation.

All other schedules are omitted because of the absence of the conditions
under which they are required or because the information required by such
omitted schedules is set forth in the financial statements or the notes
thereto.

93

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

FAIRCHILD SEMICONDUCTOR INTERNATIONAL,
INC.

By: /s/ KIRK P. POND
------------------------------------
Kirk P. Pond
President and Chief Executive
Officer

Date: March 15, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

94

EXHIBIT INDEX

96

- ---------------

(1) Incorporated by reference from Fairchild Semiconductor Corporation's
Registration Statement on Form S-4, filed May 12, 1997 (File No.
333-26897).

(2) Incorporated by reference from Fairchild Semiconductor International,
Inc.'s Current Report on Form 8-K, dated December 31, 1997, filed January
13, 1998.

(3) Incorporated by reference from Fairchild Semiconductor International,
Inc.'s Current Report on Form 8-K, dated April 13, 1999, filed April 27,
1999.

(4) Incorporated by reference from Fairchild Semiconductor International Inc.'s
Annual Report on Form 10-K for the fiscal year ended May 30, 1999, filed
August 27, 1999.

(5) Incorporated by reference from Fairchild Semiconductor International Inc.'s
Registration Statement on Form S-8, filed June 29, 2000 (File No.
333-40412).

(6) Incorporated by reference from Amendment No. 1 to Fairchild Semiconductor
Corporation's Registration Statement on Form S-4, filed April 27, 2001
(File No. 333-58848).

(7) Incorporated by reference from Fairchild Semiconductor International,
Inc.'s Registration Statement on Form S-4, filed March 23, 2000 (File No.
333-33082).

(8) Incorporated by reference from Amendment No. 1 to Fairchild Semiconductor
International, Inc.'s Registration Statement on Form S-1, filed June 30,
1999 (File No. 333-78557).

(9) Incorporated by reference from Fairchild Semiconductor International,
Inc.'s Registration Statement on Form S-3, filed December 21, 2001 (File
No. 333-75678).

(10) Incorporated by reference from Amendment No. 3 to Fairchild Semiconductor
Corporation's Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-28697).

(11) Incorporated by reference from Fairchild International's Annual Report on
Form 10-K for the fiscal year ended May 30, 1999, filed August 27, 1999.

(12) Incorporated by reference from Fairchild Semiconductor International,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended July 2, 2000,
filed August 16, 2000.

(13) Incorporated by reference from Fairchild Semiconductor International,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended July 1, 2001,
filed August 15, 2001.

(14) Incorporated by reference from Fairchild Semiconductor International,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30,
2001, filed November 14, 2001.

(15) Incorporated by reference from Fairchild Semiconductor International Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31, 2000,
filed March 26, 2001.

97