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 29, 2003
[ ] 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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

The number of shares outstanding of the issuer's classes of common stock as
of the close of business on June 29, 2003:

1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)

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 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
of America, consistent in all material respects with those applied in the
company's Annual Report on Form 10-K for the year ended December 29, 2002. 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 financial statements should be
read in conjunction with the financial statements in the company's Annual Report
on Form 10-K for the year ended December 29, 2002. 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 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 loss reported for the three and six months ended
June 29, 2003 and June 30, 2002, approximately 0.8 million, 1.2 million, 6.0
million and 5.9 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
were not included in the computation of net loss for the three and six months
ended June 29, 2003 and 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 -- STOCK BASED COMPENSATION

The company has certain stock option plans. The company accounts for those
plans under APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. The following table illustrates the effect on net loss
and net loss per common share as if the company applied the fair value based
method of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, to record expense for stock option compensation.

The following table illustrates the effect on net income and earnings per
share as if the fair value based method had been applied to all outstanding and
unvested awards in each period.

The weighted average fair value of options granted was $7.49, and $7.48 for
the three and six months ended June 29, 2003 and $15.88 and $13.85 for the three
and six months ended June 30, 2002, respectively. The fair value of each option
grant for the company's plans is estimated on the date of the grant using the
Black-Scholes option pricing model, with the following weighted average
assumptions.

NOTE 6 -- GOODWILL

Effective December 31, 2001 the company adopted 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 performs an annual test during the fourth
quarter for impairment of these assets.

7

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of acquired intangible assets as of June 29, 2003 is as follows:

The carrying amount of goodwill by reporting unit for the quarter ended
June 29, 2003 is as follows:

During the quarter, there were no changes to the carrying amount of
goodwill due to acquisitions and divestitures. The annual test for impairment of
goodwill as required by SFAS No. 142 was completed during the fourth quarter of
2002. 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.

The estimated amortization expense for the remainder of Fiscal 2003 and for
each of the five succeeding fiscal years is as follows:

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 Logic and Memory Products Group ("Logic and Memory"). As
discussed in Note 8 -- Restructuring and Impairments, the company will be
exiting the Memory business in future periods.

8

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The company has determined that its Optoelectronics Group does not meet the
threshold for a separate reportable segment under SFAS No. 131, and accordingly
this segment's results are included as part of the "Other" category for all
periods presented. Similarly, the company's contract manufacturing business is
not a separate reportable segment and its results are also recorded in the
"Other" category.

Selected operating segment financial information for the three and six
months ended June 29, 2003 and June 30, 2002 is as follows:

NOTE 8 -- RESTRUCTURING AND IMPAIRMENTS

During the three and six months ended June 29, 2003, the company recorded
pre-tax restructuring charges of $49.7 million and $60.1 million, respectively.
In the second quarter of 2003, the charge consisted of $20.1 million of employee
separation costs relating to severance and other costs associated with
approximately 1,600 salaried and hourly employees in the United States, Korea,
Europe, Japan, Hong Kong, Malaysia and China, the closure of our 4" fab in South
Portland, Maine and plant closures in Wuxi, China and Kuala Lumpur, Malaysia and
other workforce reduction actions. We expect to record additional charges as
these announced actions are completed in future periods. The remaining $29.6
million of restructuring charges relates to asset impairments in Bucheon, South
Korea as well as asset impairments and other charges associated with the closure
of the 4" fab in South Portland, Maine and plant closures in Wuxi, China and
Kuala Lumpur, Malaysia. In addition, the company recorded a pre-tax charge of
$3.9 million of distributor and inventory reserves associated with the exit from
the hybrid and non-volatile memory businesses, recorded

9

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

in revenues and cost of sales, respectively. For the six months ended June 29,
2003, these charges also include $5.5 million of employee separation costs of
approximately 190 salaried and hourly employees associated with the 6" fab
closure in Mountaintop, Pennsylvania and other various workforce reduction
actions as well as $4.9 million of asset impairments and other charges primarily
associated with the Mountaintop, Pennsylvania 6" fab closure and the closure of
the Carlsbad, California office. In addition, the company recorded a pre-tax
charge of $2.2 million of additional distributor reserves, recorded in revenue,
in connection with the 6" fab closure.

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 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.

The following table summarizes the activity in the company's accrual for
restructuring and impairment costs for the three and six months ended June 29,
2003 (in millions):

Accrual balance as of December 29, 2002..................... $ 4.1
Accrual................................................... 10.4
Cash payments............................................. (3.7)
Non-cash items............................................ (2.7)
------
Accrual balance as of March 30, 2003........................ 8.1
Accrual................................................... 49.7
Cash payments............................................. (7.9)
Non-cash items............................................ (28.1)
------
Accrual balance as of June 29, 2003......................... $ 21.8
======

The company expects that all amounts will be substantially paid within the
next year.

NOTE 9 -- STOCKHOLDERS' EQUITY

At our annual stockholders' meeting on May 8, 2003, our stockholders
approved amendments to our restated certificate of incorporation. These changes
eliminated the non-voting Class B Common Stock and changed the name of the Class
A Common Stock to be simply "Common Stock". No Class B Common Stock was
outstanding at December 29, 2002.

NOTE 10 -- REFINANCING OF SENIOR CREDIT FACILITY

On June 19, 2003, the company completed a refinancing of its senior credit
facility. The new $480 million senior credit facility includes a $300 million
term loan and a $180 million revolving line of credit. The new term loan will
carry an interest rate of LIBOR plus 2.75%, which was 3.875% at June 29, 2003.
Borrowings under the agreement are secured by a pledge of common stock of the
company and its significant subsidiaries. In connection with this refinancing,
the company recorded $4.1 million in deferred financing fees associated with the
$300 million term loan, which are being amortized over five years, and $2.5
million in deferred financing fees associated with the revolving line of credit,
which are being amortized over four years.

The company used the proceeds from the new $300 million term loan to redeem
the 10 3/8% senior subordinated notes that were due in October 2007 at a price
of 105.19% of face value. The new $180 million revolving line of credit replaces
the company's previous $300 million revolving line of credit. In connection with
the refinancing, the company incurred charges totaling $23.4 million, including
$17.4 million for the call

10

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

premium on the 10 3/8% senior subordinated notes and other transaction fees and
$6.0 million for a non-cash write-off of deferred financing fees associated with
the redeemed notes and the previous credit facility.

NOTE 11 -- 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, had no impact on
earnings for the six months ended June 29, 2003. No cash flow hedges were
derecognized or discontinued for the six months ended June 29, 2003.

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 $(1.0) million of net
unrealized derivative loss included in OCI will be reclassified into earnings
within the next twelve months.

NOTE 12 -- 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 1/2% Senior Subordinated Notes and its 5%
Convertible Senior Subordinated Notes. These guarantees 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 STATEMENT OF OPERATIONS
(UNAUDITED)

13

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)

14

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)

15

CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)

16

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)

17

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)

18

CONDENSED CONSOLIDATING STATEMENT 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 DISCUSSION AND ANALYSIS TO "WE,"
"OUR," THE "COMPANY," "FAIRCHILD," AND "FAIRCHILD INTERNATIONAL" REFER TO
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND ITS CONSOLIDATED SUBSIDIARIES,
INCLUDING FAIRCHILD SEMICONDUCTOR CORPORATION, OUR PRINCIPAL OPERATING
SUBSIDIARY. WE REFER TO INDIVIDUAL CORPORATIONS WHERE APPROPRIATE. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS IN THIS
REPORT. SEE "FORWARD-LOOKING STATEMENTS," "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 are a global company that designs, develops
and markets analog, interface, discrete, standard logic, non-volatile memory and
optoelectronic semiconductors. Within our broad product portfolio, we focus on
providing power discrete and analog products for power management applications.
Over two-thirds of our sales in the first six months of 2003 were from power
discrete and analog products used directly in power applications, such as
voltage conversion, power regulation, power distribution and power and battery
management. We believe that we are the world's leading supplier of combined
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 help to 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.

RESULTS OF OPERATIONS

On a segment basis, Analog had operating income of $2.5 million and $2.3
million in the second quarter and first six months of 2003, respectively,
compared to operating income of $9.5 million and $19.1 million in the comparable
periods of 2002. The decrease in Analog's operating income was due to a decrease
in average selling prices on higher unit volumes and increases in selling,
general and administrative expenses, offset by decreases in research and
development expenses. The decreases in operating margins also include $0.4
million in inventory reserves associated with the second quarter restructuring
action. Discrete had operating income of $10.0 million and $25.6 million in the
second quarter and first six months of 2003, respectively, compared to $19.0
million and $32.1 million in the comparable periods of 2002. The decrease in
Discrete's operating income was primarily due to lower prices on power MOSFET's,
increased selling, general and administrative expenses, offset slightly by
decreases in research and development expenses. The decreases also include $2.2
million of distributor reserves associated with the 6" fab closure in the first
quarter and $1.3 million of inventory reserves associated with the second
quarter restructuring action. Logic and Memory had an operating loss of $0.4
million in the second quarter of 2003 and broke even for the first six months of
2003, compared to operating income of $2.4 million and $2.8 million in the
comparable periods of 2002. The decrease in Logic and Memory's operating margins
was primarily due to decreases in average selling prices on lower unit volumes.
These decreases also include $2.2 million of distributor and inventory reserves
associated with the second quarter restructuring action.

REVENUES

Revenues were $347.1 million and $698.2 million in the second quarter and
first six months of 2003, respectively, compared to $360.5 million and $697.4
million in the comparable periods of 2002. The decrease in revenues in the
second quarter was driven primarily by lower average selling prices in Analog
and Logic and Memory. On a year to date basis, revenues were roughly flat, as
increased volume offset lower average selling prices. On a segment basis, Analog
revenues decreased 7.1% to $81.2 million in the second quarter of 2003
20

from $87.4 million in the second quarter of 2002, and 3.0% to $165.4 million for
the first six months of 2003 from $170.5 million, in the comparable period of
2002. The decreases in Analog's revenues were primarily due to increased unit
volumes offset by lower average selling prices. Discrete revenues increased 2.3%
to $190.9 million in the second quarter of 2003 from $186.6 million in the first
quarter of 2002, and 4.1% to $380.4 million for the first six months of 2003
from $365.4 million, in the comparable period of 2002. The increases are the
result of the continued growth of power MOSFET's into virtually all end markets.
On a year to date basis, these increases were also offset by $2.2 million of
distributor reserves associated with the 6" Mountaintop, Pennsylvania fab
closure recorded in the first quarter. Logic and Memory revenues decreased by
22.2% to $41.1 million in the second quarter of 2003 from $52.8 million in the
second quarter of 2002, and 15.7% to $87.1 million for the first six months of
2003 from $103.3, in the comparable period of 2002. The decreases were due to
lower unit volumes coupled with lower average selling prices, across all end
markets. In the second quarter of 2003, these decreases also include $1.0
million of distributor sales reserves associated with the second quarter
restructuring action.

As a percentage of sales, geographic 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 29, 2003 and June
30, 2002:

GROSS PROFIT

Gross profit was as follows for the three and six months ended June 29,
2003 and June 30, 2002:

For the second quarter of 2003, gross profit includes the previously
discussed distributor sales reserves ($1.0 million) and inventory charges ($2.9
million) associated with the second quarter restructuring actions. On a
year-to-date basis, gross profit also includes the previously discussed
distributor sales reserves in connection with the 6" fab closure ($2.2 million).
The remaining decrease in gross profit for the second quarter and first six
months of 2003 compared to the same periods of 2002 was a result of increased
pricing pressures across most product lines, partially offset by manufacturing
cost reductions.

RESEARCH AND DEVELOPMENT

R&D expenses were $18.8 million, or 5.4% of sales, in the second quarter of
2003, compared to $21.8 million, or 6.1% of sales, in the second quarter of
2002. On a year-to-date basis, R&D was $37.9 million, or 5.4% of sales, compared
to $42.5 million, or 6.1% of sales for the comparable period of 2002. The
decreases for both the quarter and first six months of 2003 as compared to the
comparable periods of 2002 were due to spending reductions in response to softer
market conditions.

21

SELLING, GENERAL AND ADMINISTRATIVE

SG&A was $37.5 million, or 10.8% of sales, in the second quarter of 2003,
or roughly flat compared to $37.6 million, or 10.4% of sales, in the second
quarter of 2002. On a year-to-date basis, SG&A expenses were $76.7 million, or
11.0% of sales, compared to $72.1 million, or 10.3% of sales, for the comparable
period of 2002. The increase in SG&A expenses for the first six months of 2003
is primarily a result of the resumption of certain benefits in the first quarter
of 2003.

AMORTIZATION OF ACQUISITION-RELATED INTANGIBLES

Amortization of acquisition-related intangibles was $7.9 million in the
second quarter of 2003, compared to $9.5 million in the second quarter of 2002.
On a year-to-date basis, amortization of acquisition related intangibles was
$17.4 million, compared to $18.8 million for the comparable period of 2002. The
decreases in amortization are due to certain intangibles becoming fully
amortized during the first quarter of 2003.

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT

Purchased in-process research and development was recorded in the first
quarter of 2002 in connection with our acquisitions of certain assets from
I-Cube, Inc. ($1.0 million) and Signal Processing Technologies, Inc. (SPT) ($0.7
million).

RESTRUCTURING AND IMPAIRMENTS

During the three and six months ended June 29, 2003, the company recorded
pre-tax restructuring charges of $49.7 million and $60.1 million, respectively.
In the second quarter of 2003, the charge consisted of $20.1 million of employee
separation costs relating to severance and other costs associated with
approximately 1,600 salaried and hourly employees in the United States, Korea,
Europe, Japan, Asia, Malaysia and China, the closure of our 4" fab in South
Portland, Maine and plant closures in Wuxi, China and Kuala Lumpur, Malaysia and
other workforce reduction actions. We expect to record additional charges as
these announced actions are completed in future periods. The remaining $29.6
million of restructuring charges relates to asset impairments in Bucheon, South
Korea as well as asset impairments and other charges associated with the closure
of the 4" fab in South Portland, Maine and plant closures in Wuxi, China and
Kuala Lumpur, Malaysia. In addition, the company recorded a pre-tax charge of
$3.9 million of distributor and inventory reserves associated with the exit from
the hybrid and non-volatile memory businesses, recorded in revenues and cost of
sales, respectively. For the six months ended June 29, 2003, these charges also
include $5.5 million of employee separation costs of approximately 190 salaried
and hourly employees associated with the 6" fab closure in Mountaintop,
Pennsylvania and other various workforce reduction actions as well as $4.9
million of asset impairments and other charges primarily associated with the
Mountaintop, Pennsylvania 6" fab closure and the closure of the Carlsbad,
California office. In addition, the company recorded a pre-tax charge of $2.2
million of additional distributor reserves, recorded in revenue, in connection
with the 6" fab closure.

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 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.

INTEREST EXPENSE

Interest expense was $21.4 million and $42.3 million in the second quarter
and first six months of 2003, respectively, compared to $28.6 million and $57.2
million in the comparable periods of 2002. The decrease in interest expense in
the second quarter of 2003 and first six months of 2003 is principally the
result of the redemption of $285.0 million of 10 1/8% senior subordinated notes
on June 28, 2002.

22

INTEREST INCOME

Interest income was $1.9 million and $4.4 million in the second quarter and
first six months of 2003, respectively, compared to $3.1 million and $5.6
million in the comparable periods of 2002. The decreases in interest income are
due to declines in the returns earned on our cash balances, partially offset by
an increase in average cash balances.

OTHER EXPENSE, NET

During the second quarter and first six months of 2003 we recorded other
expense of $23.4 million. The $23.4 million recorded in the second quarter of
2003 was for costs associated with the redemption of our 10 3/8% senior
subordinated notes and the refinancing of our $300 million revolving line of
credit. These costs included $17.4 million for the call premium on the 10 3/8%
senior subordinated notes and other transaction fees and a $6.0 million non-cash
write-off of deferred financing fees associated with the original bond offering
and the refinancing of the $300 million revolving line of credit.

During the 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 on the 10 1/8% senior subordinated notes 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.

INCOME TAXES

Income tax benefit was $20.8 million and $22.3 million for the second
quarter and first six months of 2003, respectively, compared to $7.1 million and
$5.6 million for the second quarter and first six months of 2002. The effective
tax rate for the second quarter and first six months of 2003 was 24.6% and
21.5%, respectively, compared to 35.3% and 35.2% for the second quarter and
first six months of 2002. The decrease in the effective tax rate in 2003 as
compared to 2002 was due to the changes in the magnitude and location of taxable
income among taxing jurisdictions. The tax rate was calculated based upon actual
tax rates for the quarter rather than using a projected annual tax rate due to
the uncertainty of projecting annual taxable income by tax jurisdiction. Changes
in the location of taxable income (loss) could result in significant changes in
the effective tax rate.

LIQUIDITY AND CAPITAL RESOURCES

We have a borrowing capacity of $180.0 million on a revolving basis for
working capital and general corporate purposes, including acquisitions, under
our senior credit facility. At June 29, 2003, adjusted for outstanding letters
of credit, we had up to $179.3 million available under this senior credit
facility. At June 29, 2003, we had additional outstanding letters of credit and
guarantees totaling $5.0 million that were issued on behalf of unaffiliated
companies with which we currently have a strategic investment or relationship.
These amounts outstanding do not impact available borrowings under the senior
credit facility.

Our senior credit facility, the indentures governing our 10 1/2% Senior
Subordinated Notes, 5% Convertible Senior Subordinated Notes, $300 million term
loan, 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 also include financial
measures such as a minimum interest coverage ratio, a maximum senior leverage
ratio and a minimum EBITDA less capital expenditures measure. At June 29, 2003,
the company was in compliance with these covenants. The senior credit facility
also limits our ability to modify our certificate of incorporation and bylaws,
or enter into
23

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 $120 to $140 million in 2003 on capital expenditures, including
the $72.4 million we have spent through June 29, 2003. 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 to
add capacity in our 8" Mountaintop, Pennsylvania facility and to support cost
reduction projects in our manufacturing facilities and information technology
infrastructure projects. We frequently evaluate opportunities to sell additional
equity or debt securities, obtain credit facilities from lenders or restructure
our long-term debt to further strengthen our financial position. The sale of
additional equity or convertible securities could result in additional dilution
to our stockholders. Additional borrowing or equity investment may be required
to fund future acquisitions.

As of June 29, 2003, our cash and cash equivalents were $562.3 million, a
decrease of $56.0 million from December 29, 2002 and a decrease of $37.6 from
March 30, 2003.

During the first six months of 2003, our operations provided $45.2 million
in cash compared to $24.4 million of cash in the first six months of 2002. The
increase in cash provided by operating activities reflects an increase in the
first six months of 2003 in net loss adjusted for non-cash items of $14.5
million offset by an increase in cash flows from changes in operating assets and
liabilities of $35.3 million as compared to the first six months of 2002. Cash
used in investing activities during the first six months of 2003 totaled $93.2
million, compared to $35.6 million used in the first six months of 2002. The
increase primarily results from an increase of $14.6 million in capital
expenditures, a cash outflow for purchases of marketable securities, net of
sales of marketable securities of $20.2 million in the first six months of 2003,
and net cash acquired from acquisitions and divestitures of $23.9 million in the
first six months of 2002, for which there is no comparable amount in the first
six months of 2003. Cash used in financing activities of $8.0 million for the
first six months of 2003 was primarily the repayment of long-term debt, offset
by the proceeds from the issuance of long-term debt. Cash provided by financing
activities of $120.2 million for the first six months of 2002 was primarily from
proceeds from the issuance of common stock, exercises of options to purchase
common stock, offset by repayment of long-term debt.

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 29, 2003, obligations under these
arrangements were not material to our consolidated financial statements. The
table below summarizes aggregate maturities of long-term debt, future minimum
lease payments under noncancelable operating leases, and guarantee commitments
as of June 29, 2003.

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 sole subsidiary, Fairchild
Semiconductor Corporation. Fairchild Semiconductor International on a

24

stand-alone basis had no cash flow from operations in the first six months of
2003, nor in the first six months of 2002. 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, the impairment of long-lived
assets and income taxes. 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 revenue recognition,
sales reserves, inventory valuation, impairment of long-lived assets and income
taxes. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Materially different results in the amount and timing of our actual results for
any period could occur if our management made different judgments or utilized
different estimates.

Revenue Recognition. 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. 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 distributor's inventory carrying value. Historically, we
have not experienced material differences between our estimated sales reserves
and actual results.

Inventory Valuation. 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. Once established, write-downs of inventory are considered
permanent adjustments to the cost basis of inventory.

Impairment of Long-Lived Assets. We assess the impairment of long-lived
assets, including goodwill, on an ongoing basis and whenever events or changes
in circumstances indicate that the carrying value may not be recoverable.

In conjunction with the implementation of the new accounting rules for
goodwill as of the beginning of 2002, we completed a goodwill impairment review
for the reporting units that have goodwill associated with

25

them. We also performed an annually required review during the fourth quarter of
2002, and in both reviews we found no impairment.

We will perform a similar review annually, or more frequently, if
indicators of potential impairment arise. Our impairment review process is based
upon a discounted cash flow analysis, which uses our estimates of revenues,
driven by market growth rates and estimated costs, as well as utilizing a
discount rate determined by our management to be commensurate with our cost of
capital and the risk inherent in our current business model.

For all other long-lived assets, our impairment review process is 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, and

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

Recoverability of assets that will continue to be used in our operations is
measured by comparing the carrying value to the future undiscounted cash flows.
Future undiscounted cash flows include estimates of future revenues, driven by
market growth rates, and estimated future costs.

Income Taxes. We estimate our income tax provision in each of the
jurisdictions in which we operate, including estimating exposures related to
examinations by taxing authorities. We must also make judgments regarding the
realizability of deferred tax assets. The carrying value of our net deferred tax
asset is based on our belief that it is more likely than not that we will
generate sufficient future taxable income in certain jurisdictions to realize
these deferred tax assets. A valuation allowance has been established for
deferred tax assets which we do not believe meet the more likely than not
criteria established by SFAS No. 109, "Accounting for Income Taxes." Our
judgments regarding future taxable income may change due to changes in market
conditions, changes in tax laws, or other factors. If our assumptions and
consequently our estimates, change in the future, the valuation allowances we
have established may be increased, resulting in increased income tax expense.
Conversely, if we are ultimately able to utilize all or a portion of the
deferred tax assets for which a valuation allowance has been provided, the
related portion of the valuation allowance will be released to income as a
credit to income tax expense.

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 report are made based on management's current expectations and estimates,
which involve risks and uncertainties, including those described below and more
specifically in the Business Risks section 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

26

materially different from those in the forward-looking statements. Readers are
cautioned not to place undue reliance on the forward-looking statements.

POLICY ON BUSINESS OUTLOOK DISCLOSURE AND QUIET PERIODS

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 17, 2003 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
http://investor.fairchildsemi.com. Toward the end of each quarter, and until
that quarter's results are publicly announced, 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 2003 will be from September 13, 2003 to
October 16, 2003, when we plan to release our third quarter 2003 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 filing 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 of the company's
financial results or expectations.

OUTLOOK

The third quarter is typically a seasonally slower quarter. In addition, we
believe there is excess inventory in Asian distribution that will need to be
worked off during the first part of the quarter. Therefore, we expect revenues
in the third quarter of 2003 to be down 4-6% from second quarter. While backlog
margins were slightly lower than second quarter of 2003, we expect cost
reductions both above and below the gross profit line will somewhat offset this
lower margin and allow us to deliver operating margins that will be flat to down
100 basis points compared to the second quarter of 2003.

We expect interest expense, net, to be about $16 million. We expect that
depreciation and amortization will increase $2-3 million due to startup costs in
our Suzhou, China factory and amortization of acquisition-related intangibles to
be approximately $7.9 million for the third quarter of 2003. We estimate our
effective tax rate to be near 0% for the remainder of the year. Finally, we
expect an outstanding diluted share count of approximately 119 million shares
for the third quarter of 2003.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity ("SFAS No. 150"). This statement establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The company does not expect
the provisions of this statement to have a significant impact on the company's
results of operations or financial position.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS No. 149"). The purpose of
SFAS No. 149 is to amend and clarify financial accounting and reporting for
derivative instruments and hedging activities under SFAS No. 133. SFAS No. 149
amends SFAS No. 133 for decisions made: (i) as part of the Derivatives
Implementation Group process that require amendment to SFAS No. 133, (ii) in
connection with other FASB projects dealing with financial instruments, and
(iii) in connection with the implementation issues raised related to the
application of the definition of a derivative. SFAS No. 149 is effective for
contracts entered into or modified after June 30,

27

2003 and for designated hedging relationships after June 30, 2003. SFAS No. 149
will be applied prospectively. The company does not expect SFAS No. 149 to have
a material effect on its consolidated financial condition or results of
operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 ("Interpretation No.
46"). Interpretation No. 46 clarifies Accounting Research Bulletin No. 51,
Consolidated Financial Statements related to whether companies should
consolidate certain entities, called variable interest entities, for which there
is no controlling financial interest but have characteristics of a controlling
interest in place, called a variable interest. Interpretation No. 46 is
effective immediately for variable interest entities created after January 31,
2003 and for interim periods beginning after June 15, 2003 for which a variable
interest was in place prior to February 1, 2003. The company is currently
assessing the impact of this interpretation on its consolidated financial
statements.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure-An Amendment of SFAS No. 123 ("SFAS No. 148"). SFAS No. 148 amends
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), to
provide alternative methods of transition for a voluntary change to the
fair-value-based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in not only annual, but also interim financial
statements about the effect the fair value method would have had on reported
results. The transition and annual disclosure requirements of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002. The interim
disclosure requirements are effective for interim periods beginning after
December 15, 2002. The company intends to continue to account for options under
APB Opinion No. 25.

In November 2002, the Task Force reached a consensus on EITF Issue No.
00-21, Revenue Arrangements with Multiple Deliverables ("Issue No. 00-21").
Issue No. 00-21 addresses when an arrangement with multiple deliverables should
be divided into separate units of accounting. This consensus is effective for
fiscal years beginning after June 15, 2003. We do not believe the impact of
adopting EITF Issue No 00-21 will have a material impact on our financial
statements.

BUSINESS RISKS

Our business is subject to a number of risks and uncertainties. Among other
things, these risks could cause actual results to differ materially from those
expressed in forward-looking statements. You should carefully consider the risks
described below before investing in our common stock. The risks described below
are not the only ones facing us. Additional risks not currently known to us or
that we currently believe are immaterial also may impair our business operations
and financial condition.

THE PRICE OF OUR COMMON STOCK HAS FLUCTUATED WIDELY IN THE LAST YEAR AND
MAY FLUCTUATE WIDELY IN THE FUTURE.

Our common stock, which is traded on The New York Stock Exchange, has
experienced and may continue to experience significant price and volume
fluctuations that could adversely affect the market price of our common stock
without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in financial results, earnings below
analysts' estimates and financial performance and other activities of other
publicly traded companies in the semiconductor industry could cause the price of
our common stock to fluctuate substantially. In addition, in recent periods, our
common stock, the stock market in general and the market for shares of
semiconductor industry-related stocks in particular have experienced extreme
price fluctuations which have often been unrelated to the operating performance
of the affected companies. Any similar fluctuations in the future could
adversely affect the market price of our common stock.

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. Beginning in the
fourth quarter of 2000 and continuing through most of 2001,
28

we and the rest of the semiconductor industry experienced backlog cancellations
and reduced demand for our products, resulting in significant revenue declines,
due to excess inventories at computer and telecommunications equipment
manufacturers and general economic conditions, especially in the technology
sector. Although we believe the trough of this most recent cycle occurred in the
third quarter of 2001, the semiconductor industry has yet to begin a significant
recovery. 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. For
example, in 2002, we sold approximately 7% more units than in 2001, yet our
revenues were essentially unchanged. 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. Many of our competitors are
larger, older and well established international companies with greater
engineering and research and development resources than us. A fundamental shift
in technologies in our product markets that we fail to identify or capitalize on
relative to our competitors 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 or using 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 you 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.

In addition, effective patent, trademark, copyright and trade secret
protection may be unavailable, limited or not applied for in some 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 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
29

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 SOME 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 intellectual property infringement and litigation regarding patent
and other intellectual property rights. These claims relate both to products and
manufacturing processes. Even though we maintain procedures to avoid infringing
others' rights as part of our product and process development efforts, we cannot
assure you that we will be successful, or that others will agree that our
products are non-infringing. We receive direct and indirect claims of
intellectual property infringement (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 manufacturing 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 of various sizes 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
costs of acquiring and integrating related businesses, or our failure to
integrate them successfully into our existing businesses, could result in our
company incurring unanticipated expenses and losses. In addition, we may not be
able to identify or finance additional acquisitions or realize any anticipated
benefits from acquisitions we do complete.

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

If we 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

30

otherwise be available for the ongoing development or expansion of existing
operations. Some of the risks associated with acquisitions include:

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

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

- coordinating new product and process development;

- hiring additional management and other critical personnel;

- negotiating with labor unions; and

- 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.

WE DEPEND ON SUPPLIERS FOR TIMELY DELIVERIES OF RAW MATERIALS OF ACCEPTABLE
QUALITY. PRODUCTION TIME AND PRODUCT COSTS COULD INCREASE IF WE WERE TO LOSE A
PRIMARY SUPPLIER OR IF A PRIMARY SUPPLIER INCREASED THE PRICES OF RAW MATERIALS.
PRODUCT PERFORMANCE COULD BE AFFECTED AND QUALITY ISSUES COULD DEVELOP AS A
RESULT OF A SIGNIFICANT DEGRADATION IN THE QUALITY OF RAW MATERIALS WE USE IN
OUR PRODUCTS.

Our manufacturing operations depend upon obtaining adequate supplies of raw
materials on a timely basis. Our results of operations could be adversely
affected if we were unable to obtain adequate supplies of raw materials in a
timely manner or if the costs of raw materials increased significantly. Results
could also be adversely affected if there is 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, any of which could lead
to an increase in customer returns or product warranty claims. Although we
maintain rigorous quality control systems, errors or defects may arise from a
supplied raw material and be beyond our detection or control. 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 Amkor, AUK, Enoch, Wooseok, SPS, NS
Electronics (Bangkok) Ltd., Samsung Electronics, and ChipPAC. Our operations and
ability to satisfy customer obligations could be adversely affected if our
relationships with these subcontractors were disrupted or terminated.

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

Our manufacturing efficiency is an important factor in our profitability,
and we cannot assure you that we will be able to maintain our manufacturing
efficiency or increase manufacturing efficiency to the same extent as our
competitors. Our manufacturing processes are highly complex, require advanced
and costly equipment and are continuously being modified in an effort to improve
yields and product performance. Impurities or other difficulties in the
manufacturing process can lower yields. We have begun initial production at a
new assembly and test facility in Suzhou, China. We are transferring some
production from subcontractors to this new facility. 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
completing transitions to new manufacturing processes at existing facilities. As
a consequence, we have suffered delays in product deliveries or reduced yields.

We may experience delays or problems in bringing our new factory in Suzhou,
China or other new manufacturing capacity to full production. Such delays, as
well as possible problems in achieving acceptable

31

yields, or product delivery delays relating to existing or planned new capacity
could result from, 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.

MORE THAN HALF 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 63% of our net sales for the three months ended
June 29, 2003. Our top five distributors worldwide accounted for 17% of our net
sales for the three months ended June 29, 2003. 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, ESPECIALLY IN THE MARKETS
WE SERVE, 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. Competition is especially intense in the multi-market
semiconductor segment because it is relatively easier for customers to switch
suppliers of more standardized, multi-market products like ours, compared to
switching suppliers of more highly integrated or customized semiconductor
products such as processors or system-on-a-chip products, which we do not
manufacture. Even in strong markets, price pressures may emerge as competitors
attempt to gain a greater market share by lowering prices. Competition in the
various markets in which we participate comes from companies of various sizes,
many of which are larger and have greater financial and other resources than we
have and thus are better able to pursue acquisition candidates and can better
withstand adverse economic or market conditions. In addition, companies not
currently in direct competition with us may introduce competing products in the
future.

WE MAY FACE PRODUCT WARRANTY OR PRODUCT LIABILITY CLAIMS THAT ARE
DISPROPORTIONATELY HIGHER THAN THE VALUE OF THE PRODUCTS INVOLVED.

Our products are typically sold at prices that are significantly lower than
the cost of the equipment or other goods in which they are incorporated. For
example, our products that are incorporated into a personal computer would be
sold for several dollars, whereas the personal computer would be sold by the
computer maker for several hundred dollars. Although we maintain rigorous
quality control systems, we manufacture and sell approximately 16 billion
individual semiconductor devices per year to customers around the world, and in
the ordinary course of our business we receive warranty claims for some of these
products that are defective or that do not perform to published specifications.
Since a defect or failure in our product could give rise to failures in the
goods that incorporate them (and consequential claims for damages against our
customers from their customers), we may face claims for damages that are
disproportionate to the revenues and profits we receive from the products
involved. We attempt, through our standard terms and conditions of sale and
other customer contracts, to limit our liability for defective products to
obligations to replace the defective goods or refund the purchase price.
Nevertheless, we receive claims for other charges, such as for labor and other
costs of replacing defective parts, lost profits and other damages. In addition,
our ability to reduce such liabilities may be limited by the laws or the
customary business practices of the countries where we do business. And, even in
cases where we do not believe we have legal liability for such claims, we may
choose to pay for them to retain a customer's business or goodwill. Our results
of operations and business

32

could be adversely affected as a result of a significant quality or performance
issue in our products, if we are required or choose to pay for the damages that
result.

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 are constructing another facility in China. We have sales offices
and customers around the world. Almost three-quarters of our revenues in 2002
were from Asia. The following are risks inherent in doing business on an
international level:

- economic and political instability;

- foreign currency fluctuations;

- transportation delays;

- trade restrictions;

- work stoppages; and

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

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

As a result of the acquisition of the power device business from Samsung
Electronics in 1999, we have significant operations and sales in South Korea and
are subject to risks associated with doing business there. Korea accounted for
21% of our revenue for the second quarter of 2003.

Relations between South Korea and North Korea have been tense over most of
South Korea's history, and recent concerns over North Korea's nuclear
capability, and relations between the United States and North Korea, have
created a global security issue that may adversely affect Korean business and
economic conditions. 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. And, in addition to other risks disclosed relating
to international operations, some businesses in South Korea are subject to labor
unrest.

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 SUPPLY AND SUPPORT CONTRACTS WITH SAMSUNG
ELECTRONICS IN CONNECTION WITH OUR ACQUISITION OF ITS POWER DEVICE BUSINESS IN
1999, MOST OF WHICH HAVE NOW ENDED. ANY SIGNIFICANT DECREASE IN PURCHASES BY
SAMSUNG ELECTRONICS COULD SUBSTANTIALLY REDUCE OUR FINANCIAL PERFORMANCE.

As a result of the acquisition of Samsung Electronics' power device
business in 1999, we entered into numerous arrangements with Samsung
Electronics, including arrangements relating to product sales, designation as a
preferred vendor to affiliated Samsung companies and other services. Although
most of these arrangements have expired, Samsung Electronics remains a
significant customer, due in part to the historical relationship between the
business we acquired and its former parents and affiliates. There can be no
assurances that these relationships will continue at historical levels. Samsung
Electronics (together with its affiliates) is our largest customer, accounting
for approximately 11% of total sales during the second quarter of 2003. Any
material reduction in the purchases of Samsung Electronics could have a material
adverse effect on our results of operations.

33

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

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

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

We have completed the first phase of an 800,000 square foot assembly and
test facility in Suzhou, China, and began production there in July 2003.
Although we expect a significant portion of our production from this new
facility will be exported out of China, especially initially, 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. 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.

OUR BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH SEVERE ACUTE RESPIRATORY
SYNDROME (SARS), INCLUDING THE RISKS OF REDUCED DEMAND FOR OUR PRODUCTS AND THE
RISK OF REDUCED PRODUCTION CAPACITY.

As described above, we operate a facility in Wuxi, China and are in the
process of constructing a new assembly and test facility in Suzhou, China, near
Shanghai, the first phase of which has been completed. Our sales headquarters
for the Asia Pacific region are located in Hong Kong and we have sales and
administrative offices in Beijing, Shanghai and Shenzhen, China as well as in
Singapore and Taiwan. We also have significant facilities in Malaysia, the
Philippines and South Korea. Although it now appears that SARS is under control,
during the height of the crisis we restricted employee travel, resulting in
reduced direct contacts with customers. We are continuing to monitor the effects
of SARS on our business. SARS, its actual and perceived effects, or a renewed
outbreak of the disease, and the general economic and other disruptions caused
by SARS may lead to reduced demand for our products in China and the rest of
Asia. In the second quarter of 2003, the Asian region, including Korea,
accounted for 73% of our revenue. In addition, a SARS outbreak in one of our
manufacturing facilities or the facility of a supplier could have an adverse
effect on our operations if we are not able to address the lost production
capacity that could result.

34

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, Samsung Electronics
and Intersil Corporation, these indemnities are limited to conditions that
occurred prior to the consummation of transactions with those companies.
Moreover, we cannot assure you that their indemnity obligations to us for the
covered liabilities will be adequate to protect us.

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

Our continued success depends on the retention and recruitment of skilled
personnel, including technical, marketing, management and staff personnel. In
the semiconductor industry, the competition for qualified personnel,
particularly experienced design engineers and other technical employees, is
intense, particularly in the "up" portions of our business cycle, when
competitors may try to recruit our most valuable technical employees. There can
be no assurance that we will be able to retain our current personnel or recruit
the key personnel we require.

WE ARE A LEVERAGED COMPANY WITH A DEBT-TO-EQUITY RATIO AT JUNE 29, 2003 OF
APPROXIMATELY 0.8 TO 1, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
LIMIT OUR ABILITY TO GROW AND COMPETE.

At June 29, 2003, we had total long-term debt of $852.7 million and a ratio
of debt to equity of approximately 0.8 to 1. On June 19, 2003, we entered into a
new credit facility that included a $300 million term B loan, the proceeds of
which have been used to redeem our 10 3/8% Senior Subordinated Notes due 2007,
as well as a $180 million revolving line of credit. 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) 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;
35

- 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 indenture governing
Fairchild Semiconductor Corporation's 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 $180.0 million in revolving loans, in addition to the outstanding
$300.0 million term B loan that is currently outstanding under that facility. As
of June 29, 2003, adjusted for outstanding letters of credit, we had up to
$179.3 million available under the revolving loan portion of the senior 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 and the
indenture governing Fairchild Semiconductor Corporation's 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
and the indenture governing Fairchild Semiconductor Corporation's 10 1/2% 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. Our ability to meet those financial ratios can be
affected by events beyond
36

our control, and we cannot assure you that we will meet those ratios. As of June
29, 2003, we were in compliance with these ratios. 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 29, 2002 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 37 of the 10-K.

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the specified time periods. As of the end of the period covered
by this report, our CEO and CFO have evaluated, with the participation of our
management, the effectiveness of our disclosure controls and procedures. Based
on the evaluation, our CEO and CFO concluded that our disclosure controls and
procedures are effective. There were no changes in our internal control over
financial reporting that occurred during our most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

37

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 2. CHANGES IN SECURITIES

At our annual stockholders' meeting on May 8, 2003, our stockholders
approved amendments to our restated certificate of incorporation (see Item 4
below). Before these amendments, we had two classes of common stock -- voting
Class A Common Stock and non-voting Class B Common Stock. Shares of each class
were convertible for shares of the other class on a share-for-share basis at the
option of the holder. The two classes were identical in all respects, except
that Class B shares were non-voting and there was no public market for the Class
B shares. One of the amendments approved at our recent stockholders' meeting
eliminated the non-voting Class B Common Stock (of which there were 0 shares
outstanding) and changed the name of the voting Class A Common Stock to be
simply "Common Stock." That amendment also eliminated, by necessity, the
conversion feature. Otherwise, the rights of holders of our common stock were
not affected. Another amendment approved at the meeting increased the number of
shares of common stock the company is authorized to issue to 340,000,000 shares
from 170,000,000 shares.

We have filed a certificate of amendment to our restated certificate of
incorporation with the Secretary of State of the State of Delaware. The
certificate of amendment is included as an exhibit to this quarterly report.

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

(a) Our annual meeting of stockholders was held on May 8, 2003.

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

38

(c) In addition to the election of directors described above, the following
matters were voted on at the meeting:

A proposal to amend the company's restated certificate of incorporation to
eliminate Class B Common Stock (of which there were 0 shares outstanding) and to
rename Class A Common Stock as "Common Stock", as described in Item 2, above,
was approved by the following votes:

FOR: 107,129,208 AGAINST: 82,728 ABSTAIN: 23,946

A proposal to amend the company's restated certificate of incorporation to
increase the number of shares of common stock the company is authorized to issue
to 340,000,000 shares from 170,000,000 shares, as described in Item 2, above,
was approved by the following votes:

FOR: 101,114,728 AGAINST: 6,083,548 ABSTAIN: 37,606

A proposal to increase the maximum size of our board of directors, to 13
members from 9 members, was approved by the following votes:

FOR: 91,106,753 AGAINST: 1,065,203 ABSTAIN: 41,640 NO-VOTE:
15,022,286

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

(b) Reports on Form 8-K

On March 31, 2003, we filed a current report on Form 8-K relating to
several senior corporate appointments, as announced in a press release dated
March 27, 2003. The press release is incorporated in, and filed as an exhibit
to, the current report.

On April 17, 2003, we filed a current report on Form 8-K relating to
financial information for the quarter ended March 30, 2003, and forward-looking
statements relating to the second quarter of 2003, as announced in a press
release dated April 17, 2003. The press release is incorporated in, and filed as
an exhibit to, the current report.

On June 6, 2003, we filed a current report on Form 8-K relating to the
update of our forward-looking guidance for the second quarter of 2003, as
announced in a press release dated June 4, 2003. The press release is
incorporated in, and filed as an exhibit to, the current report.

ITEMS 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

39

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.

By: /s/ ROBIN A. SAWYER
------------------------------------
Robin A. Sawyer
Vice President, Corporate Controller
(Principal Accounting Officer)

Date: August 13, 2003

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