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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended July 1, 2005



or



| ̈ | 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 001-32241



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FREESCALE SEMICONDUCTOR, INC.

(Exact name of registrant as specified in its charter)



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|                         |  |                                     
|------------------------ |  | ------------------------------------
|DELAWARE                 |  | 20-0443182                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)



|                                             |  |           
|-------------------------------------------- |  | ----------
|6501 William Cannon Drive West Austin, Texas |  | 78735     
|(Address of principal executive offices)     |  | (Zip Code)



(512) 895-2000

(Registrants telephone number)



---



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes ̈Nox.



The number of shares outstanding of each of the issuers classes of common stock as of the close of business on July 15, 2005:



|                                     |  |                 
|------------------------------------ |  | ----------------
|Class                                |  | Number of Shares
|Class A Common Stock; $.01 Par Value |  | 135,114,708     
|Class B Common Stock; $.01 Par Value |  | 269,978,659     



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##### Table of Contents

INDEX



|                             |  |                                                                                                                                                  |  |     
|---------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|                             |  |                                                                                                                                                  |  | Page
|Part I Financial Information |  |                                                                                                                                                 
|                             |  |                                                                                                                                                 
|Item 1                       |  | Financial Statements:                                                                                                                            |  |     
|                             |  | Condensed Consolidated and Combined Statements of Operations (Unaudited) for the Three Months and Six Months Ended July 1, 2005 and July 3, 2004 |  | 3   
|                             |  | Condensed Consolidated Balance Sheets as of July 1, 2005 (Unaudited) and December 31, 2004                                                       |  | 4   
|                             |  | Condensed Consolidated and Combined Statements of Cash Flows (Unaudited) for the Six Months Ended July 1, 2005 and July 3, 2004                  |  | 5   
|                             |  | Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)                                                                    |  | 6   
|                             |  |                                                                                                                                                 
|Item 2                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                            |  | 15  
|Item 3                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                       |  | 27  
|Item 4                       |  | Controls and Procedures                                                                                                                          |  | 27  
|                             | 
|Part II Other Information    |  |                                                                                                                                                 
|                             |  |                                                                                                                                                 
|Item 1                       |  | Legal Proceedings                                                                                                                                |  | 28  
|Item 2                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                      |  | 29  
|Item 3                       |  | Defaults Upon Senior Securities                                                                                                                  |  | 29  
|Item 4                       |  | Submission of Matters to a Vote of Security Holders                                                                                              |  | 30  
|Item 5                       |  | Other Information                                                                                                                                |  | 30  
|Item 6                       |  | Exhibits                                                                                                                                         |  | 31  



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##### Table of Contents

PART I - FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



Freescale Semiconductor, Inc. and Subsidiaries

Condensed Consolidated and Combined Statements of Operations

(Unaudited)

(In
millions, except per share amounts)



|                                                      |  |                    |       |   |                  |   |       |             |  |   |             |   |  |   |       |  
|----------------------------------------------------- |  | ------------------ | ----- | - | ---------------- | - | ----- | ----------- |  | - | ----------- | - |  | - | ----- | -
|                                                      |  | Three Months Ended |       |   | Six Months Ended |  
|                                                      |  | July 1,2005        |       |   | July 3,2004      |   |       | July 1,2005 |  |   | July 3,2004 |  
|Net sales                                             |  | $                  | 1,472 |   |                  | $ | 1,461 |             |  | $ | 2,914       |   |  | $ | 2,857 |  
|Cost of sales                                         |  |                    | 860   |   |                  |   | 900   |             |  |   | 1,722       |   |  |   | 1,789 |  
|                                                      |  |                    |       |   |                  |   |       |             |  |   |             |   |  |   |       |  
|Gross margin                                          |  |                    | 612   |   |                  |   | 561   |             |  |   | 1,192       |   |  |   | 1,068 |  
|                                                      |  |                    |       |   |                  |   |       |             |  |   |             |   |  |   |       |  
|Selling, general and administrative                   |  |                    | 202   |   |                  |   | 225   |             |  |   | 393         |   |  |   | 365   |  
|Research and development                              |  |                    | 266   |   |                  |   | 242   |             |  |   | 530         |   |  |   | 492   |  
|Reorganization of businesses                          |  |                    |      |   |                  |   | (2    | )           |  |   | 10          |   |  |   | (9    | )
|Separation expenses                                   |  |                    | 5     |   |                  |   | 41    |             |  |   | 10          |   |  |   | 50    |  
|                                                      |  |                    |       |   |                  |   |       |             |  |   |             |   |  |   |       |  
|Operating earnings                                    |  |                    | 139   |   |                  |   | 55    |             |  |   | 249         |   |  |   | 170   |  
|                                                      |  |                    |       |   |                  |   |       |             |  |   |             |   |  |   |       |  
|Other income (expense):                               |  |                    |       |   |                  |   |       |             |  |   |             |   |  |   |       |  
|Interest expense, net                                 |  |                    | (1    | ) |                  |   |      |             |  |   | (7          | ) |  |   | (21   | )
|Gains on sales of investments and businesses, net     |  |                    |      |   |                  |   |      |             |  |   |            |   |  |   | 41    |  
|Other, net                                            |  |                    | (2    | ) |                  |   | (1    | )           |  |   | (12         | ) |  |   | (4    | )
|                                                      |  |                    |       |   |                  |   |       |             |  |   |             |   |  |   |       |  
|Total other income (expense)                          |  |                    | (3    | ) |                  |   | (1    | )           |  |   | (19         | ) |  |   | 16    |  
|                                                      |  |                    |       |   |                  |   |       |             |  |   |             |   |  |   |       |  
|Earnings before income taxes                          |  |                    | 136   |   |                  |   | 54    |             |  |   | 230         |   |  |   | 186   |  
|Income tax expense                                    |  |                    | 14    |   |                  |   | 11    |             |  |   | 23          |   |  |   | 37    |  
|                                                      |  |                    |       |   |                  |   |       |             |  |   |             |   |  |   |       |  
|Net earnings                                          |  | $                  | 122   |   |                  | $ | 43    |             |  | $ | 207         |   |  | $ | 149   |  
|                                                      |  |                    |       |   |                  |   |       |             |  |   |             |   |  |   |       |  
|Net earnings per common share:                        |  |                    |       |   |                  |   |       |             |  |   |             |   |  |   |       |  
|Basic                                                 |  | $                  | 0.30  |   |                  |   |       |             |  | $ | 0.51        |   |  |   |       |  
|Diluted                                               |  | $                  | 0.29  |   |                  |   |       |             |  | $ | 0.50        |   |  |   |       |  
|Weighted average common shares outstanding:           |  |                    |       |   |                  |   |       |             |  |   |             |   |  |   |       |  
|Basic                                                 |  |                    | 403   |   |                  |   |       |             |  |   | 402         |   |  |   |       |  
|Diluted                                               |  |                    | 420   |   |                  |   |       |             |  |   | 418         |   |  |   |       |  
|                                                      |  |                    |       |  
|Pro forma net earnings per common share:              |  |                    |       |   |                  |   |       |             |  |   |             |   |  |   |       |  
|Basic                                                 |  |                    |       |   |                  | $ | 0.15  |             |  |   |             |   |  | $ | 0.54  |  
|Diluted                                               |  |                    |       |   |                  | $ | 0.15  |             |  |   |             |   |  | $ | 0.54  |  
|Pro forma weighted average common shares outstanding: |  |                    |       |   |                  |   |       |             |  |   |             |   |  |   |       |  
|Basic                                                 |  |                    |       |   |                  |   | 278   |             |  |   |             |   |  |   | 278   |  
|Diluted                                               |  |                    |       |   |                  |   | 278   |             |  |   |             |   |  |   | 278   |  



See accompanying notes.



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##### Table of Contents

Freescale Semiconductor, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In millions, except per share information)



|                                                                                                                                                             |  |              |       |   |                   |   |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ----- | - | ----------------- | - | -----
|                                                                                                                                                             |  | July 1, 2005 |       |   | December 31, 2004
|                                                                                                                                                             |  | (Unaudited)  |       |   |                  
|ASSETS                                                                                                                                                       |  |              |       |   |                   |   |      
|Cash and cash equivalents                                                                                                                                    |  | $            | 262   |   |                   | $ | 382  
|Short-term investments                                                                                                                                       |  |              | 2,293 |   |                   |   | 1,992
|Accounts receivable, net of allowance for doubtful accounts of $4 at July 1, 2005 and December 31, 2004                                                      |  |              | 657   |   |                   |   | 636  
|Inventories:                                                                                                                                                 |  |              |       |   |                   |   |      
|Work in process and raw materials                                                                                                                            |  |              | 472   |   |                   |   | 502  
|Finished goods                                                                                                                                               |  |              | 199   |   |                   |   | 240  
|                                                                                                                                                             |  |              |       |   |                   |   |      
|Total inventories                                                                                                                                            |  |              | 671   |   |                   |   | 742  
|                                                                                                                                                             |  |              |       |   |                   |   |      
|Deferred income taxes                                                                                                                                        |  |              | 24    |   |                   |   | 26   
|Other current assets                                                                                                                                         |  |              | 159   |   |                   |   | 183  
|Assets held for sale                                                                                                                                         |  |              | 43    |   |                   |   | 45   
|                                                                                                                                                             |  |              |       |   |                   |   |      
|Total current assets                                                                                                                                         |  |              | 4,109 |   |                   |   | 4,006
|                                                                                                                                                             |  |              |       |   |                   |   |      
|Property, plant and equipment, net                                                                                                                           |  |              | 2,051 |   |                   |   | 2,207
|Investments                                                                                                                                                  |  |              | 14    |   |                   |   | 31   
|Goodwill                                                                                                                                                     |  |              | 235   |   |                   |   | 222  
|Other assets, net                                                                                                                                            |  |              | 185   |   |                   |   | 167  
|                                                                                                                                                             |  |              |       |   |                   |   |      
|Total assets                                                                                                                                                 |  | $            | 6,594 |   |                   | $ | 6,633
|                                                                                                                                                             |  |              |       |   |                   |   |      
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                         |  |              |       |   |                   |   |      
|Notes payable                                                                                                                                                |  | $            | 2     |   |                   | $ | 2    
|Accounts payable                                                                                                                                             |  |              | 411   |   |                   |   | 474  
|Accrued liabilities and other                                                                                                                                |  |              | 505   |   |                   |   | 669  
|                                                                                                                                                             |  |              |       |   |                   |   |      
|Total current liabilities                                                                                                                                    |  |              | 918   |   |                   |   | 1,145
|                                                                                                                                                             |  |              |       |   |                   |   |      
|Long-term debt                                                                                                                                               |  |              | 1,269 |   |                   |   | 1,269
|Deferred income taxes                                                                                                                                        |  |              | 27    |   |                   |   | 26   
|Other liabilities                                                                                                                                            |  |              | 242   |   |                   |   | 257  
|                                                                                                                                                             |  |             
|Stockholders Equity:                                                                                                                                        |  |              |       |   |                   |   |      
|Preferred stock, $.01 par value; 1,000 shares authorized; no shares issued and outstanding                                                                   |  |              |      |   |                   |   |     
|Class A common stock, $.01 par value; 1,500 shares authorized; 135 and 131 shares issued and outstanding at July 1, 2005 and December 31,
2004, respectively |  |              | 1     |   |                   |   | 1    
|Class B common stock, $.01 par value; 1,000 shares authorized; 270 shares issued and outstanding at July 1, 2005 and December 31,
2004                       |  |              | 3     |   |                   |   | 3    
|Additional paid-in capital                                                                                                                                   |  |              | 3,855 |   |                   |   | 3,800
|Retained earnings                                                                                                                                            |  |              | 280   |   |                   |   | 73   
|Accumulated other comprehensive earnings                                                                                                                     |  |              |      |   |                   |   | 59   
|Less: Treasury stock                                                                                                                                         |  |              | (1    | ) |                   |   |     
|                                                                                                                                                             |  |              |       |   |                   |   |      
|Total stockholders equity                                                                                                                                   |  |              | 4,138 |   |                   |   | 3,936
|                                                                                                                                                             |  |              |       |   |                   |   |      
|Total liabilities and stockholders equity                                                                                                                   |  | $            | 6,594 |   |                   | $ | 6,633
|                                                                                                                                                             |  |              |       |   |                   |   |      



See accompanying notes.



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Freescale Semiconductor, Inc. and Subsidiaries

Condensed Consolidated and Combined Statements of Cash Flows

(Unaudited)

(In
millions)



|                                                                                                                         |  |                  |      |   |              |   |      |  
|------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ---- | - | ------------ | - | ---- | -
|                                                                                                                         |  | Six Months Ended |     
|                                                                                                                         |  | July 1,2005      |      |   | July 3, 2004 |  
|Cash flows from operating activities:                                                                                    |  |                  |      |   |              |   |      |  
|Net earnings                                                                                                             |  | $                | 207  |   |              | $ | 149  |  
|Depreciation and amortization                                                                                            |  |                  | 362  |   |              |   | 399  |  
|Net expenses paid by Motorola                                                                                            |  |                  |     |   |              |   | 22   |  
|Charges (reversals) for reorganization of businesses                                                                     |  |                  | 13   |   |              |   | (10  | )
|Stock-based compensation                                                                                                 |  |                  | 16   |   |              |   |     |  
|Gain on sales of investments and businesses, net                                                                         |  |                  |     |   |              |   | (41  | )
|Deferred income taxes                                                                                                    |  |                  |     |   |              |   | 14   |  
|Other non-cash items                                                                                                     |  |                  | 9    |   |              |   | (12  | )
|Change in operating assets and liabilities, net of effects of acquisitions, dispositions, Contribution and Distribution: |  |                  |      |   |              |   |      |  
|Accounts receivable, net                                                                                                 |  |                  | (28  | ) |              |   | (228 | )
|Inventories                                                                                                              |  |                  | 69   |   |              |   | 15   |  
|Other current assets                                                                                                     |  |                  | 2    |   |              |   | (22  | )
|Accounts payable and accrued liabilities                                                                                 |  |                  | (210 | ) |              |   | 290  |  
|Other operating assets and liabilities                                                                                   |  |                  | (14  | ) |              |   | 3    |  
|                                                                                                                         |  |                  |      |   |              |   |      |  
|Net cash provided by operating activities                                                                                |  |                  | 426  |   |              |   | 579  |  
|                                                                                                                         |  |                  |      |   |              |   |      |  
|Cash flows from investing activities:                                                                                    |  |                  |      |   |              |   |      |  
|Capital expenditures                                                                                                     |  |                  | (230 | ) |              |   | (230 | )
|Acquisitions and investments, net of cash acquired                                                                       |  |                  | (25  | ) |              |   | (41  | )
|Proceeds from sale of investments and businesses                                                                         |  |                  | 9    |   |              |   | 100  |  
|Sales and purchases of short-term investments, net                                                                       |  |                  | (301 | ) |              |   |     |  
|Proceeds from sale of property, plant and equipment and assets held for sale                                             |  |                  | 8    |   |              |   | 21   |  
|Payments for other assets                                                                                                |  |                  | (29  | ) |              |   | (38  | )
|                                                                                                                         |  |                  |      |   |              |   |      |  
|Net cash used for investing activities                                                                                   |  |                  | (568 | ) |              |   | (188 | )
|                                                                                                                         |  |                  |      |   |              |   |      |  
|Cash flows from financing activities:                                                                                    |  |                  |      |   |              |   |      |  
|Proceeds from stock option exercises                                                                                     |  |                  | 38   |   |              |   |     |  
|Debt modification costs                                                                                                  |  |                  | (2   | ) |              |   |     |  
|Repayment of short-term borrowings                                                                                       |  |                  |     |   |              |   | (14  | )
|Repayment of long-term debt                                                                                              |  |                  |     |   |              |   | (7   | )
|Net transfers to Motorola                                                                                                |  |                  |     |   |              |   | (170 | )
|Borrowings from Motorola                                                                                                 |  |                  |     |   |              |   | 428  |  
|                                                                                                                         |  |                  |      |   |              |   |      |  
|Net cash provided by financing activities                                                                                |  |                  | 36   |   |              |   | 237  |  
|                                                                                                                         |  |                  |      |   |              |   |      |  
|Effect of exchange rate changes on cash and cash equivalents                                                             |  |                  | (14  | ) |              |   | (2   | )
|                                                                                                                         |  |                  |      |   |              |   |      |  
|Net (decrease) increase in cash and cash equivalents                                                                     |  |                  | (120 | ) |              |   | 626  |  
|Cash and cash equivalents, beginning of period                                                                           |  |                  | 382  |   |              |   | 87   |  
|                                                                                                                         |  |                  |      |   |              |   |      |  
|Cash and cash equivalents, end of period                                                                                 |  | $                | 262  |   |              | $ | 713  |  
|                                                                                                                         |  |                  |      |   |              |   |      |  



See accompanying notes.



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Freescale Semiconductor, Inc. and Subsidiaries

Notes to Condensed Consolidated and Combined Financial
Statements

(Dollars in millions, except as noted)



(1) Basis of Presentation



Freescale Semiconductor, Inc. (Freescale Semiconductor) was incorporated in Delaware on December 3, 2003 in preparation for the contribution
and transfer by Motorola, Inc. (Motorola) of substantially all of its semiconductor businesses assets and liabilities to Freescale Semiconductor (the Contribution) and an initial public offering (IPO) of
Freescale Semiconductor Class A common stock. Freescale Semiconductor completed the Contribution in the second quarter of 2004 and the IPO on July 21, 2004. Prior to the IPO, Freescale Semiconductor was a wholly owned subsidiary of Motorola. All of
the Freescale Semiconductor Class B shares of common stock were held by Motorola until Motorola distributed its remaining ownership interest in us by means of a special dividend to its common stockholders (the Distribution) on December
2, 2004 (the Distribution Date). We refer to Freescale Semiconductor and its combined predecessor companies and businesses as the Company, we, us or our unless the context otherwise
requires.



The condensed combined financial statements for the
three and six months ended July 3, 2004, included herein, include amounts prior to the Contribution that have been derived from the consolidated financial statements and accounting records of Motorola, principally representing Motorolas
Semiconductor Products Segment, using the historical results of operations, and historical basis of assets and liabilities of the semiconductor businesses. Management believes the assumptions underlying the condensed combined financial statements
for the three and six months ended July 3, 2004 are reasonable. However, the combined financial statements for the three and six months ended July 3, 2004 do not necessarily reflect the Companys results of operations, financial position and
cash flows in the future or what its results of operations, financial position and cash flows would have been had the Company been a stand-alone company during the periods presented.



The Company and Motorola entered into various agreements detailing the provisions of the Contribution and the separation of
the Company from Motorola, and related tax, purchase and supply, transition services and employee matters. Transactions between the Company and Motorola have been identified in Note 2 as transactions between related parties.



The accompanying condensed financial statements as of July 1, 2005 and for
the three months and six months ended July 1, 2005 and July 3, 2004 are unaudited, with the December 31, 2004 amounts included herein derived from the audited consolidated financial statements. In the opinion of management, these unaudited condensed
financial statements include all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the financial position, results of operations and cash flows as of July 1, 2005 and for all periods
presented. Certain amounts reported in previous periods have been reclassified to conform to the current period presentation.



Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted. These condensed financial statements should be read in conjunction with the consolidated and combined financial statements and notes thereto included in our December 31, 2004 Annual Report
on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the three and six months ended July 1, 2005 are not necessarily indicative of the operating results to be expected for the full year.



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



(2) Relationship with Motorola



The Company designs, produces and sells semiconductors to Motorola. The Companys direct net sales to Motorola businesses included in Net sales were
$342 million and $302 million for the three months ended July 1, 2005 and July 3, 2004, respectively, and $709 million and $578 million for the six months ended July 1, 2005 and July 3, 2004, respectively. Accounts receivable from Motorola were $229
million at July 1, 2005 and $266 million at December 31, 2004, including $83 million and $155 million, respectively, due in connection with the Distribution. Accounts payable to Motorola were $19 million and $59 million at July 1, 2005 and December
31, 2004, respectively.



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The statements of operations prior to the second quarter of 2004 include expense allocations for certain
corporate functions historically provided by Motorola. These allocations were made on a specifically identifiable basis or by using relative percentages, as compared to Motorolas other businesses, net sales, payroll, fixed assets, inventory,
net assets excluding debt, headcount or other reasonable methods. These expense allocations included general corporate expenses, basic research expenses, employee benefits and incentives and interest expense.



After the first quarter of 2004, the expense allocation for certain corporate
services ceased, and the Company began purchasing such services from Motorola under the terms of a transition services agreement. Under the terms of that transition services agreement, the Company also receives compensation for services provided to
Motorola in certain locations. The Company charged Motorola $1 million and $6 million for these services for the three months ended July 1, 2005 and July 3, 2004, respectively, and $4 million and $6 million for the six months ended July 1, 2005 and
July 3, 2004, respectively. These amounts were reported as a reduction to the cost classification to which such expenses were recognized, primarily Research and development.



The following table presents the expense allocations reflected in the accompanying statements of operations and expenses
incurred under the transition services agreement:



|                                                  |  |                    |   |                  |   |             |  |             |   |  |   |    
|------------------------------------------------- |  | ------------------ | - | ---------------- | - | ----------- |  | ----------- | - |  | - | ---
|                                                  |  | Three Months Ended |   | Six Months Ended
|                                                  |  | July 1,2005        |   | July 3,2004      |   | July 1,2005 |  | July 3,2004
|Expense allocations:                              |  |                    |   |                  |   |             |  |             |   |  |   |    
|General corporate expenses                        |  | $                  |  |                  | $ |            |  | $           |  |  | $ | 36 
|Basic research                                    |  |                    |  |                  |   |            |  |             |  |  |   | 10 
|Employee benefits and incentives                  |  |                    |  |                  |   |            |  |             |  |  |   | 63 
|Interest expense                                  |  |                    |  |                  |   |            |  |             |  |  |   | 20 
|Expenses under the transition services agreement: |  |                    |   |                  |   |             |  |             |   |  |   |    
|General corporate expenses                        |  |                    | 3 |                  |   | 93          |  |             | 8 |  |   | 93 
|                                                  |  |                    |   |                  |   |             |  |             |   |  |   |    
|                                                  |  | $                  | 3 |                  | $ | 93          |  | $           | 8 |  | $ | 222
|                                                  |  |                    |   |                  |   |             |  |             |   |  |   |    



The Company and
Motorola considered these general corporate expenses, basic research and employee benefits and incentives allocations to be a reasonable reflection of the utilization of services provided during the six months ended July 3, 2004.



(3) Other Financial Data



Statements of Operations Supplemental Information



Selling, General and Administrative



In 2002, as a result of the Companys decision not to be the sole owner
of a wafer fabrication facility in China, the Company recorded an $80 million provision associated with the potential obligation to reimburse the Chinese government for tax exemptions previously received. However, the acquirer of the wafer
fabrication facility, Semiconductor Manufacturing International Corporation (SMIC), filed an application in January 2004 with the Chinese government to request that their exemption provided by the Chinese government to exclude imported
raw materials, construction material and production equipment for value added tax and duty be expanded to include the Companys obligations related to these exemptions. In February 2004, the Chinese government accepted this application, and the
Companys liability to reimburse these incentives was reduced by $51 million, of which $54 million was recognized as a reduction of Selling, general and administrative expenses and $3 million was recognized as Income tax expense in the
Companys accompanying statements of operations for the six months ended July 3, 2004.



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##### Table of Contents

Other Income (Expense)



The following table displays the amounts comprising Interest expense, net and Other, net included in Other income (expense)
in the accompanying statements of operations:



|                                                       |  |                    |     |   |                  |   |    |             |  |   |             |   |  |   |     |  
|------------------------------------------------------ |  | ------------------ | --- | - | ---------------- | - | -- | ----------- |  | - | ----------- | - |  | - | --- | -
|                                                       |  | Three Months Ended |     |   | Six Months Ended |  
|                                                       |  | July 1,2005        |     |   | July 3,2004      |   |    | July 1,2005 |  |   | July 3,2004 |  
|Interest expense, net:                                 |  |                    |     |   |                  |   |    |             |  |   |             |   |  |   |     |  
|Interest expense                                       |  | $                  | (19 | ) |                  | $ |   |             |  | $ | (39         | ) |  | $ | (22 | )
|Interest income                                        |  |                    | 18  |   |                  |   |   |             |  |   | 32          |   |  |   | 1   |  
|                                                       |  |                    |     |   |                  |   |    |             |  |   |             |   |  |   |     |  
|                                                       |  | $                  | (1  | ) |                  | $ |   |             |  | $ | (7          | ) |  | $ | (21 | )
|                                                       |  |                    |     |   |                  |   |    |             |  |   |             |   |  |   |     |  
|Other:                                                 |  |                    |     |   |                  |   |    |             |  |   |             |   |  |   |     |  
|Investment impairments                                 |  | $                  |    |   |                  | $ |   |             |  | $ | (6          | ) |  | $ | (4  | )
|Equity income (losses) of non-consolidated investments |  |                    | (2  | ) |                  |   | (1 | )           |  |   | (5          | ) |  |   | 2   |  
|Net foreign currency losses                            |  |                    |    |   |                  |   |   |             |  |   | (1          | ) |  |   | (2  | )
|                                                       |  |                    |     |   |                  |   |    |             |  |   |             |   |  |   |     |  
|                                                       |  | $                  | (2  | ) |                  | $ | (1 | )           |  | $ | (12         | ) |  | $ | (4  | )
|                                                       |  |                    |     |   |                  |   |    |             |  |   |             |   |  |   |     |  



Prior to the
Contribution, Motorola allocated interest expense to the Company. Following the Contribution, the allocation of interest expense was discontinued as the Company secured borrowings from outside sources, including Motorola, until the IPO and
concurrent debt offering, and incurred interest expense on such borrowings. On July 21, 2004, the Company completed the sale of $1.25 billion of senior unsecured debt.



Earnings Per Share



The Company calculates its earnings per share in accordance with SFAS No. 128, Earnings per Share. Basic earnings per share is computed based
on the weighted-average number of common shares outstanding during the period. Diluted net earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in the net earnings of the Company. For the three months and six months ended July 1, 2005, less than 1 million of the Companys stock options were excluded from the
calculation of diluted earnings per share because the exercise prices of the stock options were greater than the average price of the common shares, and therefore, 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.



The shares used in the computation of the Companys basic and diluted earnings per common share are as follows:



|                                                   |  |                               |  |                            
|-------------------------------------------------- |  | ----------------------------- |  | ---------------------------
|                                                   |  | Three MonthsEnded July 1,2005 |  | Six MonthsEnded July 1,2005
|Basic weighted average common shares outstanding   |  | 403                           |  | 402                        
|Dilutive effect of common stock equivalents        |  | 17                            |  | 16                         
|                                                   |  |                               |  |                            
|Diluted weighted average common shares outstanding |  | 420                           |  | 418                        
|                                                   |  |                               |  |                            



As a result of the
IPO, partial over-allotment exercise, employee option exercises and employee restricted stock unit exercises, the Company now has a total of 405 million shares of common stock outstanding, including 135 million Class A and 270 million Class B
shares. The Class A and Class B shares generally have identical rights except that the holders of Class B common stock have superior voting rights.



8



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##### Table of Contents

Prior to the completion of the IPO, the Company had approximately 278 million shares of Class B common
stock outstanding as a result of the Contribution. The Company has presented pro forma basic and diluted earnings per share amounts for the three and six months ended July 3, 2004 as if the Contribution had occurred on January 1, 2004.



Balance Sheet and Other Supplemental Information



Cash and Cash Equivalents



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



Short-Term Investments



The Company
utilizes a wholly owned subsidiary, which functions as an investment company, to provide the Company and its subsidiaries a mechanism via a money market fund to effectively and efficiently manage its free cash flow on a global basis. The money
market fund does not have investments in related parties of the Company or its subsidiaries.



We reclassified $2.0 billion of our Cash and cash equivalents balance held in the money market fund described above from Cash and cash equivalents to Short-term investments as of December 31, 2004. The money market
fund portfolio includes investments in high quality (rated at least A/ A-2 by S&P or A3/ P-2 by Moodys at purchase date) U.S. dollar-denominated debt obligations including certificates of deposit, bankers acceptances and fixed time
deposits, government obligations, asset-backed securities and commercial paper or short-term corporate obligations. The underlying weighted average maturity of the investments was approximately 40 days at July 1, 2005 and approximately 50 days at
December 31, 2004. The Company values investments in the money market fund using the amortized cost method, which approximates current market value. Under this method, securities are valued at cost when purchased and thereafter a constant
proportionate amortization of any discount or premium is recorded until maturity of the security. As the Company and its subsidiaries own 100% of the outstanding shares of the fund, we believe the correct classification is Short-term investments.



Property, Plant and Equipment



Depreciation expense was $160 million and $185 million for the three months
ended July 1, 2005 and July 3, 2004, respectively, and $328 million and $372 million for the six months ended July 1, 2005 and July 3, 2004, respectively. Accumulated depreciation was $860 million and $551 million at July 1, 2005 and December 31,
2004, respectively.



Assets Held for Sale



Assets held for sale were $43 million and $45 million at July 1, 2005 and
December 31, 2004, respectively. The assets held for sale at July 1, 2005 primarily consist of property in West Creek, Virginia, and a facility in Austin, Texas.



The total net gains from the disposal of assets, including assets held for sale, were $1 million and $12 million for the
three and six months ended July 3, 2004, respectively. These net gains are included in Operating earnings in the accompanying statements of operations.



The assets sold in 2004 include $260 million related to building, machinery and equipment of a wafer fabrication facility in Tianjin, China that was sold
on January 16, 2004 to SMIC. In conjunction with the asset sale, the Company also entered into a cross-patent license agreement. Consideration received for the cross-patent license agreement will be amortized over the five year term of the
agreement. The Company transferred assets, entered into a cross-patent license agreement, paid $30 million in cash and received Series D convertible preference shares in SMIC and warrants valued at $321 million, resulting in a net gain of $6
million. The SMIC common stock was not among the net assets contributed to the Company by Motorola. During the six months ended July 3, 2004, the Company also sold a facility in South Queensferry, Scotland, a building in Austin, Texas, a building
and property in Mesa, Arizona, and excess manufacturing equipment.



9



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##### Table of Contents

Investments



Investments consist of the following:



|                               |  |             |    |                   |   |   
|------------------------------ |  | ----------- | -- | ----------------- | - | --
|                               |  | July 1,2005 |    | December 31, 2004
|Available-for-sale securities: |  |             |    |                   |   |   
|Cost basis                     |  | $           | 1  |                   | $ | 1 
|Gross unrealized gains         |  |             |   |                   |   |  
|Gross unrealized losses        |  |             |   |                   |   |  
|                               |  |             |    |                   |   |   
|Fair value                     |  |             | 1  |                   |   | 1 
|Other securities, cost         |  |             | 10 |                   |   | 24
|Equity method investments      |  |             | 3  |                   |   | 6 
|                               |  |             |    |                   |   |   
|                               |  | $           | 14 |                   | $ | 31
|                               |  |             |    |                   |   |   



On March 11, 2004, all
of the Companys Series D convertible preference shares in SMIC were converted to 1.7 billion shares of common stock in connection with the IPO of SMIC. The Company sold 297 million shares of SMIC common stock in the IPO for $100 million in net
proceeds, resulting in a $41 million gain. The 1.4 billion remaining shares of SMIC common stock were subject to restrictions on transfer that were released over an eighteen-month period, ending in September 2005. Warrants held by the Company for
SMIC stock expired unexercised at the date of the IPO. The SMIC common stock and certain other investments, with carrying values of $464 million, were historically part of the semiconductor operations and were not among the net assets contributed to
the Company by Motorola.



The Company recorded investment
impairment charges of $6 million and $4 million for the six months ended July 1, 2005 and July 3, 2004, respectively. These impairment charges represent other-than-temporary declines in the value of investments within the Companys investment
portfolio and are included in Other income (expense) in the accompanying statements of operations.



Comprehensive Earnings



The components of total comprehensive earnings, net of tax, were as follows:



|                                                                |  |                    |     |   |                  |   |    |             |  |   |             |   |  |   |    
|--------------------------------------------------------------- |  | ------------------ | --- | - | ---------------- | - | -- | ----------- |  | - | ----------- | - |  | - | ---
|                                                                |  | Three Months Ended |     |   | Six Months Ended
|                                                                |  | July 1,2005        |     |   | July 3,2004      |   |    | July 1,2005 |  |   | July 3,2004
|Net income                                                      |  | $                  | 122 |   |                  | $ | 43 |             |  | $ | 207         |   |  | $ | 149
|Net change in unrealized gain on available-for-sale investments |  |                    |    |   |                  |   |   |             |  |   |            |   |  |   | 104
|Net change in cumulative translation adjustments                |  |                    | (27 | ) |                  |   | (4 | )           |  |   | (59         | ) |  |   | 12 
|                                                                |  |                    |     |   |                  |   |    |             |  |   |             |   |  |   |    
|Total comprehensive earnings                                    |  | $                  | 95  |   |                  | $ | 39 |             |  | $ | 148         |   |  | $ | 265
|                                                                |  |                    |     |   |                  |   |    |             |  |   |             |   |  |   |    



(4) Stock Compensation Costs



The Company accounts for employee options to purchase
Company common stock and restricted stock units and for employee participation in the Company employee stock purchase plan under the intrinsic value method of expense recognition. Compensation cost, if any, is recorded based on the excess of the
quoted market price at grant date over the amount an employee must pay to acquire the stock.



Prior to the Distribution, compensation expense, if any, relating to Motorola options and restricted stock units held by Company employees was allocated by Motorola on a specific employee basis. At the Distribution,
all unvested options outstanding under Motorolas stock-based compensation plans that were held by the Companys employees were converted to options to acquire Class A common stock of the Company. The conversion rate was based on a formula
that maintained



10



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##### Table of Contents

the intrinsic value of the original unvested portion of the Motorola grant and allowed for the fair value of the grant
before and after the conversion to be maintained. As a result, under this formula, using the average closing prices at the Distribution Date of Motorola and the Companys shares of stock, a total of approximately 23 million unvested Company
stock options at an average exercise price of $9.91 were issued. These new issuances will maintain the original fair value calculated at their original grant date from Motorola and any related compensation expense will continue to be recognized over
the remaining employee service period.



All unvested Motorola
restricted stock units held by the Companys employees on the date of Distribution were cancelled and reissued as restricted stock units for Class A common stock of the Company. A total of approximately 350 thousand restricted stock units at
$17.93 were issued at the Distribution Date. The compensation expense related to these reissued restricted stock units will continue to be recognized over the remaining employee service period.



The Company has evaluated the pro forma effects of using the fair-value-based
method of accounting and as such, net earnings, basic earnings per common share and diluted earnings per common share would have been as follows:



|                                                                                                                  |  |                    |      |   |                  |   |     |              |  |   |              |   |  |   |     |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---- | - | ---------------- | - | --- | ------------ |  | - | ------------ | - |  | - | --- | -
|                                                                                                                  |  | Three Months Ended |      |   | Six Months Ended |  
|                                                                                                                  |  | July 1, 2005       |      |   | July 3, 2004     |   |     | July 1, 2005 |  |   | July 3, 2004 |  
|Net earnings:                                                                                                     |  |                    |      |   |                  |   |     |              |  |   |              |   |  |   |     |  
|Net earnings, as reported                                                                                         |  | $                  | 122  |   |                  | $ | 43  |              |  | $ | 207          |   |  | $ | 149 |  
|Plus: Stock-based employee compensation expense included in reported net earnings, net of tax                     |  |                    | 9    |   |                  |   | 2   |              |  |   | 14           |   |  |   | 6   |  
|Less: Stock-based employee compensation expense determined under the fair-value method for all awards, net of tax |  |                    | (26  | ) |                  |   | (11 | )            |  |   | (49          | ) |  |   | (32 | )
|                                                                                                                  |  |                    |      |   |                  |   |     |              |  |   |              |   |  |   |     |  
|Net earnings, pro forma                                                                                           |  | $                  | 105  |   |                  | $ | 34  |              |  | $ | 172          |   |  | $ | 123 |  
|                                                                                                                  |  |                    |      |   |                  |   |     |              |  |   |              |   |  |   |     |  
|Basic earnings per common share:                                                                                  |  |                    |      |   |                  |   |     |              |  |   |              |   |  |   |     |  
|As reported                                                                                                       |  | $                  | 0.30 |   |                  |   |     |              |  | $ | 0.51         |   |  |   |     |  
|Pro forma                                                                                                         |  | $                  | 0.26 |   |                  |   |     |              |  | $ | 0.43         |   |  |   |     |  
|                                                                                                                  |  |                    |      |  
|Diluted pro forma earnings per common share:                                                                      |  |                    |      |   |                  |   |     |              |  |   |              |   |  |   |     |  
|As reported                                                                                                       |  | $                  | 0.29 |   |                  |   |     |              |  | $ | 0.50         |   |  |   |     |  
|Pro forma                                                                                                         |  | $                  | 0.25 |   |                  |   |     |              |  | $ | 0.41         |   |  |   |     |  



As a result of the
issuance of a revision of FASB SFAS No. 123,Accounting for Stock-Based Compensation, the Company will be required, beginning in the first quarter of 2006, to begin expensing the stock compensation related to options instead of the disclosure
only requirement disclosed above.



(5) Income Taxes



Income taxes for the interim periods presented have been included in the
accompanying financial statements on the basis of an estimated annual effective tax rate. As of the end of the second quarter, the estimated annualized effective tax rate for 2005 is 10%. The decline in the estimated annual effective tax rate from
20% in the prior year is a result of the changing mix of profitability in the domestic and international entities, and the income tax impact for domestic earnings being offset against the Companys deferred tax valuation allowance, thereby
lowering the worldwide effective rate. Our estimated annual effective tax rate is less than the statutory rate of 35% primarily due to (1) no tax expense being recorded on domestic earnings due to the utilization of deferred tax assets, which are
subject to a full valuation allowance; and (2) the mix of earnings and losses by taxing jurisdiction and foreign tax rate differentials.



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##### Table of Contents

(6) Commitments and Contingencies



Environmental



Under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (CERCLA, or Superfund), and equivalent state law,
Motorola has been designated as a Potentially Responsible Party by the United States Environmental Protection Agency with respect to certain waste sites with which the Companys operations may have had direct or indirect involvement. Such
designations are made regardless of the extent of Motorolas involvement. Pursuant to the master separation and distribution agreement, the Company has indemnified Motorola for these liabilities going forward. These claims are in various stages
of administrative or judicial proceedings. They include demands for recovery of past governmental costs and for future investigations or remedial actions. The remedial efforts include environmental cleanup costs and communication programs. In many
cases, the dollar amounts of the claims have not been specified and have been asserted against a number of other entities for the same cost recovery or other relief as was asserted against the Company. The Company accrues costs associated with
environmental matters when they become probable and reasonably estimable. Due to the uncertain nature, the actual costs that will be incurred will differ from the amounts accrued, perhaps significantly.



Litigation



The Company is a defendant in various lawsuits, including intellectual property suits, and is subject to various claims
which arise in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Companys financial position, liquidity or results of operations.



From time to time, the Company is involved in legal proceedings arising in
the ordinary course of business, including tort and contractual disputes, claims before the United States Equal Employment Opportunity Commission and other employee grievances, and intellectual property litigation and infringement claims.
Intellectual property litigation and infringement claims could cause us to incur significant expenses or prevent us from selling our products. Under our agreements with Motorola, we will indemnify Motorola for certain liabilities related to our
business.



Our intellectual property litigation matter against
Micron Technology has been resolved. On January 8, 2004, Motorola filed a complaint asserting infringement of ten patents against Micron Technology in the United States District Court for the Western District of Texas, Austin Division, seeking,
among other remedies, unspecified monetary damages and injunctive relief. Those patents were assigned to the Company, and the Company was added to the lawsuit. On March 15, 2004, Micron Technology answered and counterclaimed by asserting 17 patents
against Motorola, and by seeking, among other remedies, unspecified monetary damages and injunctive relief. On March 30, 2004, Micron Technology filed a separate patent infringement suit asserting infringement of seven other patents against Motorola
in a different federal court, the United States District Court for the Western District of Wisconsin, again seeking, among other remedies, unspecified monetary damages and injunctive relief. Motorola answered the complaint and counterclaimed by
accusing Micron Technology of infringing five of the same patents that are the subject of the Texas lawsuit seeking, among other remedies, unspecified monetary damages and injunctive relief. On June 10, 2004, the court in the Wisconsin case ordered
that the Wisconsin case be transferred to the United States District Court for the Western District of Texas, and that action was consolidated with the Austin case. Under our agreements with Motorola, the Company had defense and indemnity
obligations to Motorola for the Austin case. On June 20, 2005, the case was dismissed with prejudice as to Freescale and Micron, and dismissed without prejudice as to Motorola.



Other Contingencies



In the ordinary course of business, the Company regularly executes contracts that contain indemnifications as it is customary business practice for most
business arrangements that are reduced to a contract to contain some level of indemnity between parties. Additionally, the Company executes other contracts considered outside the ordinary course of business which contain indemnifications. Examples
of these types of agreements include business divestitures, business acquisitions, settlement agreements and third-party performance guarantees. In each of these circumstances, payment by the Company is conditioned on the other party making a claim
pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other partys claims. Further, the Companys obligations under these agreements may be limited in terms of
duration, typically not in excess of 24 months, and/or amounts not in excess of the contract value, and in some instances, the Company may have recourse against third parties for certain payments made by the Company.



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##### Table of Contents

Historically, the Company has not made significant payments for indemnification provisions contained in
these agreements. At July 1, 2005, there was one contract executed outside the ordinary course of business containing indemnification obligations with a maximum amount payable of $5 million under the terms of these indemnification provisions. At
July 1, 2005, the Company had accrued $4 million, to cover known estimated indemnification obligations. The Company believes that if it were to incur additional losses with respect to any unknown matters at July 1, 2005, such losses would not have a
material adverse effect on the Companys financial position, results of operations or cash flows.



(7) Reorganization of Businesses



Beginning in 2000 and continuing through 2004, the Company implemented a series of plans to reduce its workforce, discontinue product lines, exit businesses and consolidate manufacturing and administrative operations
in an effort to reduce costs and simplify its product portfolio. Exit costs primarily consist of facility closure costs. Employee separation costs consist primarily of ongoing termination benefits, principally severance payments. At each reporting
date, the Company evaluates its accruals for exit costs and employee separation costs to ensure that the accruals are still appropriate. In certain circumstances, accruals are no longer required because of efficiencies in carrying out the plans or
because employees previously identified for separation resigned from the Company unexpectedly and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were initiated. The Company reverses accruals to
income when it is determined they are no longer required.



All
reorganization of business programs initiated prior to 2004 were finalized, fully expensed and paid by the end of the third quarter of 2004. On October 19, 2004, the Company announced further plans to streamline its operations and reduce selling,
general and administrative expenses.



Six Months Ended July 1, 2005



2004 Initiated Reorganization of Business Program



In the fourth quarter of 2004, the Company announced
plans to further reduce costs through an employee separation program. As a result, during the six months ended July 1, 2005, the Company recorded net charges of $13 million; of which $3 million was included in Cost of sales and $10 million was
recorded under Reorganization of businesses in the accompanying statements of operations. The following table displays a roll-forward of the accruals established for these employee separation costs from January 1, 2005 to July 1, 2005.



|                                                    |  |                             |     |                    |   |                   |  |               |    |                   |   |   |                   |   |    |                          |  |   |      |   |  |   |   
|--------------------------------------------------- |  | --------------------------- | --- | ------------------ | - | ----------------- |  | ------------- | -- | ----------------- | - | - | ----------------- | - | -- | ------------------------ |  | - | ---- | - |  | - | --
|                                                    |  |                             |     | Additional Charges |   | Adjustments       |  |               |    |                   |   |  
|Employee Separation Costs                           |  | Accruals at January 1, 2005 |     | Cost of Sales      |   | Reorg of Business |  | Cost of Sales |    | Reorg of Business |   |   | 2005 Amounts Used |   |    | Accruals at July 1, 2005
|U.S. manufacturing                                  |  | $                           | 17  |                    | $ | 1                 |  | $             |   |                   | $ |  |                   | $ |   |                          |  | $ | (10  | ) |  | $ | 8 
|Asia manufacturing                                  |  |                             | 2   |                    |   | 1                 |  |               |   |                   |   |  |                   |   |   |                          |  |   | (3   | ) |  |   |  
|Europe manufacturing                                |  |                             | 9   |                    |   | 1                 |  |               |   |                   |   |  |                   |   |   |                          |  |   | (8   | ) |  |   | 2 
|General and administrative/Research and development |  |                             | 42  |                    |   |                  |  |               | 11 |                   |   |  |                   |   | (1 | )                        |  |   | (40  | ) |  |   | 12
|                                                    |  |                             |     |                    |   |                   |  |               |    |                   |   |   |                   |   |    |                          |  |   |      |   |  |   |   
|Total                                               |  | $                           | 70  |                    | $ | 3                 |  | $             | 11 |                   | $ |  |                   | $ | (1 | )                        |  | $ | (61  | ) |  | $ | 22
|                                                    |  |                             |     |                    |   |                   |  |               |    |                   |   |   |                   |   |    |                          |  |   |      |   |  |   |   
|Related headcount                                   |  |                             | 460 |                    |   | 170               |  |               | 60 |                   |   |  |                   |   |   |                          |  |   | (615 | ) |  |   | 75
|                                                    |  |                             |     |                    |   |                   |  |               |    |                   |   |   |                   |   |    |                          |  |   |      |   |  |   |   



At January 1, 2005,
the Company had an accrual of $70 million for employee separation costs, representing the severance costs for approximately 460 employees, 260 of which were manufacturing employees and 200 were non-manufacturing employees.



During the six months ended July 1, 2005, 615 employees were separated from
the Company. The $61 million used in the six months ended July 1, 2005 reflects the initial cash payments made to these separated employees. For these separated employees, of which 390 are manufacturing employees and 225 are non-manufacturing
employees, an additional $8 million will be paid in the third quarter of 2005. The remaining $14 million will be paid for healthcare costs and severance related to previously terminated employees, and for severance relating to the remaining 75
employees, of which 40 are manufacturing employees and 35 are non-manufacturing employees.



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Six Months Ended July 3, 2004



Pre-2004 Initiated Reorganization of Business Programs



For the six months ended July 3, 2004, the Company recorded net reversals of $10 million, of which $1 million was included
in Cost of sales and $9 million was recorded under Reorganization of businesses in the accompanying statements of operations. The aggregate $10 million net reversal is comprised of the following:



|                                                |  |                        |   |                                 |   |    |                           |  |   |       |   |  |   |     |  
|----------------------------------------------- |  | ---------------------- | - | ------------------------------- | - | -- | ------------------------- |  | - | ----- | - |  | - | --- | -
|                                                |  | Exit Costs (Reversals) |   | Employee Separations(Reversals) |   |    | Decommissioning reversals |  |   | Total |  
|Manufacturing and administrative consolidations |  | $                      |  |                                 | $ | (3 | )                         |  | $ | (7    | ) |  | $ | (10 | )
|                                                |  |                        |   |                                 |   |    |                           |  |   |       |   |  |   |     |  



Manufacturing and Administrative
Consolidations



There were no additional charges for the
six months ended July 3, 2004. Accruals of $10 million established prior to 2004 were reversed for reserves to cover decommissioning costs which were no longer needed due primarily to the sale of the related facility and employee separation costs
for approximately 60 employees previously identified for separation who resigned unexpectedly and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were approved.



(8) Information by Segment



Summarized below are the Companys segment net sales and operating
earnings for the three and six months ended July 1, 2005 and July 3, 2004:



|                                     |  |                    |       |   |                  |   |       |              |  |   |              |   |  |   |       |  
|------------------------------------ |  | ------------------ | ----- | - | ---------------- | - | ----- | ------------ |  | - | ------------ | - |  | - | ----- | -
|                                     |  | Three Months Ended |       |   | Six Months Ended |  
|                                     |  | July 1, 2005       |       |   | July 3, 2004     |   |       | July 1, 2005 |  |   | July 3, 2004 |  
|Net Sales:                           |  |                    |       |   |                  |   |       |              |  |   |              |   |  |   |       |  
|Transportation and Standard Products |  | $                  | 667   |   |                  | $ | 646   |              |  | $ | 1,328        |   |  | $ | 1,284 |  
|Networking and Computing Systems     |  |                    | 387   |   |                  |   | 398   |              |  |   | 736          |   |  |   | 787   |  
|Wireless and Mobile Solutions        |  |                    | 401   |   |                  |   | 400   |              |  |   | 813          |   |  |   | 754   |  
|Other                                |  |                    | 17    |   |                  |   | 17    |              |  |   | 37           |   |  |   | 32    |  
|                                     |  |                    |       |   |                  |   |       |              |  |   |              |   |  |   |       |  
|Segment totals                       |  | $                  | 1,472 |   |                  | $ | 1,461 |              |  | $ | 2,914        |   |  | $ | 2,857 |  
|                                     |  |                    |       |   |                  |   |       |              |  |   |              |   |  |   |       |  
|Operating Earnings:                  |  |                    |       |   |                  |   |       |              |  |   |              |   |  |   |       |  
|Transportation and Standard Products |  | $                  | 87    |   |                  | $ | 60    |              |  | $ | 167          |   |  | $ | 101   |  
|Networking and Computing Systems     |  |                    | 94    |   |                  |   | 71    |              |  |   | 165          |   |  |   | 157   |  
|Wireless and Mobile Solutions        |  |                    | 5     |   |                  |   | (43   | )            |  |   | 20           |   |  |   | (115  | )
|Other                                |  |                    | (47   | ) |                  |   | (33   | )            |  |   | (103         | ) |  |   | 27    |  
|                                     |  |                    |       |   |                  |   |       |              |  |   |              |   |  |   |       |  
|Operating earnings                   |  |                    | 139   |   |                  |   | 55    |              |  |   | 249          |   |  |   | 170   |  
|Total other income (expense)         |  |                    | (3    | ) |                  |   | (1    | )            |  |   | (19          | ) |  |   | 16    |  
|                                     |  |                    |       |   |                  |   |       |              |  |   |              |   |  |   |       |  
|Earnings before income taxes         |  | $                  | 136   |   |                  | $ | 54    |              |  | $ | 230          |   |  | $ | 186   |  
|                                     |  |                    |       |   |                  |   |       |              |  |   |              |   |  |   |       |  



Certain items are
included in the Other segment category, which are not allocated to the three operating segments. These include reorganization of business charges (reversals) of $(2) million for the three months ended July 3, 2004, and $13 million and $(10) million
for the six months ended July 1, 2005 and July 3, 2004, respectively. In addition, the Company has included separation expenses of $5 million and $41 million within the Other segment for the three months ended July 1, 2005 and July 3, 2004,
respectively, and $10 million and $50 million for the six months ended July 1, 2005 and July 3, 2004, respectively.



14



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##### Table of Contents

Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS



The following is a discussion and analysis of our financial position and results of operations for the three months and six months ended July 1, 2005 and July 3, 2004. This commentary should be read in conjunction with our condensed
consolidated and combined financial statements and the notes in Item 1: Financial Statements, as well as our consolidated and combined financial statements and related notes thereto and managements discussion and analysis of
financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2004.



This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements may be identified by words such as expects, anticipates, plans, believes, estimates, will or words of similar meaning and include statements regarding the plans and expectations for the third quarter, the year and the future. These
forward-looking statements are found at various places throughout this report. We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. Although we
believe that our expectations are based on reasonable assumptions, we can give no assurance that our goals will be achieved. Important factors that could cause our actual results to differ from estimates or projections contained in the
forward-looking statements are described further in Trends, Risks and Uncertainties of our December 31, 2004 Annual Report on Form 10-K.



Overview



Our Business. Freescale Semiconductor, Inc. is a leading global semiconductor company focused on providing embedded processing and
connectivity products to large, high-growth markets. We currently focus on providing products to the automotive, networking and wireless communications industries. Examples of embedded processors include microcontrollers, digital signal processors
and communications processors. In addition to our embedded processors, we also offer a portfolio of complementary devices that facilitate connectivity between products, across networks and to real-world signals, such as sound, vibration and
pressure. These complementary devices include sensors, radio frequency semiconductors, power management and other analog and mixed-signal integrated circuits. Through the combination of our embedded processors and complementary products, we are
further able to offer our customers platform-level products, which incorporate both semiconductors and software. We believe that the ability to offer platform-level products will become increasingly important to long-term success in many markets
within the semiconductor industry.



Our Business
Groups. We operate our business through our three primary segments: the Transportation and Standard Products Group (TSPG), the Networking and Computing Systems Group (NCSG) and the Wireless and Mobile Solutions Group
(WMSG). TSPG provides products for the automotive electronics, industrial and other markets. NCSG supplies products to the wired and wireless infrastructure and computing markets. WMSG provides products for wireless mobile devices. In
addition to these three segments, we have an Other business segment that includes all of our other operations.



Revenues and Expenses. Our revenues are derived from the sale of our embedded processing and connectivity products and the licensing of our
intellectual property. Our business segments include both product and intellectual property revenues associated with the activities of each of the respective segments.



We currently manufacture a substantial portion of our products internally at our seven wafer fabrication facilities and two
assembly and test facilities. We track our inventory and cost of sales by using standard costs that are reviewed at least once a year and are valued at the lower of cost or market value. For the purposes of segment reporting, cost of sales for each
segment reflects standard costs, adjustments to inventory balances and valuation and an allocation of manufacturing variances incurred on a plant-by-plant basis. The primary user of each wafer fabrication facility is allocated the capacity and
inefficiency variances for the facility. The exceptions to this are (1) our Austin, Texas technology and manufacturing center, for which manufacturing variances are divided among all our business segments based upon usage, and (2) start-up
facilities such as the Crolles facility which are allocated to the Other segment. Assembly and final test costs are allocated to the business segments on an actual cost basis.



15



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##### Table of Contents

Our gross margin is greatly influenced by our utilization. Utilization refers only to our wafer
fabrication facilities and is based on the capacity of the installed equipment. As our utilization rate increases, there is operating leverage in our business as our fixed manufacturing costs are spread over increased output.



Direct expenses incurred by a segment are included in that segments
results. Shared research and development, sales and marketing, and general and administrative costs are allocated to each segment based upon the specific activities being performed for each segment, where possible. Remaining costs are charged using
a specifically identifiable methodology or other reasonable basis of allocation. Certain corporate expenses are in the Other segment.



Our Challenges That Lie Ahead. Going forward, our business will be highly dependent on demand for electronic content in automobiles,
networking and wireless infrastructure equipment, cellular handsets and other electronic devices. In addition, we operate in an industry that is highly cyclical and subject to constant and rapid technological change, product obsolescence, price
erosion, evolving standards, short product life-cycles and wide fluctuations in product supply and demand. Through our efforts to reduce and streamline our cost structure, we believe that we are becoming better equipped to respond to changes in
market conditions and improve our financial performance.



During the second quarter of 2005, Apple Computer Inc. (Apple) announced its intention to migrate its personal computing architecture away from products that we supply. On an annualized basis, Apple currently represents
approximately 3% of our net sales. We are evaluating the potential impact of this announcement and developing plans to manage this migration based on the information available at this time. Due to our current uncertainty about the implementation of
Apples planned migration, we cannot accurately estimate the timing or full financial impact on our business at this time.



Due to environmental concerns, the need for lead-free solutions in electronic components and systems is receiving increasing attention within the
semiconductor industry. Many companies, including our Company, are taking steps to become compliant with the Restriction of Hazardous Substances Directive, the European legislation that will restrict the use of lead and some flame retardants in
electronic components effective as of July 2006. Our compliance with the Restriction on Hazardous Substances Directive and any other requirements for lead-free products could cause us to incur substantial additional costs by potentially requiring us
to devote more resources to research and development efforts, requiring us to change certain of our manufacturing or supply chain management processes or causing us to use more costly materials or to have obsolete inventory.



Second Quarter Highlights



Second quarter 2005 net sales increased 0.8% as compared to the second
quarter of 2004 driven by a sales increase of $21 million in TSPG, partially offset by a decrease of $11 million in NCSG. Gross margins rose to 41.6% in the second quarter of 2005 compared to 38.4% in the second quarter of 2004 primarily due to
continued operational efficiencies, reduced depreciation and further manufacturing cost reduction savings.



Net sales made to Motorola and to contract manufacturers that produce products for Motorola were 25% of our total net sales in the second quarter of 2005
compared to 28% in the second quarter of 2004. Net sales made directly to Motorola were 23% of our total net sales in the second quarter of 2005 and 21% in the second quarter of 2004.



The second quarter of 2005 included $5 million of separation expenses related to the separation from Motorola versus $41
million in the second quarter of 2004.



16



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##### Table of Contents

Results of Operations

(in millions, except per share data)



|                                                  |  |                                |       |   |           |       |    |             |   |       |           |  |       |   
|------------------------------------------------- |  | ------------------------------ | ----- | - | --------- | ----- | -- | ----------- | - | ----- | --------- |  | ----- | --
|                                                  |  | Three Months Ended (Unaudited) |      
|                                                  |  | July 1,2005                    |       |   | % ofSales |       |    | July 1,2004 |   |       | % ofSales | 
|Orders                                            |  | $                              | 1,384 |   |           | 94.0  | %  |             | $ | 1,446 |           |  | 99.0  | % 
|                                                  |  |                                |       |   |           |       |    |             |   |       |           |  |       |   
|Net sales                                         |  | $                              | 1,472 |   |           | 100.0 | %  |             | $ | 1,461 |           |  | 100.0 | % 
|Costs of sales                                    |  |                                | 860   |   |           | 58.4  | %  |             |   | 900   |           |  | 61.6  | % 
|                                                  |  |                                |       |   |           |       |    |             |   |       |           |  |       |   
|Gross margin                                      |  |                                | 612   |   |           | 41.6  | %  |             |   | 561   |           |  | 38.4  | % 
|                                                  |  |                                |       |   |           |       |    |             |   |       |           |  |       |   
|Selling, general and administrative               |  |                                | 202   |   |           | 13.7  | %  |             |   | 225   |           |  | 15.4  | % 
|Research and development                          |  |                                | 266   |   |           | 18.1  | %  |             |   | 242   |           |  | 16.5  | % 
|Reorganization of businesses                      |  |                                |      |   |           |      | %  |             |   | (2    | )         |  | (0.1  | )%
|Separation expenses                               |  |                                | 5     |   |           | 0.4   | %  |             |   | 41    |           |  | 2.8   | % 
|                                                  |  |                                |       |   |           |       |    |             |   |       |           |  |       |   
|Operating earnings                                |  |                                | 139   |   |           | 9.4   | %  |             |   | 55    |           |  | 3.8   | % 
|                                                  |  |                                |       |   |           |       |    |             |   |       |           |  |       |   
|Other income (expense):                           |  |                                |       |   |           |       |    |             |   |       |           |  |       |   
|Interest expense, net                             |  |                                | (1    | ) |           | (0.1  | )% |             |   |      |           |  |      | % 
|Gains on sales of investments and businesses, net |  |                                |      |   |           |      | %  |             |   |      |           |  |      | % 
|Other, net                                        |  |                                | (2    | ) |           | (0.1  | )% |             |   | (1    | )         |  | (0.1  | )%
|                                                  |  |                                |       |   |           |       |    |             |   |       |           |  |       |   
|Total other income (expense)                      |  |                                | (3    | ) |           | (0.2  | )% |             |   | (1    | )         |  | (0.1  | )%
|                                                  |  |                                |       |   |           |       |    |             |   |       |           |  |       |   
|Earnings before income taxes                      |  |                                | 136   |   |           | 9.2   | %  |             |   | 54    |           |  | 3.7   | % 
|Income tax expense                                |  |                                | 14    |   |           | 0.9   | %  |             |   | 11    |           |  | 0.8   | % 
|                                                  |  |                                |       |   |           |       |    |             |   |       |           |  |       |   
|Net earnings                                      |  | $                              | 122   |   |           | 8.3   | %  |             | $ | 43    |           |  | 2.9   | % 
|                                                  |  |                                |       |   |           |       |    |             |   |       |           |  |       |   
|Basic earnings per share                          |  | $                              | 0.30  |   |           |       |    |             |   |       |           |  |       |   
|Diluted earnings per share                        |  | $                              | 0.29  |   |           |       |    |             |   |       |           |  |       |   



|                                                  |  |                              |       |   |           |       |    |             |   |       |           |  |       |   
|------------------------------------------------- |  | ---------------------------- | ----- | - | --------- | ----- | -- | ----------- | - | ----- | --------- |  | ----- | --
|                                                  |  | Six Months Ended (Unaudited) |      
|                                                  |  | July 1,2005                  |       |   | % ofSales |       |    | July 1,2004 |   |       | % ofSales | 
|Orders                                            |  | $                            | 2,765 |   |           | 94.9  | %  |             | $ | 3,013 |           |  | 105.5 | % 
|                                                  |  |                              |       |   |           |       |    |             |   |       |           |  |       |   
|Net sales                                         |  | $                            | 2,914 |   |           | 100.0 | %  |             | $ | 2,857 |           |  | 100.0 | % 
|Costs of sales                                    |  |                              | 1,722 |   |           | 59.1  | %  |             |   | 1,789 |           |  | 62.6  | % 
|                                                  |  |                              |       |   |           |       |    |             |   |       |           |  |       |   
|Gross margin                                      |  |                              | 1,192 |   |           | 40.9  | %  |             |   | 1,068 |           |  | 37.4  | % 
|                                                  |  |                              |       |   |           |       |    |             |   |       |           |  |       |   
|Selling, general and administrative               |  |                              | 393   |   |           | 13.5  | %  |             |   | 365   |           |  | 12.8  | % 
|Research and development                          |  |                              | 530   |   |           | 18.2  | %  |             |   | 492   |           |  | 17.2  | % 
|Reorganization of businesses                      |  |                              | 10    |   |           | 0.4   | %  |             |   | (9    | )         |  | (0.3  | )%
|Separation expenses                               |  |                              | 10    |   |           | 0.3   | %  |             |   | 50    |           |  | 1.8   | % 
|                                                  |  |                              |       |   |           |       |    |             |   |       |           |  |       |   
|Operating earnings                                |  |                              | 249   |   |           | 8.5   | %  |             |   | 170   |           |  | 5.9   | % 
|                                                  |  |                              |       |   |           |       |    |             |   |       |           |  |       |   
|Other income (expense):                           |  |                              |       |   |           |       |    |             |   |       |           |  |       |   
|Interest expense, net                             |  |                              | (7    | ) |           | (0.2  | )% |             |   | (21   | )         |  | (0.7  | )%
|Gains on sales of investments and businesses, net |  |                              |      |   |           |      | %  |             |   | 41    |           |  | 1.4   | % 
|Other, net                                        |  |                              | (12   | ) |           | (0.4  | )% |             |   | (4    | )         |  | (0.1  | )%
|                                                  |  |                              |       |   |           |       |    |             |   |       |           |  |       |   
|Total other income (expense)                      |  |                              | (19   | ) |           | (0.6  | )% |             |   | 16    |           |  | 0.6   | % 
|                                                  |  |                              |       |   |           |       |    |             |   |       |           |  |       |   
|Earnings before income taxes                      |  |                              | 230   |   |           | 7.9   | %  |             |   | 186   |           |  | 6.5   | % 
|Income tax expense                                |  |                              | 23    |   |           | 0.8   | %  |             |   | 37    |           |  | 1.3   | % 
|                                                  |  |                              |       |   |           |       |    |             |   |       |           |  |       |   
|Net earnings                                      |  | $                            | 207   |   |           | 7.1   | %  |             | $ | 149   |           |  | 5.2   | % 
|                                                  |  |                              |       |   |           |       |    |             |   |       |           |  |       |   
|Basic earnings per share                          |  | $                            | 0.51  |   |           |       |    |             |   |       |           |  |       |   
|Diluted earnings per share                        |  | $                            | 0.50  |   |           |       |    |             |   |       |           |  |       |   



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##### Table of Contents

Three Months Ended July 1, 2005 Compared to Three Months Ended July 3, 2004



Net Sales



Net sales increased primarily due to an increase in sales within the TSPG operating segment, while net sales in NCSG
decreased slightly and WMSG was relatively flat as compared to the prior year second quarter, despite the products shipped increasing in our WMSG operating segment. Orders decreased due to an increase in the sale of products with shorter lead times
and lower orders in computing products. Intellectual property revenue increased to approximately 3% of net sales in the second quarter of 2005 as compared to 1% in the second quarter of 2004.



Gross Margin



The increase in gross margin was due primarily to reduced manufacturing costs resulting from a reduction in manufacturing
headcount and a decrease in depreciation. In addition, manufacturing factory performance improved in the second quarter of 2005 versus the second quarter of 2004. We also reduced our external manufacturing costs by a shift to increased internal
facility sourcing. These items were partially offset by a decrease in our utilization rate in the second quarter of 2005 as compared to the second quarter of 2004. Cost reductions of $7 million in the second quarter of 2005 resulted from the
Reorganization of business activity announced in the fourth quarter of 2004.



Selling, General and Administrative



The
decrease in selling, general and administrative expenses in the second quarter of 2005 was primarily driven by a decrease in employee-related expenses from reductions in headcount. In addition, the second quarter of 2004 included higher bonus
expense. We had approximately $5 million in payroll cost reductions during the second quarter of 2005 resulting from the Reorganization of business activity announced in the fourth quarter of 2004.



Research and Development



The increase was due to increased investment in research and development
primarily in our WMSG and NCSG technologies in the second quarter of 2005 versus the prior year. Partially offsetting this increase was $5 million in payroll cost reductions in the second quarter of 2005 resulting from the Reorganization of business
activity announced in the fourth quarter of 2004.



Separation Expenses



Separation expenses in the current quarter were lower
than the second quarter of 2004 by $36 million and will continue to decrease as we transition off of the remaining services provided by Motorola. These incremental, non-recurring costs were directly related to the Contribution and subsequent
separation from Motorola and include transaction taxes, professional fees, information technology and other services.



Net Interest Expense



Net interest expense in second quarter of 2005 included interest expense of $19 million, which was offset by interest income of $18 million. In the second
quarter of the prior year, no interest income or expense was recorded as the interest expense historically allocated from Motorola prior to the Contribution was discontinued in the second quarter of 2004. Prior to the Contribution, Motorola
allocated interest expense to the Company. Following the Contribution, the allocation of interest expense was discontinued as the Company secured borrowings from outside sources, including Motorola, until the IPO and concurrent debt offering, and
incurred interest expense on such borrowings. On July 21, 2004, the Company completed the sale of $1.25 billion of senior unsecured debt.



Other



Other expenses are primarily made up of equity losses in income of non-consolidated investments in private companies accounted for as cost basis investments.



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##### Table of Contents

Income Taxes



Our effective tax rate was 10% for the second quarter of 2005, representing a $14 million net tax expense, compared to a 20% effective tax rate in the
second quarter of 2004, representing an $11 million net tax expense. The decline in the estimated annual effective tax rate is a result of the changing mix of profitability in the domestic and international entities. In addition, tax expense on our
domestic profits is offset against the Companys deferred tax valuation allowance, thereby lowering the worldwide estimated annual effective tax rate. Our estimated annual effective tax rate is less than the statutory rate of 35% primarily due
to (1) no tax expense being recorded on our domestic earnings due to the utilization of deferred tax assets, which are subject to a full valuation allowance and (2) the mix of earnings and losses by taxing jurisdiction and foreign tax rate
differentials.



Six Months Ended July 1, 2005 Compared to Six Months Ended
July 3, 2004



Net Sales



Our net sales were up 2% in the six months ended July 1, 2005, compared with
the same period last year due to increases in TSPG and WMSG net sales partially offset by declines in NCSG. Our orders in the six months ended July 1, 2005 were down 8% from the six months ended July 3, 2004. Our orders were down due to lower
required inventory replenishment levels by our networking customers, lower computing products orders, a slow adoption rate of 3G phones and a continuation of increasing volume of shipments with shorter lead times as compared to the prior year. The
Company experienced an increase in volume of shipments in the six months ended July 1, 2005 of 9% versus the prior year primarily due to the WMSG operating segment. This impact was partially offset by lower average selling prices in the WMSG
operating segment. Intellectual property revenue increased to approximately 3% of net sales in the first half of 2005 as compared to 2% in the first half of 2004.



Gross Margin



The increase in gross margin was due primarily to reduced manufacturing costs resulting from a reduction in manufacturing headcount and a decrease in
depreciation. We also improved our manufacturing factory performance in the first half of 2005. This was partially offset by a decrease in our utilization rate in the first half of 2005 as compared to the first half of 2004. Payroll cost reductions
of $13 million in the first half of 2005 resulted from the Reorganization of business activity announced in the first half of 2004.



Selling, General and Administrative



The increase in selling, general and administrative expenses was due primarily to the fact that the first quarter of 2004 selling, general and
administrative expenses included a $54 million reversal of a provision originally accrued for the potential obligation to reimburse the Chinese government for various exemptions previously received on VAT and duty on imported materials. This
increase was partially offset by approximately $9 million in cost reductions during six months ended July 1, 2005 resulting from the Reorganization of business activity announced in the fourth quarter of 2004.



Research and Development



Our research and development expenses increased in the six months ended July
1, 2005, compared with the corresponding period in the prior year. The increase was due to increased investment in research and development due primarily to our WMSG and NCSG segments in the six months ended July 1, 2005 versus the prior year. In
addition, there were $9 million in cost reductions in the six months ended July 1, 2005 resulting from the Reorganization of business activity announced in the fourth quarter of 2004, which partially offset the increased spending.



19



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##### Table of Contents

Reorganization of Businesses



The reorganization of business programs initiated prior to 2004 were finalized, fully expensed and paid by the end of the
third quarter of 2004.



A new reorganization of business
program was announced on October 19, 2004 to streamline operations and reduce selling, general and administrative expenses. As a result, we recorded net charges of $13 million; of which $3 million was included in Cost of sales and $10 million was
recorded under Reorganization of businesses in the accompanying statements of operations related to employee separation costs. These actions are expected to generate $71 million in annualized net cost savings, $32 million of which is expected to be
in Cost of sales and $39 million in Selling, general and administrative and Research and development expenses.



Reorganization of businesses reflected a recovery of $9 million in the first six months of 2004. The $9 million recovery resulted from the reversal of
previous accruals due to lower than expected employee separation costs and the completion of decommissioning activities at closed facilities for less cost than originally estimated.



Separation Expenses



Separation expenses were $40 million lower in the six months ended July 1, 2005 compared to the six months ended July 3, 2004 and will continue to
decrease as we transition off of the remaining services provided by Motorola. These incremental, non-recurring costs were directly related to the Contribution and subsequent separation from Motorola and include transaction taxes, professional fees,
information technology and other services.



Net Interest Expense



Net interest expense in the six months ended July 1, 2005
included interest expense of $39 million, which was offset by interest income of $32 million. Net interest expense in the six months ended July 3, 2004 included interest expense of $22 million, which was partially offset by interest income of $1
million. Prior to the Contribution in the second quarter of 2004, our interest expense represented the amount allocated from Motorola. This allocation was based on the relative historical percentage of our net assets included in Motorolas
consolidated financial statements, excluding debt.



Gains on Sales of
Investments and Businesses



There were no net gains on
sales of investments and businesses in the six months ended July 1, 2005, compared to $41 million in six months ended July 3, 2004. The net gain in the six months ended July 3, 2004 was primarily related to the sale of our SMIC stock.



Other



Other expenses increased $8 million primarily due to increased equity losses of non-consolidated investments in private
companies and a slight increase in other than temporary impairment charges on investments accounted for on the cost basis.



Income Taxes



Our effective tax rate was 10% for the six months ended July 1, 2005, representing a $23 million net tax expense, compared to a 20% effective tax rate in
the six months ended July 3, 2004, representing a $37 million net tax expense. The decline in the estimated annual effective tax rate is a result of the changing mix of profitability in the domestic and international entities. In addition, tax
expense on our domestic profits is offset against the Companys deferred tax valuation allowance, thereby lowering the worldwide estimated annual effective tax rate. Our estimated annual effective tax rate is less than the statutory rate of 35%
primarily due to (1) no tax expense being recorded on our domestic earnings due to the utilization of deferred tax assets, which are subject to a full valuation allowance and (2) the mix of earnings and losses by taxing jurisdiction and foreign tax
rate differentials.



20



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##### Table of Contents

Segment Information



Our orders, net sales, and operating results for our primary segments for the three and six months ended July 1, 2005 and July 3, 2004 are presented
below. Order information as of any particular date may not be an accurate indicator of future results, as orders are subject to revision or cancellation to reflect changes in customer needs.



Transportation and Standard Products Group



TSPG designs, manufactures and markets key components of embedded control
systems, which include processors (microcontrollers, embedded microprocessors and digital signal processors), sensors and analog and mixed-signal integrated circuits. TSPGs largest market segment is the automobile electronics market, which
represented approximately 71% of its sales in the three and six months ended July 1, 2005, which was up slightly from the respective periods in the prior year. In the second quarter of 2005, TSPG net sales represented 45% of our net sales compared
to 44% in the second quarter of 2004. In the first six months of 2005, TSPG net sales represented 46% of our net sales compared to 45% in the first six months of 2004.



|                      |  |                    |     |              |                  |          |  |    |              |  |              |       |          |   |       |  |    |   
|--------------------- |  | ------------------ | --- | ------------ | ---------------- | -------- |  | -- | ------------ |  | ------------ | ----- | -------- | - | ----- |  | -- | --
|                      |  | Three Months Ended |     |              | Six Months Ended |         
|(Dollars in millions) |  | July 1, 2005       |     | July 3, 2004 |                  | % Change |  |    | July 1, 2005 |  | July 3, 2004 |       | % Change |  
|Orders                |  | $                  | 643 |              | $                | 671      |  | (4 | )%           |  | $            | 1,290 |          | $ | 1,346 |  | (4 | )%
|Segment net sales     |  |                    | 667 |              |                  | 646      |  | 3  | %            |  |              | 1,328 |          |   | 1,284 |  | 3  | % 
|Operating earnings    |  |                    | 87  |              |                  | 60       |  | 45 | %            |  |              | 167   |          |   | 101   |  | 65 | % 



Three months ended July 1, 2005
compared to three months ended July 3, 2004



Net sales
grew primarily as a result of increased automotive market shipments. The decrease in orders was due to a reduction in lead times from our customers as they book closer to ship dates. The increase in operating earnings was partially due to increased
sales and primarily due to lower manufacturing costs and improved factory performance.



Six months ended July 1, 2005 compared to six months ended July 3, 2004



Net sales grew primarily as a result of increased automotive market shipments. The decrease in orders was primarily due to a reduction in lead times from our customers as they book closer to ship dates. The increase
in operating earnings was partially due to increased sales and primarily due to lower manufacturing costs and improved factory performance.



Networking and Computing Systems Group



NCSG designs, manufactures and markets embedded processors and related connectivity products for the wired and wireless networking and computing markets.
NCSG offers semiconductors that facilitate the transmission, switching and processing of data and voice signals within communications systems. In the second quarter of 2005, NCSG net sales represented 26% of our net sales, compared to 27% in the
second quarter of 2004. In the first six months of 2005, NCSG net sales represented 25% of our net sales, compared to 28% in the first six months of 2004.



|                      |  |                    |     |              |                  |          |  |     |              |  |              |     |          |   |     |  |     |   
|--------------------- |  | ------------------ | --- | ------------ | ---------------- | -------- |  | --- | ------------ |  | ------------ | --- | -------- | - | --- |  | --- | --
|                      |  | Three Months Ended |     |              | Six Months Ended |         
|(Dollars in millions) |  | July 1, 2005       |     | July 3, 2004 |                  | % Change |  |     | July 1, 2005 |  | July 3, 2004 |     | % Change |  
|Orders                |  | $                  | 354 |              | $                | 410      |  | (14 | )%           |  | $            | 741 |          | $ | 878 |  | (16 | )%
|Segment net sales     |  |                    | 387 |              |                  | 398      |  | (3  | )%           |  |              | 736 |          |   | 787 |  | (6  | )%
|Operating earnings    |  |                    | 94  |              |                  | 71       |  | 32  | %            |  |              | 165 |          |   | 157 |  | 5   | % 



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Three months ended July 1, 2005 compared to three months ended July 3, 2004



The decrease in net sales was primarily due to a slight decrease in volume
of products shipped. Order decline was principally driven by reduced computing products orders in the current period and lower required inventory replenishment levels required by our customers as compared to the corresponding period in the prior
year. The increase in operating earnings was primarily due to favorable product sales mix, improved manufacturing factory performance and lower manufacturing costs.



Six months ended July 1, 2005 compared to six months ended July 3, 2004



The decrease in net sales was due to lower volumes of products shipped.
Order decreases due to reduced computing products orders and a continuing trend of lower inventory replenishment levels required by our customers as compared to the corresponding period in the prior year. The increase in operating earnings was
primarily due to favorable product sales mix, improved manufacturing factory performance and lower manufacturing costs.



Wireless and Mobile Solutions Group



WMSG designs, manufactures and markets semiconductors for wireless mobile devices, such as cellular phones, smartphones, personal data assistants, two-way
messaging devices, global positioning systems, mobile gaming devices and wireless consumer electronics. In the second quarter and the first six months of 2005, approximately 68% and 71%, respectively, of WMSG Segment net sales were to Motorola on an
end customer basis. This percentage sales figure includes sales made directly to Motorola and sales made to contract manufacturers that produce products for Motorola. In the second quarter of 2005 and 2004, WMSG net sales represented 27% of our net
sales. In the first six months of 2005, WMSG net sales represented 28% of our net sales, compared to 26% in the first six months of 2004.



|                          |  |                    |     |              |                  |     |          |  |     |              |  |              |     |  |          |      |   |  |     |   
|------------------------- |  | ------------------ | --- | ------------ | ---------------- | --- | -------- |  | --- | ------------ |  | ------------ | --- |  | -------- | ---- | - |  | --- | --
|                          |  | Three Months Ended |     |              | Six Months Ended |    
|(Dollars in millions)     |  | July 1, 2005       |     | July 3, 2004 |                  |     | % Change |  |     | July 1, 2005 |  | July 3, 2004 |     |  | % Change |     
|Orders                    |  | $                  | 367 |              | $                | 349 |          |  | 5   | %            |  | $            | 697 |  | $        | 754  |   |  | (8  | )%
|Segment net sales         |  |                    | 401 |              |                  | 400 |          |  | 0   | %            |  |              | 813 |  |          | 754  |   |  | 8   | % 
|Operating earnings (loss) |  |                    | 5   |              |                  | (43 | )        |  | *** |              |  |              | 20  |  |          | (115 | ) |  | *** |   

---

|*** | Percent change not meaningful
|--- | -----------------------------



Three months ended July 1, 2005 compared to three months ended July 3, 2004



The increase in net sales was due to higher unit shipments almost entirely offset by shifts in product sales mix. The
improvement in operating earnings was primarily due to increased volumes of products shipped, manufacturing yield improvement and lower manufacturing costs due to shifting production from external facilities to internal facilities.



Six months ended July 1, 2005 compared to six months ended July 3, 2004



The increase in net sales was due to an increase in product shipments
primarily to customers in the wireless market, particularly to our largest customer, Motorola. The improvement in operating earnings was primarily due to increased volumes of products shipped, improved manufacturing yield and lower manufacturing
costs.



22



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##### Table of Contents

Other



Other includes sales of wafers to other semiconductor companies, other miscellaneous businesses and any factories in production start-up, including our
300 mm facility in Crolles, France. Other also includes any business reorganization charges and miscellaneous income or expense not identified to any of our business segments. For all periods presented, other net sales represented 1% of our
consolidated net sales.



|                          |  |                    |     |   |                  |   |     |          |  |     |              |  |   |              |   |          |   |    |  |     |  
|------------------------- |  | ------------------ | --- | - | ---------------- | - | --- | -------- |  | --- | ------------ |  | - | ------------ | - | -------- | - | -- |  | --- | -
|                          |  | Three Months Ended |     |   | Six Months Ended |  
|(Dollars in millions)     |  | July 1, 2005       |     |   | July 3, 2004     |   |     | % Change |  |     | July 1, 2005 |  |   | July 3, 2004 |   | % Change |  
|Orders                    |  | $                  | 20  |   |                  | $ | 16  |          |  | 25  | %            |  | $ | 37           |   |          | $ | 35 |  | 6   | %
|Segment net sales         |  |                    | 17  |   |                  |   | 17  |          |  |    |              |  |   | 37           |   |          |   | 32 |  | 16  | %
|Operating earnings (loss) |  |                    | (47 | ) |                  |   | (33 | )        |  | (42 | )%           |  |   | (103         | ) |          |   | 27 |  | *** |  

---

|*** | Percent not meaningful
|--- | ----------------------



Three months ended July 1, 2005 compared to three months ended July 3, 2004



The increase in operating loss was due to activities related to factories in start-up phase, additional corporate governance costs and other expenses not
attributable to any one of our segments.



Six months ended July 1, 2005
compared to six months ended July 3, 2004



Other operating
loss in the first six months of 2005 increased over the same period in the prior year due primarily to a $54 million reversal in the first quarter of 2004 of a provision originally accrued for the potential obligation to reimburse the Chinese
government for various exemptions previously received on value added tax and duty on imported materials. In addition, we incurred increased costs related to factories in start-up phase. We also recorded $13 million of net reorganization of business
charges in the first six months of 2005 versus reversals of $10 million in the first six months of 2004.



Reorganization of Businesses



Beginning in 2000 and continuing through 2004, we implemented a series of plans to reduce our workforce, discontinue product lines, exit businesses and consolidate manufacturing and administrative operations in an effort to reduce costs and
simplify our product portfolio. Exit costs primarily consist of facility closure costs. Employee separation costs consist primarily of ongoing termination benefits, principally severance payments. At each reporting date, we evaluate our accruals for
exit costs and employee separation costs to ensure that the accruals are still appropriate. In certain circumstances, accruals are no longer required because of efficiencies in carrying out the plans or because employees previously identified for
separation resigned unexpectedly and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were initiated. We reverse accruals to income when it is determined they are no longer required.



All reorganization of business programs initiated prior to 2004 were
finalized, fully expensed and paid by the end of the third quarter of 2004. On October 19, 2004, we announced further plans to streamline our operations and reduce Selling, general and administrative expenses.



Six Months Ended July 1, 2005



2004 Initiated Reorganization of Business Program



In the fourth quarter of 2004, we announced plans to further reduce costs
through an employee separation program. As a result, during the six months ended July 1, 2005, we recorded net charges of $13 million; of which $3 million was included in Cost of sales and $10 million was recorded under Reorganization of businesses
in the accompanying statements of operations. The following table displays a roll-forward of the accruals established for these employee separation costs from January 1, 2005 to July 1, 2005.



23



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##### Table of Contents

|                                                    |  |                            |     |                   |   |                   |  |               |    |                  |   |   |                 |   |    |                         |  |   |      |   |  |   |   
|--------------------------------------------------- |  | -------------------------- | --- | ----------------- | - | ----------------- |  | ------------- | -- | ---------------- | - | - | --------------- | - | -- | ----------------------- |  | - | ---- | - |  | - | --
|                                                    |  |                            |     | AdditionalCharges |   | Adjustments       |  |               |    |                  |   |  
|Employee Separation Costs                           |  | Accruals at January 1,2005 |     | Cost of Sales     |   | Reorg of Business |  | Cost of Sales |    | Reorg ofBusiness |   |   | 2005AmountsUsed |   |    | Accruals at July 1,2005
|U.S. manufacturing                                  |  | $                          | 17  |                   | $ | 1                 |  | $             |   |                  | $ |  |                 | $ |   |                         |  | $ | (10  | ) |  | $ | 8 
|Asia manufacturing                                  |  |                            | 2   |                   |   | 1                 |  |               |   |                  |   |  |                 |   |   |                         |  |   | (3   | ) |  |   |  
|Europe manufacturing                                |  |                            | 9   |                   |   | 1                 |  |               |   |                  |   |  |                 |   |   |                         |  |   | (8   | ) |  |   | 2 
|General and administrative/Research and development |  |                            | 42  |                   |   |                  |  |               | 11 |                  |   |  |                 |   | (1 | )                       |  |   | (40  | ) |  |   | 12
|                                                    |  |                            |     |                   |   |                   |  |               |    |                  |   |   |                 |   |    |                         |  |   |      |   |  |   |   
|Total                                               |  | $                          | 70  |                   | $ | 3                 |  | $             | 11 |                  | $ |  |                 | $ | (1 | )                       |  | $ | (61  | ) |  | $ | 22
|                                                    |  |                            |     |                   |   |                   |  |               |    |                  |   |   |                 |   |    |                         |  |   |      |   |  |   |   
|Related headcount                                   |  |                            | 460 |                   |   | 170               |  |               | 60 |                  |   |  |                 |   |   |                         |  |   | (615 | ) |  |   | 75
|                                                    |  |                            |     |                   |   |                   |  |               |    |                  |   |   |                 |   |    |                         |  |   |      |   |  |   |   



At January 1, 2005, we
had an accrual of $70 million for employee separation costs, representing the severance costs for approximately 460 employees, 260 of which were manufacturing employees and 200 were non-manufacturing employees.



During the six months ended July 1, 2005, 615 employees were separated from
the Company. The $61 million used in the six months ended July 1, 2005 reflects the initial cash payments made to these separated employees. For these separated employees, of which 390 are manufacturing employees and 225 are non-manufacturing
employees, an additional $8 million will be paid in the third quarter of 2005. The remaining $14 million will be paid for healthcare costs and severance related to previously terminated employees and for severance relating to the remaining 75
employees, of which 40 are manufacturing employees and 35 are non-manufacturing employees.



Six Months Ended July 3, 2004



Pre-2004 Initiated Reorganization of Business Programs



For the six months ended July 3, 2004, we recorded net reversals of $10 million, of which $1 million was included in Cost of sales and $9 million was recorded under Reorganization of businesses in the accompanying
statements of operations. The aggregate $10 million net reversal is comprised of the following:



|                                                |  |                       |   |                                  |   |    |                           |  |   |       |   |  |   |     |  
|----------------------------------------------- |  | --------------------- | - | -------------------------------- | - | -- | ------------------------- |  | - | ----- | - |  | - | --- | -
|                                                |  | Exit Costs(Reversals) |   | Employee Separations (Reversals) |   |    | Decommissioning reversals |  |   | Total |  
|Manufacturing and administrative consolidations |  | $                     |  |                                  | $ | (3 | )                         |  | $ | (7    | ) |  | $ | (10 | )
|                                                |  |                       |   |                                  |   |    |                           |  |   |       |   |  |   |     |  



Manufacturing and Administrative
Consolidations



There were no additional charges for the
six months ended July 3, 2004. Accruals of $10 million established prior to 2004 were reversed for reserves to cover decommissioning costs which were no longer needed due primarily to the sale of the related facility and employee separation costs
for approximately 60 employees previously identified for separation who resigned unexpectedly and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were approved.



Liquidity and Capital Resources



At July 1, 2005, our total cash and cash equivalents and short-term
investments aggregated approximately $2.6 billion, an increase of approximately $200 million from approximately $2.4 billion at December 31, 2004. Prior to the Contribution, we utilized Motorolas worldwide cash management system in which cash
accounts were principally swept on a daily basis to finance operations with activity between our company and Motorola reflected as business equity transactions in owners net investment in our combined balance sheets until the Contribution.
After the Contribution, we began managing our own cash balances on a world-wide basis. On July 1, 2005, $1.9 billion of this amount was held in the United States and $0.7 billion was held in other countries. Repatriation of some of these funds could
be subject to delay and could have potential tax consequences, principally with respect to withholding taxes paid in foreign jurisdictions.



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##### Table of Contents

Operating Activities



In the first six months of 2005, we generated positive cash flow from operations of $426 million, compared to $579 million
in the first six months of 2004. Our positive cash flow from operations in the first six months of 2005 was driven by Net income of $207 million, depreciation and amortization and a decrease in inventory. Partially offsetting these items was a
decrease of $210 million in Accounts payable and Accrued liabilities.



Our net Accounts receivable were $657 million at July 1, 2005, compared to $636 million at December 31, 2004. Our days sales outstanding were 35 days as of July 1, 2005, compared to 30 days outstanding as of December 31, 2004. The increase
to net Accounts receivable as of July 1, 2005 was due to increased sales during June 2005 versus December 2004, which contributed $93 million, which was partially offset by a decrease in receivables due from Motorola in connection with the
Distribution of $72 million.



Our Inventory decreased $71
million from December 31, 2004 to July 1, 2005. Our days of inventory on hand were 70 as of July 1, 2005, and 76 as of December 31, 2004.



Our accounts payable were $411 million as of July 1, 2005, compared to $474 million at December 31, 2004. Accounts payable to Motorola were $19 million
and $59 million as of July 1, 2005 and December 31, 2004, respectively.



Investing Activities



Our net cash used
for investing activities was $568 million and $188 million in the first six months of 2005 and 2004, respectively. Our investing activities are driven by investing our excess cash, capital expenditures, strategic acquisitions and investments in
other companies and sales of investments and businesses.



In
the six months ended July 1, 2005, we invested an additional $301 million in excess cash from operations and borrowings into a money market fund classified as Short term investments on our balance sheet. Our capital expenditures were $230 million in
both the first six months of 2005 and 2004. Our capital expenditures as a percentage of net sales were 7.9% in the first six months of 2005 and 8.1% in the first six months of 2004.



Cash used for strategic acquisitions and new investment activities was $25 million in the first six months of 2005 and $41
million during the first six months of 2004. The use in 2005 was primarily due to the acquisition of certain assets of PrairieComm, Inc., consisting primarily of intellectual property and licenses. Our expenditures in the first six months of 2004
included the transfer of $30 million of cash to SMIC in connection with the sale of our wafer fabrication facility in China.



We received cash proceeds from dispositions of investments and businesses of $9 million in the first six months of 2005 and $100 million in the first six
months of 2004. The 2004 proceeds were generated from the sale of our SMIC stock.



Financing Activities



Our net cash
generated by financing activities in the first six months of 2005 was $36 million resulting primarily from the proceeds from the exercise of stock options. This compared to our net cash provided by financing activities of $237 million in the first
six months of 2004.



The change in financing activities is due
to the fact that, prior to the Contribution, we financed our operations principally through Motorola, and we participated in Motorolas worldwide, centralized approach to cash management. The types of activities flowing through the cash
management system were cash deposits from our business which were transferred to Motorolas bank account on a regular basis, cash borrowings from Motorola used to fund operations, capital expenditures or acquisitions, charges (benefits) for
income taxes and allocations of corporate expenses. Net transfers of $170 million were provided to Motorola, and we borrowed $428 million from Motorola in the first six months of 2004.



We reclassified $2.0 billion of our cash and cash equivalents balance held in the money market fund from cash and cash
equivalents to short term investments as of December 31, 2004. As the Company and its subsidiaries own 100% of the outstanding shares of the fund, we believe the correct classification is Short-term investments. Due to the covenants governing our
debt offering including limitations on the type and maturity of short term investments, we modified the cash and cash equivalent definition in order to enhance our return on Short-term investments. Through bond holder approval, the cash and cash
equivalent definition in the indenture has been amended to allow greater flexibility regarding the types and maturities of the instruments that qualify as a permitted investment.



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Future Financing Activities



Our primary future cash needs on a recurring basis will be for working capital, capital expenditures and debt service. We
believe that our current net cash balance of approximately $1.3 billion (total cash, cash equivalents and short-term investments less total debt) plus cash flows from operations will be sufficient to fund our working capital needs, capital
expenditures and other business requirements for at least the next 12 months. If our cash flows from operations are less than we expect, we may need to incur additional debt.



We may need to incur additional debt or issue equity to make strategic acquisitions or investments. We cannot assure you
that such financing will be available to us on acceptable terms or that such financing will be available at all. Our ability to issue additional equity is constrained because our issuance of additional stock may cause the Distribution to be taxable
under section 355(e) of the Internal Revenue Code, and, under the tax sharing agreement, we would be required to indemnify Motorola against such tax.



Our ability to make payments to fund working capital, capital expenditures, debt service and strategic acquisitions, joint ventures and investments will
depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control. Future indebtedness may impose various restrictions and covenants on us
which could limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities.



Significant Accounting Policies and Critical Estimates



The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date of the financial statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The Companys significant accounting policies and critical estimates are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2004. No significant
changes to our accounting policies have occurred subsequent to December 31, 2004.



Recent Accounting Pronouncements



In December
2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS No. 123R is a revision of FASB SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123R focuses primarily on accounting
for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The provisions of SFAS No. 123R are effective for public
entities that do not file as small business issuers as of the beginning of their next fiscal year that begins after June 15, 2005. We have previously issued employee stock options for which no expense has been recognized, and which will not be fully
vested as of the effective date of SFAS No. 123R. As a result of this consideration and other decisions not finalized regarding certain assumptions, we continue to evaluate the amount of the negative impact of SFAS No. 123R on our financial position
and results of operations.



In November 2004, the FASB issued
SFAS No.151, Inventory Costs, amendment to ARB No. 43 Chapter 4, (SFAS No. 151) which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 is effective
for fiscal years beginning after June 15, 2005. We are still assessing the impact of SFAS No. 151 on our financial position, results of operations and liquidity.



In October 2004, the American Jobs Creation Act of 2004 (the Act) was signed into law. Two of the more
significant provisions of the Act relate to a one time opportunity to repatriate foreign earnings at a reduced rate and manufacturing benefits for qualified production activity income. We have not yet determined the impact, if any, of this Act on
our financial position, results of operations and liquidity.



26



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##### Table of Contents

Item 3: Quantitative and Qualitative Disclosures About Market Risk



Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2004. We experienced no significant changes in market risk during the first six months of 2005. However, we cannot assure you that future changes in foreign currency rates or interest rates will not have an affect on our
consolidated financial position, results of operations or cash flows.



Item 4: Controls and Procedures.



(a)Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this quarterly report (the
Evaluation Date). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the
Company, including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (SEC) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and
forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.



(b)Changes in internal control over financial reporting. There have
been no changes in our internal control over financial reporting that occurred during the quarter ended July 1, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



27



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##### Table of Contents

PART II - Other Information



Item 1: Legal Proceedings.



From
time to time we are involved in legal proceedings arising in the ordinary course of business, including tort and contractual disputes, claims before the United States Equal Employment Opportunity Commission and other employee grievances, and
intellectual property litigation and infringement claims. Intellectual property litigation and infringement claims could cause us to incur significant expenses or prevent us from selling our products. Under our agreements with Motorola, we will
indemnify Motorola for liabilities related to our business and have assumed these liabilities.



Our intellectual property litigation matter against Micron Technology has been resolved. On January 8, 2004, Motorola filed a complaint asserting infringement of ten patents against Micron Technology in the United
States District Court for the Western District of Texas, Austin Division, seeking, among other remedies, unspecified monetary damages and injunctive relief. Those patents were assigned to the Company, and the Company was added to the lawsuit. On
March 15, 2004, Micron Technology answered and counterclaimed by asserting 17 patents against Motorola, and by seeking, among other remedies, unspecified monetary damages and injunctive relief. On March 30, 2004, Micron Technology filed a separate
patent infringement suit asserting infringement of seven other patents against Motorola in a different federal court, the United States District Court for the Western District of Wisconsin, again seeking, among other remedies, unspecified monetary
damages and injunctive relief. Motorola answered the complaint and counterclaimed by accusing Micron Technology of infringing five of the same patents that are the subject of the Texas lawsuit seeking, among other remedies, unspecified monetary
damages and injunctive relief. On June 10, 2004, the court in the Wisconsin case ordered that the Wisconsin case be transferred to the United States District Court for the Western District of Texas, and that action was consolidated with the Austin
case. Under our agreements with Motorola, the Company had defense and indemnity obligations to Motorola for the Austin case. On June 20, 2005, the case was dismissed with prejudice as to Freescale and Micron, and dismissed without prejudice as to
Motorola.



If we are unsuccessful in resolving any of these
proceedings, our operations may be interrupted or we may incur additional costs that could adversely affect our financial condition. However, we do not believe we will be unsuccessful in resolving these proceedings.



We do not believe that there is any litigation pending that could have,
individually or in the aggregate, a material adverse effect on our financial position, results of operations, or cash flow.



Environmental Matters



Our operations are subject to a variety of environmental laws and regulations in each of the jurisdictions in which we operate governing, among other
things, air emissions, wastewater discharges, the use, handling and disposal of hazardous substances and wastes, soil and groundwater contamination and employee health and safety. As with other companies engaged in similar industries, environmental
compliance obligations and liability risks are inherent in many of our manufacturing and other activities. In the United States certain environmental remediation laws, such as the federal Superfund law, can impose the entire cost of site
clean-up, regardless of fault, upon any one among a number of statutory categories of parties, including companies that owned, operated or sent wastes to a site. In some jurisdictions, environmental requirements could become more stringent in the
future which could affect our ability to obtain or maintain necessary authorizations and approvals or result in increased environmental compliance costs.



Motorola has been identified as a Potentially Responsible Party at the two facilities identified below, and has been engaged in investigations,
administrative proceedings, and/or cleanup processes with respect to past chemical releases into the environment at those facilities. Under our agreements with Motorola, we will indemnify Motorola for liabilities related to our business, including
the matters described below, and have assumed these liabilities. Our potential future liability at such sites (excluding costs spent to date) may adversely affect our results of operations.



52nd Street Facility, Phoenix, AZ. In 1983, a trichloroethane leak
from a solvent tank led to the discovery of trichloroethylene and other organic compounds in the groundwater underlying the former Motorola 52nd Street facility in Phoenix, Arizona, which is a federal National Priorities List Superfund site. The
Superfund site has been divided into operable units. Under the first operable unit, the Arizona Department of Environmental Quality required Motorola to investigate and perform on-site soil remediation, plus on-site and nearby off-site groundwater
remediation. The



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Environmental Protection Agency (EPA) issued a record of decision for the second operable unit in July 1994. After
approval of the design, the EPA issued an administrative order requiring Motorola and another third party to construct and operate a remediation plant targeted at containing and cleaning up off-site solvent groundwater contamination. The EPA has not
issued a final remedy for either the first operable unit or the second operable unit which leaves open the possibility that there could be additional cleanup costs associated with either unit. The EPA has performed some preliminary investigation
into the third operable unit, which is an area extending beyond the boundaries of the area delineated in the second operable unit. A number of additional potentially responsible parties, including Motorola, have been identified at the third operable
unit. Based on the information currently available, we believe our responsibility for the third operable unit conditions to be negligible and continue to look for opportunities to resolve our liability for the entire site.



56th Street Facility, Phoenix, AZ. In 1985, the EPA initiated an
inquiry concerning our 56th Street facility in Phoenix, Arizona following the discovery of organic compounds in certain local area wells. The Arizona Department of Environmental Quality assumed primary responsibility for this matter. We voluntarily
undertook negotiations with the state to remediate the groundwater contamination, and are currently managing the remediation under the Arizona Department of Environmental Qualitys Water Quality Assurance Revolving Fund Program.



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



(a) Not applicable.



(b) Not applicable.



(c) The following table provides information with respect to acquisitions by
the Company of shares of its Class A common stock during the six months ended July 1, 2005.



ISSUER PURCHASES OF EQUITY SECURITIES



|                   |  |                                |  |                             |       |                                                                   |   |                                                                 |  
|------------------ |  | ------------------------------ |  | --------------------------- | ----- | ----------------------------------------------------------------- | - | --------------------------------------------------------------- | -
|Period             |  | Total Numberof SharesPurchased |  | Average PricePaid per Share |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plans |   | Maximum Numberof Shares that MayYet Be PurchasedUnder the Plans
|1/1/05 to 1/28/05  |  |                               |  |                             |      |                                                                   |  |                                                                 | 
|1/29/05 to 2/25/05 |  |                               |  |                             |      |                                                                   |  |                                                                 | 
|2/26/05 to 4/1/05  |  |                               |  |                             |      |                                                                   |  |                                                                 | 
|4/2/05 to 4/29/05  |  |                               |  |                             |      |                                                                   |  |                                                                 | 
|4/30/05 to 5/27/05 |  | 32,045                         |  | $                           | 19.54 |                                                                   |  |                                                                 | 
|5/28/05 to 7/1/05  |  |                               |  |                             |      |                                                                   |  |                                                                 | 
|                   |  |                                |  |                             |       |                                                                   |   |                                                                 |  
|Total              |  | 32,045                         |  | $                           | 19.54 |                                                                   |  |                                                                 | 
|                   |  |                                |  |                             |       |                                                                   |   |                                                                 |  



|(1) | The transaction involved the delivery to the Company of shares of Freescale Class A common stock to satisfy tax withholding obligations in connection with the vesting of restricted
stock granted to a Company employee under the Companys equity compensation plans.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 3: Defaults Upon Senior Securities.



Not applicable.



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



At Freescale Semiconductor, Inc.s Annual Stockholders Meeting on April 29, 2005, stockholders elected each of the director nominees, approved certain amendments to our Amended and Restated Certificate of
Incorporation, approved certain amendments to our Amended and Restated By-Laws, approved our Omnibus Incentive Plan of 2005, and ratified the appointment of the independent registered public accounting firm as our auditors.



|                                                                                          |  |                  |  |           
|----------------------------------------------------------------------------------------- |  | ---------------- |  | ----------
|                                                                                          |  | Number of Shares
|                                                                                          |  | Voted For        |  | Withheld  
|1. To elect two members of the board of directors to serve until the 2008 Annual Meeting. |  |                  |  |           
|H. Raymond Bingham                                                                        |  | 1,256,420,801    |  | 68,655,540
|Stephen P. Kaufman                                                                        |  | 1,256,788,918    |  | 68,287,423



|                                                                                                                                           |  |                  |  |               |  |            |  |                 
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- |  | ------------- |  | ---------- |  | ----------------
|                                                                                                                                           |  | Number of Shares
|                                                                                                                                           |  | Voted For        |  | Voted Against |  | Abstain    |  | Broker Non-Votes
|2. To approve amendments to our Amended and Restated Certificate of Incorporation.                                                         |  | 1,061,371,965    |  | 4,130,675     |  | 13,116,373 |  | 246,457,328     
|3. To approve amendments to our Amended and Restated By-Laws.                                                                              |  | 1,060,658,007    |  | 4,635,403     |  | 13,325,603 |  | 246,457,328     
|4. To approve our Omnibus Incentive Plan of 2005.                                                                                          |  | 722,598,352      |  | 342,527,044   |  | 13,487,547 |  | 246,463,398     
|5. To ratify the appointment of the independent registered public accounting firm of KPMG LLP as our independent auditors for fiscal 2005. |  | 1,309,387,530    |  | 3,579,094     |  | 12,109,716 |  | N/A             



Under Section 216 of
the Delaware General Corporation Law, the affirmative vote of the majority of the votes cast was required to pass each of Proposals 2-4. In addition, to approve certain of the amendments in proposals 2 and 3, our Amended and Restated Certificate of
Incorporation and Amended and Restated By-Laws require the affirmative vote of the holders of at least 80% of the total voting power of our common stock outstanding and entitled to vote at our annual meeting, which we did not obtain. On May 4, 2005,
we filed copies of the Second Amended and Restated Certificate of Incorporation and the Seconded Amended and Restated By-Laws (which reflect the approved amendments) as exhibits to a Current Report on Form 8-K. A description of all amendments,
including those that required 80% approval, is set forth in our Proxy filed on March 21, 2005.



In addition, significantly fewer shares voted on each of Proposals 2-4 than voted on Proposal 1, the election of directors, and Proposal 5, the ratification of the selection of the Companys auditors.
Broker non-votes accounted for this difference in voted shares. For certain types of non-routine proposals, such as Proposals 2-4, brokers do not have the discretionary authority to vote their clients shares, and
therefore they must refrain from voting on such proposals in the absence of instructions from their clients.



Item 5: Other Information.



Not
applicable.



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Item 6: Exhibits



|3.1 | Second Amended and Restated Certificate of Incorporation incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on May 4, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



|3.2 | Second Amended and Restated By-Laws incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on May 4, 2005.
|--- | ------------------------------------------------------------------------------------------------------------------------------------



|31.1 | Certification of Michel Mayer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|---- | ----------------------------------------------------------------------------------------



|31.2 | Certification of Alan Campbell pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|---- | ----------------------------------------------------------------------------------------



|32.1 | Certification of Michel Mayer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- | ----------------------------------------------------------------------------------------



|32.2 | Certification of Alan Campbell pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- | -----------------------------------------------------------------------------------------



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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.



|                     |  |                               |  |                                                                                                                                            
|-------------------- |  | ----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|                     |  | FREESCALE SEMICONDUCTOR, INC.
|                     |  |                              
|Date: August 1, 2005 |  | By:                           |  | /s/ ALAN CAMPBELL                                                                                                                          
|                     |  |                               |  | Alan Campbell Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer of the Registrant)



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