Fairchild Semiconductor International (FCS) 10-Q 2005 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 26, 2005
	OR
o	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 incorporation or organization)	(I.R.S. Employer 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 þ          No o.

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

      The number of shares outstanding of the issuer’s classes of common stock as of the close of business on June 26, 2005:

Title of Each Class	Number of Shares
Common Stock	119,855,554

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

			Page
PART I. FINANCIAL INFORMATION
	Item 1.  Financial Statements (Unaudited)
		CONSOLIDATED BALANCE SHEETS as of June 26, 2005 and December 26, 2004		3
		CONSOLIDATED STATEMENTS OF OPERATIONS for the Three and Six Months Ended June 26, 2005 and June 27, 2004		4
		CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) for the Three and Six Months Ended June 26, 2005 and June 27, 2004		5
		CONSOLIDATED STATEMENTS OF CASH FLOWS for the Six Months Ended June 26, 2005 and June 27, 2004		6
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)		7
	Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
	Item 3.  Quantitative and Qualitative Disclosures about Market Risk			45
	Item 4.  Controls and Procedures			46
PART II. OTHER INFORMATION
	Item 1.  Legal Proceedings			46
	Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds			47
	Item 4.  Submission of Matters to a vote of Security Holders			48
	Item 6.  Exhibits			48
	SIGNATURE			49
EX-10.3 Deferred Stock Unit Agreement
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO
EX-32.2 Section 906 Certification of CFO

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

			June 26,			December 26,
			2005			2004
			(In millions)
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	193.8		$	146.3
	Short-term marketable securities			172.7			422.1
	Accounts receivable, net of allowances of $24.5 and $22.5 at June 26, 2005 and December 26, 2004, respectively			143.2			154.0
	Inventories			243.4			253.9
	Deferred income taxes, net of allowances of $22.0 and $0 at June 26, 2005 and December 26, 2004, respectively			3.2			25.7
	Other current assets			25.1			30.4
		Total current assets		781.4			1,032.4
Property, plant and equipment, net				644.3			664.1
Deferred income taxes, net of allowances of $180.0 and $6.1 at June 26, 2005 and December 26, 2004, respectively				—			129.3
Intangible assets, net				139.4			151.6
Goodwill				229.9			229.9
Long-term marketable securities				95.0			124.0
Other assets				37.2			45.2
		Total assets	$	1,927.2		$	2,376.5
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	4.8		$	3.3
	Accounts payable			100.2			118.2
	Accrued expenses and other current liabilities			112.8			165.1
		Total current liabilities		217.8			286.6
Long-term debt, less current portion				646.2			845.2
Deferred income taxes				25.0			—
Other liabilities				15.9			15.6
		Total liabilities		904.9			1,147.4
Commitments and contingencies
Stockholders’ equity:
	Common stock			1.2			1.2
	Additional paid-in capital			1,266.2			1,259.2
	Accumulated deficit			(240.4	)		(24.7	)
	Accumulated other comprehensive loss			(0.3	)		(2.5	)
	Less treasury stock (at cost)			(4.4	)		(4.1	)
		Total stockholders’ equity		1,022.3			1,229.1
		Total liabilities and stockholders’ equity	$	1,927.2		$	2,376.5

See accompanying notes to unaudited consolidated financial statements.

3

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended						Six Months Ended
		June 26,			June 27,			June 26,			June 27,
		2005			2004			2005			2004
		(In millions, except per share data)
		(Unaudited)
Total revenue		$	346.0		$	414.3		$	708.8		$	814.0
Cost of sales			277.1			292.9			556.1			587.3
	Gross profit		68.9			121.4			152.7			226.7
Operating expenses:
Research and development			19.5			21.0			38.5			41.7
Selling, general and administrative			47.5			44.1			94.9			85.8
Amortization of acquisition-related intangibles			6.1			6.2			12.2			13.8
Restructuring and impairments			3.9			4.4			8.0			8.2
Reserve for potential settlement losses			—			11.0			—			11.0
	Total operating expenses		77.0			86.7			153.6			160.5
Operating income (loss)			(8.1	)		34.7			(0.9	)		66.2
Interest expense			8.7			15.8			22.0			31.6
Interest income			(2.8	)		(1.7	)		(6.0	)		(4.3	)
Other expense			—			—			23.9			—
Income (loss) before income taxes			(14.0	)		20.6			(40.8	)		38.9
Provision for income taxes			191.3			3.6			174.9			8.9
Net income (loss)		$	(205.3	)	$	17.0		$	(215.7	)	$	30.0
Net income (loss) per common share:
	Basic	$	(1.71	)	$	0.14		$	(1.80	)	$	0.25
	Diluted	$	(1.71	)	$	0.14		$	(1.80	)	$	0.24
Weighted average common shares:
	Basic		119.8			119.3			119.8			119.3
	Diluted		119.8			124.0			119.8			124.8

See accompanying notes to unaudited consolidated financial statements.

4

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

		Three Months Ended						Six Months Ended
		June 26,			June 27,			June 26,			June 27,
		2005			2004			2005			2004
		(In millions)
		(Unaudited)
Net income (loss)		$	(205.3	)	$	17.0		$	(215.7	)	$	30.0
Other comprehensive income (loss), net of tax:
	Net change associated with hedging transactions		0.9			0.4			2.1			0.7
	Net amount reclassified to earnings for hedging		(0.1	)		0.1			0.3			1.1
	Net change associated with unrealized holding gain (loss) on marketable securities		0.4			(1.7	)		(0.3	)		(1.6	)
	Net amount reclassified to earnings for marketable securities		—			0.1			0.1			0.1
Comprehensive income (loss)		$	(204.1	)	$	15.9		$	(213.5	)	$	30.3

See accompanying notes to unaudited consolidated financial statements.

5

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

			Six Months Ended
			June 26,			June 27,
			2005			2004
			(In millions)
			(Unaudited)
Cash flows from operating activities:
Net income (loss)			$	(215.7	)	$	30.0
	Adjustments to reconcile net income (loss) to cash provided by operating activities:
	Depreciation and amortization			87.4			86.0
	Amortization of deferred compensation			1.2			1.5
	Non-cash restructuring and impairment expense			2.1			—
	(Gain) loss on disposal of property, plant, and equipment			0.2			(0.8	)
	Non-cash vesting of equity awards			3.8			—
	Non-cash financing expense			1.4			1.9
	Deferred income taxes, net			175.4			4.0
	Non-cash write off of deferred financing fees			5.4			—
Changes in operating assets and liabilities:
	Accounts receivable, net			10.8			(15.9	)
	Inventories			10.5			(2.4	)
	Other current assets			10.1			(11.2	)
	Current liabilities			(70.3	)		33.8
	Other assets and liabilities, net			1.4			(8.9	)
		Cash provided by operating activities		23.7			118.0
Cash flows from investing activities:
	Capital expenditures			(55.7	)		(90.2	)
	Proceeds from sale of property, plant and equipment			—			3.1
	Purchase of molds and tooling			(1.0	)		(2.1	)
	Purchase of marketable securities			(401.4	)		(540.9	)
	Sale of marketable securities			663.2			406.9
	Maturity of marketable securities			15.5			49.2
		Cash provided by (used in) investing activities		220.6			(174.0	)
Cash flows from financing activities:
	Repayment of long-term debt			(352.0	)		(1.7	)
	Issuance of long-term debt			154.5			—
	Proceeds from issuance of common stock and from exercise of stock options, net			5.7			18.8
	Purchase of treasury stock			(4.0	)		(4.6	)
	Debt issuance costs			(1.0	)		—
		Cash provided by (used in) financing activities		(196.8	)		12.5
Net change in cash and cash equivalents				47.5			(43.5	)
Cash and cash equivalents at beginning of period				146.3			169.5
Cash and cash equivalents at end of period			$	193.8		$	126.0

See accompanying notes to unaudited consolidated financial statements.

6

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Basis of Presentation

      The accompanying interim 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 26, 2004. 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 26, 2004. Certain amounts for prior periods have been reclassified to conform to the current presentation.

Note 2 — Financial Statement Details

			June 26,		December 26,
			2005		2004
			(In millions)
Inventories
Raw materials			$	30.8	$	30.9
Work in process				155.6		162.5
Finished goods				57.0		60.5
			$	243.4	$	253.9
Property, plant and equipment
	Land		$	32.1	$	32.1
	Buildings and improvements			303.3		299.5
	Machinery and equipment			1,317.4		1,273.9
	Construction in progress			100.8		109.8
		Total property, plant and equipment		1,753.6		1,715.3
	Less accumulated depreciation			1,109.3		1,051.2
			$	644.3	$	664.1

Note 3 — Computation of Net Income (Loss) Per Share

      The company calculates earnings per share in accordance with Statement of Financial Accounting Standards (SFAS) No. 128,Earnings Per Share. Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. The dilutive effect of the common stock equivalents is included in the calculation of diluted earnings per share only when the effect of their inclusion would be dilutive. Potentially dilutive common equivalent shares consist of stock options, deferred stock units (DSUs) and shares obtainable upon the conversion of the Convertible Senior Subordinated Notes, due November 1, 2008.

	Three Months Ended				Six Months Ended
	June 26,		June 27,		June 26,		June 27,
	2005		2004		2005		2004
	(In millions)
Basic weighted average common shares outstanding		119.8		119.3		119.8		119.3
Net effect of dilutive stock options and DSUs based on the treasury stock method using the average market price		—		4.7		—		5.5
Diluted weighted average common shares outstanding		119.8		124.0		119.8		124.8

7

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      For the three and six months ended June 26, 2005, approximately 2.3 million and 2.5 million common equivalent shares from stock options and DSUs, respectively, have been excluded from the calculation of diluted net loss per common share because their effect would have been anti-dilutive. In addition, $1.7 million and $3.4 million were excluded in the computation of net income (loss) for the three and six months ended June 26, 2005 and June 27, 2004, respectively, and 6.7 million potential common shares were excluded 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.

      For the three and six months ended June 26, 2005, approximately 17.1 million and 17.0 million, respectively, of the company’s stock options were greater than or equal to the average price of the common shares, and therefore have been excluded because their inclusion would have been anti-dilutive. For the three and six months ended June 27, 2004, approximately 9.9 million and 9.6 million, respectively, of the company’s stock options were greater than or equal to the average price of the common shares, and therefore have been excluded because their inclusion would have been anti-dilutive. These options could be dilutive in the future if the average share price increases and is greater than the exercise price of these options.

Note 4 — Supplemental Cash Flow Information

		Six Months Ended
		June 26,		June 27,
		2005		2004
		(In millions)
Cash paid, net for:
	Income taxes	$	4.9	$	3.0
	Interest	$	34.4	$	29.1

Note 5 — Marketable Securities

      The company invests excess cash in marketable securities consisting primarily of commercial paper, corporate notes and bonds, and U.S. Government securities with maturities of no greater than 36 months. The company also invests in auction rate securities. These securities have long-term underlying maturities, however, the market is highly liquid and the interest rates reset every 7, 28 or 35 days. The company’s intent is not to hold these securities to maturity, but rather to use the interest rate reset feature to sell securities to provide liquidity as needed. The company’s practice is to invest in these securities for higher yields compared to cash equivalents. Prior to December 26, 2004, auction rate securities were classified as cash equivalents due to their highly liquid nature. They are now classified as short-term investments for the periods presented. In addition, due to the new classification all purchases and sales of auction rate securities are reflected in the investing section of the Consolidated Statements of Cash Flows. As a result, certain previously reported amounts have been reclassified in the accompanying Consolidated Statement of Cash Flows for the Six months ended June 27, 2004 to conform to this presentation. Auction rate securities of $407.3 million and $361.6 million were reclassified from cash to short-term marketable investments as of June 27, 2004 and December 28, 2003, respectively.

      All of the company’s marketable securities are classified as available-for-sale. In accordance with SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities, available-for-sale securities are carried at fair value with unrealized gains and losses included as a separate component of stockholders’ equity, net of any related tax effect. Realized gains and losses and declines in value judged by management to be other than temporary on these investments are included in interest income and expense.

8

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at June 26, 2005 are as follows:

	Amortized		Market
	Cost		Value
	(In millions)
Due in one year or less	$	24.9	$	24.7
Due after one year through three years		96.2		95.0
Due after ten years		148.0		148.0
	$	269.1	$	267.7

Note 6 — Stock Based Compensation

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

		Three Months Ended						Six Months Ended
		June 26,			June 27,			June 26,			June 27,
		2005			2004			2005			2004
		(In millions, except per share amounts)
Net income (loss), as reported		$	(205.3	)	$	17.0		$	(215.7	)	$	30.0
Add: Stock compensation charge included in net income (loss) determined under the intrinsic value method, net of tax			2.1			0.4			5.0			0.9
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(15.7	)		(10.8	)		(52.8	)		(24.0	)
Pro forma net income (loss)		$	(218.9	)	$	6.6		$	(263.5	)	$	6.9
Income (loss) per share:
	Basic — as reported	$	(1.71	)	$	0.14		$	(1.80	)	$	0.25
	Basic — pro forma	$	(1.83	)	$	0.06		$	(2.20	)	$	0.06
	Diluted — as reported	$	(1.71	)	$	0.14		$	(1.80	)	$	0.24
	Diluted — pro forma	$	(1.83	)	$	0.05		$	(2.20	)	$	0.06

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Due to the income tax valuation allowance recorded by the company in the second quarter, the pro forma effect on net loss for the six months ended June 26, 2005 reflects a zero tax rate. The three months ended June 26, 2005 includes the reversal of the first quarter tax effect.

      The weighted average fair value of options granted was $8.74 and $8.85 for the three and six months ended June 26, 2005, respectively, and $12.61 and $12.64 for the three and six months ended June 27, 2004, 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:

	Three Months Ended						Six Months Ended
	June 26,			June 27,			June 26,			June 27,
	2005			2004			2005			2004
Expected volatility		64	%		68	%		64	%		68	%
Dividend yield		—			—			—			—
Risk-free interest rate		4.0	%		3.8	%		4.0	%		3.8	%
Expected life, in years		6.0			6.0			6.0			6.0

      On February 18, 2005, the company announced the acceleration of certain unvested and “out-of-the-money” stock options previously awarded to employees and officers that have exercise prices per share of $19.50 or higher. As a result, options to purchase approximately six million shares of Fairchild stock became exercisable immediately upon the announcement. Based upon the company’s closing stock price of $16.15 on February 18, 2005, none of these options had economic value on the date of acceleration.

      During the second quarter of 2005, the company accelerated unvested stock options related to certain employee retirements, effective June 26, 2005. As a result of this acceleration, options to purchase approximately 350,000 shares became exercisable at the date of acceleration. In addition, approximately $0.5 million of additional expense is included in pro forma net loss for the three and six months ended June 26, 2005.

      The company uses the expense recognition method in Financial Accounting Standards Board (FASB) Interpretation (FIN) 28: Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plansfor recognizing stock compensation expense for SFAS No. 123 disclosure purposes.

      The company previously reported that it will apply the expense recognition provisions relating to stock options beginning in the third quarter of 2005 in accordance with the recently revised SFAS No. 123R,Share-Based Payment; however, on April 14, 2005, the Securities and Exchange Commission adopted a new rule which amends the compliance date to the beginning of the first annual period that begins after June 15, 2005, therefore deferring the company’s required adoption to the beginning of the first quarter of 2006.

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 7 — Goodwill and Intangible Assets

      A summary of acquired intangible assets is as follows:

					As of June 26, 2005					As of December 26, 2004
			Period of		Gross Carrying		Accumulated			Gross Carrying		Accumulated
			Amortization		Amount		Amortization			Amount		Amortization
					(In millions)
Identifiable intangible assets:
	Developed technology			5 - 15 years	$	225.6	$	(98.1	)	$	225.6	$	(89.5	)
	Customer base			8 years		55.8		(44.2	)		55.8		(40.7	)
	Covenant not to compete			5 years		30.4		(30.4	)		30.4		(30.4	)
	Trademarks and tradenames			4 years		24.9		(24.9	)		24.9		(24.9	)
	Patents			4 years		5.4		(5.1	)		5.4		(5.0	)
		Subtotal				342.1		(202.7	)		342.1		(190.5	)
	Goodwill			—		229.9		—			229.9		—
		Total			$	572.0	$	(202.7	)	$	572.0	$	(190.5	)

      Due to a change in our SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information, segment reporting, our new identified reporting units that carry goodwill include power analog, power discrete and standard products. The carrying amount of goodwill by reporting unit is as follows:

	Power		Power		Standard
	Analog		Discrete		Products		Total
	(In millions)
Balance as of December 26, 2004 and June 26, 2005	$	15.5	$	159.9	$	54.5	$	229.9

      During the six months ended June 26, 2005, there were no changes to the carrying amount of goodwill due to acquisitions or divestitures. Also, in conjunction with the change in our SFAS No. 131 segment reporting during the first quarter of 2005, goodwill was retested for impairment and the company concluded that goodwill was not impaired.

      The estimated amortization expense for intangible assets for the remainder of 2005 and for each of the five succeeding fiscal years is as follows:

	(In millions)
Estimated Amortization Expense:
Remainder of 2005	$	11.8
2006		23.7
2007		18.5
2008		16.8
2009		16.8
2010		16.7

Note 8 — Segment Information

      Effective December 27, 2004 (first day of fiscal year 2005), the company realigned its operating segments as a result of a reorganization of the reporting and management structure. The company is currently organized into three reportable segments: Power Discrete Products Group (“Power Discrete”), Power Analog Products Group (“Power Analog”) and Standard Products Group (“Standard Products”). Power Discrete includes high power, lower power, automotive and radio frequency (“RF”) products. Power Analog includes

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

system power, power conversion, signal conditioning, switches and interface products. Standard Products includes opto lighting, linear IC, logic, small signal products and foundry.

      Historical amounts in the table below have been reclassified to align with these new operating segments. Selected operating segment financial information for the three and six months ended June 26, 2005 and June 27, 2004 is as follows:

		Three Months Ended						Six Months Ended
		June 26,			June 27,			June 26,			June 27,
		2005			2004			2005			2004
		(In millions)
Revenue and Operating Income (Loss):
Power Discrete
	Total revenue	$	193.1		$	216.5		$	397.7		$	423.7
	Operating income		5.7			33.6			21.0			55.3
Power Analog
	Total revenue		66.7			83.3			137.0			156.4
	Operating income (loss)		(9.5	)		6.6			(15.8	)		14.3
Standard Products
	Total revenue		86.2			114.5			174.1			233.9
	Operating income (loss)		(0.4	)		9.9			1.9			15.8
Other
	Operating loss(1)		(3.9	)		(15.4	)		(8.0	)		(19.2	)
Total Consolidated
	Total revenue	$	346.0		$	414.3		$	708.8		$	814.0
	Operating income (loss)	$	(8.1	)	$	34.7		$	(0.9	)	$	66.2

(1)  Includes $3.9 million and $8.0 million of restructuring in the three and six months ended June 26, 2005, respectively, and $4.4 million and $8.2 million of restructuring in the three and six months ended June 27, 2004, respectively. Also includes $11.0 million for the three and six months ended June 27, 2004 for a reserve for potential settlement losses stemming from customer claims related to products manufactured with a defective mold compound purchased from Sumitomo Bakelite Singapore Pte. Ltd and affiliated companies (See Note 12).

Note 9 — Restructuring and Impairments

      During the three months and six months ended June 26, 2005, the company recorded restructuring charges of $3.9 million and $8.0 million, respectively. In the second quarter of 2005, these charges include $1.8 million in employee separation costs, $2.1 million in asset impairment charges, a $0.2 million net release due to a revised estimate associated with first quarter employee separation charges, and $0.2 million of other charges. For the six months ended June 25, 2005, these charges also include $3.9 million in employee separation costs, $0.5 million in office closure costs, and a $0.3 million reserve release associated with the 2004 Infrastructure Realignment Program due to new estimates in restructuring expenses.

      During the three and six months ended June 27, 2004, the company recorded restructuring charges of $4.4 million and $8.2 million, respectively. In the second quarter of 2004, the charge included $2.0 million relating to our six-inch Mountaintop, Pennsylvania wafer fab closure, primarily associated with the decommissioning of certain assets, $0.2 million of employee separation costs related to the four-inch wafer fab closure in

12

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

South Portland, Maine, an additional $1.7 million primarily relating to decommissioning of certain assets relating to the closure of our four-inch South Portland wafer fab, $0.5 million of additional charges relating to the closure of our Kuala Lumpur, Malaysia plant; all related to restructuring actions announced in 2003. In addition, the company recorded a charge of $0.8 million of employee separation costs relating to the severance for approximately 15 employees in the United States associated with on-going infrastructure alignment projects. The company also released $0.8 million of reserves relating primarily to Q2 and Q4 2003 employee separation costs and our Kuala Lumpur, Malaysia plant closure due to revised estimates relating to these actions. For the six months ended June 27, 2004, these charges also include $2.5 million relating to our six-inch Mountaintop wafer fab closure, primarily associated with the decommissioning of certain assets, $0.2 million of asset impairment charges relating to the discontinuation of our memory product line, $0.9 million reversal of employee separation costs related to fewer than anticipated headcount reduction actions related to the four-inch wafer fab closure in South Portland, an additional $0.9 million primarily relating to decommissioning of certain assets relating to the closure of our four-inch South Portland wafer fab, $0.2 million of additional charges relating to the closure of our Kuala Lumpur, Malaysia plant and $0.9 million of employee separation costs relating to the severance for approximately 15 employees in the United States associated with on-going infrastructure alignment projects.

      In addition, for the six months ended June 27, 2004, the company recorded a net reserve release of $(1.9) million due to a change in distributor reserve estimates and a charge of $0.9 million to increase inventory reserves, recorded in revenues and cost of sales, respectively, associated with our 2003 restructuring actions.

      The following table summarizes the activity in the company’s accrual for restructuring and impairment costs for the three and six months ended June 26, 2005 (in millions):

		Accrual												Accrual
		Balance at		New		Cash			Reserve			Non-Cash		Balance at
		12/26/2004		Charges		Paid			Release			Items		3/27/2005
First Quarter 2003 Restructuring Program:
	Mountaintop, PA 6 Inch Closure Employee Separation Costs	$	0.1	$	—	$	(0.1	)	$	—		$	—	$	—
Second Quarter 2003 Restructuring Program:
	Employee Separation Costs		0.1		—		(0.1	)		—			—		—
	South Portland, ME 4 Inch Closure Employee Separation Costs		0.7		—		(0.1	)		—			—		0.6
	Kuala Lumpur, Malaysia Plant Closure Employee Separation Costs		0.5		—		(0.3	)		—			—		0.2
2004 Infrastructure Realignment Program:
	Employee Separation Costs		3.2		—		(1.0	)		(0.3	)		—		1.9
2005 Infrastructure Realignment Program:
	Employee Separation Costs		—		3.9		(0.9	)		—			—		3.0
	Office Closure Costs		—		0.5		—			—			—		0.5
		$	4.6	$	4.4	$	(2.5	)	$	(0.3	)	$	—	$	6.2

13

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		Accrual													Accrual
		Balance at		New		Cash			Reserve			Non-Cash			Balance at
		3/27/2005		Charges		Paid			Release			Items			6/26/2005
Second Quarter 2003 Restructuring Program:
	South Portland, ME 4 inch Closure Employee Separation Costs	$	0.6	$	—	$	(0.1	)	$	—		$	—		$	0.5
	Kuala Lumpur, Malaysia Plant Closure Employee Separation Costs		0.2		—		—			—			—			0.2
2004 Infrastructure Realignment Program:
	Employee Separation Costs		1.9		—		(0.4	)		—			—			1.5
2005 Infrastructure Realignment Program:
	Employee Separation Costs		3.0		1.8		(3.0	)		(0.2	)		—			1.6
	Office Closure Costs		0.5		—		(0.1	)		—			—			0.4
	Asset Impairment		—		2.1		—			—			(2.1	)		—
	Transfer Costs		—		0.2		(0.2	)		—			—			—
		$	6.2	$	4.1	$	(3.8	)	$	(0.2	)	$	(2.1	)	$	4.2

      The company expects to complete payment of substantially all 2003 and 2004 restructuring accruals during 2005, and substantially all 2005 accruals by the second quarter of 2006.

Note 10 — Refinancing of Senior Credit Facility

      In January 2005, we increased our senior credit facility to $630 million, consisting of a term loan of $450 million replacing the previous $300 million term loan, and a $180 million revolving line of credit. On January 13, 2005, Fairchild Semiconductor Corporation gave notice to redeem all $350 million of its 10¹/2% Senior Subordinated Notes due 2009. The company used the proceeds of the $150 million increase of the term loan together with approximately $216 million of existing cash, to complete the redemption, which included a call premium of 5.25%, on February 13, 2005. The company incurred a cash charge of $19.6 million in the first quarter of 2005 for the call premium and accrued and unpaid interest through the date of redemption. The company also incurred a non-cash charge of $5.4 million for the write-off of deferred financing fees associated with the redeemed notes. The refinancing reduced the company’s debt by approximately $200 million, net of the term loan increase, during the quarter ended March 27, 2005.

Note 11 — Derivatives

      The company uses derivative instruments to manage exposures to foreign currencies. In accordance with SFAS No. 133,Accounting for certain Derivative Instruments and Certain Hedging Activities, 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. Currencies hedged include the euro, the Japanese yen, the Malaysian ringgit and the Korean won. 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,Accounting for certain Derivative Instruments and Certain Hedging Activities — an amendment of FASB Statement No. 133, had no impact on earnings for the three and six months ended June 26, 2005. Two cash flow hedges were discontinued for the six months ended June 26, 2005. The $0.2 million favorable impact of terminating the hedges was booked to earnings in accordance with SFAS No. 133.

14

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      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 $0.7 million of net unrealized derivative gains included in OCI will be reclassified into earnings within the next twelve months.

Note 12 — Contingencies

      From time to time since late 2001, the company has received claims from a number of customers seeking damages resulting from certain products manufactured with a phosphorus-containing mold compound. Mold compound is the plastic resin used to encapsulate semiconductor chips. This particular mold compound causes some chips to short in some situations, resulting in chip failure. In May 2004 the company was named, along with three product distribution companies, as a defendant in a lawsuit filed by Alcatel Canada Inc. in the Ontario Superior Court of Justice. The lawsuit alleges breach of contract, negligence and other claims and seeks C$200,000,000 (Canadian dollars) in damages allegedly caused by the company’s products containing the mold compound. In January 2005 the company was named as a defendant in a lawsuit filed by Lucent Technologies Inc. in the Superior Court of New Jersey. The lawsuit alleges breach of contract and breach of warranty claims and seeks unspecified damages allegedly caused by our products. The company believes it has strong defenses against all these claims relating to mold compound and intends to vigorously defend both lawsuits.

      In a related action, the company filed a lawsuit in August 2002 against the mold compound supplier, Sumitomo Bakelite Singapore Pte. Ltd., and other related parties, alleging claims for breach of contract, misrepresentation, negligence and other claims and seeking unspecified damages, including damages caused to the company’s customers as a result of mold compound supplied by Sumitomo. Other manufacturers have also filed lawsuits against Sumitomo relating to the same mold compound issue. The company’s lawsuit against Sumitomo is pending in California Superior Court for Santa Clara County and we expect the case to go to trial in late 2005. The company is unable to predict or determine the outcome of the litigation with Sumitomo Bakelite Singapore Pte. Ltd., and there can be no assurance that the company will prevail, nor can the company predict the amount of damages that may be recovered if the company does prevail.

      Several other customers have made claims for damages or threatened to begin litigation as a result of the Sumitomo mold compound issue if their claims are not resolved according to their demands, and the company may face additional lawsuits as a result. The company has also resolved similar claims with several of its leading customers. The company has limited insurance coverage for such customer claims, almost all of which has been utilized. While the exact amount of these losses is not known, the company recorded a reserve for estimated potential settlement losses of $11.0 million in the Consolidated Statement of Operations during the second quarter of 2004. This estimate was based upon an assessment of the potential liability using an analysis of all the claims to date and historical experience. If the company continues to receive additional claims for damages from customers beyond the period of time normally observed for such claims, if more of these claims proceed to litigation, or if the company chooses to settle claims in settlement of or to avoid litigation, then the company may incur a liability in excess of the current reserve. At June 26, 2005 and December 26, 2004 the reserve for estimated potential settlement losses was $11.0 million.

      On October 20, 2004, the company and its wholly owned subsidiary, Fairchild Semiconductor Corporation, were sued by Power Integrations, Inc. in the United States District Court for the District of Delaware. The complaint filed by Power Integrations alleges that certain of our Pulse-Width Modulator (PWM) integrated circuit products infringe four Power Integrations’ U.S. patents, and seeks a permanent injunction preventing us from manufacturing, selling, offering for sale or importing the allegedly infringing products as well as money damages for the alleged past infringement. The company has analyzed the Power Integrations patents in light of our products and, based on that analysis, does not believe its products violate Power Integrations’ patents and, accordingly, plans to vigorously contest this lawsuit.

15

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      On December 30, 2004, our wholly owned subsidiary, Fairchild Semiconductor Corporation, was sued by ZTE Corporation, a communications equipment manufacturer, in Guangdong Higher People’s Court in Guangzhou, People’s Republic of China. The complaint filed by ZTE alleges that certain of our products were defective and caused personal injury and/or property loss to ZTE. ZTE claims 65,733,478 RMB as damages. We deny the allegations in the lawsuit and plan to contest the complaint vigorously.

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

Note 13 —  Income Taxes

      Included in worldwide income tax expense of $191.3 million for the second quarter of 2005 is a non-cash tax charge of $195.4 million recorded to increase the valuation allowance for U.S. deferred tax assets. This charge includes a valuation allowance established against the Company’s U.S. deferred tax assets as of the beginning of the year of approximately $183.2 million and a reversal of approximately $12.2 million of deferred tax benefits previously recognized in the first quarter of 2005. As a result of establishing a full valuation allowance against its net U.S. deferred tax assets, the Company did not recognize any deferred tax benefits related to U.S. net losses incurred in the second quarter of 2005. The valuation allowance of $202.0 million as of June 26, 2005 consists of the beginning of the year allowance of $6.1 million plus second quarter 2005 charges of $195.4 million to income from continuing operations, $0.4 million to additional paid in capital and $0.1 million to other comprehensive income.

      Significant management judgment is required in determining our provision for income taxes and in determining whether deferred tax assets will be realized in full or in part. When it is more likely than not that all or some portion of specific deferred tax assets such as net operating losses or foreign tax credit carryforwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that are determined not likely to be realizable. Realization is based on our ability to generate sufficient future taxable income. The valuation allowance was determined in accordance with the provisions of SFAS No. 109,Accounting for Income Taxes which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. At the end of the second quarter of 2005, full year 2005 projections changed from a forecasted U.S. profit to a forecasted U.S. loss. This shift in full year 2005 forecasted results, from income to a loss, continues the cumulative losses incurred in the U.S. in recent years and represents significant negative evidence under SFAS No. 109 which is difficult to overcome. Accordingly, a full valuation allowance was recorded. The company will maintain a full valuation allowance on its net U.S. deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance. Until such time that some or all of the valuation allowance is reversed, future income tax expense (benefit) in the U.S. will be offset by adjustments to the valuation allowance to effectively eliminate any income tax expense or benefit in the United States. Income taxes will continue to be recorded for other tax jurisdictions subject to the need for valuation allowances in those jurisdictions.

      As part of the company’s analysis of the repatriation provisions under the American Jobs Creation Act (AJCA), the company is performing additional analysis of the amount of previously untaxed earnings that are a component of the earnings and profits available to be offset by the special dividend received deduction. As a result of this review, the company may need to adjust historical U.S. net operating losses, which could also result in an adjustment to the deferred tax asset valuation allowance. The amount or range of amounts of any such adjustments, if any, is not yet determinable.

      The company has not yet determined whether it is going to take advantage of the repatriation provisions. Until such time, the company will make no change to its current intention to indefinitely reinvest the undistributed earnings of its foreign subsidiaries. The maximum amount of undistributed earnings that the

16

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

company can repatriate, as limited under the AJCA, is up to $500 million. The range of possible amounts qualifying as dividends of foreign earnings is between zero and approximately $400 million. The estimated range of income tax effects of such repatriation is between zero and approximately $33 million.

Note 14 — 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 5% Convertible Senior Subordinated Notes. These guarantees are joint and several. Accordingly, presented below are condensed consolidating balance sheets of Fairchild Semiconductor International, Inc. as of June 26, 2005 and December 26, 2004 and related condensed consolidating statements of operations for the three and six months ended June 26, 2005 and June 27, 2004 and condensed consolidating cash flows for the six months ended June 26, 2005 and June 27, 2004.

17

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET

			June 26, 2005
			Unconsolidated			Unconsolidated												Consolidated
			Fairchild			Fairchild						Non-						Fairchild
			Semiconductor			Semiconductor			Guarantor			Guarantor						Semiconductor
			International, Inc.			Corporation			Subsidiaries			Subsidiaries			Eliminations			International, Inc.
			(In millions)
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	—		$	146.0		$	—		$	47.8		$	—		$	193.8
	Short-term marketable securities			—			172.7			—			—			—			172.7
	Accounts receivable, net			—			18.9			—			124.3			—			143.2
	Inventories			—			121.0			6.8			115.6			—			243.4
	Deferred income taxes, net			—			—			—			3.2			—			3.2
	Other current assets			—			14.1			0.1			10.9			—			25.1
		Total current assets		—			472.7			6.9			301.8			—			781.4
Property, plant and equipment, net				—			302.9			1.5			339.9			—			644.3
Intangible assets, net				—			35.2			14.8			89.4			—			139.4
Goodwill				—			167.7			61.8			0.4			—			229.9
Long-term marketable securities				—			95.0			—			—			—			95.0
Investment in subsidiary				1,022.6			882.6			263.1			87.8			(2,256.1	)		—
Other assets				—			20.8			1.7			14.7			—			37.2
		Total assets	$	1,022.6		$	1,976.9		$	349.8		$	834.0		$	(2,256.1	)	$	1,927.2
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	—		$	4.8		$	—		$	—		$	—		$	4.8
	Accounts payable			—			62.7			0.2			37.3			—			100.2
	Accrued expenses and other current liabilities			—			63.7			0.8			48.3			—			112.8
		Total current liabilities		—			131.2			1.0			85.6			—			217.8
Long-term debt, less current portion				—			646.2			—			—			—			646.2
Net intercompany (receivable) payable				—			158.7			(19.5	)		(139.2	)		—			—
Deferred income taxes				—			18.0			—			7.0			—			25.0
Other liabilities				—			0.5			—			15.4			—			15.9
		Total liabilities		—			954.6			(18.5	)		(31.2	)		—			904.9
Commitments and contingencies
Stockholders’ equity:
	Common stock			1.2			—			—			—			—			1.2
	Additional paid-in capital			1,266.2			—			—			—			—			1,266.2
	Retained earnings (deficit)			(240.4	)		1,022.6			368.3			865.2			(2,256.1	)		(240.4	)
	Accumulated other comprehensive loss			—			(0.3	)		—			—			—			(0.3	)
	Less treasury stock (at cost)			(4.4	)		—			—			—			—			(4.4	)
		Total stockholders’ equity		1,022.6			1,022.3			368.3			865.2			(2,256.1	)		1,022.3
		Total liabilities and stockholders’ equity	$	1,022.6		$	1,976.9		$	349.8		$	834.0		$	(2,256.1	)	$	1,927.2

18

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

		Three Months Ended June 26, 2005
		Unconsolidated			Unconsolidated												Consolidated
		Fairchild			Fairchild						Non-						Fairchild
		Semiconductor			Semiconductor			Guarantor			Guarantor						Semiconductor
		International, Inc.			Corporation			Subsidiaries			Subsidiaries			Eliminations			International, Inc.
		(In millions)
		(Unaudited)
Total revenue		$	—		$	326.8		$	0.9		$	434.2		$	(415.9	)	$	346.0
Cost of sales			—			301.4			2.8			388.8			(415.9	)		277.1
	Gross profit		—			25.4			(1.9	)		45.4			—			68.9
Operating Expenses:
Research and development			—			10.7			2.8			6.0			—			19.5
Selling, general and administrative			—			31.1			1.0			15.4			—			47.5
Amortization of acquisition-related intangibles			—			1.5			0.6			4.0			—			6.1
Restructuring and impairments			—			3.6			—			0.3			—			3.9
	Total operating expenses		—			46.9			4.4			25.7			—			77.0
Operating income (loss)			—			(21.5	)		(6.3	)		19.7			—			(8.1	)
Interest expense			—			8.7			—			—			—			8.7
Interest income			—			(2.6	)		—			(0.2	)		—			(2.8	)
Equity in subsidiary (income) loss			205.3			0.8			(2.0	)		—			(204.1	)		—
Income (loss) before income taxes			(205.3	)		(28.4	)		(4.3	)		19.9			204.1			(14.0	)
Provision for income taxes			5.9			171.0			12.4			2.0			—			191.3
Net income (loss)		$	(211.2	)	$	(199.4	)	$	(16.7	)	$	17.9		$	204.1		$	(205.3	)

19

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

		Six Months Ended June 26, 2005
		Unconsolidated			Unconsolidated												Consolidated
		Fairchild			Fairchild						Non-						Fairchild
		Semiconductor			Semiconductor			Guarantor			Guarantor						Semiconductor
		International, Inc.			Corporation			Subsidiaries			Subsidiaries			Eliminations			International, Inc.
		(In millions)
		(Unaudited)
Total revenue		$	—		$	683.4		$	2.6		$	883.0		$	(860.2	)	$	708.8
Cost of sales			—			630.7			4.8			780.8			(860.2	)		556.1
	Gross profit		—			52.7			(2.2	)		102.2			—			152.7
Operating expenses:
Research and development			—			21.2			5.4			11.9			—			38.5
Selling, general and administrative			—			63.6			2.0			29.3			—			94.9
Amortization of acquisition-related intangibles			—			2.9			1.3			8.0			—			12.2
Restructuring and impairments			—			6.9			—			1.1			—			8.0
	Total operating expenses		—			94.6			8.7			50.3			—			153.6
Operating income (loss)			—			(41.9	)		(10.9	)		51.9			—			(0.9	)
Interest expense			—			22.0			—			—			—			22.0
Interest income			—			(5.7	)		—			(0.3	)		—			(6.0	)
Other expense			—			23.9			—			—			—			23.9
Equity in subsidiary income (loss)			215.7			(26.1	)		(10.5	)		—			(179.1	)		—
Income (loss) before income taxes			(215.7	)		(56.0	)		(0.4	)		52.2			179.1			(40.8	)
Provision for income taxes			5.9			153.8			12.4			2.8			—			174.9
Net income (loss)		$	(221.6	)	$	(209.8	)	$	(12.8	)	$	49.4		$	179.1		$	(215.7	)

20

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

			Six Months Ended June 26, 2005
			Unconsolidated			Unconsolidated								Consolidated
			Fairchild			Fairchild					Non-			Fairchild
			Semiconductor			Semiconductor			Guarantor		Guarantor			Semiconductor
			International, Inc.			Corporation			Subsidiaries		Subsidiaries			International, Inc.
			(In millions)
			(Unaudited)
Cash flows provided by (used in) operating activities:			$	—		$	(11.2	)	$	—	$	34.9		$	23.7
Investing activities:
	Capital expenditures			—			(19.9	)		—		(35.8	)		(55.7	)
	Purchase of molds and tooling			—			—			—		(1.0	)		(1.0	)
	Purchase of marketable securities			—			(401.4	)		—		—			(401.4	)
	Sale of marketable securities			—			663.2			—		—			663.2
	Maturity of marketable securities			—			15.5			—		—			15.5
	Investment (in) from affiliate			(1.7	)		1.7			—		—			—
		Cash provided by (used in) investing activities		(1.7	)		259.1			—		(36.8	)		220.6
Financing activities:
	Repayment of long-term debt			—			(352.0	)		—		—			(352.0	)
	Issuance of long-term debt			—			154.5			—		—			154.5
	Proceeds from issuance of common stock and from exercise of stock options, net			5.7			—			—		—			5.7
	Purchase of treasury stock			(4.0	)		—			—		—			(4.0	)
	Other			—			(1.0	)		—		—			(1.0	)
		Cash provided by (used in) financing activities		1.7			(198.5	)		—		—			(196.8	)
Net change in cash and cash equivalents				—			49.4			—		(1.9	)		47.5
Cash and cash equivalents at beginning of period				—			96.6			—		49.7			146.3
Cash and cash equivalents at end of period			$	—		$	146.0		$	—	$	47.8		$	193.8
Supplemental Cash Flow Information:
	Cash paid during the period for:
		Income taxes	$	—		$	—		$	—	$	4.9		$	4.9
		Interest	$	—		$	34.4		$	—	$	—		$	34.4

21

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET

			December 26, 2004
			Unconsolidated			Unconsolidated												Consolidated
			Fairchild			Fairchild						Non-						Fairchild
			Semiconductor			Semiconductor			Guarantor			Guarantor						Semiconductor
			International, Inc.			Corporation			Subsidiaries			Subsidiaries			Eliminations			International, Inc.
			(In millions)
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	—		$	96.6		$	—		$	49.7		$	—		$	146.3
	Short-term marketable securities			—			422.1			—			—			—			422.1
	Accounts receivable, net			—			20.0			—			134.0			—			154.0
	Inventories			—			129.7			13.8			110.4			—			253.9
	Deferred income taxes, net			—			22.7			0.8			2.2			—			25.7
	Other current assets			—			18.0			0.5			11.9			—			30.4
		Total current assets		—			709.1			15.1			308.2			—			1,032.4
Property, plant and equipment, net				—			232.6			91.2			340.3			—			664.1
Deferred income taxes				5.9			118.9			11.7			(7.2	)		—			129.3
Intangible assets, net				—			5.8			48.7			97.1			—			151.6
Goodwill				—			8.0			221.5			0.4			—			229.9
Long-term marketable securities				—			124.0			—			—			—			124.0
Investment in subsidiary				1,225.7			1,158.6			262.9			84.6			(2,731.8	)		—
Other assets				—			27.6			1.7			15.9			—			45.2
		Total assets	$	1,231.6		$	2,384.6		$	652.8		$	839.3		$	(2,731.8	)	$	2,376.5
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	—		$	3.3		$	—		$	—		$	—		$	3.3
	Accounts payable			—			62.0			4.3			51.9			—			118.2
	Accrued expenses and other current liabilities			—			99.8			5.8			59.5			—			165.1
		Total current liabilities		—			165.1			10.1			111.4			—			286.6
Long-term debt, less current portion				—			845.2			—			—			—			845.2
Net intercompany (receivable) payable				—			150.9			(13.5	)		(137.4	)		—			—
Other liabilities				—			0.2			—			15.4			—			15.6
		Total liabilities		—			1,161.4			(3.4	)		(10.6	)		—			1,147.4
Commitments and contingencies
Stockholders’ equity:
	Common stock			1.2			—			—			—			—			1.2
	Additional paid-in capital			1,259.2			—			—			—			—			1,259.2
	Retained earnings (deficit)			(24.7	)		1,225.7			656.2			849.9			(2,731.8	)		(24.7	)
	Accumulated other comprehensive loss			—			(2.5	)		—			—			—			(2.5	)
	Less treasury stock (at cost)			(4.1	)		—			—			—			—			(4.1	)
		Total stockholders’ equity		1,231.6			1,223.2			656.2			849.9			(2,731.8	)		1,229.1
		Total liabilities and stockholders’ equity	$	1,231.6		$	2,384.6		$	652.8		$	839.3		$	(2,731.8	)	$	2,376.5

22

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

		Three Months Ended June 27, 2004
		Unconsolidated			Unconsolidated												Consolidated
		Fairchild			Fairchild						Non-						Fairchild
		Semiconductor			Semiconductor			Guarantor			Guarantor						Semiconductor
		International, Inc.			Corporation			Subsidiaries			Subsidiaries			Eliminations			International, Inc.
		(In millions)
		(Unaudited)
Total revenue		$	—		$	355.9		$	29.5		$	467.2		$	(438.3	)	$	414.3
Cost of sales			—			315.4			28.3			387.5			(438.3	)		292.9
	Gross profit		—			40.5			1.2			79.7			—			121.4
Operating Expenses:
Research and development			—			8.2			6.9			5.9			—			21.0
Selling, general and administrative			—			28.3			2.0			13.8			—			44.1
Amortization of acquisition-related intangibles			—			0.2			2.0			4.0			—			6.2
Restructuring and impairments			—			3.2			1.3			(0.1	)		—			4.4
Reserve for potential settlement losses			—			11.0			—			—			—			11.0
	Total operating expenses		—			50.9			12.2			23.6			—			86.7
Operating income (loss)			—			(10.4	)		(11.0	)		56.1			—			34.7
Interest expense			—			15.8			—			—			—			15.8
Interest income			—			(1.6	)		—			(0.1	)		—			(1.7	)
Equity in subsidiary income			(17.0	)		(40.1	)		(11.3	)		—			68.4			—
Income before income taxes			17.0			15.5			0.3			56.2			(68.4	)		20.6
Provision (benefit) for income taxes			—			(1.5	)		0.9			4.2			—			3.6
Net income (loss)		$	17.0		$	17.0		$	(0.6	)	$	52.0		$	(68.4	)	$	17.0

23

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

		Six Months Ended June 27, 2004
		Unconsolidated			Unconsolidated												Consolidated
		Fairchild			Fairchild						Non-						Fairchild
		Semiconductor			Semiconductor			Guarantor			Guarantor						Semiconductor
		International, Inc.			Corporation			Subsidiaries			Subsidiaries			Eliminations			International, Inc.
		(In millions)
		(Unaudited)
Total revenue		$	—		$	675.3		$	66.7		$	917.7		$	(845.7	)	$	814.0
Cost of sales			—			597.2			63.7			772.1			(845.7	)		587.3
	Gross profit		—			78.1			3.0			145.6			—			226.7
Operating expenses:
Research and development			—			15.6			13.8			12.3			—			41.7
Selling, general and administrative			—			55.9			4.0			25.9			—			85.8
Amortization of acquisition-related intangibles			—			0.3			4.0			9.5			—			13.8
Restructuring and impairments			—			4.6			3.5			0.1			—			8.2
Reserve for potential settlement losses			—			11.0			—			—			—			11.0
	Total operating expenses		—			87.4			25.3			47.8			—			160.5
Operating income (loss)			—			(9.3	)		(22.3	)		97.8			—			66.2
Interest expense			—			31.6			—			—			—			31.6
Interest income			—			(4.1	)		—			(0.2	)		—			(4.3	)
Equity in subsidiary income			(30.0	)		(65.7	)		(23.0	)		—			118.7			—
Income before income taxes			30.0			28.9			0.7			98.0			(118.7	)		38.9
Provision (benefit) for income taxes			—			(1.1	)		0.9			9.1			—			8.9
Net income (loss)		$	30.0		$	30.0		$	(0.2	)	$	88.9		$	(118.7	)	$	30.0

24

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

			Six Months Ended June 27, 2004
			Unconsolidated			Unconsolidated									Consolidated
			Fairchild			Fairchild						Non-			Fairchild
			Semiconductor			Semiconductor			Guarantor			Guarantor			Semiconductor
			International, Inc.			Corporation			Subsidiaries			Subsidiaries			International, Inc.
			(In millions)
			(Unaudited)
Cash flows provided by operating activities:			$	—		$	43.2		$	17.4		$	57.4		$	118.0
Investing activities:
	Capital expenditures			—			(22.6	)		(17.2	)		(50.4	)		(90.2	)
	Proceeds from sale of property, plant and equipment			—			—			—			3.1			3.1
	Purchase of molds and tooling			—			—			(0.2	)		(1.9	)		(2.1	)
	Purchase of marketable securities			—			(540.9	)		—			—			(540.9	)
	Sale of marketable securities			—			406.9			—			—			406.9
	Maturity of marketable securities			—			49.2			—			—			49.2
	Investment (in) from affiliate			(14.2	)		14.2			—			—			—
		Cash used in investing activities		(14.2	)		(93.2	)		(17.4	)		(49.2	)		(174.0	)
Financing activities:
	Repayment of long-term debt			—			(1.7	)		—			—			(1.7	)
	Proceeds from issuance of common stock and from exercise of stock options, net			18.8			—			—			—			18.8
	Purchase of treasury stock			(4.6	)		—			—			—			(4.6	)
		Cash provided by (used in) financing activities		14.2			(1.7	)		—			—			12.5
Net change in cash and cash equivalents				—			(51.7	)		—			8.2			(43.5	)
Cash and cash equivalents at beginning of period				—			141.7			—			27.8			169.5
Cash and cash equivalents at end of period			$	—		$	90.0		$	—		$	36.0		$	126.0
Supplemental Cash Flow Information:
	Cash paid during the period for:
		Income taxes	$	—		$	0.1		$	—		$	2.9		$	3.0
		Interest	$	—		$	29.1		$	—		$	—		$	29.1

25

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

      Except as otherwise indicated in this Quarterly Report on Form 10-Q, the terms “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.

Overview

      Effective for the first quarter of 2005, we have reorganized our internal reporting and management structure and, accordingly, our segment reporting to reflect our strategic focus on power products. The new segments, Power Discrete, Power Analog and Standard Products, align with the way we now manage the business and should help investors better judge our performance. All segment reporting within management’s discussion and analysis has been restated to reflect this change.

      Gross margins and operating margins are key indices that both senior management and our investors utilize to measure the financial performance of the company. During the first six months of 2005, we experienced a gross margin decline, primarily due to lower factory utilization as a result of our efforts to reduce channel and internal inventories. As a result, in the second quarter of 2005, we reduced our internal inventory from the first quarter of 2005 by $13.5 million. Other indicators that we use are days sales outstanding (DSO) and inventory turns. In the second quarter of 2005, DSO was flat compared to the second quarter of 2004. Inventory turns decreased to 4.6 in the second quarter of 2005 compared to 5.2 in the second quarter of 2004 due to lower revenue levels and to a lesser extent by higher inventories. Distributor’s inventories were approximately 14 weeks, which is above our current target of roughly 13 weeks of supply on hand, but down from the approximately 16 weeks we reported at the end of the first quarter.

      As part of a our strategic initiative, we are committing to a long term improvement of our return on invested capital (ROIC), by reducing our depreciation and amortization expenses and improving the quality of the business we pursue. In addition, we plan to reduce our annual capital expenditures to 6-8% of sales, down from our historical average of approximately 11%. In addition, we have completed an analysis of the useful life experience of our factory machinery and equipment and expect to adjust our estimated useful life assumptions upward in the third quarter of 2005 to better align our depreciation to our actual historical useful lives. We expect this will reduce our depreciation expense by approximately $13 - $15 million per quarter in 2006. As part of our cost reduction efforts, we have also identified certain software programs which we will no longer be utilizing. We expect this will result in approximately $6.0 million and $1.0 million of accelerated depreciation in the third and fourth quarter, respectively, to reflect the shortened useful lives.

      We continue to follow our “asset-light” investment strategy for many of our standard products, which typically have lower gross margins and lower or negative long-term sales growth potential. Through this strategy we are gradually transferring the manufacturing for these mature products to third party subcontractors, where appropriate, allowing our own manufacturing facilities to focus on building higher-growth, higher-margin and more strategic products. We believe that by following this long term asset-light approach for mature products we will improve our return on invested capital and lessen our exposure to falling prices on commodity products during industry downturns.

      We also continue to focus on our balance sheet, particularly our cash and investment balances. In the first quarter of 2005, we redeemed our high-yield notes, reducing the company’s debt by approximately $200 million as well as reducing our future interest expense. Net interest expense in the second quarter of 2005 was $5.9 million, down from the $14.1 million in the second quarter of 2004, reflecting the full impact of our lower interest rates and debt level as well as increased interest on our cash and investment balances. In addition, we continue to focus on maintaining positive operating cash flow.

      While our expanding power product portfolio serves a wide variety of end markets, our sales tend to follow a seasonal pattern which is affected by consumer and corporate purchasing patterns, and regional lifestyle issues such as vacation periods and holidays. Typically, our strongest shipping quarter is the fourth quarter, which is driven by sales into products that are purchased by consumers for the Christmas holiday

26

season. First quarter sales are generally weaker than fourth quarter, as our production lines are constrained by the celebration of Lunar New Year holidays in Asia. Second quarter sales are generally stronger than first quarter, often driven by stronger corporate spending. Third quarter sales are generally weaker than second quarter as customer summer vacation schedules slow business activity. These are the general seasonal trends that we have observed over many years, however specific conditions in any given year, such as channel inventory builds or corrections, customer demand increases or decreases, new end market product cycles, or macroeconomic or political events may override these cyclical patterns.

Results of Operations

      The following table summarizes certain information relating to our operating results as derived from our unaudited consolidated financial statements:

		Three Months Ended										Six Months Ended
		June 26,					June 27,					June 26,					June 27,
		2005					2004					2005					2004
		(Dollars in millions)
Total revenues		$	346.0		100	%	$	414.3		100	%	$	708.8		100	%	$	814.0		100	%
Gross profit			68.9		20	%		121.4		29	%		152.7		22	%		226.7		28	%
Operating expenses:
Research and development			19.5		6	%		21.0		5	%		38.5		5	%		41.7		5	%
Selling, general and administrative			47.5		14	%		44.1		11	%		94.9		13	%		85.8		11	%
Amortization of acquisition-related intangibles			6.1		2	%		6.2		1	%		12.2		2	%		13.8		2	%
Restructuring and impairments			3.9		1	%		4.4		1	%		8.0		1	%		8.2		1	%
Reserve for potential settlement losses			—		0	%		11.0		3	%		—		0	%		11.0		1	%
	Total operating expenses		77.0		22	%		86.7		21	%		153.6		22	%		160.5		20	%
Operating income (loss)			(8.1	)	(2	)%		34.7		8	%		(0.9	)	0	%		66.2		8	%
Interest expense			8.7		3	%		15.8		4	%		22.0		3	%		31.6		4	%
Interest income			(2.8	)	(1	)%		(1.7	)	0	%		(6.0	)	(1	)%		(4.3	)	(1	)%
Other expense			—		0	%		—		0	%		23.9		3	%		—		0	%
Income (loss) before income taxes			(14.0	)	(4	)%		20.6		5	%		(40.8	)	(6	)%		38.9		5	%
Provision for income taxes			191.3		55	%		3.6		1	%		174.9		25	%		8.9		1	%
Net income (loss)		$	(205.3	)	(59	)%	$	17.0		4	%	$	(215.7	)	(30	)%	$	30.0		4	%

     Total Revenues. Total revenues in the three and six months of 2005 decreased $68.3 million and $105.2 million, or 16% and 13%, respectively, compared to 2004. The decrease for the first six months of 2005 compared to the same period of 2004 came across all segments, particularly the Standard Products group, which accounted for more than half the decline (or $59.8 million). Overall, decreases in average selling prices (including mix and pricing declines) contributed 41% of the decrease, while unit volumes accounted for the remaining 59% of the decline for the first six months of 2005. In general, revenues were down as we tried to reduce inventory balances at our distributors.

      Geographic revenue information is based on the customer location within the indicated geographic region. As a percentage of sales, geographic sales for the United States, Other Americas, Europe, China, Taiwan, Other Asia/ Pacific (which for our geographic reporting purposes includes Japan and Singapore and

27

excludes Korea) and Korea were as follows for the three and six months ended June 26, 2005 and June 27, 2004:

	Three Months Ended						Six Months Ended
	June 26,			June 27,			June 26,			June 27,
	2005			2004			2005			2004
United States		10	%		11	%		10	%		12	%
Other Americas		2			2			2			2
Europe		12			12			12			12
China		26			21			24			20
Taiwan		18			22			19			22
Other Asia/Pacific		16			15			16			15
Korea		16			17			17			17
Total		100	%		100	%		100	%		100	%

      The decrease in our United States percentage of sales is a result of customers moving purchases of product to the Asia region. The increase in our China percentage of sales is due to our growing customer base, as well as our commitment to investing our resources in this growing region.

     Gross Profit. The decrease in gross profit for the second quarter and first six months of 2005 compared to the same period of 2004 was primarily due to our efforts to reduce internal and channel inventory during the second quarter. As a result, we experienced lower revenues and lower factory utilization. Approximately 39% of the gross profit decrease was due to declining revenues, with the remaining decrease due to lower factory utilization. We believe these factors impacted our gross margins by approximately 400 to 600 basis points. For the first six months of 2004, gross profit included a $1.9 million net reversal of sales reserves and a $0.9 million inventory charge associated with the discontinuation of certain products in connection with our 2003 restructuring actions.

     Operating Expenses. Research and development (R&D) expenses were roughly flat to slightly higher as a percentage of sales in the three and six month periods ended June 26, 2005, as compared to 2004. Selling, general and administrative (SG&A) expenses increased as a percentage of sales in the three and six month periods ended June 26, 2005, as compared to 2004 primarily due to a $3.8 million non-cash expense for the vesting of equity awards related to certain employee retirements in the first quarter of 2005, and an approximate year to date $4.0 million increase in legal costs associated with on-going litigation. Selling costs were roughly flat as a percentage of revenues.

      The decrease in amortization of acquisition-related intangibles is due to certain intangibles becoming fully amortized during the first quarter of 2004 and second quarter of 2005.

      During the three months and six months ended June 26, 2005, the company recorded restructuring charges of $3.9 million and $8.0 million, respectively. In the second quarter of 2005, these charges include $1.8 million in employee separation costs, $2.1 million in asset impairment charges, a $0.2 million net release due to a revised estimate associated with first quarter employee separation charges, and $0.2 million of other charges. For the six months ended June 25, 2005, these charges also include $3.9 million in employee separation costs, $0.5 million in office closure costs, and a $0.3 million reserve release associated with the 2004 Infrastructure Realignment Program due to new estimates in restructuring expenses.

      The 2005 Infrastructure Realignment Program commenced during the first quarter of 2005 and is expected to be substantially complete by the second quarter of 2006. This program will impact approximately 140 manufacturing and non-manufacturing personnel. We anticipate annual cost savings associated with employee separation of approximately $7.5 million beginning in 2006. In addition, we expect annualized cost savings of $0.5 associated with depreciation savings related to the second quarter 2005 asset impairment charge.

28

      During the three and six months ended June 27, 2004, the company recorded restructuring charges of $4.4 million and $8.2 million, respectively. In the second quarter of 2004, the charge included $2.0 million relating to our six-inch Mountaintop, PA closure, primarily associated with the decommissioning of certain assets, $0.2 million of employee separation costs related to the four-inch closure in South Portland, ME, an additional $1.7 million primarily relating to decommissioning of certain assets relating to the closure of our four-inch South Portland, ME wafer fab, $0.5 million of additional charges relating to the closure of our Kuala Lumpur, Malaysia plant and $0.8 million of employee separation costs relating to the severance for approximately 15 employees in the United States associated with the first quarter 2004 infrastructure alignment project. The company also released $0.8 million of reserves relating primarily to second and fourth quarter 2003 employee separation costs and our Kuala Lumpur, Malaysia plant closure due to revised estimates relating to these actions. For the six months ended June 27, 2004, these charges also include $2.5 million relating to our six-inch Mountaintop, PA closure, primarily associated with the decommissioning of certain assets, $0.2 million of asset impairment charges relating to the discontinuation of our Memory product line, $0.9 million reversal of employee separation costs related to fewer than anticipated headcount reduction actions related to the four-inch closure in South Portland, ME, an additional $0.9 million primarily relating to decommissioning of certain assets relating to the closure of our four-inch South Portland, ME wafer fab, $0.2 million of additional charges relating to the closure of our Kuala Lumpur, Malaysia plant and $0.9 million of employee separation costs relating to the severance for approximately 15 employees in the United States associated with on-going infrastructure alignment projects.

      In addition, for the six months ended June 27, 2004, the company recorded a net reserve release of $(1.9) million due to a change in distributor reserve estimates and a charge of $0.9 million of inventory reserves, recorded in revenues and cost of sales, respectively, associated with our 2003 restructuring actions.

      Total net costs for the closure of the six-inch wafer fab in Mountaintop were approximately $5.0 million for severance and $14.4 million for all other related costs and impairments. This closure was considered substantially complete as of March 27, 2005. Based on comparisons to our fourth quarter 2003 spending levels, the closure of the Mountaintop six-inch fab is expected to save us approximately $8.0 million annually in manufacturing costs, including salary and benefits associated with the termination of approximately 160 employees.

      Total net costs for the South Portland closure were approximately $2.1 million in severance and $10.3 million in asset impairments and other exit costs including decommissioning and technology transfer costs. This closure was considered substantially complete as of December 26, 2004. The South Portland four-inch fab closure is expected to save us approximately $10.0 million annually in manufacturing costs, including salary and benefits associated with the termination of approximately 90 employees.

      Total net costs for the Wuxi and Kuala Lumpur closures are approximately $5.4 million in severance and $5.6 million in asset impairments and other exit costs including decommissioning and technology transfer costs. Both of these closures were considered substantially complete as of December 26, 2004. These closures are expected to save us approximately $3.0 million annually in manufacturing costs, including salary and benefits associated with the termination of approximately 1,060 employees.

      On February 18, 2005, the company announced the acceleration of certain unvested and “out-of-the-money” stock options previously awarded to employees and officers that have exercise prices per share of $19.50 or higher. As a result, options to purchase approximately 6 million shares of Fairchild stock became exercisable immediately upon the announcement. Based upon the company’s closing stock price of $16.15 on February 18, 2005, none of these options had economic value on the date of acceleration. As a result of the acceleration, the company expects to reduce the non-cash stock option expense that would otherwise be required in accordance with SFAS 123R,Share-Based Payment, by approximately $12 million in 2006, $4 million in 2007 and $1 million in 2008 on a pre-tax basis. The company believes that reducing these expenses in future periods is in the best interest of the company and its stockholders. The company also believes that with exercise prices in excess of current market values, the shares are not fully achieving their original objectives of incentive compensation and employee retention. Lastly, the company also believes the acceleration may have a positive effect on employee morale and retention.

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     Interest Expense. Interest expense decreased $7.1 million and $9.6 million in the three and six month periods ended June 26, 2005, as compared to 2004. We had gross interest expense savings of $13.5 million related to the paydown of our 10¹/2% Notes on February 13, 2005. These savings were offset by an increase in interest paid on our term loan resulting from the $150 million increase in the term loan, which was used to paydown the Notes, as well as rising interest rates on the variable rate loan over the first six months of 2005.

     Interest Income. The increase in interest income in the three and six month periods ended June 26, 2005, as compared to 2004, is due to higher interest rates on investments.

     Other Expense. The $23.9 million recorded in the first six months of 2005 was for costs associated with the redemption of our 10¹/2% Notes. These costs included $18.5 million for the call premium and other transaction fees and a $5.4 million non-cash write off of deferred financing fees.

     Income Taxes. Income taxes from continuing operations for the second quarter and first six months of 2005 was $191.3 million and $174.9 million, on loss before taxes of $14.0 million and $40.8 million, respectively, compared to $3.6 million and $8.9 million, on income before taxes of $20.6 million and $38.9 million, respectively, for the comparable period of 2004. The primary change in income tax expense during the second quarter of 2005 is that a non-cash tax charge of $195.4 million was recorded to increase our U.S. valuation allowance to $202.0 million. This charge includes a valuation allowance on approximately $12.2 million and $6.2 million of U.S. tax benefits recorded during the first and second quarters of 2005, respectively. The valuation allowance of $202.0 million as of June 26, 2005 consists of the beginning of the year allowance of $6.1 million and second quarter 2005 charges of $195.4 million to income from continuing operations, $0.4 million to additional paid in capital and $0.1 million to other comprehensive income. We are continuing to examine other tax items, which could reduce the value of the valuation allowance recorded in the second quarter (See Note 13 in Item I).

      Comparative disclosures of revenue and gross profit of our reportable segments are as follows:

	Three Months Ended
	June 26,								June 27,
	2005								2004
						Gross								Gross
	Revenue		% of Total			Profit %			Revenue		% of Total			Profit %
	(Dollars in millions)
Power Discrete	$	193.1		55.8	%		22.1	%	$	216.5		52.3	%		31.6	%
Power Analog		66.7		19.3	%		20.7	%		83.3		20.1	%		33.1	%
Standard Products		86.2		24.9	%		14.4	%		114.5		27.6	%		22.1	%
Total	$	346.0		100.0	%		19.9	%	$	414.3		100.0	%		29.3	%

	Six Months Ended
	June 26,								June 27,
	2005								2004
						Gross								Gross
	Revenue		% of Total			Profit %			Revenue		% of Total			Profit %
	(Dollars in millions)
Power Discrete	$	397.7		56.1	%		23.9	%	$	423.7		52.1	%		29.3	%
Power Analog		137.0		19.3	%		21.5	%		156.4		19.2	%		35.6	%
Standard Products		174.1		24.6	%		16.1	%		233.9		28.7	%		20.0	%
Total	$	708.8		100.0	%		21.5	%	$	814.0		100.0	%		27.9	%

Power Discrete Products Group.

      Power Discrete revenues decreased approximately 11% and 6% in the second quarter and first six months of 2005, respectively, compared to the same periods of 2004. A decline in average selling prices brought revenues down 1%, while a 5% decline in unit volume contributed the remainder of the overall decrease in the

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first half of 2005. The decline in average selling prices was the result of continued pricing pressure, particularly from competition in China and changes in our product mix. The decline in unit volume was the result of reduced demand, particularly in Asia Pacific where distributors were actively reducing their inventory levels. Sales in the United States and Taiwan regions declined approximately 39% driven by lower low power product sales in the desktop, DC/DC and notebook markets, while sales in China increased 12% due to higher sales in the display, entertainment, and lighting-industrial markets. Gross profits decreased due to unfavorable changes in product mix, and decreased factory utilization. Power Discrete gross profit in the first six months of 2004 includes a $0.2 million sales reserve release recorded in revenue, associated with the discontinuation of certain products in connection with our 2003 restructuring actions.

      Power Discrete had operating income of $5.7 million and $21.0 million in the second quarter and first six months of 2005, compared to $33.6 million and $55.3 for the comparable periods of 2004. The decrease in operating income was due to lower gross profits and higher SG&A expenses. R&D expenses were roughly flat. SG&A expenses increased due mainly to increased allocated legal expenses, an increased focus on more field application support, as well as non-cash expenses related to certain employee retirement benefits. Acquisition amortization decreased due to certain intangibles becoming fully amortized during the first quarter of 2004.

Power Analog Products Group.

      Power Analog revenues decreased approximately 20% and 12% in the second quarter and first six months of 2005, respectively, compared to the same periods of 2004. A decline in average selling prices and product mix decreased revenues 15%, while a moderate increase in unit volume grew revenues 3% in the first six months of 2005. Unit volume increases in the first quarter of 2005, particularly in Fairchild Power Switch (FPS), were offset by overall declines in unit volume in the second quarter. This was primarily due to reduced demand as distributors actively reduced their inventory levels. The decline in average selling prices was due to a lower margin mix and aggressive pricing pressure during the first half of 2005. Regional growth continued in Asia, while the United States declined consistent with the first quarter of 2005. Gross profits decreased as a result of our efforts to reduce channel and internal inventories, causing a decrease in factory utilization compared to 2004 levels. We also experienced an unfavorable change in product mix driven by decreased revenues from our heritage products and decreased revenue and volume in signal path products, specifically amps and mixed signal. Power Analog gross profit in the first six months of 2004 includes a charge (release) of $(0.2) million of sales reserves and $0.1 million of inventory reserves, recorded in revenue and cost of sales, respectively, both associated with the discontinuation of certain products in connection with our 2003 restructuring actions.

      Power Analog had operating income (loss) of $(9.5) million and $(15.8) million in the second quarter and first six months of 2005, respectively, compared to $6.6 million and $14.3 million for the comparable periods of 2004, respectively. R&D expenses increased as a percentage of sales as spending remained flat, but revenues declined. We remain committed to our R&D to be able to sustain future revenue growth. SG&A expenses increased due to non-cash expenses related to certain employee retirement benefits as well as higher allocated legal expenses. Acquisition amortization decreased due to certain intangibles becoming fully amortized during the first quarter of 2004.

Standard Products Group.

      Standard Products revenues decreased approximately 25% and 26% in the second quarter and first six months of 2005, respectively, compared to the same period of 2004. Unit volumes decreased sales 19%, while declines in average selling prices contributed an additional 7% to the overall decrease in the first half of 2005. The decline in revenues was due to reduced demand as our distributors actively reduced their inventory levels, particularly for our logic and discrete standard products, as well as significant pricing pressure. The decline in units was driven mainly by reduced demand for our logic and discrete standard products. Virtually all end markets declined and on a regional basis, Japan saw an over 52% decrease in revenues as distributors substantially reduced their inventories of our products. In addition, revenues declined $5.2 million in the first six months of 2005, compared to the same periods of 2004 due to the discontinuation of the Memory product line during 2004. In the future, we anticipate that Standard Products as a percentage of total revenue will

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continue to decrease, as our strategic focus shifts to the Power Analog and Power Discrete segments. Standard Product gross profits, excluding the effect of the discontinuation of the Memory product line, which was approximately $2.2 million in the first six months of 2004, decreased due to a combination of lower factory utilization as we reduced inventories and continued pricing pressure. While we anticipate revenues will continue to decline as a percentage of our total company revenues, we will continue to focus on improving gross profit margins in this product line. Standard Products gross profit in the first six months of 2004 includes $(1.5) million of sales reserve releases and $0.8 million of inventory reserves, recorded in revenue and cost of sales, respectively, both associated with the discontinuation of certain products in connection with our 2003 restructuring actions.

      Standard Products had operating income (loss) of $(0.4) million and $1.9 million in the second quarter and first six months of 2005, compared to $9.9 million and $15.8 million for the comparable period of 2004. R&D expenses were flat as a percentage of revenue, while SG&A expenses increased due to a one-time non-cash expense related to certain employee retirement benefits and higher allocated legal expenses. Acquisition amortization decreased due to certain intangibles becoming fully amortized during the second quarter of 2005.

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 26, 2005, adjusted for outstanding letters of credit, we had up to $179.4 million available under this senior credit facility. At June 26, 2005, we had additional outstanding letters of credit of $1.1 million and guarantees totaling $2.9 million that were issued on behalf of an unaffiliated company with which we currently have a strategic investment. At June 26, 2005, we also had $23.7 million of undrawn credit facilities at certain of our foreign subsidiaries. These amounts outstanding do not impact available borrowings under the senior credit facility.

      Our senior credit facility, which includes the $450 million term loan and the $180 million revolving line of credit, the indentures governing our 5% Convertible Senior Subordinated Notes, and other debt instruments we may enter into in the future, impose various restrictions and contain various covenants which could 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 (earnings before interest, taxes, depreciation and amortization) less capital expenditures measure. At June 26, 2005, we were in compliance with these covenants. The senior credit facility also limits our ability to modify our certificate of incorporation and bylaws, or enter into shareholder agreements, voting trusts or similar arrangements. Under our debt instruments, the subsidiaries of Fairchild Semiconductor Corporation cannot be restricted, except to a limited extent, from paying dividends or making advances to Fairchild Semiconductor Corporation. We believe that funds to be 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 had capital expenditures of $55.7 million in the first six months of 2005. This capital was primarily spent to expand manufacturing capacity in Korea.

      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 26, 2005, our cash and cash equivalents were $193.8 million, an increase of $47.5 million from December 26, 2004. Our short term and long term marketable securities totaled $172.7 million and

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$95.0 million, respectively, a decrease of $249.4 million and $29.0 million, respectively as compared to December 26, 2004. Included in the short-term marketable securities are auction rate securities in which the company invests to help maintain liquidity. These securities have long-term underlying maturities, but are sold in a market which is highly liquid with interest rates reset every 7, 28, or 35 days. The company’s practice is to not hold these underlying securities to maturity but to take advantage of this interest rate reset feature to provide short-term liquidity for the company at advantageous yields when compared to cash equivalents. As of June 26, 2005, the company held $148.0 million of auction rate securities, a decrease of $263.8 million from December 26, 2004.

      During the first six months of 2005, our cash provided by operations was $23.7 million compared to $118.0 million in the comparable period of 2004. The decrease in cash provided by operating activities was due to a net loss in 2005 (exclusive of the non-cash deferred income tax reserve expense) in comparison to income in 2004, as well as other changes in working capital items, primarily current liabilities. Decreases in current liabilities was due to payments made on operating accruals, taxes, payables and a decrease in interest payable due to the payoff on the 10¹/2% Notes.

      Cash provided by investing activities during the first six months of 2005 totaled $220.6 million, compared to $174.0 million of cash used in investing activities for the comparable period of 2004. The increase primarily results from the sale of marketable investments, reduced purchases of marketable securities and decreased capital expenditures.

      Cash used in financing activities of $196.8 million for the first six months of 2005 was primarily due to the repayment of the company’s 10¹/2% Notes, net of the issuance of long term debt. Cash provided by financing activities of $12.5 million for the first six months of 2004 was primarily from proceeds from the exercise of stock options.

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 stand-alone basis had no cash flow from operations and has no cash requirements for the next twelve months.

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 overall global or regional economic conditions; changes in demand for our products; changes in inventories at our customers and distributors; technological and product development risks, including the risks of failing to maintain the right to use some technologies or failing to adequately protect our own intellectual property against misappropriation or infringement; availability of manufacturing capacity; the risk of production delays; availability of raw materials; competitors’ actions; loss of key customers, including but not limited to distributors; the inability to attract and retain key management and other employees; order cancellations or reduced bookings; changes in manufacturing yields or output; risks related to warranty and product liability claims; risks inherent in doing business internationally; regulatory risks; and significant litigation. These and other risks are described in the Business Risks section in the quarterly and annual reports we file with the Securities and Exchange Commission. Such risks and uncertainties could cause actual results to be materially different from those expressed in forward-looking statements. Readers are cautioned not to place undue reliance on the forward-looking statements.

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Policy on Business Outlook Disclosure and Quiet Periods

      It is our current policy to update our 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 outlook below is consistent with the outlook included in our July 14, 2005 press release announcing second quarter results. The second update is within a press release issued approximately two months into each quarter. The current outlook is accessible at the Investor Relations section of our website athttp://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 2005 will be from September 12, 2005 to October 13, 2005, when we plan to release our third quarter 2005 results. Except during quiet periods, the 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 outlook, as posted on our website, announced in press releases and provided in quarterly, annual and special reports or other filings with the SEC, should be considered to be historical, speaking as of prior to the quiet period only and not subject to update by the company. During quiet periods, Fairchild Semiconductor representatives will not comment about the outlook of the company’s financial results or expectations for the quarter in question.

Outlook

      For the third quarter of 2005, we expect revenues and gross margins to be roughly flat compared to the second quarter of 2005. Lead times at the beginning of the third quarter were in the 5 - 7 week range, which should allow us to book and ship a higher amount of orders during the quarter. We also plan to continue our efforts to manage factory loadings and focus on distribution re-sales to further reduce inventories in the channel. This revenue guidance reflects lower sales into the distribution channel for the third quarter than we expect in re-sales by the distributors. Once the distributor inventories hit an optimal level, we anticipate that our revenues will be better aligned to the current end demand levels.

      We expect R&D to remain fairly flat as a percentage of sales even as we shift funding to support greater investments in our analog business. We also expect SG&A to remain stable at the current percentage of sales as we plan to reduce spending in some areas to offset more spending on selling and field application engineer’s (FAE’s).

      To improve the quality of our business, our product lines are completing an exhaustive analysis of their lower margin products and are developing actions to improve these gross margins or discontinue/divest the products. The familiar 80/20 rule is very applicable here as only a handful of products and product lines are driving the lower margins. As we identify and execute on plans to exit certain products, we may be required to take charges over the next couple of quarters for potential returns or to adjust the carrying value of our inventory for these products. Ultimately, we expect that these product management actions will improve our on-going gross margins.

      Long term, we are focusing on improving our return on invested capital, or ROIC. Our new capital expenditure model will be in the range of 6-8% of sales, down from our historical average of approximately 11%. In addition, we have completed an analysis of our machinery and equipment useful lives. As a result of this analysis, beginning in the third quarter, we will be adjusting the useful lives of certain factory machinery and equipment to better align our depreciation to the actual longer lives we have experienced. The two changes of our new capital expenditures model and lower depreciation expenses will reduce depreciation expenses gradually this year and drive our quarterly depreciation and amortization run-rate to about $25 to $27 million in 2006.

Recently Issued Financial Accounting Standards

      In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections. This statement replaces APB Opinion No. 20 and FASB SFAS No. 3 and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 requires the retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable

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to determine either the period specific effects or the cumulative effect of the change. This statement is effective for fiscal periods beginning after December 15, 2005. The company has yet to determine the impact, if any, of SFAS No. 154 on its consolidated financial statements.

      In March 2005, the FASB issued FIN No. 47,Accounting for Conditional Asset Retirement Obligations. FIN 47 clarifies that the term Conditional Asset Retirement Obligation as used in FASB Statement No. 143,Accounting for Asset Retirement Obligation, refers to a legal obligation to perform as asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The company is required to adopt the provisions of FIN 47 by May 2006, although earlier adoption is permitted. The company has yet to determine the impact, if any, of FIN 47 on its consolidated financial statements.

      In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The Issue’s objective is to provide guidance for identifying other-than-temporarily impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB issued a FASB Staff Position (FSP) EITF 03-1-1 that delays the effective date of the measurement and recognition guidance in EITF 03-1 until further notice. Once the FASB reaches a final decision on the measurement and recognition provisions, the company will evaluate the impact of the adoption of the accounting provisions of EITF 03-1.

      In December 2004, the FASB issued FSP No. 109-1,Application of FASB Statement No. 109, Accounting for Income Taxes, to the Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004. The American Jobs Creation Act of 2004 (AJCA) introduces a special 9% tax deduction on qualified production activities. FSP 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with SFAS No. 109. We do not expect the adoption of this new tax provision to have a material impact on our consolidated financial position, results of operations or cash flows.

      In December 2004, the FASB issued FSP No. 109-2,Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. The AJCA introduces a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FSP 109-2 provides accounting and disclosure guidance for the repatriation provision. We are in the process of winding down operations in our Kuala Lumpur facility. As such, it is anticipated that a dividend distribution will be made in fiscal year 2005. The estimated amount of the dividend is $3.6 million. Taxes of $0.2 million were accrued at the end of fiscal year 2004 utilizing the special one time 85% dividend received deduction. We have not yet determined whether we are going to take advantage of the repatriation provisions on any other unremitted earnings. Until such time, we will make no change to our current intention to indefinitely reinvest the undistributed earnings of those foreign subsidiaries. The maximum amount of undistributed earnings that we can repatriate, as limited under the AJCA, is up to $500 million. The range of possible amounts qualifying as dividends of foreign earnings is between zero and approximately $400 million. The estimated range of income tax effects of such repatriation is between zero and approximately $33 million.

      In December 2004, the FASB issued SFAS No. 123 (Revised 2004),Share Based Payment. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. The company previously reported that it will apply the expense recognition provisions relating to stock options beginning in the third quarter of 2005; however, on April 14, 2005, the Securities and Exchange Commission adopted a new rule which amends the compliance date to the beginning of the first annual period that begins after June 15, 2005, therefore deferring the company’s required adoption to the beginning of the first quarter of 2006. SFAS No. 123R allows for either prospective recognition of compensation expense or retrospective recognition. We are currently evaluating these transition methods. The adoption of SFAS 123R is expected to have a material impact to our results of operations. See Note 6 of Item 1, Notes to Consolidated Financial Statements (Unaudited).

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      In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. This statement is effective for fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material affect on our results of operations or financial position.

      In November 2004, the FASB issued SFAS No. 151,Inventory Costs. This statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4,Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This statement is effective for fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have a material affect on our results of operations or financial position.

Business Risks

      Our business is subject to a number of risks and uncertainties. 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 past 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.

We maintain a backlog of customer orders that is subject to cancellation, reduction or delay in delivery schedules, which may result in lower than expected revenues.

      We manufacture products primarily pursuant to purchase orders for current delivery or to forecast, rather than pursuant to long-term supply contracts. The semiconductor industry is subject to rapid changes in customer outlooks or unexpected build ups of inventory in the supply channel as a result of shifts in end market demand. Accordingly, many of these purchase orders or forecasts may be revised or canceled without penalty. As a result, we must commit resources to the production of products without any advance purchase commitments from customers. Our inability to sell products after we devote significant resources to them could have a material adverse effect on both our levels of inventory and revenues.

Downturns in the highly cyclical semiconductor industry or changes in end user market demands could reduce the profitability and overall value of our business, which could cause the trading price of our stock to decline or have other adverse effects on our financial position.

      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 into 2003, 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 low point of this most recent cycle occurred in the third quarter of 2001, the semiconductor industry did not experience a recovery in orders until 2003. We may experience renewed, possibly more severe and prolonged, downturns in the future as a result of such cyclical changes. Even as demand increases

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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. And, in 2003 we sold approximately the same numbers of units as in 2002, while at the same time experiencing revenue declines due to price decreases. 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 consumer electronics such as personal computers, cellular telephones, handsets and digital cameras, and automotive, household and industrial goods. These end user markets may experience changes in demand that could 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. The semiconductor industry is characterized by rapidly changing technologies and industry standards, together with frequent new product introductions. 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. New products often command higher prices and, as a result, higher profit margins. We may not successfully identify new product opportunities and develop and bring new products to market or succeed in selling them into new customer applications 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. Our failure to identify or capitalize on any fundamental shifts in technologies in our product markets 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. 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; or

•  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 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.

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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. From time to time, we may be notified of claims (often implicit in offers to sell us a license to another company’s patents) that we may be infringing patents issued to other companies, and we may subsequently engage in license negotiations regarding these claims. Such 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, it is impossible to be aware of every possible patent which our products may infringe, and we cannot assure you that we will be successful. Furthermore, even if we conclude our products do not infringe another’s patents, others may not agree. We have been and are 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. For example, on October 20, 2004, Power Integrations, Inc. sued us in the United States District Court for the District of Delaware, alleging that some of our PWM integrated circuit products infringe four of its U.S. patents. We do not believe our products violate Power Integrations’ patents and plan to vigorously contest the lawsuit. Our involvement in this lawsuit and future intellectual property litigation, or the costs of avoiding or settling 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. We may decide to settle patent infringement claims or litigation by purchasing license rights from the claimant, even if we believe we are not infringing, in order to reduce the expense of continuing the dispute or because we are not sufficiently confident that we would eventually prevail. 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 eleven 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 frequently conducting due diligence or holding preliminary discussions with respect to possible acquisition transactions,

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some of which could 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 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 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. For example, some phosphorus-containing mold compound received from one supplier and incorporated into our products has resulted in a number of claims for damages from customers. 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. We subcontract a minority of our wafer fabrication needs, primarily to Advanced Semiconductor Manufacturing Corporation, Phenitec Semiconductor, Taiwan Semiconductor Manufacturing Company, Central Semiconductor Manufacturing Corporation, United Microelectronic Corporation, WIN Semiconductor and New Japan Radio Corporation. In order to maximize our production capacity, some of our back-end assembly and testing operations are also subcontracted. Primary back-end subcontractors include AUK, Enoch, Liteon Technology, Panjit Semiconductor, GEM Services, Hana Semiconductor, SP Semiconductor, STATS ChipPAC, STS Semiconductor and Wooseok. Our operations and ability to satisfy customer obligations could be adversely affected if our relationships with these subcontractors were disrupted or terminated.

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Delays in beginning production at new facilities, expanding capacity at existing facilities, implementing new production techniques, or incurring problems associated with technical equipment malfunctions, all could adversely affect our manufacturing efficiencies.

      Our manufacturing efficiency is an important factor in our profitability, and we cannot assure you that we will be able to maintain our manufacturing efficiency or increase manufacturing efficiency to the same extent as our competitors. Our manufacturing processes are highly complex, require advanced and costly equipment and are continuously being modified in an effort to improve yields and product performance. Impurities or other difficulties in the manufacturing process can lower yields. In 2003, we began initial production at a new assembly and test facility in Suzhou, China. We are transferring some production from subcontractors to this new facility. Delays or technical problems in completing these transfers could lead to order cancellations and lost revenue. 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 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 67% of our net sales for the first six months of 2005. Our top five distributors worldwide accounted for 19% of our net sales for the first six months of 2005. 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 standard component or “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.

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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 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 may be sold for several dollars, whereas the personal computer might 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 have received 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 or to settle claims to avoid protracted litigation. Our results of operations and business 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.

      For example, from time to time since late 2001, we have received claims from a number of customers seeking damages resulting from certain products manufactured with a phosphorus-containing mold compound. Mold compound is the plastic resin used to encapsulate semiconductor chips. This particular mold compound causes some chips to short in some situations, resulting in chip failure. We have been named in two lawsuits relating to these mold compound claims. In May 2004 we were named, along with three product distribution companies, as a defendant in a lawsuit filed by Alcatel Canada Inc. in the Ontario Superior Court of Justice. The lawsuit alleges breach of contract, negligence and other claims and seeks C$200,000,000 (Canadian dollars) in damages allegedly caused by our products containing the mold compound. In January 2005 we were named as a defendant in a lawsuit filed by Lucent Technologies Inc. in the Superior Court of New Jersey. The lawsuit alleges breach of contract and breach of warranty claims and seeks unspecified damages allegedly caused by our products. We believe we have strong defenses against all these claims and intend to vigorously defend both lawsuits.

      In a related action, we filed a lawsuit in August 2002 against the mold compound supplier, Sumitomo Bakelite Singapore Pte. Ltd., and other related parties, alleging claims for breach of contract, misrepresentation, negligence and other claims and seeking unspecified damages, including damages caused to our customers as a result of mold compound supplied by Sumitomo. Other manufacturers have also filed lawsuits against Sumitomo relating to the same mold compound issue. Our lawsuit against Sumitomo is pending in California Superior Court for Santa Clara County and we expect the case to go to trial in late 2005. We are unable to predict or determine the outcome of the litigation with Sumitomo Bakelite Singapore Pte. Ltd., and there can be no assurance that we will prevail, nor can we predict the amount of damages that may be recovered if we do prevail.

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      Several other customers have made claims for damages or threatened to begin litigation as a result of the Sumitomo mold compound issue if their claims are not resolved according to their demands, and we may face additional lawsuits as a result. We have also resolved similar claims with several of our leading customers. We have limited insurance coverage for such customer claims. While the exact amount of these losses is not known, we have recorded a reserve for estimated potential settlement losses of $11.0 million in the Consolidated Statement of Operations for the year ended December 26, 2004. This estimate was based upon an assessment of the potential liability using an analysis of the claims and historical experience. If we continue to receive additional claims for damages from customers beyond the period of time normally observed for such claims, if more of these claims proceed to litigation, or if we choose to settle claims in settlement of or to avoid litigation, then we may incur a liability in excess of the current reserve.

Our international operations subject our company to risks not faced by domestic competitors.

      Through our subsidiaries we maintain significant operations in the Philippines, Malaysia, China and South Korea and also operate facilities in Singapore. We have sales offices and customers around the world. Approximately three-quarters of our revenues in the first six months of 2005 were from Asia. The following are some of the 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.

Our 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 16% of our revenue for the second quarter of 2005.

      Relations between South Korea and North Korea have been tense over most of South Korea’s history, and more 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. In addition to other risks disclosed relating to international operations, some businesses in South Korea are subject to labor unrest.

      Our Korean power device business’ sales are increasingly 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 as much as possible, 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 (see Item 3, Quantitative and Qualitative Disclosures about Market Risk).

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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 have significantly expanded our manufacturing operations in China and, as a result, will be increasingly subject to risks inherent in doing business in China, which may adversely affect our financial performance.

      In July 2003, we began production on an 800,000 square foot assembly and test facility in Suzhou, China. We have completed the first phase of the project and in 2004 began implementing the second phase. The factory began production in 2003 and is steadily increasing its output. 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. Our ability to operate in China may be adversely affected by changes in that country’s laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. In addition, our results of operations in China are subject to the economic and political situation there. We believe that our operations in China are in compliance with all applicable legal and regulatory requirements. However, there can be no assurance that China’s central or local governments will not impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures. Changes in the political environment or government policies could result in revisions to laws or regulations or their interpretation and enforcement, increased taxation, restrictions on imports, import duties or currency revaluations. In addition, a significant destabilization of relations between China and the United States could result in restrictions or prohibitions on our operations or the sale of our products in China. The legal system of China relating to foreign trade is relatively new and continues to evolve. There can be no certainty as to the application of its laws and regulations in particular instances. Enforcement of existing laws or agreements may be sporadic and implementation and interpretation of laws inconsistent. Moreover, there is a high degree of fragmentation among regulatory authorities resulting in uncertainties as to which authorities have jurisdiction over particular parties or transactions.

We are subject to many environmental laws and regulations that could affect our operations or result in significant expenses.

      Increasingly stringent environmental regulations restrict the amount and types of pollutants that can be released from our operations into the environment. While the cost of compliance with environmental laws has not had a material adverse effect on our results of operations historically, compliance with these and any future regulations could require significant capital investments in pollution control equipment or changes in the way we make our products. In addition, because we use hazardous and other regulated materials in our manufacturing processes, we are subject to risks of liabilities and claims, regardless of fault, resulting from accidental releases, including personal injury claims and civil and criminal fines, any of which could be material to our cash flow or earnings. For example:

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

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•  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 indemnification agreements with Raytheon Company, National Semiconductor, Samsung Electronics and Intersil Corporation, these indemnities are limited to conditions that occurred prior to the consummation of the transactions through which we acquired facilities from those companies. Moreover, we cannot assure you that their indemnity obligations to us for the covered liabilities will be available, or, if available, adequate to protect us.

We are a leveraged company with a ratio of debt-to-equity at June 26, 2005 of approximately 0.6 to 1, which could adversely affect our financial health and limit our ability to grow and compete.

      At June 26, 2005, we had total debt of $651.0 million, and the ratio of this debt to equity was approximately 0.6 to 1. In June 2003 we entered into a new senior credit facility that included a $300 million term loan, the proceeds of which were used to redeem our 10³/8% Senior Subordinated Notes due 2007, and a $180 million revolving line of credit. In January 2005 we increased the senior credit facility to $630 million, consisting of a term loan of $450 million replacing the previous $300 million term loan, and a $180 million revolving line of credit of which $179.4 million remained undrawn as of June 26, 2005, adjusted for outstanding letters of credit. The proceeds from the increased senior credit facility were used, together with approximately $216 million in cash, to redeem all our outstanding 10¹/2% Senior Subordinated Notes due 2009. Despite reducing some of our long term debt we continue to carry substantial indebtedness which could have important consequences. For example, it could:

•  require us to dedicate a 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;

•  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; or

•  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, repurchase stock 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 credit agreement relating to the senior credit facility contain restrictions on the incurrence of additional indebtedness, these

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restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, additional indebtedness incurred in compliance with these restrictions or upon further amendment of the credit facility could be substantial. The senior credit facility, as amended in January 2005, permits borrowings of up to $180.0 million in revolving loans under the line of credit, in addition to the outstanding $450 million term loan that is currently outstanding under that facility. As of June 26, 2005, adjusted for outstanding letters of credit, we had up to $179.4 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 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 the credit agreement relating to our senior credit facility may limit our ability to finance our future operations or capital needs or engage in other business activities that may be in our interests. The credit agreement imposes significant operating and financial restrictions 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 senior credit facility also requires us to maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and we cannot assure you that we will meet those ratios. As of June 26, 2005, 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 our assets, including any 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 26, 2004 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 43 of the Form 10-K. There were no material changes in the information we provided in our Form 10-K during the period covered by this Quarterly Report.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

      We maintain disclosure controls and procedures designed to assure, as much as is reasonably possible, that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is communicated to management and recorded, processed, summarized and disclosed within the specified time periods. As of the end of the period covered by this report, our Chief Executive Officer (CEO) and Chief Financial Officer (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 as of June 26, 2005, our disclosure controls and procedures are effective.

Inherent Limitations on Effectiveness of Controls

      The company’s management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that the breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Changes in Internal Control over Financial Reporting

      There have been no changes in our internal control over financial reporting during the second quarter of 2005 that have materially affected, or are reasonably likely to materially affect, our own internal control over financial reporting. During the first quarter of 2005, we implemented an upgrade to several modules of our enterprise resource planning (ERP) system.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

      From time to time since late 2001, we have received claims from a number of customers seeking damages resulting from certain products manufactured with a phosphorus-containing mold compound. Mold compound is the plastic resin used to encapsulate semiconductor chips. This particular mold compound causes some chips to short in some situations, resulting in chip failure. On May 14, 2004 we were named, along with three product distribution companies, as a defendant in a lawsuit filed by Alcatel Canada Inc. in the Ontario Superior Court of Justice in Toronto. The other named defendants are Arrow Electronics Canada Ltd., Avnet International (Canada) Ltd. and Future Electronics Inc. The lawsuit alleges breach of contract, negligence and other claims and seeks C$200,000,000 (Canadian dollars) in damages allegedly caused by some of our products manufactured with the phosphorous-containing mold compound. In January 2005 we were named as a defendant in a lawsuit filed by Lucent Technologies Inc. in the Superior Court of New Jersey. The lawsuit alleges breach of contract and breach of warranty claims and seeks unspecified damages allegedly caused by our products. We believe we have strong defenses against all these claims and intend to vigorously defend both lawsuits.

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      In a related action, we filed a lawsuit in August 2002 against the mold compound supplier, Sumitomo Bakelite Singapore Pte. Ltd., and other related parties, alleging claims for breach of contract, misrepresentation, negligence and other claims and seeking unspecified damages, including damages caused to our customers as a result of mold compound supplied by Sumitomo. Other manufacturers have also filed lawsuits against Sumitomo relating to the same mold compound issue. Our lawsuit against Sumitomo is pending in California Superior Court for Santa Clara County and we expect the case to go to trial in late 2005. We are unable to predict or determine the outcome of the litigation with Sumitomo Bakelite Singapore Pte. Ltd., and there can be no assurance that we will prevail, nor can we predict the amount of damages that may be recovered if we do prevail.

      Several other customers have made claims for damages or threatened to begin litigation as a result of the Sumitomo mold compound issue if their claims are not resolved according to their demands, and we may face additional lawsuits as a result. We have also resolved similar claims with several of our leading customers. We have limited insurance coverage for such customer claims. While the exact amount of these losses is not known, we have recorded a reserve for estimated potential settlement losses of $11.0 million in the Consolidated Statement of Operations for 2004. This estimate was based upon an assessment of the potential liability using an analysis of all the claims and historical experience. If we continue to receive additional claims for damages from customers beyond the period of time normally observed for such claims, if more of these claims proceed to litigation, or if we choose to settle claims in settlement of or to avoid litigation, then we may incur a liability in excess of the current reserve.

      On October 20, 2004, we and our wholly owned subsidiary, Fairchild Semiconductor Corporation, were sued by Power Integrations, Inc. in the United States District Court for the District of Delaware. The complaint filed by Power Integrations alleges that certain of our PWM integrated circuit products infringe four Power Integrations’ U.S. patents, and seeks a permanent injunction preventing us from manufacturing, selling, offering for sale or importing the allegedly infringing products as well as money damages for the alleged past infringement. We have analyzed the Power Integrations patents in light of our products and, based on that analysis, we do not believe our products violate Power Integrations’ patents and, accordingly, plan to vigorously contest this lawsuit.

      On December 30, 2004, our wholly owned subsidiary, Fairchild Semiconductor Corporation, was sued by ZTE Corporation, a communications equipment manufacturer, in Guangdong Higher People’s Court in Guangzhou, People’s Republic of China. The complaint filed by ZTE alleges that certain of our products were defective and caused personal injury and/or property loss to ZTE. ZTE claims 65,733,478 RMB as damages. We deny the allegations in the lawsuit and plan to contest the complaint vigorously.

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

      There were no sales of unregistered equity securities in the second quarter of 2005. The following table provides information with respect to purchases made by the company of its own common stock.

					Total Number of		Maximum Number (or
					Shares Purchased		Approximate Dollar Value)
	Total Number of		Average Price		as Part of Publicly		of Shares That May yet be
	Shares (or Units)		Paid per		Announced Plans		Purchased Under the Plans
Period	Purchased(1)		Share ($)		or Programs		or Programs
March 28, 2004 - April 24, 2005		150,000		13.64		—		—
April 25, 2004 - May 22, 2005		—		—		—		—
May 23, 2004 - June 26, 2005		—		—		—		—
Total		150,000		13.64		—		—

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(1)  All of these shares were purchased by the company in open-market transactions to satisfy its obligations to deliver shares under the company’s employee stock purchase plan. The purchase of these shares satisfied the conditions of the safe harbor provided by the Securities Exchange Act of 1934.

Item 4. Submission of Matters to a Vote of Security Holders

      (a) Our annual meeting of stockholders was held on May 4, 2004.

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

	Votes for		Votes Withheld
Kirk P. Pond		107,512,455		3,061,443
Joseph R. Martin		108,737,416		1,836,482
Charles P. Carinalli		108,669,544		1,904,354
Charles M. Clough		101,087,052		9,486,846
Robert F. Friel		108,775,269		1,798,629
Thomas L. Magnanti		105,898,074		4,675,824
Bryan R. Roub		108,776,243		1,797,655
Ronald W. Shelly		104,218,407		6,355,491
William N. Stout		104,341,157		6,232,741

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

      A proposal to amend the Fairchild Semiconductor Stock Plan, as described in our definitive proxy statement filed with the Securities and Exchange Commission on March 29, 2005, was approved by the following votes:

      FOR: 80,059,755 AGAINST: 18,275,175 ABSTAIN: 1,552,149 BROKER NON-VOTES: 10,686,819

      A proposal to ratify the appointment of KPMG LLP as the independent auditors of the company for 2005, was approved by the following votes:

      FOR: 108,920,143 AGAINST: 1,602,271 ABSTAIN: 51,484

Item 6. Exhibits

Exhibit
No.			Description
	10	.1	Employment Agreement, dated as of April 6, 2005, between Mark S. Thompson, Fairchild Semiconductor International, Inc. and Fairchild Semiconductor Corporation (incorporated by reference from our current report on Form 8-K, filed on April 6, 2005).
	10	.2	Fairchild Semiconductor Stock Plan, approved at the Annual Stockholders’ Meeting held on May 4, 2005 (incorporated by reference from our current report on Form 8-K, filed on May 10, 2005).
	10	.3	Form of Deferred Stock Unit Agreement for non-employee directors under the Fairchild Semiconductor Stock Plan.
	31	.1	Section 302 Certification of the Chief Executive Officer.
	31	.2	Section 302 Certification of the Chief Financial Officer.
	32	.1	Certification, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Mark S. Thompson.
	32	.2	Certification, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Matthew W. Towse.

Items 3, and 5 are not applicable and have been omitted.

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SIGNATURE

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

Fairchild Semiconductor International, Inc.

Date: August 5, 2005 By:  /s/ Robin A. Sawyer

Robin A. Sawyer

Vice President, Corporate Controller

(Principal Accounting Officer)

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