FAIRCHILD SEMICONDUCTOR INTERNATIONAL INC - 10-Q Quarterly Report

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

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER: 001-15181

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, MAINE 04106
(Address of principal executive offices, including zip code)

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

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

The number of shares outstanding of the issuer's classes of common stock as
of the close of business on June 30, 2002:

1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)

See accompanying notes to unaudited condensed consolidated financial statements.

2

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

See accompanying notes to unaudited condensed consolidated financial statements.

3

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS)
(UNAUDITED)

See accompanying notes to unaudited condensed consolidated financial statements.

4

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)

See accompanying notes to unaudited condensed consolidated financial statements.

5

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION

The accompanying interim condensed consolidated financial statements of
Fairchild Semiconductor International, Inc. (the Company) have been prepared in
conformity with accounting principles generally accepted in the United States,
consistent in all material respects with those applied in the company's Annual
Report on Form 10-K for the year ended December 30, 2001, except as noted below.
The interim financial information is unaudited, but reflects all normal
adjustments, which are, in the opinion of management, necessary to provide a
fair statement of results for the interim periods presented. The interim
financial statements should be read in connection with the financial statements
in the company's Annual Report on Form 10-K for the year ended December 30,
2001. Certain amounts for prior periods have been reclassified to conform to the
current presentation.

NOTE 2 -- INVENTORIES

The components of inventories are as follows:

NOTE 3 -- COMPUTATION OF NET INCOME (LOSS) PER SHARE

Basic net loss per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net loss per
common share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period. Potentially
dilutive common equivalent shares consist of stock options and shares obtainable
upon the conversion of the convertible senior subordinated notes.

As a result of the net losses reported for the three and six months ended
June 30, 2002 and July 1, 2001, approximately 6.0 million, 5.9 million, 3.1
million and 2.6 million common equivalent shares, respectively, have been
excluded from the calculation of diluted loss per common share because their
effect would have been anti-dilutive. In addition, $1.8 million and $3.6 million
was not included in the computation of net loss for the three and six months
ended June 30, 2002, respectively, and 6.7 million 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.

NOTE 4 -- SUPPLEMENTAL CASH FLOW INFORMATION

6

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5 -- ACQUISITIONS AND DIVESTITURES

On March 20, 2002, the Company completed its acquisition of the cross-point
switch product line and associated intellectual property of I-Cube, Inc.
(I-Cube) for approximately $1.0 million in cash. Cross-point switch products are
critical to Internet infrastructure, data communications, telecommunications,
broadcast video, test equipment and digital signal processing. The transaction
was accounted for as a purchase and the acquired product line's results of
operation since the date of acquisition have been included in the accompanying
statement of operations. The purchase price was allocated entirely to in-process
research and development.

On March 20, 2002, the Company sold its military and space-related discrete
power product line to International Rectifier Corporation for approximately
$29.6 million in cash. As a result of the sale, the Company recorded a gain of
$20.5 million, which was net of the assets acquired by International Rectifier,
transaction fees and other exit costs associated with the sale.

On March 25, 2002, the Company completed its acquisition of the assets of
Signal Processing Technologies, Inc. (SPT), a wholly-owned subsidiary of Toko,
Inc., for approximately $4.0 million in cash. The acquired business, located in
Colorado Springs, Colorado, markets high performance analog-to-digital and
digital-to-analog converters and comparators for the consumer, communications
and industrial markets. The purchase also includes a design center in Horten,
Norway. 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. In connection with the SPT
purchase, the Company recorded a non-recurring charge of $0.7 million for
in-process research and development. The remaining purchase price was allocated
to various tangible and identifiable intangible assets, which will be amortized
over their useful lives of 5 years.

NOTE 6 -- GOODWILL

Effective December 31, 2001 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, which addresses financial accounting and
reporting for acquired goodwill and other intangible assets. Goodwill and other
intangibles with indefinite lives are no longer amortized. Instead, the Company
will perform an annual test for impairment of these assets.

A summary of acquired intangible assets as of June 30, 2002 is as follows:

7

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The carrying amount of goodwill by reporting unit for the quarter ended
June 30, 2002 is as follows:

During the quarter, there were no changes to the carrying amount of
goodwill due to acquisitions. In addition, the initial test for impairment of
goodwill as required by SFAS No. 142 was completed during the first quarter. No
impairment was indicated. The fair value of the reporting units for purposes of
the annual impairment test were estimated using discounted future cash flows.
Identified reporting units which carry goodwill include domestic analog,
discrete power products, which are included in the Analog and Discrete segments,
respectively, and Optoelectronics, which does not meet the requirements of a
reportable segment as defined in SFAS No. 131.

For comparative purposes, net loss before goodwill amortization net of tax
and related per share amounts for the Company for the three and six months ended
July 1, 2001 are as follows (in millions, except per share amounts):

The estimated amortization expense for the remainder of Fiscal 2002 and for
each of the five succeeding fiscal years is as follows:

8

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7 -- SEGMENT INFORMATION

The Company is currently organized into three reportable segments: the
Analog and Mixed Signal Products Group (Analog), the Discrete Products Group
(Discrete) and the Interface and Logic Products Group (Interface and Logic). The
operating results for the product line acquired from I-Cube are included with
the Interface and Logic reporting segment. The operating results for the
business acquired from SPT are included with the Analog reporting segment.

The Company has determined that its Memory (formerly referred to as
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. The Company's contract manufacturing business is not
a separate reportable segment and its results are also recorded in the "Other"
category. 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 Corporation and Samsung Electronics Co., Ltd in
connection with acquisitions from those companies.

Selected operating segment financial information for the three and six
months ended June 30, 2002 and July 1, 2001 is as follows:

NOTE 8 -- RESTRUCTURING AND IMPAIRMENTS

During the six months ended June 30, 2002, the Company recorded a pre-tax
restructuring charge of $3.6 million, which occurred in the first quarter. The
restructuring charge consisted of employee separation

9

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

costs relating primarily to severance and other costs associated with
approximately 150 salaried and hourly employees severed in the United States,
Europe, Japan and Malaysia.

During the three and six months ended July 1, 2001, the Company recorded
pre-tax restructuring charges of $3.9 million and $13.4 million, respectively.
In the second quarter of 2001 the charge was due to employee separation costs
related to severance and other benefits associated with work force reduction
actions affecting approximately 400 employees in the United States and Malaysia.
For the six months ended July 1, 2001 these charges also included $8.3 million
for asset impairments relating to the consolidation of the five-inch wafer
fabrication line in South Portland, Maine and $1.2 million for employee
separation costs, affecting approximately 300 employees in the Philippines,
recorded in the first quarter.

The following table summarizes the activity in the Company's accrual for
restructuring and impairment costs for the three months ended June 30, 2002 (in
millions):

Accrual balance as of December 30, 2001..................... $ 1.3
Accrual................................................... 3.6
Cash payments............................................. (3.1)
Non-cash items............................................ (0.3)
-----
Accrual balance as of March 31, 2002........................ 1.5
Cash payments............................................. (0.9)
-----
Accrual balance as of June 30, 2002......................... $ 0.6
=====

The Company expects that all amounts will be substantially paid before the
end of the year.

NOTE 9 -- FOLLOW-ON OFFERING AND REDEMPTION OF 10 1/8% SENIOR SUBORDINATED NOTES

On May 30, 2002, the Company completed a follow-on public offering of
20,000,000 shares of its Class A Common Stock at a price to the public of $25.65
per share. On June 20, 2002, the underwriters executed their option to cover
over-allotments and purchased a further 2,219,196 shares. The underwriting
discount was $1.09 per share. The total of 22,219,196 shares included 16,219,196
newly issued shares sold by the Company and 6,000,000 shares sold by an existing
stockholder. The Company did not receive any proceeds from shares sold by the
existing stockholder. The net proceeds to the Company after the underwriting
discount and other related expenses were approximately $397.7 million.

On June 28, 2002, the Company used some of the proceeds raised in the
follow-on offering to redeem all $285.0 million of its 10 1/8% senior
subordinated notes that were due in March 2007, at a price of 105.063% of face
value. In connection with the redemption, the company had one-time charges
totaling $22.1 million, including $14.5 million for the call premium and other
transaction fees and a $7.6 million non-cash write-off of deferred financing
fees associated with the original bond offering.

NOTE 10 -- DERIVATIVES

The Company uses derivative instruments to manage exposures to foreign
currencies. In accordance with SFAS No. 133, the fair value of these hedges is
recorded on the balance sheet. Certain forecasted transactions are exposed to
foreign currency risks. 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 eliminate or reduce the impacts 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,

10

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

had no impact on earnings for the six months ended June 30, 2002. No cash flow
hedges were derecognized or discontinued for the six months ended June 30, 2002.

Derivative gains and losses included in other comprehensive income (OCI)
are reclassified into earnings at the time the forecasted transaction revenue is
recognized. The Company estimates that the entire $2.4 million of net derivative
loss included in OCI will be reclassified into earnings within the next twelve
months.

NOTE 11 -- CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The Company operates through its wholly owned subsidiary Fairchild
Semiconductor Corporation and other indirect wholly owned subsidiaries.
Fairchild Semiconductor International, Inc. and certain of Fairchild
Semiconductor Corporation's subsidiaries are guarantors under Fairchild
Semiconductor Corporation's 10 3/8% and 10 1/2% Senior Subordinated Notes and
its 5% Convertible Senior Subordinated Notes. These guaranties are full and
unconditional. In addition, all guaranties are joint and several. Accordingly,
the interim condensed consolidating financial statements are presented below.

11

CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)

12

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(UNAUDITED)

13

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(UNAUDITED)

14

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)

15

CONDENSED CONSOLIDATING BALANCE SHEET

16

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(UNAUDITED)

17

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(UNAUDITED)

18

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)

19

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

UNLESS OTHERWISE INDICATED, REFERENCES IN THIS MD&A TO "WE", "OUR" AND THE
"COMPANY" REFER TO FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND ITS
SUBSIDIARIES TAKEN AS A WHOLE. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON FORWARD-LOOKING STATEMENTS IN THIS REPORT. SEE "OUTLOOK" AND "BUSINESS RISKS"
BELOW.

OVERVIEW

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. Nearly two-thirds
of our trade sales in the first six months of 2002 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 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.

On March 20, 2002, we acquired the cross-point switch product line and
associated intellectual property of I-Cube, Inc. (I-Cube) for approximately $1.0
million in cash, including related acquisition costs. Cross-point switches are
critical to Internet infrastructure, data communications, telecommunications,
broadcast video, test equipment and digital signal processing.

On March 20, 2002, we sold our military and space-related discrete power
product line to International Rectifier Corporation for approximately $29.6
million in cash.

On March 25, 2002, we acquired Signal Processing Technologies, Inc. (SPT),
the data conversion business and related design center of Toko, Inc. for
approximately $4.0 million in cash, including related acquisition costs. SPT
will add leading-edge converter products to our analog and mixed signal product
offering.

RESULTS OF OPERATIONS

We generated net losses of $13.0 million and $10.3 million in the second
quarter and first six months of 2002, respectively, compared to net losses of
$8.0 million and $6.4 million in the comparable periods of 2001. During the
first quarter of 2002, amortization of goodwill was stopped in accordance with
SFAS No. 142. Had goodwill not been amortized in the second quarter and first
six months of 2001, net losses would have been

20

$4.4 million and $1.1 million, respectively. Excluding unusual (gains) charges
and amortization of acquisition-related intangibles, pro forma net income was as
follows:

Restructuring and impairments in the first six months of 2002 include $3.6
million recorded in the first quarter associated with workforce reduction
actions. Restructuring and impairments in the second quarter and first six
months of 2001 include $3.9 million recorded in the second quarter for employee
severance and benefit costs associated with workforce reduction actions, $8.3
million recorded in the first quarter for asset impairment charges related to
the consolidation of the five-inch wafer fabrication line in South Portland,
Maine and $1.2 million recorded in the first quarter for employee severance and
benefit costs associated with workforce reduction actions.

Purchased in-process research and development was recorded in the first
quarter of 2002 in connection with our acquisitions of I-Cube ($1.0 million) and
SPT ($0.7 million). Purchased in-process research and development of $12.8
million was recorded in connection with our acquisition of DPP in the first
quarter of 2001.

Operating income was $27.5 million and $37.3 million in the second quarter
and first six months of 2002, respectively, compared to $11.6 million and $30.2
million in the second quarter and first six months of 2001. Excluding
restructuring and impairments, purchased in-process research and development and
other unusual charges, pro forma operating income was $27.5 million and $42.6
million in the second quarter and first six months of 2002, respectively,
compared to $18.0 million and $58.9 million in the second quarter and first six
months of 2001. The increase in pro forma operating income in the second quarter
of 2002 as compared to the second quarter of 2001 is due to higher gross profit,
lower selling, general and administrative ("SG&A") expenses as a result of
spending cuts and lower amortization charges as a result of the adoption of SFAS
No. 142. The decrease in pro forma operating income for the first six months of
2002 compared to the first six months of 2001 is due to lower gross margins,
primarily in the first quarter, partially offset by lower research and
development expenses ("R&D") and SG&A, as well as lower amortization charges as
a result of the adoption of SFAS No. 142.

On a segment basis, Analog had operating income of $6.8 million and $12.4
million for the second quarter and first six months of 2002, respectively,
compared to operating losses of $4.4 million and $0.3 million in the comparable
periods of 2001. The increases in Analog's operating income were primarily due
to increases in revenues and gross margins as well as decreases in selling,
general and administrative expenses and intangibles amortization, as a result of
the adoption of SFAS No. 142. Discrete had operating income of $13.2 million and
$20.5 million in the second quarter and first six months of 2002, respectively,
compared to $7.3 million and $19.6 million in the comparable periods of 2001.
The increases in Discrete's operating income were primarily due to an increase
in gross margins, primarily in the second quarter, coupled with lower
amortization charges as a result of the adoption of SFAS No. 142. Interface and
Logic had operating income of $2.6 million and

21

$4.8 million in the second quarter and first six months of 2002 compared to
operating income of $9.1 million and $30.3 million in the comparable periods of
2001.

The decreases in Interface and Logic's operating income were the result of
decreases in revenues and gross margins partially offset by decreases in
research and development and selling, general and administrative expenses.

Excluding depreciation and amortization of $41.6 million and $82.9 million
in the second quarter and first six months of 2002, respectively, and $47.5
million and $88.0 million in the comparable periods of 2001, restructuring and
impairments, purchased in-process research and development and other expense,
earnings before interest, taxes depreciation and amortization (EBITDA) were
$69.1 million and $125.5 million in the second quarter and first six months of
2002, respectively, compared to $65.5 million and $146.9 million in the
comparable periods of 2001. EBITDA is presented because we believe that it is a
widely accepted financial indicator of an entity's ability to incur and service
debt. Pro forma net income and pro forma operating income are presented because
we use them as alternative measures of the operating performance of the
business. EBITDA, pro forma net income, and pro forma operating income 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 flow as a
measure of liquidity.

REVENUES

Our revenues consist of trade sales to unaffiliated customers (96.2% and
96.5% of total revenues in the second quarter and first six months of 2002,
respectively, and 95.2% and 95.3% of total revenues in the comparable periods of
2001) and revenues from contract manufacturing services provided to National
Semiconductor and Samsung Electronics (3.8% and 3.5% of total revenues in the
second quarter and first six months of 2002, respectively, and 4.8% and 4.7% of
total revenues in the comparable periods of 2001).

Trade sales were $346.8 million and $673.0 million in the second quarter
and first six months of 2002, respectively, compared to $354.5 million and
$722.3 million for the comparable periods of 2001. The decrease in trade sales
in the second quarter resulted primarily from lower average selling prices while
the decrease in the first six months of 2002 was the result of lower unit
volumes coupled with lower average selling prices.

Analog revenues increased 14.0% and 2.2% to $82.1 million and $159.6
million in the second quarter and first six months of 2002, respectively, from
$72.0 million and $156.2 million in the comparable periods of 2001. The
increases are a result of higher sales for switching regulators and linear
regulators. Discrete revenues increased 4.2% and 9.3% to $186.6 million and
$365.4 million in the second quarter and first six months of 2002, respectively,
compared to $179.1 million and $334.3 million in the comparable periods of 2001.
The increases are primarily the result of stronger sales of low power MOSFET's,
in ball grid array and surface mount packages, and for the first six months of
2002, the result of a full six months of revenue from our DPP acquisition, which
occurred late in the first quarter of 2001. Interface and Logic revenues
decreased 29.5% and 37.6% to $51.9 million and $103.4 million in the second
quarter and first six months of 2002, respectively, from $73.6 million and
$165.7 million in the comparable periods of 2001. The decreases are a result of
lower revenues due to price competition in our mature logic products and the
impact of the wireline communications market slowdown on our interface product
lines.

22

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 three and six months ended June 30,
2002 and July 1, 2001:

North American revenues decreased 34% and 33% in the second quarter and
first six months of 2002, respectively, compared to the same periods of 2001.
The North American sales region has been impacted by a shrinking market due to
the continued migration of component manufacturing offshore. All market segments
are exhibiting weakness except for small improvements in automotive. European
revenues decreased 26% and 27% in the second quarter and first six months of
2002, respectively, compared to the same periods of 2001. They have been
impacted by the same factors affecting North America, with particular weakness
in the communications market. Revenues in our Asia/Pacific sales region
increased 13% and 4% in the second quarter and first six months of 2002,
respectively, compared to the same periods of 2001. The year over year increases
in Asia/Pacific are due in part to the continued migration of electronics
production into the region as well as strength in industrial and consumer
markets. Sales in our Korean region increased 21% and 14% in the second quarter
and first six months of 2002, respectively, compared to the same periods of
2001. This increase was primarily due to strong demand from our largest
customer, Samsung Electronics, particularly for products directed towards
consumer and computing markets.

Contract manufacturing revenues decreased 23.5% and 31.1% to $13.7 million
and $24.4 million in the second quarter and first six months of 2002 compared to
$17.9 million and $35.4 million in the second quarter and first six months of
2001. The decrease in contract manufacturing revenue resulted from diminishing
demand from both National Semiconductor and Samsung Electronics.

GROSS PROFIT

Gross profit was as follows for the three and six months ended June 30,
2002 and July 1, 2001:

Excluding non-recurring charges in the second quarter and first six months
of 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 $95.0 million (25.5%) and $213.1 million (28.1%), respectively.

The increase in gross profit for the second quarter of 2002 compared to the
second quarter of 2001 is a result of a decrease in revenues offset by better
factory utilization as well as cost reductions. The decrease in gross profit for
the first six months of 2002 compared to the first six months of 2001 is a
result of a decrease in revenues as well as lower factory utilization, primarily
in the first quarter of 2002.

23

RESEARCH AND DEVELOPMENT

R&D expenses were $21.8 million, or 6.3% of trade sales, in the second
quarter of 2002, compared to $21.8 million, or 6.2% of trade sales, in the
second quarter of 2001. On a year-to-date basis, R&D was $42.5 million, or 6.3%
of trade sales, compared to $45.3 million, or 6.3% of trade sales for the
comparable period of 2001. The decrease in the first six months of 2002 as
compared to the first six months of 2001 was due to spending reductions in
response to softer market conditions, offset by increased R&D as a result of a
full six months of R&D expenses in 2002 from our DPP acquisition.

SELLING, GENERAL AND ADMINISTRATIVE

SG&A were $37.6 million, or 10.8% of trade sales, in the second quarter of
2002, compared to $41.0 million, or 11.6% of trade sales, in the second quarter
of 2001. On a year-to-date basis, SG&A expenses were $72.1 million, or 10.7% of
trade sales, compared to $84.3 million, or 11.7% of trade sales, for the
comparable period of 2001. We have offset incremental SG&A from our acquired
businesses with spending reductions in response to softer market conditions.

AMORTIZATION OF ACQUISITION-RELATED INTANGIBLES

Amortization of acquisition-related intangibles was $9.5 million in the
second quarter of 2002, compared to $14.2 million in the second quarter of 2001.
On a year-to-date basis, amortization of acquisition related intangibles was
$18.8 million, compared to $24.6 million for the comparable period of 2001. The
decreases in amortization are due to our adoption of SFAS No. 142 offset by an
increase in amortization, particularly in the first six months of 2002 as
compared to the comparable period of 2001, due to a full six months of
amortization of intangibles acquired as part of DPP acquisition, our Impala
acquisition in the latter part of 2001 and the acquisition of SPT in March of
2002.

INTEREST EXPENSE

Interest expense was $28.6 million and $57.2 million in the second quarter
and first six months of 2002, respectively, compared to $26.6 million and $50.5
million in the comparable periods of 2001. The increase in interest expense in
the second quarter was principally the result of expense associated with the
$200.0 million of 5% Convertible Senior Subordinated Notes we sold in the fourth
quarter of 2001. The redemption of $285.0 million of 10 1/8% senior subordinated
notes occurred on June 28, 2002 and had no impact on interest expense for the
second quarter of 2002. Year-to-date interest expense is additionally impacted
by increased expense on the $350.0 million of 10 1/2% Senior Subordinated Notes
we sold in the first quarter of 2001.

INTEREST INCOME

Interest income was $3.1 million and $5.6 million in the second quarter and
first six months of 2002, respectively, compared to $3.0 million and $10.4
million in the comparable periods of 2001. The increase in interest income in
the second quarter of 2002 as compared to the second quarter of 2001 is
primarily due to higher average cash balances offset by lower rates of return on
our short-term investments. The decrease in interest income for the first six
months of 2002 compared to the comparable periods of 2001 was due to lower rates
of return.

OTHER EXPENSE, NET

During second quarter and first six months of 2002 we recorded other
expense, net of $22.1 million and $1.6 million, respectively. The $22.1 million
recorded in the second quarter of 2002 was for costs associated with the
redemption of our 10 1/8% senior subordinated notes. These costs included $14.5
million for the call premium and other transaction fees and a $7.6 million
non-cash write-off of deferred financing fees associated with the original bond
offering. The year to date expense includes these costs offset by a gain of
$20.5 million related to the sale of our military and space-related discrete
power product line recorded in the first quarter of 2002.

24

INCOME TAXES

Income tax benefits were $7.1 million and $5.6 million for the second
quarter and first six months of 2002, respectively, compared to $4.0 million and
$3.5 million for the second quarter and first six months of 2001. The effective
tax rate for the second quarter and first six months of 2002 was 35.3% and
35.2%, respectively, compared to 33.3% and 35.3% for the second quarter and
first six months of 2001. The increase in our effective tax rate in the second
quarter of 2002 as compared to the second quarter of 2001 was due primarily to
regional economic conditions resulting in decreased profits in certain low tax
jurisdictions.

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 June 30, 2002, adjusted for outstanding letters
of credit, we had $299.2 million available under this senior credit facility.

Our senior credit facility, the indentures governing our 10 3/8% Senior
Subordinated Notes, 10 1/2% Senior Subordinated Notes and 5.0% Convertible
Senior Subordinated Notes and other debt instruments we may enter into in the
future may impose various restrictions and covenants on us 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 planned capital
expenditures for the remainder of the year and for the next twelve months. We
intend to invest approximately $145 to $155 million in 2002 on capital
expenditures, including the $57.8 million we have spent through June 30, 2002.
This capital primarily will be spent to expand capacity in support of
in-sourcing of assembly and test capacity, including construction of our new
facility in Suzhou, China, 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.

On May 30, 2002, the Company completed a follow-on public offering of
20,000,000 shares of its Class A Common Stock at a price to the public of $25.65
per share. On June 20, 2002, the underwriters executed their option to cover
over-allotments and purchased a further 2,219,196 shares. The underwriting
discount was $1.09 per share. The total of 22,219,196 shares included 16,219,196
newly issued shares sold by the Company and 6,000,000 shares sold by an existing
stockholder. The Company did not receive any proceeds from shares sold by the
existing stockholder. The net proceeds to the Company after the underwriting
discount and other related expenses were approximately $397.7 million.

On June 28, 2002, the Company used some of the proceeds raised in the
follow-on offering to redeem all $285.0 million of its 10 1/8% senior
subordinated notes that were due in March 2007, at a price of 105.063% of face
value. In connection with the redemption, the company had one-time charges
totaling $22.1 million, including $14.5 million for the call premium and other
transaction fees and a $7.6 million non cash write-off of deferred financing
fees associated with the original bond offering.

25

As of June 30, 2002, our cash and cash equivalents balance was $613.4
million, an increase of $100.6 million from March 31, 2002.

During the first six months of 2002, our operations provided $24.4 million
in cash compared to $63.2 million of cash in the first six months of 2001. The
decrease in cash provided by operating activities is due primarily to a decrease
in the first six months of 2002 in net income adjusted for non-cash items
compared with the first six months of 2001. Cash used in investing activities
during the first six months of 2002 totaled $35.6 million, compared to $426.7
million in the first six months of 2001. The decrease primarily results from a
net cash inflow for acquisitions and divestitures of $23.9 million in the first
six months of 2002 versus a net cash outflow in the first six months of 2001 for
acquisitions and divestitures of $344.1 million. Cash provided by financing
activities of $120.2 million for the first six months of 2002 was primarily from
proceeds from the follow on offering and issuance of common stock upon the
exercise of options offset by the cash used to redeem the 10 1/8% senior
subordinated notes. Cash provided by financing activities of $218.6 million in
the first six months of 2001 was due primarily to proceeds from the issuance of
the 10 1/2% Senior Subordinated Notes, net of debt issuance costs, offset by
cash used to repay the outstanding balance on our Senior Credit Facility.

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 June 30, 2002, 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 June 30, 2002.

LIQUIDITY AND CAPITAL RESOURCES OF FAIRCHILD INTERNATIONAL, EXCLUDING
SUBSIDIARIES

Fairchild Semiconductor International, Inc. is a holding company, the
principal asset of which is the stock of its wholly owned subsidiary, Fairchild
Semiconductor Corporation. Fairchild Semiconductor International on a
stand-alone basis had no cash flow from operations in the first six months of
2002, nor in the first six months of 2001. Fairchild Semiconductor 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 on 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 ongoing 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

26

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 claims
and any known, specifically identified unusual returns. Other 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 quarterly 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 quarterly report are made based on management's current expectations and
estimates, which involve risks and uncertainties,

27

including those described below and more specifically in the Business Risks
section below. 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 the
forward-looking statements in this quarterly 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 business outlook below is consistent with the
outlook included in our July 23, 2002 press release announcing second quarter
results. The second update is within a press release issued approximately two
months into each quarter. 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. The quiet period for the
third quarter of 2002 will be from September 16, 2002 to October 17, 2002, when
we plan to release our third 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 expect revenues in the third quarter of 2002 to be flat to slightly up
from the second quarter of 2002. We expect pricing in the third quarter of 2002
to be roughly flat to the second quarter, but with slightly better mix
management we will look for gross margins to be up sequentially about 50 basis
points in the third quarter of 2002.

For the third quarter of 2002, we expect our research and development and
selling, general and administrative expenses (excluding amortization of
intangibles) to stay roughly flat as a percentage of sales. We expect interest
expense to be in the range of $18.0 to $19.0 million in the third quarter.

For purposes of computing EBITDA, pro forma net income and net income per
share, we expect that depreciation and amortization will be roughly $33.0
million and amortization of acquisition-related intangibles to be approximately
$9.5 million for the third quarter of 2002. Finally, we expect an outstanding
diluted share count of approximately 123.0 million shares for the third quarter
of 2002.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

In July 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 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 requires 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.
This provision was effective upon adoption for goodwill acquired after June 30,
2001 and effective December 31, 2001 for goodwill acquired prior to June 30,
2001. SFAS No. 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful

28

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 adopted the provisions of SFAS No. 141, effective in the third quarter
of 2001, and SFAS No. 142 effective December 31, 2001. We were required 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, assembled workforce of $3.5 million was reclassified
into goodwill in the first quarter of 2002. We were also 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 during the first quarter of 2002. No such adjustments were
deemed necessary.

SFAS No. 142 required us to perform an assessment of whether there is an
indication that goodwill was impaired as of the date of adoption. To accomplish
this we identified our reporting units and determined the carrying value of each
reporting unit by assigning assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of the date of
adoption. Identified reporting units which carry goodwill include domestic
analog, discrete power products and Optoelectronics, which does not meet the
requirements of a segment as defined in SFAS No. 131. We then determined the
fair value of each reporting unit and compared 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. We determined the fair value of our reporting units using discounted
future cash flows. For each reporting unit, we determined that its fair value
exceeded its carrying value, therefore no impairment is indicated. SFAS No. 142
requires that future impairment charges be recorded as a component of operating
income. We will be required to perform an annual impairment test during the
fourth quarter of 2002 and each year thereafter.

During the first quarter of 2002, we adopted SFAS No. 143, Accounting For
Asset Retirement Obligations, issued in August 2001, which 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
applies to all entities that have a legal obligation associated with the
retirement of a tangible long-lived asset. Implementation of SFAS No. 143 did
not have a material impact on our financial condition or results of operations.

During the first quarter of 2002, we adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, issued in October 2001, which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. Implementation of SFAS No. 144 did not have a material impact
on our financial condition or results of operations.

In April 2002 the FASB issued SFAS No. 145, Rescission of FASB Statement
No's. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections, effective for fiscal years beginning May 15, 2002 or later. It
rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt,
SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements
and SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. This
Statement also amends SFAS No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions. We do not believe the impact of adopting SFAS No. 145 will have a
material impact on our financial statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This statement is
29

effective for fiscal years beginning after December 31, 2002. We do not believe
the impact of adopting SFAS No. 146 will have a material impact on our financial
statements.

BUSINESS RISKS

Our business is subject to a number of risks and uncertainties, which could
cause actual results to differ materially from those expressed in
forward-looking statements. 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
telecommunications equipment manufacturers and general economic conditions,
especially in the technology sector. 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 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:

- 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;

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

30

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 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.

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 and others of
intellectual property infringement. The semiconductor industry is characterized
by claims of and litigation regarding patent and other intellectual property
rights. We receive direct, and indirect claims, (including offers to sell us
licenses), have been involved in lawsuits, and could become subject to other
lawsuits, 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, or the costs of avoiding litigation by
purchasing licenses rights or by other means, 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 nine 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

31

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 are 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 or customers 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

- 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, if the costs of raw materials increased significantly, if there
was a significant degradation in the quality of raw materials used in our
products, or if the raw materials give rise to compatibility or performance
issues in our products. 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, Inc. 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

32

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 BY 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 61.0% of our net trade sales for the six months
ended June 30, 2002. Our five domestic distributors accounted for 5.0% of our
net trade sales for the six months ended June 30, 2002. 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.

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. Competitors offer equivalent or
similar versions of many of our products and customers may switch from our
products to competitors' products on the basis of price, delivery terms, product
performance, quality, reliability and customer service or a combination of any
of these factors. Even in strong markets, price pressures may emerge as
competitors attempt to gain a greater market share by lowering prices. Although
we maintain rigorous quality control systems, errors or defects are often
difficult to detect or may arise from a supplied raw material and be beyond our
control. Our future revenues could be adversely affected as a result of
difficulties detecting or remedying quality problems. 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.

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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 relations
with North Korea could have a material adverse effect on our Korean subsidiary
and our company.

Our 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. Any material adverse change in
the purchase requirements of Samsung Electronics, 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 the power
device business has historically 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.

34

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 the cost of compliance with environmental laws has not had a
material adverse effect on our results of operations historically, compliance
with these and any future regulations could require significant capital
investments in pollution control equipment or changes in 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 or Samsung
Electronics, these indemnities are limited to conditions that occurred prior to
the consummation of those 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

35

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.

On June 30, 2002, affiliates of Citigroup Inc., and our directors and
executive officers together owned approximately 19.4% of the outstanding shares
of our Class A Common Stock (including shares underlying vested options held by
our directors and executive officers). 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 APPROXIMATELY 0.7
TO 1, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND LIMIT OUR ABILITY TO
GROW AND COMPETE.

At June 30, 2002, we had total long-term debt of $853.3 million and a ratio
of debt to equity of approximately 0.7 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 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;

- 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 Fairchild Semiconductor Corporation's 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 Fairchild Semiconductor Corporation's outstanding 10 3/8% Senior
Subordinated Notes, its 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

36

$300.0 million. As of June 30, 2002 we had $299.2 million available under this
revolving credit facility. If new debt is added to our subsidiaries' 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 FAIRCHILD SEMICONDUCTOR CORPORATION'S 10 3/8%
SENIOR SUBORDINATED NOTES AND ITS 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 Fairchild Semiconductor Corporation's 10 1/2%
Senior Subordinated Notes and the indenture governing its 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.

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 further 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosure about Market Risk, in Fairchild Semiconductor International's annual
report on Form 10-K for the year ended December 30, 2001 and under the
subheading "Quantitative and Qualitative Disclosures about Market Risk" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 48 of the 10-K.

37

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We have settled 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.

From time to time we are involved in threatened or actual legal proceedings
in the ordinary course of business. We believe that there is no such ordinary
course litigation threatened or 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

(a) Fairchild Semiconductor International's annual meeting of stockholders
was held on May 8, 2002.

(b) The following directors were elected at the meeting by the following
votes:

Mr. Comfort, a consultant to Citigroup Venture Capital Equity Partners, resigned
from the board of directors effective May 30, 2002 in connection with the
closing of the sale by a Citigroup Inc. affiliate of 6,000,000 shares of our
common stock, which was part of our follow-on public offering of 22.2 million
shares.

ITEM 5. OTHER INFORMATION

Effective December 31, 2001, we adopted Statement of Financial Accounting
Standards (SFAS) No. 142, which addresses financial accounting and reporting for
acquired goodwill and other intangible assets. Goodwill and other intangibles
with indefinite lives are no longer amortized. Instead, we will perform an
annual test for impairment of these assets. We conducted our transitional
goodwill impairment testing in the first quarter of 2002. No impairment was
indicated.

We believe that all audited financial statements incorporated by reference
into our open registration statements are fairly presented, in all material
respects, without transitional disclosure. Accordingly, we present in this
quarterly report, net income (loss) before goodwill amortization net of tax and
related per share

38

amounts for the years ended December 30, 2001 and December 31, 2000, the seven
months ended December 26, 1999 and the year ended May 30, 1999 are as follows
(in millions, except per share amounts):

As described in Item 4 above, in connection with the sale by a Citigroup
Inc. affiliate of 6,000,000 shares of our common stock, William T. Comfort III,
a consultant to Citigroup Venture Capital Equity Partners, resigned from our
board of directors effective May 30, 2002.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

(b) Reports on Form 8-K

On April 24, 2002, we filed a current report on Form 8-K relating to
financial information for the three and six months ended March 31, 2002 and
forward-looking statements relating to the second quarter of 2002 as announced
in a press release issued April 23, 2002. The press release is incorporated in,
and filed as an exhibit to, the current report.

On May 20, 2002, we filed a current report on Form 8-K relating to the
update of our forward-looking guidance for the second quarter of 2002, as
announced in a press release dated May 20, 2002. The press release is
incorporated in, and filed as an exhibit to, the current report.

39

On May 23, 2002, we filed a current report on Form 8-K relating to our
announcement on May 20, 2002 that we and a selling stockholder would offer
shares of our Class A common stock in a public offering pursuant to a shelf
Registration Statement on Form S-3 (Registration No. 333-84094) that we had
filed with the Securities and Exchange Commission. The agreed form of
Underwriting Agreement, among the Company, Court Square Capital Limited, as the
selling stockholder and the underwriters named therein, is incorporated in and
filed as exhibit to the current report.

On May 24, 2002, we filed a current report on Form 8-K relating to our
announcement on May 20, 2002 that we and a selling stockholder would offer
shares of our Class A common stock in a public offering pursuant to a shelf
Registration Statement on Form S-3 (Registration No. 333-84094) that we had
filed with the Securities and Exchange Commission. An updated opinion of counsel
as to the legality of the securities being registered is incorporated in and
filed as an exhibit to the current report.

ITEMS 2 AND 3 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

40

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Fairchild Semiconductor International,
Inc.

Date: August 12, 2002 By: /s/ DAVID A. HENRY
------------------------------------
David A. Henry
Vice President, Corporate Controller
(Principal Accounting Officer)

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