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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 September 30, 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)



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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 Exchange Act).    Yes  x    No ̈.



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x.



The number of shares outstanding of each of the issuers classes of
common stock as of the close of business on October 14, 2005:



|                                     |  |                 
|------------------------------------ |  | ----------------
|Class                                |  | Number of Shares
|Class A Common Stock; $.01 Par Value |  | 140,416,001     
|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 Nine Months Ended September 30, 2005 and October 2, 2004 |  | 3   
|                             |  | Condensed Consolidated Balance Sheets as of September 30, 2005 (Unaudited) and December 31, 2004                                                           |  | 4   
|                             |  | Condensed Consolidated and Combined Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2005 and October 2, 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                                                                      |  | 17  
|Item 3                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                 |  | 29  
|Item 4                       |  | Controls and Procedures                                                                                                                                    |  | 29  
|                             | 
|Part II
Other Information    |  |                                                                                                                                                           
|                             |  |                                                                                                                                                           
|Item 1                       |  | Legal Proceedings                                                                                                                                          |  | 30  
|Item 2                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                |  | 31  
|Item 3                       |  | Defaults Upon Senior Securities                                                                                                                            |  | 31  
|Item 4                       |  | Submission of Matters to a Vote of Security Holders                                                                                                        |  | 31  
|Item 5                       |  | Other Information                                                                                                                                          |  | 31  
|Item 6                       |  | Exhibits                                                                                                                                                   |  | 32  



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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 |       |   | Nine Months Ended |  
|                                                      |  | September 30,2005  |       |   | October 2,2004    |   |       | September 30,2005 |  |   | October 2,2004 |  
|Net sales                                             |  | $                  | 1,450 |   |                   | $ | 1,430 |                   |  | $ | 4,364          |   |  | $ | 4,287 |  
|Cost of sales                                         |  |                    | 822   |   |                   |   | 872   |                   |  |   | 2,544          |   |  |   | 2,661 |  
|                                                      |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Gross margin                                          |  |                    | 628   |   |                   |   | 558   |                   |  |   | 1,820          |   |  |   | 1,626 |  
|                                                      |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Selling, general and administrative                   |  |                    | 201   |   |                   |   | 230   |                   |  |   | 594            |   |  |   | 595   |  
|Research and development                              |  |                    | 274   |   |                   |   | 229   |                   |  |   | 804            |   |  |   | 721   |  
|Reorganization of businesses and other                |  |                    |      |   |                   |   | (1    | )                 |  |   | 10             |   |  |   | (10   | )
|Separation expenses                                   |  |                    |      |   |                   |   | 19    |                   |  |   | 10             |   |  |   | 69    |  
|                                                      |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Operating earnings                                    |  |                    | 153   |   |                   |   | 81    |                   |  |   | 402            |   |  |   | 251   |  
|                                                      |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Other income (expense):                               |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Interest expense, net                                 |  |                    |      |   |                   |   | (5    | )                 |  |   | (7             | ) |  |   | (26   | )
|Gains on sales of investments and businesses, net     |  |                    | 26    |   |                   |   |      |                   |  |   | 26             |   |  |   | 41    |  
|Other, net                                            |  |                    | (1    | ) |                   |   | (5    | )                 |  |   | (13            | ) |  |   | (9    | )
|                                                      |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Total other income (expense)                          |  |                    | 25    |   |                   |   | (10   | )                 |  |   | 6              |   |  |   | 6     |  
|                                                      |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Earnings before income taxes                          |  |                    | 178   |   |                   |   | 71    |                   |  |   | 408            |   |  |   | 257   |  
|Income tax expense                                    |  |                    | 14    |   |                   |   | 14    |                   |  |   | 37             |   |  |   | 51    |  
|                                                      |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Net earnings                                          |  | $                  | 164   |   |                   | $ | 57    |                   |  | $ | 371            |   |  | $ | 206   |  
|                                                      |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Net earnings per common share:                        |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Basic                                                 |  | $                  | 0.40  |   |                   | $ | 0.15  |                   |  | $ | 0.92           |   |  | $ | 1.60  |  
|Diluted                                               |  | $                  | 0.38  |   |                   | $ | 0.15  |                   |  | $ | 0.88           |   |  | $ | 1.57  |  
|Weighted average common shares outstanding:           |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Basic                                                 |  |                    | 408   |   |                   |   | 384   |                   |  |   | 404            |   |  |   | 129   |  
|Diluted                                               |  |                    | 428   |   |                   |   | 390   |                   |  |   | 421            |   |  |   | 131   |  
|                                                      |  |                    |       |  
|Pro forma net earnings per common share:              |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Basic                                                 |  |                    |       |   |                   |   |       |                   |  |   |                |   |  | $ | 0.66  |  
|Diluted                                               |  |                    |       |   |                   |   |       |                   |  |   |                |   |  | $ | 0.65  |  
|Pro forma weighted average common shares outstanding: |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Basic                                                 |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   | 313   |  
|Diluted                                               |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   | 315   |  



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)



|                                                                                                                                                                   |  |                    |       |   |                   |   |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ----- | - | ----------------- | - | -----
|                                                                                                                                                                   |  | September 30, 2005 |       |   | December 31, 2004
|                                                                                                                                                                   |  | (Unaudited)        |       |   |                  
|ASSETS                                                                                                                                                             |  |                    |       |   |                   |   |      
|Cash and cash equivalents                                                                                                                                          |  | $                  | 299   |   |                   | $ | 382  
|Short-term investments                                                                                                                                             |  |                    | 1,186 |   |                   |   | 1,992
|Accounts receivable, net of allowance for doubtful accounts of $13 and $4 at September 30, 2005 and December 31, 2004,
respectively                                |  |                    | 687   |   |                   |   | 636  
|Inventories:                                                                                                                                                       |  |                    |       |   |                   |   |      
|Work in process and raw materials                                                                                                                                  |  |                    | 452   |   |                   |   | 502  
|Finished goods                                                                                                                                                     |  |                    | 185   |   |                   |   | 240  
|                                                                                                                                                                   |  |                    |       |   |                   |   |      
|Total inventories                                                                                                                                                  |  |                    | 637   |   |                   |   | 742  
|                                                                                                                                                                   |  |                    |       |   |                   |   |      
|Deferred income taxes                                                                                                                                              |  |                    | 23    |   |                   |   | 26   
|Other current assets                                                                                                                                               |  |                    | 169   |   |                   |   | 183  
|Assets held for sale                                                                                                                                               |  |                    | 42    |   |                   |   | 45   
|                                                                                                                                                                   |  |                    |       |   |                   |   |      
|Total current assets                                                                                                                                               |  |                    | 3,043 |   |                   |   | 4,006
|                                                                                                                                                                   |  |                    |       |   |                   |   |      
|Property, plant and equipment, net                                                                                                                                 |  |                    | 2,006 |   |                   |   | 2,207
|Investments                                                                                                                                                        |  |                    | 1,413 |   |                   |   | 31   
|Goodwill                                                                                                                                                           |  |                    | 242   |   |                   |   | 222  
|Other assets, net                                                                                                                                                  |  |                    | 175   |   |                   |   | 167  
|                                                                                                                                                                   |  |                    |       |   |                   |   |      
|Total assets                                                                                                                                                       |  | $                  | 6,879 |   |                   | $ | 6,633
|                                                                                                                                                                   |  |                    |       |   |                   |   |      
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                               |  |                    |       |   |                   |   |      
|Notes payable                                                                                                                                                      |  | $                  | 2     |   |                   | $ | 2    
|Accounts payable                                                                                                                                                   |  |                    | 429   |   |                   |   | 474  
|Accrued liabilities and other                                                                                                                                      |  |                    | 583   |   |                   |   | 669  
|                                                                                                                                                                   |  |                    |       |   |                   |   |      
|Total current liabilities                                                                                                                                          |  |                    | 1,014 |   |                   |   | 1,145
|                                                                                                                                                                   |  |                    |       |   |                   |   |      
|Long-term debt                                                                                                                                                     |  |                    | 1,251 |   |                   |   | 1,269
|Deferred income taxes                                                                                                                                              |  |                    | 28    |   |                   |   | 26   
|Other liabilities                                                                                                                                                  |  |                    | 237   |   |                   |   | 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; 140 and 131 shares issued and outstanding at September 30, 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 September 30, 2005 and December 31,
2004                       |  |                    | 3     |   |                   |   | 3    
|Additional paid-in capital                                                                                                                                         |  |                    | 3,922 |   |                   |   | 3,800
|Retained earnings                                                                                                                                                  |  |                    | 444   |   |                   |   | 73   
|Accumulated other comprehensive earnings (loss)                                                                                                                    |  |                    | (12   | ) |                   |   | 59   
|Less: Treasury stock                                                                                                                                               |  |                    | (9    | ) |                   |   |     
|                                                                                                                                                                   |  |                    |       |   |                   |   |      
|Total stockholders equity                                                                                                                                         |  |                    | 4,349 |   |                   |   | 3,936
|                                                                                                                                                                   |  |                    |       |   |                   |   |      
|Total liabilities and stockholders equity                                                                                                                         |  | $                  | 6,879 |   |                   | $ | 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)



|                                                                                                                         |  |                    |        |   |                |   |        |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | - | -------------- | - | ------ | -
|                                                                                                                         |  | Nine Months Ended  |       
|                                                                                                                         |  | September 30, 2005 |        |   | October 2,2004 |  
|Cash flows from operating activities:                                                                                    |  |                    |        |   |                |   |        |  
|Net earnings                                                                                                             |  | $                  | 371    |   |                | $ | 206    |  
|Depreciation and amortization                                                                                            |  |                    | 528    |   |                |   | 597    |  
|Net expenses paid by Motorola                                                                                            |  |                    |       |   |                |   | 21     |  
|Charges (reversals) for reorganization of businesses                                                                     |  |                    | 13     |   |                |   | (11    | )
|Stock-based compensation                                                                                                 |  |                    | 28     |   |                |   | 6      |  
|Gain on sales of investments and businesses, net                                                                         |  |                    | (26    | ) |                |   | (41    | )
|Loss on sales of marketable securities                                                                                   |  |                    | 1      |   |                |   |       |  
|Deferred income taxes                                                                                                    |  |                    |       |   |                |   | 23     |  
|Other non-cash items                                                                                                     |  |                    | 14     |   |                |   | (13    | )
|Change in operating assets and liabilities, net of effects of acquisitions, dispositions, Contribution and Distribution: |  |                    |        |   |                |   |        |  
|Accounts receivable, net                                                                                                 |  |                    | (58    | ) |                |   | (272   | )
|Inventories                                                                                                              |  |                    | 101    |   |                |   | (19    | )
|Other current assets                                                                                                     |  |                    | (17    | ) |                |   | 36     |  
|Accounts payable and accrued liabilities                                                                                 |  |                    | (119   | ) |                |   | 386    |  
|Other operating assets and liabilities                                                                                   |  |                    | (23    | ) |                |   | (4     | )
|                                                                                                                         |  |                    |        |   |                |   |        |  
|Net cash provided by operating activities                                                                                |  |                    | 813    |   |                |   | 915    |  
|                                                                                                                         |  |                    |        |   |                |   |        |  
|Cash flows from investing activities:                                                                                    |  |                    |        |   |                |   |        |  
|Capital expenditures                                                                                                     |  |                    | (344   | ) |                |   | (372   | )
|Acquisitions and strategic investments, net of cash acquired                                                             |  |                    | (45    | ) |                |   | (41    | )
|Proceeds from sale of strategic investments and businesses                                                               |  |                    | 43     |   |                |   | 100    |  
|Sales and maturities of marketable securities                                                                            |  |                    | 883    |   |                |   |       |  
|Purchases of marketable securities                                                                                       |  |                    | (2,284 | ) |                |   |       |  
|Sales and purchases of short-term investments, net                                                                       |  |                    | 806    |   |                |   |       |  
|Proceeds from sale of property, plant and equipment and assets held for sale                                             |  |                    | 11     |   |                |   | 37     |  
|Payments for other assets                                                                                                |  |                    | (43    | ) |                |   | (61    | )
|                                                                                                                         |  |                    |        |   |                |   |        |  
|Net cash used for investing activities                                                                                   |  |                    | (973   | ) |                |   | (337   | )
|                                                                                                                         |  |                    |        |   |                |   |        |  
|Cash flows from financing activities:                                                                                    |  |                    |        |   |                |   |        |  
|Proceeds from stock option exercises                                                                                     |  |                    | 94     |   |                |   |       |  
|Debt modification costs                                                                                                  |  |                    | (2     | ) |                |   |       |  
|Debt issuance proceeds, net of debt issuance costs                                                                       |  |                    |       |   |                |   | 1,218  |  
|IPO proceeds, net of IPO offering costs                                                                                  |  |                    |       |   |                |   | 1,616  |  
|Repayment of short-term borrowings                                                                                       |  |                    |       |   |                |   | (20    | )
|Repayment of long-term debt                                                                                              |  |                    |       |   |                |   | (7     | )
|Net transfers to Motorola                                                                                                |  |                    |       |   |                |   | (170   | )
|Borrowings from Motorola                                                                                                 |  |                    |       |   |                |   | 428    |  
|Repayments to Motorola                                                                                                   |  |                    |       |   |                |   | (428   | )
|Distributions to Motorola                                                                                                |  |                    |       |   |                |   | (1,127 | )
|                                                                                                                         |  |                    |        |   |                |   |        |  
|Net cash provided by financing activities                                                                                |  |                    | 92     |   |                |   | 1,510  |  
|                                                                                                                         |  |                    |        |   |                |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                                                             |  |                    | (15    | ) |                |   | (2     | )
|                                                                                                                         |  |                    |        |   |                |   |        |  
|Net (decrease) increase in cash and cash equivalents                                                                     |  |                    | (83    | ) |                |   | 2,086  |  
|Cash and cash equivalents, beginning of period                                                                           |  |                    | 382    |   |                |   | 87     |  
|                                                                                                                         |  |                    |        |   |                |   |        |  
|Cash and cash equivalents, end of period                                                                                 |  | $                  | 299    |   |                | $ | 2,173  |  
|                                                                                                                         |  |                    |        |   |                |   |        |  



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 the assets and liabilities of its semiconductor business 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
shares of Freescale Semiconductor Class B common stock were held by Motorola until Motorola distributed its remaining ownership interest 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 nine
months ended October 2, 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 nine
months ended October 2, 2004 are reasonable. However, the combined financial statements for the nine months ended October 2, 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.



The accompanying condensed financial statements as of September 30, 2005 and for the three months and nine months ended September 30, 2005 and October 2,
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 September 30, 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 nine months ended September 30, 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 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.



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##### Table of Contents

After the first quarter of 2004, the expense allocation for certain corporate services ceased, and the
Company began purchasing 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 $7 million for these services for the three months ended October 2, 2004, and $4 million and $13 million for the nine months ended September 30, 2005 and October 2, 2004, respectively. These amounts were reported as a
reduction to the cost classification to which such expenses were recognized, primarily Research and development. As of July 2, 2005, the Company has ended virtually all transition services with Motorola. Any continuing or new agreements have been
negotiated on an arms-length basis as with any other vendor and will no longer be reported as transition services.



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 |   | Nine Months Ended
|                                                  |  | September 30, 2005 |   | October 2, 2004   |   | September 30, 2005 |  | October 2, 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                        |  |                    |  |                   |   | 48                 |  |                 | 8 |  |   | 92 
|Employee benefits and incentives                  |  |                    |  |                   |   | 33                 |  |                 |  |  |   | 82 
|                                                  |  |                    |   |                   |   |                    |  |                 |   |  |   |    
|                                                  |  | $                  |  |                   | $ | 81                 |  | $               | 8 |  | $ | 303
|                                                  |  |                    |   |                   |   |                    |  |                 |   |  |   |    



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 nine months ended October 2, 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 nine months ended October 2, 2004.



7



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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 |     |   | Nine Months Ended |  
|                                              |  | September 30, 2005 |     |   | October 2, 2004   |   |     | September 30, 2005 |  |   | October 2, 2004 |  
|Interest expense, net:                        |  |                    |     |   |                   |   |     |                    |  |   |                 |   |  |   |     |  
|Interest expense                              |  | $                  | (22 | ) |                   | $ | (13 | )                  |  | $ | (61             | ) |  | $ | (35 | )
|Interest income                               |  |                    | 22  |   |                   |   | 8   |                    |  |   | 54              |   |  |   | 9   |  
|                                              |  |                    |     |   |                   |   |     |                    |  |   |                 |   |  |   |     |  
|                                              |  | $                  |    |   |                   | $ | (5  | )                  |  | $ | (7              | ) |  | $ | (26 | )
|                                              |  |                    |     |   |                   |   |     |                    |  |   |                 |   |  |   |     |  
|Other:                                        |  |                    |     |   |                   |   |     |                    |  |   |                 |   |  |   |     |  
|Investment impairments                        |  | $                  |    |   |                   | $ | (1  | )                  |  | $ | (6              | ) |  | $ | (5  | )
|Equity losses of non-consolidated investments |  |                    | (2  | ) |                   |   | (3  | )                  |  |   | (7              | ) |  |   | (1  | )
|Net foreign currency losses                   |  |                    | 1   |   |                   |   | (1  | )                  |  |   |                |   |  |   | (3  | )
|                                              |  |                    |     |   |                   |   |     |                    |  |   |                 |   |  |   |     |  
|                                              |  | $                  | (1  | ) |                   | $ | (5  | )                  |  | $ | (13             | ) |  | $ | (9  | )
|                                              |  |                    |     |   |                   |   |     |                    |  |   |                 |   |  |   |     |  



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, and paid interest expense
on those borrowings until July 21, 2004, when the Company completed the IPO and the sale of $1.25 billion of senior unsecured debt.



In September 2005 the Company sold the assets related to its timing solutions business resulting in a gain of $26 million for the three and nine months
ended September 30, 2005. The assets sold consisted of inventory, fixed assets, rights under certain patents related to the timing solutions product line and certain other contractual rights.



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 nine months ended September
30, 2005, options to purchase approximately 1 million shares of Company Class A common stock 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 stock, 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 Months Ended |  | Nine Months Ended
|                                                    |  | September 30, 2005 |  | October 2, 2004   |  | September 30, 2005 |  | October 2, 2004
|Weighted average common shares outstanding          |  | 408                |  | 384               |  | 404                |  | 129            
|Dilutive potential common stock                     |  | 20                 |  | 6                 |  | 17                 |  | 2              
|                                                    |  |                    |  |                   |  |                    |  |                
|Dilutive weighted average common shares outstanding |  | 428                |  | 390               |  | 421                |  | 131            
|                                                    |  |                    |  |                   |  |                    |  |                



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##### Table of Contents

As a result of the IPO, partial over-allotment exercise, employee option exercises and the vesting of
employee restricted stock units, the Company now has a total of approximately 410 million shares of common stock outstanding, including 140 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 five votes per share and the holders of Class A common stock have one vote per share.



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 nine months ended October 2, 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, not considered Short-term investments or Marketable securities, purchased with an original maturity
of three months or less to be cash equivalents.



Short-Term Investments



We have approximately $1.2 billion and $2.0 billion
as of September 30, 2005 and December 31, 2004, respectively, invested in a money market fund portfolio of a wholly owned subsidiary of the Company. The money market fund provides the Company and its subsidiaries a mechanism to 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.



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 80 days at September 30, 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 interests of the fund, we believe the correct classification of the money market fund is Short-term investments.



Property, Plant and Equipment



Depreciation expense was $149 million and $182 million for the three months ended September 30, 2005 and October 2, 2004, respectively, and $477 million
and $554 million for the nine months ended September 30, 2005 and October 2, 2004, respectively. Accumulated depreciation was $1.0 billion and $551 million at September 30, 2005 and December 31, 2004, respectively.



Assets Held for Sale



Assets held for sale were $42 million and $45 million at September 30, 2005
and December 31, 2004, respectively. The assets held for sale at September 30, 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 $4 million and $16 million for the
three and nine months ended October 2, 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
in the first quarter of 2004 to SMIC. 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. Consideration received for the cross-patent license agreement will be amortized over the five year term of the agreement. The SMIC Series D convertible preferred shares were converted into common stock upon SMICs
initial public offering and a portion were sold by the Company The remaining SMIC common stock was not among the net assets contributed to the Company by Motorola. During the nine months ended October 2, 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 Marketable securities and Strategic investments. Marketable securities consist primarily of debt securities held in connection with
the Companys investment program. Strategic investments consist primarily of equity securities and investments in partnerships related to our strategic business initiatives.



|                      |  |                    |       |                   |   |   
|--------------------- |  | ------------------ | ----- | ----------------- | - | --
|                      |  | September 30, 2005 |       | December 31, 2004
|Marketable securities |  | $                  | 1,397 |                   | $ |  
|Strategic investments |  |                    | 16    |                   |   | 31
|                      |  |                    |       |                   |   |   
|                      |  | $                  | 1,413 |                   | $ | 31
|                      |  |                    |       |                   |   |   



Marketable Securities



Investments in
Marketable securities are considered to be available-for-sale and are stated at fair value, which is based on market quotes where available or estimates by investment advisors or management, as appropriate. Adjustments to fair value of these
investments are recorded as an increase or decrease in accumulated other comprehensive earnings (loss) within stockholders equity, except where losses are considered to be other-than-temporary, in which case the losses are recorded as a
reduction to Interest income. The amortized cost of debt securities in this category is adjusted for amortization of premiums and discounts to maturity computed under the effective interest method and the amortization is included in Interest income.
Realized gains and losses and interest and dividends on debt securities are also included in Interest income. The cost of securities is based upon the specific identification method.



The following is a summary of our Marketable securities at September 30, 2005:



|                           |  |                |       |                        |   |                         |  |   |            |   |  |   |      
|-------------------------- |  | -------------- | ----- | ---------------------- | - | ----------------------- |  | - | ---------- | - |  | - | -----
|                           |  | Amortized Cost |       | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Fair Value
|U.S. government and agency |  | $              | 392   |                        | $ |                        |  | $ | (1         | ) |  | $ | 391  
|Corporate debt             |  |                | 304   |                        |   |                        |  |   | (2         | ) |  |   | 302  
|Mortgage and asset-backed  |  |                | 495   |                        |   | 1                       |  |   | (2         | ) |  |   | 494  
|Other                      |  |                | 210   |                        |   |                        |  |   |           |   |  |   | 210  
|                           |  |                |       |                        |   |                         |  |   |            |   |  |   |      
|                           |  | $              | 1,401 |                        | $ | 1                       |  | $ | (5         | ) |  | $ | 1,397
|                           |  |                |       |                        |   |                         |  |   |            |   |  |   |      



The average effective
maturity of the Marketable securities is 1.6 years. The amortized cost and estimated fair value of the Companys available-for-sale debt securities as of September 30, 2005, by contractual maturity, are shown below.



|                                       |  |                |       |            |   |      
|-------------------------------------- |  | -------------- | ----- | ---------- | - | -----
|                                       |  | Amortized Cost |       | Fair Value
|Due in one year or less                |  |                | 319   |            |   | 319  
|Due after one year through two years   |  |                | 329   |            |   | 328  
|Due after two years through five years |  |                | 375   |            |   | 372  
|Due after five years                   |  |                | 378   |            |   | 378  
|                                       |  |                |       |            |   |      
|                                       |  | $              | 1,401 |            | $ | 1,397
|                                       |  |                |       |            |   |      



The Company recorded
losses of $1 million on sales of Marketable securities during the three and nine months ended September 30, 2005. The net adjustment to unrealized holding gains (losses) on available-for-sale securities included in other comprehensive income was a
net loss of $4 million as of September 30, 2005.



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##### Table of Contents

Strategic Investments



Strategic investments consist of the following:



|                               |  |                    |    |                   |   |   
|------------------------------ |  | ------------------ | -- | ----------------- | - | --
|                               |  | September 30, 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         |  |                    | 12 |                   |   | 24
|Equity method investments      |  |                    | 3  |                   |   | 6 
|                               |  |                    |    |                   |   |   
|                               |  | $                  | 16 |                   | $ | 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. Warrants held by the Company for SMIC stock expired unexercised at the date of the IPO. The remaining SMIC common stock and certain other investments, with carrying values of $464 million, were historically
part of the semiconductor operations, but were not among the net assets contributed to the Company by Motorola.



The Company recorded investment impairment charges of $6 million and $5 million for the nine months ended September 30, 2005 and October 2, 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 |     | Nine Months Ended
|                                                                         |  | September 30, 2005 |     |                   | October 2, 2004 |   | September 30, 2005 |  |   | October 2, 2004
|Net earnings                                                             |  | $                  | 164 |                   |                 | $ | 57                 |  | $ | 371             |   |  | $ | 206
|Net change in unrealized gain / (loss) on available-for-sale investments |  |                    | (4  | )                 |                 |   |                   |  |   | (4              | ) |  |   | 104
|Net change in cumulative translation adjustments                         |  |                    | (8  | )                 |                 |   | 2                  |  |   | (67             | ) |  |   | 14 
|                                                                         |  |                    |     |                   |                 |   |                    |  |   |                 |   |  |   |    
|Total comprehensive earnings                                             |  | $                  | 152 |                   |                 | $ | 59                 |  | $ | 300             |   |  | $ | 324
|                                                                         |  |                    |     |                   |                 |   |                    |  |   |                 |   |  |   |    



(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 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



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##### Table of Contents

Date of Motorola and the Companys shares of stock, the Company issued a total of approximately 23 million unvested
options to purchase Class A common stock of the Company at an average exercise price of $9.91. 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. The Company issued a total of
approximately 350 thousand restricted stock units at the Distribution Date with a compensation cost of $17.93 per unit. The compensation expense related to these reissued restricted stock units will continue to be recognized over the remaining
employee service period.



The Company recorded $9 million of
treasury stock as of September 30, 2005 related to the withholding of shares of the Companys Class A common stock used to satisfy employee tax obligations in connection with the vesting of employee restricted stock units.



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 |      |   | Nine Months Ended |  
|                                                                                                                  |  | September 30, 2005 |      |   | October 2, 2004   |   |      | September 30, 2005 |  |   | October 2, 2004 |  
|Net earnings:                                                                                                     |  |                    |      |   |                   |   |      |                    |  |   |                 |   |  |   |      |  
|Net earnings, as reported                                                                                         |  | $                  | 164  |   |                   | $ | 57   |                    |  | $ | 371             |   |  | $ | 206  |  
|Plus: Stock-based employee compensation expense included in reported net earnings, net of tax                     |  |                    | 12   |   |                   |   | 5    |                    |  |   | 26              |   |  |   | 5    |  
|Less: Stock-based employee compensation expense determined under the fair-value method for all awards, net of tax |  |                    | (29  | ) |                   |   | (21  | )                  |  |   | (78             | ) |  |   | (52  | )
|                                                                                                                  |  |                    |      |   |                   |   |      |                    |  |   |                 |   |  |   |      |  
|Net earnings, pro forma                                                                                           |  | $                  | 147  |   |                   | $ | 41   |                    |  | $ | 319             |   |  | $ | 159  |  
|                                                                                                                  |  |                    |      |   |                   |   |      |                    |  |   |                 |   |  |   |      |  
|Basic earnings per common share:                                                                                  |  |                    |      |   |                   |   |      |                    |  |   |                 |   |  |   |      |  
|As reported                                                                                                       |  | $                  | 0.40 |   |                   | $ | 0.15 |                    |  | $ | 0.92            |   |  | $ | 1.60 |  
|Pro forma                                                                                                         |  | $                  | 0.36 |   |                   | $ | 0.11 |                    |  | $ | 0.79            |   |  | $ | 1.23 |  
|                                                                                                                  |  |                    |      |  
|Diluted pro forma earnings per common share:                                                                      |  |                    |      |   |                   |   |      |                    |  |   |                 |   |  |   |      |  
|As reported                                                                                                       |  | $                  | 0.38 |   |                   | $ | 0.15 |                    |  | $ | 0.88            |   |  | $ | 1.57 |  
|Pro forma                                                                                                         |  | $                  | 0.34 |   |                   | $ | 0.11 |                    |  | $ | 0.76            |   |  | $ | 1.21 |  



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 share based payments instead of
the disclosure only requirement shown 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 third quarter, the estimated annualized effective tax rate for 2005 is 9%. This is a change from 10% as of July 1, 2005,
and the impact of this change in estimate was approximately a $4 million reduction to income tax expense for the three months ended September 30, 2005.



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 agreed to indemnify Motorola for these liabilities. 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.



Other Contingencies



In the ordinary course of business, the Company regularly executes contracts
that contain customary indemnification provisions. Additionally, the Company executes other contracts considered outside the ordinary course of business which contain indemnification provisions. 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.



Historically, the Company has not made significant payments for indemnification provisions contained in these agreements. At
September 30, 2005, there was one contract executed outside the ordinary course of business containing indemnification obligations with a maximum amount payable of $5 million. At September 30, 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 September 30, 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 and Other



The Company has 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.



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##### Table of Contents

All reorganization of business programs initiated prior to 2004 were finalized, fully expensed and paid
by the end of the third quarter of 2004. During the third quarter of 2004, the Company announced further plans to streamline its operations and reduce selling, general and administrative expenses. In addition, during the third quarter of 2005 the
Company initiated actions to reorganize certain operations as a result of a customer decision to discontinue utilizing certain products provided by the Company, as described below.



Nine Months Ended September 30, 2005



2005 Initiated Reorganization of Business Program



In the third quarter of 2005, the Company initiated plans to reorganize certain of its operations in response to a customers decision to discontinue
utilizing certain products provided by the Company. The reorganization resulted in an employee separation program and the impairment of certain equipment. As a result, during the three and nine months ended September 30, 2005, the Company recorded
employee separation costs of $16 million and asset impairment and other charges of $1 million under Reorganization of businesses and other in the accompanying Statements of Operations.



In the third quarter of 2005, the Company entered into an agreement with the customer to settle all potential claims by the
Company related to the customers decision to discontinue utilizing certain products provided by the Company. There are no continuing obligations of the Company under the agreement. The Company was paid $17 million, which was recorded during
the three and nine months ended September 30, 2005 under Reorganization of businesses and other in the accompanying Statements of Operations.



|                                                |  |                                       |     |  
|----------------------------------------------- |  | ------------------------------------- | --- | -
|                                                |  | Three Months Ended September 30, 2005 |    
|Employee severance                              |  | $                                     | 16  |  
|Asset impairment and other exit costs           |  |                                       | 1   |  
|Settlement of claims related to customer action |  |                                       | (17 | )
|                                                |  |                                       |     |  
|                                                |  | $                                     |    |  



The following table
displays a roll-forward from January 1, 2005 to September 30, 2005 of the accruals established related to the 2005 employee separation program discussed above.



|                          |  |                             |   |                   |   |              |  |                  |     |                              |   |   |  |   |   |  |   |   |  |   |    
|------------------------- |  | --------------------------- | - | ----------------- | - | ------------ |  | ---------------- | --- | ---------------------------- | - | - |  | - | - |  | - | - |  | - | ---
|Employee Separation Costs |  | Accruals at January 1, 2005 |   | AdditionalCharges |   | Adjustments  |  | 2005AmountsUsed  |     | Accruals atSeptember 30,2005
|                          |  | Cost ofSales                |   | Reorg ofBusiness  |   | Cost ofSales |  | Reorg ofBusiness |     |                             
|Research and development  |  | $                           |  |                   | $ |             |  | $                | 16  |                              | $ |  |  | $ |  |  | $ |  |  | $ | 16 
|                          |  |                             |   |                   |   |              |  |                  |     |                              |   |   |  |   |   |  |   |   |  |   |    
|Related headcount         |  |                             |  |                   |   |             |  |                  | 350 |                              |   |  |  |   |  |  |   |  |  |   | 350
|                          |  |                             |   |                   |   |              |  |                  |     |                              |   |   |  |   |   |  |   |   |  |   |    



The Company will pay
$5 million of the separation costs in the fourth quarter of 2005, with the remaining $11 million to be paid in the first six months of 2006.



2004 Initiated Reorganization of Business Program



In the fourth quarter of 2004, the Company announced plans to reduce costs through an employee separation program. As a result, during the nine months
ended September 30, 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.



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##### Table of Contents

The following table displays a roll-forward from January 1, 2005 to September 30, 2005 of the accruals
established related to the 2004 employee separation program discussed above.



|                                                      |  |                           |     |                    |   |              |  |                  |                 |  |   |                              |  |   |    |   |  |   |      |   |  |   |   
|----------------------------------------------------- |  | ------------------------- | --- | ------------------ | - | ------------ |  | ---------------- | --------------- |  | - | ---------------------------- |  | - | -- | - |  | - | ---- | - |  | - | --
|Employee Separation Costs                             |  | Accruals atJanuary 1,2005 |     | Additional Charges |   | Adjustments  |  |                  | 2005AmountsUsed |  |   | Accruals atSeptember 30,2005
|                                                      |  | Cost ofSales              |     | Reorg ofBusiness   |   | Cost ofSales |  | Reorg ofBusiness |                 |  |  
|U.S. manufacturing                                    |  | $                         | 17  |                    | $ | 1            |  | $                |                |  | $ |                             |  | $ |   |   |  | $ | (13  | ) |  | $ | 5 
|Asia manufacturing                                    |  |                           | 2   |                    |   | 1            |  |                  |                |  |   |                             |  |   |   |   |  |   | (3   | ) |  |   |  
|Europe manufacturing                                  |  |                           | 9   |                    |   | 1            |  |                  |                |  |   |                             |  |   |   |   |  |   | (10  | ) |  |   |  
|General and administrative / Research and development |  |                           | 42  |                    |   |             |  |                  | 11              |  |   |                             |  |   | (1 | ) |  |   | (47  | ) |  |   | 5 
|                                                      |  |                           |     |                    |   |              |  |                  |                 |  |   |                              |  |   |    |   |  |   |      |   |  |   |   
|Total                                                 |  | $                         | 70  |                    | $ | 3            |  | $                | 11              |  | $ |                             |  | $ | (1 | ) |  | $ | (73  | ) |  | $ | 10
|                                                      |  |                           |     |                    |   |              |  |                  |                 |  |   |                              |  |   |    |   |  |   |      |   |  |   |   
|Related headcount                                     |  |                           | 460 |                    |   | 170          |  |                  | 60              |  |   |                             |  |   |   |   |  |   | (690 | ) |  |   |  
|                                                      |  |                           |     |                    |   |              |  |                  |                 |  |   |                              |  |   |    |   |  |   |      |   |  |   |   



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 nine months ended September 30, 2005, 690 employees were separated
from the Company. The $73 million used in the nine months ended September 30, 2005 reflects the initial cash payments made to these separated employees. For these separated employees, of which 430 are manufacturing employees and 260 are
non-manufacturing employees, an additional $3 million will be paid in the fourth quarter of 2005. The remaining $7 million will be paid for healthcare costs and severance related to previously terminated employees.



Nine Months Ended October 2, 2004



Pre-2004 Initiated Reorganization of Business Programs



For the nine months ended October 2, 2004, the Company recorded net
reversals of $11 million; of which $1 million was included in Cost of sales and $10 million was recorded under Reorganization of businesses in the accompanying Statements of Operations. The aggregate $11 million net reversal is comprised of the
following:



|                                                |  |                       |   |                                |   |    |                          |  |   |       |   |  |   |     |  
|----------------------------------------------- |  | --------------------- | - | ------------------------------ | - | -- | ------------------------ |  | - | ----- | - |  | - | --- | -
|                                                |  | Exit Costs(Reversals) |   | EmployeeSeparations(Reversals) |   |    | Decommissioningreversals |  |   | Total |  
|Manufacturing and administrative consolidations |  | $                     |  |                                | $ | (4 | )                        |  | $ | (7    | ) |  | $ | (11 | )
|                                                |  |                       |   |                                |   |    |                          |  |   |       |   |  |   |     |  



Manufacturing and Administrative
Consolidations



There were no additional charges for the
nine months ended October 2, 2004. Accruals of $11 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.



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##### Table of Contents

(8) Information by Segment



Summarized below are the Companys segment net sales and operating earnings for the three and nine months ended
September 30, 2005 and October 2, 2004:



|                                     |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|------------------------------------ |  | ------------------ | ----- | - | ----------------- | - | ----- | ----------------- |  | - | -------------- | - |  | - | ----- | -
|                                     |  | Three Months Ended |       |   | Nine Months Ended |  
|                                     |  | September 30,2005  |       |   | October 2,2004    |   |       | September 30,2005 |  |   | October 2,2004 |  
|Net Sales:                           |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Transportation and Standard Products |  | $                  | 637   |   |                   | $ | 650   |                   |  | $ | 1,965          |   |  | $ | 1,934 |  
|Networking and Computing Systems     |  |                    | 360   |   |                   |   | 361   |                   |  |   | 1,096          |   |  |   | 1,148 |  
|Wireless and Mobile Solutions        |  |                    | 438   |   |                   |   | 404   |                   |  |   | 1,251          |   |  |   | 1,158 |  
|Other                                |  |                    | 15    |   |                   |   | 15    |                   |  |   | 52             |   |  |   | 47    |  
|                                     |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Segment totals                       |  | $                  | 1,450 |   |                   | $ | 1,430 |                   |  | $ | 4,364          |   |  | $ | 4,287 |  
|                                     |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Operating Earnings:                  |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Transportation and Standard Products |  | $                  | 70    |   |                   | $ | 74    |                   |  | $ | 237            |   |  | $ | 175   |  
|Networking and Computing Systems     |  |                    | 76    |   |                   |   | 58    |                   |  |   | 241            |   |  |   | 215   |  
|Wireless and Mobile Solutions        |  |                    | 31    |   |                   |   | (9    | )                 |  |   | 51             |   |  |   | (124  | )
|Other                                |  |                    | (24   | ) |                   |   | (42   | )                 |  |   | (127           | ) |  |   | (15   | )
|                                     |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Segment totals                       |  |                    | 153   |   |                   |   | 81    |                   |  |   | 402            |   |  |   | 251   |  
|                                     |  |                    |       |  
|Total other income (expense)         |  |                    | 25    |   |                   |   | (10   | )                 |  |   | 6              |   |  |   | 6     |  
|                                     |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  
|Earnings before income taxes         |  | $                  | 178   |   |                   | $ | 71    |                   |  | $ | 408            |   |  | $ | 257   |  
|                                     |  |                    |       |   |                   |   |       |                   |  |   |                |   |  |   |       |  



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 $(1) million for the three months ended October 2, 2004, and $10 million and $(11)
million for the nine months ended September 30, 2005 and October 2, 2004, respectively. In addition, the Company has included Separation expenses of $19 million within the Other segment for the three months ended October 2, 2004, and $10 million and
$69 million for the nine months ended September 30, 2005 and October 2, 2004, respectively. For the periods presented, one customer, Motorola, represented 10% or more of the Companys combined net sales at approximately the same historical
percentage levels.



(9) Subsequent Event



On October 8, 2005, Delphi Corporation (Delphi), a customer to
the Transportation and Standard Products segment (TSPG) of the Company, filed for Chapter 11 bankruptcy in the Southern District of New York. Most all of Delphis domestic subsidiaries are included in the Chapter 11 bankruptcy
filing; however, very few of its foreign subsidiaries filed for bankruptcy. Revenues related to shipments to Delphi approximated 5% of the Companys revenues and 10% of the TSPG segment revenues for the nine months ended September 30, 2005.
Delphi has noted an unsecured debtor claim of approximately $23 million related to the Company in its initial Chapter 11 bankruptcy filing documents. Based upon the limited amount of information concerning the manner in which the Companys
pre-petition claim and on-going relationship with Delphi will be administered in connection with the bankruptcy process, the Company has recorded an allowance of $10 million due to the potential impairment of the trade receivables.



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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 nine months ended September 30, 2005 and October 2, 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 cannot assure you 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 our Austin, Texas Technology and Manufacturing Center for which manufacturing variances are divided among all our business segments based upon usage and start-up facilities, such as
the Crolles, France facility, which are allocated to the Other segment. Assembly and final test costs are allocated to the business segments on an actual cost basis.



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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.



Delphi Corporation (Delphi) has entered into labor negotiations with the United Auto Workers (UAW) in connection with Delphis bankruptcy. In connection with these negotiations, the UAW could declare a work
stoppage at Delphi or other automotive industry companies. Any work stoppage could have a material adverse effect on the automotive industry. Because the automotive industry currently represents the largest portion of our TSPG segment Net sales, a
work stoppage could have a material adverse effect on TSPGs business and our results of operations.



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.



Third Quarter Highlights



Our third quarter 2005 net sales increased slightly as compared to the third
quarter of 2004, driven by a sales increase of $34 million in WMSG. Gross margins rose to 43.3% in the third quarter of 2005 compared to 39.0% in the third quarter of 2004 primarily due to continued operational efficiencies, reduced depreciation and
further manufacturing cost reduction savings.



The third
quarter of 2004 included $19 million of Separation expenses related to the separation from Motorola as compared to no such expenses in the current quarter. The Company also recorded a gain of $26 million on the sale of its timing solutions business
in the third quarter of 2005.



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##### Table of Contents

Results of Operations

(in millions, except per share data)



|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|------------------------------------------------- | ------------- | ------------------------------ | ----- | --------- | --------- | ----- | -------------- | -------------- | - | --------- | --------- |  | ----- | --
|                                                  |               | Three Months Ended (Unaudited) |      
|                                                  | Sept. 30,2005 |                                |       | % ofSales |           |       | October 2,2004 |                |   | % ofSales |          
|Orders                                            |               | $                              | 1,609 |           |           | 111.0 | %              |                | $ | 1,416     |           |  | 99.0  | % 
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Net sales                                         |               | $                              | 1,450 |           |           | 100.0 | %              |                | $ | 1,430     |           |  | 100.0 | % 
|Costs of sales                                    |               |                                | 822   |           |           | 56.7  | %              |                |   | 872       |           |  | 61.0  | % 
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Gross margin                                      |               |                                | 628   |           |           | 43.3  | %              |                |   | 558       |           |  | 39.0  | % 
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Selling, general and administrative               |               |                                | 201   |           |           | 13.8  | %              |                |   | 230       |           |  | 16.1  | % 
|Research and development                          |               |                                | 274   |           |           | 18.9  | %              |                |   | 229       |           |  | 16.1  | % 
|Reorganization of businesses and other            |               |                                |      |           |           |      | %              |                |   | (1        | )         |  | (0.1  | )%
|Separation expenses                               |               |                                |      |           |           |      | %              |                |   | 19        |           |  | 1.3   | % 
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Operating earnings                                |               |                                | 153   |           |           | 10.6  | %              |                |   | 81        |           |  | 5.6   | % 
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Other income (expense):                           |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Interest expense, net                             |               |                                |      |           |           |      | %              |                |   | (5        | )         |  | (0.3  | )%
|Gains on sales of investments and businesses, net |               |                                | 26    |           |           | 1.8   | %              |                |   |          |           |  |      | % 
|Other, net                                        |               |                                | (1    | )         |           | (0.1  | )%             |                |   | (5        | )         |  | (0.3  | )%
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Total other income (expense)                      |               |                                | 25    |           |           | 1.7   | %              |                |   | (10       | )         |  | (0.6  | )%
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Earnings before income taxes                      |               |                                | 178   |           |           | 12.3  | %              |                |   | 71        |           |  | 5.0   | % 
|Income tax expense                                |               |                                | 14    |           |           | 1.0   | %              |                |   | 14        |           |  | 1.0   | % 
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Net earnings                                      |               | $                              | 164   |           |           | 11.3  | %              |                | $ | 57        |           |  | 4.0   | % 
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Basic earnings per share                          |               | $                              | 0.40  |           |           |       |                |                | $ | 0.15      |           |  |       |   
|Diluted earnings per share                        |               | $                              | 0.38  |           |           |       |                |                | $ | 0.15      |           |  |       |   
|                                                  |              
|                                                  |               | Nine Months Ended (Unaudited)  |      
|                                                  |               | Sept. 30,2005                  |       |           | % ofSales |       |                | October 2,2004 |   |           | % ofSales | 
|Orders                                            |               | $                              | 4,373 |           |           | 100.2 | %              |                | $ | 4,428     |           |  | 103.3 | % 
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Net sales                                         |               | $                              | 4,364 |           |           | 100.0 | %              |                | $ | 4,287     |           |  | 100.0 | % 
|Costs of sales                                    |               |                                | 2,544 |           |           | 58.3  | %              |                |   | 2,661     |           |  | 62.1  | % 
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Gross margin                                      |               |                                | 1,820 |           |           | 41.7  | %              |                |   | 1,626     |           |  | 37.9  | % 
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Selling, general and administrative               |               |                                | 594   |           |           | 13.6  | %              |                |   | 595       |           |  | 13.8  | % 
|Research and development                          |               |                                | 804   |           |           | 18.4  | %              |                |   | 721       |           |  | 16.8  | % 
|Reorganization of businesses and other            |               |                                | 10    |           |           | 0.2   | %              |                |   | (10       | )         |  | (0.2  | )%
|Separation expenses                               |               |                                | 10    |           |           | 0.2   | %              |                |   | 69        |           |  | 1.6   | % 
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Operating earnings                                |               |                                | 402   |           |           | 9.2   | %              |                |   | 251       |           |  | 5.9   | % 
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Other income (expense):                           |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Interest expense, net                             |               |                                | (7    | )         |           | (0.2  | )%             |                |   | (26       | )         |  | (0.6  | )%
|Gains on sales of investments and businesses, net |               |                                | 26    |           |           | 0.6   | %              |                |   | 41        |           |  | 1.0   | % 
|Other, net                                        |               |                                | (13   | )         |           | (0.3  | )%             |                |   | (9        | )         |  | (0.2  | )%
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Total other income (expense)                      |               |                                | 6     |           |           | 0.1   | %              |                |   | 6         |           |  | 0.1   | % 
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Earnings before income taxes                      |               |                                | 408   |           |           | 9.3   | %              |                |   | 257       |           |  | 6.0   | % 
|Income tax expense                                |               |                                | 37    |           |           | 0.8   | %              |                |   | 51        |           |  | 1.2   | % 
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Net earnings                                      |               | $                              | 371   |           |           | 8.5   | %              |                | $ | 206       |           |  | 4.8   | % 
|                                                  |               |                                |       |           |           |       |                |                |   |           |           |  |       |   
|Basic earnings per share                          |               | $                              | 0.92  |           |           |       |                |                | $ | 1.60      |           |  |       |   
|Diluted earnings per share                        |               | $                              | 0.88  |           |           |       |                |                | $ | 1.57      |           |  |       |   



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Three Months Ended September 30, 2005 Compared to Three Months Ended October 2, 2004



Net Sales



Net sales increased due to a 10% increase in shipments within the WMSG operating segment. Orders increased due to increased
customer demand among all three operating segments in the third quarter of 2005 versus the prior year. Intellectual property revenue was 3% of Net sales in both the third quarter of 2005 and 2004.



Gross Margin



The increase in Gross margin was due primarily to reduced manufacturing costs resulting from a reduction in manufacturing
headcount, a decrease in depreciation and an increase in factory utilization. We also lowered our external manufacturing costs by a shift to more internal facility sourcing. Cost reductions of $7 million in the third 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 third quarter of 2005 was primarily driven by a decrease in bonus expense due to bonus accrual adjustments in the prior year. We had approximately $5 million in payroll cost reductions
during the third 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 segment and process technologies in the third quarter of
2005 versus the prior year. We also received fewer government grant reimbursements in the third quarter of 2005. In addition, we recorded an in-process research and development charge related to an acquisition which closed during the three months
ended September 30, 2005. Partially offsetting these increases was $4 million in payroll cost reductions in the third quarter of 2005 resulting from the Reorganization of business activity announced in the fourth quarter of 2004.



Reorganization of Businesses and Other



In the third quarter of 2005, we initiated plans to reorganize certain of
our operations in response to the decision by a customer to discontinue purchasing certain of our products. As a result, during the three months ended September 30, 2005, we recorded $16 million for employee separation costs and $1 million for asset
impairment and other charges. These actions are expected to generate approximately $22 million in annualized net cost savings in Research and development expenses.



We also entered into an agreement with the customer to settle all of our potential claims related to the customers
decision to discontinue utilizing certain products provided by us. We were paid $17 million, which was recorded in the third quarter of 2005.



Separation Expenses



We did not incur any Separation expenses in the current quarter, as compared to $19 million in the third quarter of 2004. These incremental, non-recurring
costs were directly related to the Contribution and subsequent separation from Motorola and included transaction taxes, professional fees, information technology and other services.



Net Interest Expense



Our Interest expense of $22 million in the third quarter of 2005 was offset by Interest income in the same amount. Net interest expense in the third
quarter of 2004 was $5 million, which included $13 million in Interest expense partially offset by $8 million in Interest income. The increase in Interest expense was due to increases in interest rates during the third quarter of 2005 versus the
prior year as our long-term debt is effectively variable because of interest rate swaps on our fixed rate debt. In addition, the third quarter of 2004 did not include a full period of Interest expense as our financing closed on July 16, 2004. The
increase in Interest income is the result of investing our excess cash in debt securities with longer maturities and higher yields and an increase in the average level of our funds invested in interest bearing investments.



Gains on Sales of Investments and Businesses



We recorded a gain of $26 million related to the sale of our timing
solutions business, which closed in September 2005.



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##### Table of Contents

Other



Other expenses in the three months ended September 30, 2005 decreased slightly due primarily to decreased equity losses of non-consolidated investments in
private companies.



Income Taxes



Our effective tax rate was 8% for the third quarter of 2005, representing a
$14 million net tax expense, compared to a 20% effective tax rate in the third quarter of 2004, representing a $14 million net tax expense. The decline to 9% 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.



Nine Months Ended September 30, 2005 Compared to Nine Months Ended October 2, 2004



Net Sales



Our Net
sales were up 2% in the nine months ended September 30, 2005, compared with the same period last year due to increases in TSPG and WMSG net sales partially offset by declines in NCSG. The Company experienced an increase in volume of shipments in the
nine months ended September 30, 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 nine months ended September 30, 2005 as compared to 2% in the same period in the prior year.



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 utilization and performance in the nine months ended September 30, 2005 versus the prior year. Payroll cost reductions of $19 million in the nine months ended September 30, 2005 resulted from
the Reorganization of business activity announced in the fourth quarter of 2004.



Selling, General and Administrative



Selling,
general and administrative expenses for the nine months ended September 30, 2005 approximate the prior years levels. Our selling, general and administrative expenses for the nine months ended September 30, 2004 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 offset by cost savings of approximately $13 million in
payroll and benefits due to reduced headcount, which resulted from the reorganization of business activity announced in the fourth quarter of 2004.



Research and Development



The increase in Research and development expenses was due to increased investment in research and development and increased introduction of new products
by all three of our operating segments in the nine months ended September 30, 2005 versus the prior year. We also received lower funding from our government grant programs in the first nine months of 2005. Finally, we recorded an in-process research
and development charge related to an acquisition which closed during the three months ended September 30, 2005. There were $13 million in cost reductions in the nine months ended September 30, 2005 resulting from the Reorganization of business
activity announced in the fourth quarter of 2004, which partially offset the increased spending.



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##### Table of Contents

Reorganization of Businesses and Other



In the third quarter of 2005, we initiated plans to reorganize certain of our operations in response to the decision by a
customer to discontinue purchasing certain of our products. As a result, during the nine months ended September 30, 2005, the Company recorded $16 million for employee separation costs and $1 million in asset impairment and other charges. These
actions are expected to generate $22 million in annualized net cost savings in Research and development expenses.



The Company also entered into an agreement with the customer to settle all potential claims by the Company related to the customers decision to
discontinue utilizing certain products provided by the Company. The Company was paid $17 million, which was recorded during the nine months ended September 30, 2005.



A reorganization of business program was announced on October 19, 2004 to streamline operations and reduce selling, general
and administrative expenses. As a result, during the nine months ended September 30, 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 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 $10 million in the first nine months of 2004. The 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 $59 million lower in the nine months ended September 30, 2005 compared to the nine months ended October 2, 2004. We did not incur any Separation expenses during the three months ended September 30, 2005 and do not
currently anticipate incurring any for the remainder of 2005. 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 nine months ended September 30, 2005 included
Interest expense of $61 million, which was partially offset by Interest income of $54 million. Net interest expense in the nine months ended October 2, 2004 included Interest expense of $35 million, which was partially offset by Interest income of
$9 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



We recorded a gain of $26
million during the nine months ended September 30, 2005 related to the sale of our timing solutions business in the third quarter of September 2005. This amount compared to $41 million during the nine months ended October 2, 2004, which primarily
related to the sale of our SMIC common stock.



Other



Other expenses increased $4 million primarily due to increased equity losses
of non-consolidated investments in private companies.



Income Taxes



Our effective tax rate was 9% for the nine months ended
September 30, 2005, representing a $37 million net tax expense, compared to a 20% effective tax rate in the nine months ended October 2, 2004, representing a $51 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.



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##### Table of Contents

Segment Information



Our orders, net sales, and operating results for our primary segments for the three and nine months ended September 30, 2005 and October 2, 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 nine months ended September 30, 2005, which was up slightly from the respective periods in the prior year. In the third quarter of 2005, TSPG Net sales represented 44% of our Net sales
compared to 45% in the third quarter of 2004. In the first nine months of 2005 and 2004, TSPG Net sales represented 45% of our Net sales.



|                      |  |                    |     |                |                   |          |  |    |                   |  |                |       |          |   |       |  |    |   
|--------------------- |  | ------------------ | --- | -------------- | ----------------- | -------- |  | -- | ----------------- |  | -------------- | ----- | -------- | - | ----- |  | -- | --
|                      |  | Three Months Ended |     |                | Nine Months Ended |         
|(Dollars in millions) |  | September 30,2005  |     | October 2,2004 |                   | % Change |  |    | September 30,2005 |  | October 2,2004 |       | % Change |  
|Orders                |  | $                  | 652 |                | $                 | 620      |  | 5  | %                 |  | $              | 1,942 |          | $ | 1,966 |  | (1 | )%
|Segment net sales     |  |                    | 637 |                |                   | 650      |  | (2 | )%                |  |                | 1,965 |          |   | 1,934 |  | 2  | % 
|Operating earnings    |  |                    | 70  |                |                   | 74       |  | (5 | )%                |  |                | 237   |          |   | 175   |  | 35 | % 



Three months ended September 30,
2005 compared to three months ended October 2, 2004



Net
sales during the three months ended September 30, 2005 decreased due to the charge related to the additional allowance for doubtful accounts related to the bankruptcy filing of Delphi Corporation on October 8, 2005. The increase in Orders was due to
increased customer demand for our product in the third quarter of 2005 versus the prior year. The decrease in Operating earnings was due to the $10 million charge related to the Delphi bankruptcy filing, partially offset by lower manufacturing costs
and increased factory utilization.



Nine months ended September 30, 2005
compared to nine months ended October 2, 2004



Net sales
increased slightly as a result of increased automotive market shipments. 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 third quarter of
2005 and 2004, NCSG Net sales represented 25% of our net sales. In the first nine months of 2005, NCSG Net sales represented 25% of our Net sales, compared to 27% in the first nine months of 2004.



|                      |  |                    |     |                |                   |          |  |    |                   |  |                |       |          |   |       |  |    |   
|--------------------- |  | ------------------ | --- | -------------- | ----------------- | -------- |  | -- | ----------------- |  | -------------- | ----- | -------- | - | ----- |  | -- | --
|                      |  | Three Months Ended |     |                | Nine Months Ended |         
|(Dollars in millions) |  | September 30,2005  |     | October 2,2004 |                   | % Change |  |    | September 30,2005 |  | October 2,2004 |       | % Change |  
|Orders                |  | $                  | 366 |                | $                 | 267      |  | 37 | %                 |  | $              | 1,107 |          | $ | 1,145 |  | (3 | )%
|Segment net sales     |  |                    | 360 |                |                   | 361      |  |   |                   |  |                | 1,096 |          |   | 1,148 |  | (5 | )%
|Operating earnings    |  |                    | 76  |                |                   | 58       |  | 31 | %                 |  |                | 241   |          |   | 215   |  | 12 | % 



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##### Table of Contents

Three months ended September 30, 2005 compared to three months ended October 2, 2004



Our Net sales in NCSG were flat in the current period despite a slight
decrease in the volume of products shipped. Order increase was driven by higher turn orders in the third quarter of 2004 as compared to the third quarter of 2005 and strong demand for computing products during the third quarter of 2005 versus the
prior year. The increase in Operating earnings was primarily due to lower manufacturing costs and increased factory utilization.



Nine months ended September 30, 2005 compared to nine months ended October 2, 2004



The decrease in Net sales was due to lower volumes of products shipped. Orders decreased due to a trend of lower inventory
replenishment levels required by our customers, primarily in the first half of the year, as compared to the corresponding period in the prior year. The increase in Operating earnings was primarily due to lower manufacturing costs and increased
factory utilization.



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 third quarter of 2005 and 2004, WMSG
Net sales represented 30% and 28% of our Net sales, respectively. In the first nine months of 2005, WMSG Net sales represented 29% of our Net sales, compared to 27% in the first nine months of 2004.



|                          |  |                    |     |                |                   |     |          |  |    |                   |  |                |       |  |          |       |   |  |   |  
|------------------------- |  | ------------------ | --- | -------------- | ----------------- | --- | -------- |  | -- | ----------------- |  | -------------- | ----- |  | -------- | ----- | - |  | - | -
|                          |  | Three Months Ended |     |                | Nine Months Ended |    
|(Dollars in millions)     |  | September 30,2005  |     | October 2,2004 |                   |     | % Change |  |    | September 30,2005 |  | October 2,2004 |       |  | % Change |      
|Orders                    |  | $                  | 575 |                | $                 | 514 |          |  | 12 | %                 |  | $              | 1,272 |  | $        | 1,268 |   |  |  |  
|Segment net sales         |  |                    | 438 |                |                   | 404 |          |  | 8  | %                 |  |                | 1,251 |  |          | 1,158 |   |  | 8 | %
|Operating earnings (loss) |  |                    | 31  |                |                   | (9  | )        |  |   |                   |  |                | 51    |  |          | (124  | ) |  |  |  



Three months ended September 30,
2005 compared to three months ended October 2, 2004



The
increase in Net sales was due entirely to higher unit shipments primarily to customers in the wireless market, particularly to our largest customer, Motorola. The increase in orders is due to increased demand from Motorola in the three months ended
September 30, 2005. The improvement in Operating earnings was primarily due to increased volumes of products shipped, increased factory utilization and lower manufacturing costs.



Nine months ended September 30, 2005 compared to nine months ended October 2, 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 increase in orders is due to increased demand from Motorola in the current year versus the prior year. The improvement in Operating earnings was
primarily due to increased volumes of products shipped, improved manufacturing yield and lower manufacturing costs.



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 |     |   | Nine Months Ended |  
|(Dollars in millions) |  | September 30,2005  |     |   | October 2,2004    |   |     | % Change |  |    | September 30,2005 |  |   | October 2,2004 |   |  | % Change |    
|Orders                |  | $                  | 16  |   |                   | $ | 15  |          |  | 7  | %                 |  | $ | 52             |   |  | $        | 49  |   |  | 6  | %
|Segment net sales     |  |                    | 15  |   |                   |   | 15  |          |  |   |                   |  |   | 52             |   |  |          | 47  |   |  | 11 | %
|Operating loss        |  |                    | (24 | ) |                   |   | (42 | )        |  | 43 | %                 |  |   | (127           | ) |  |          | (15 | ) |  |   |  



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##### Table of Contents

Three months ended September 30, 2005 compared to three months ended October 2, 2004



The decrease in Operating loss was due to Separation expenses of $19 million
in the third quarter of the prior year versus the charges related to the customer notification to discontinue utilizing certain products in the third quarter of 2005 being offset by a settlement we entered into with the customer related to various
claims concerning such notification.



Nine months ended September 30, 2005
compared to nine months ended October 2, 2004



Operating
loss in the first nine 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. We also recorded $10 million of net Reorganization of businesses and other charges in the first nine months of 2005 versus reversals of $10
million in the first nine months of 2004.



Reorganization of Businesses and
Other



The Company has 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. During the fourth quarter of 2004 the Company announced further plans to streamline its operations and reduce selling, general and administrative expenses. In addition, in
the third quarter of 2005 the Company initiated actions to reorganize certain operations as a result of the decision by a customer to discontinue utilizing certain products provided by the Company.



Nine Months Ended September 30, 2005



2005 Initiated Reorganization of Business Program



In the third quarter of 2005, the Company initiated plans to reorganize
certain of its operations in response to a customers decision to discontinue utilizing certain products provided by the Company. The reorganization resulted in an employee separation program and the impairment of certain equipment. As a
result, during the three and nine months ended September 30, 2005, the Company recorded employee separation costs of $16 million and asset impairment and other charges of $1 million under Reorganization of businesses and other in the accompanying
Statements of Operations.



The Company entered into an
agreement with the customer to settle all potential claims by the Company related to the customers decision to discontinue utilizing certain products provided by the Company. There are no continuing obligations of the Company under the
agreement. The Company was paid $17 million, which was recorded during the three and nine months ended September 30, 2005 under Reorganization of businesses and other in the accompanying Statements of Operations.



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##### Table of Contents

The following table displays a roll-forward from January 1, 2005 to September 30, 2005 of the accruals
established related to the 2005 employee separation program discussed above.



|                          |  |                           |   |                    |   |              |  |                  |     |                              |   |   |  |   |   |  |   |   |  |   |    
|------------------------- |  | ------------------------- | - | ------------------ | - | ------------ |  | ---------------- | --- | ---------------------------- | - | - |  | - | - |  | - | - |  | - | ---
|Employee Separation Costs |  | Accruals atJanuary 1,2005 |   | Additional Charges |   | Adjustments  |  | 2005AmountsUsed  |     | Accruals atSeptember 30,2005
|                          |  | Cost ofSales              |   | Reorg ofBusiness   |   | Cost ofSales |  | Reorg ofBusiness |     |                             
|Research and development  |  | $                         |  |                    | $ |             |  | $                | 16  |                              | $ |  |  | $ |  |  | $ |  |  | $ | 16 
|                          |  |                           |   |                    |   |              |  |                  |     |                              |   |   |  |   |   |  |   |   |  |   |    
|Related headcount         |  |                           |  |                    |   |             |  |                  | 350 |                              |   |  |  |   |  |  |   |  |  |   | 350
|                          |  |                           |   |                    |   |              |  |                  |     |                              |   |   |  |   |   |  |   |   |  |   |    



The Company will pay
$5 million of the separation costs in the fourth quarter of 2005, with the remaining $11 million to be paid in the first six months of 2006.



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 nine
months ended September 30, 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 from January 1,
2005 to September 30, 2005 of the accruals established related to the 2004 employee separation program discussed above.



|                                                    |  |                           |     |                   |   |              |  |                  |                 |  |   |                              |  |   |    |   |  |   |      |   |  |   |   
|--------------------------------------------------- |  | ------------------------- | --- | ----------------- | - | ------------ |  | ---------------- | --------------- |  | - | ---------------------------- |  | - | -- | - |  | - | ---- | - |  | - | --
|Employee Separation Costs                           |  | Accruals atJanuary 1,2005 |     | AdditionalCharges |   | Adjustments  |  |                  | 2005AmountsUsed |  |   | Accruals atSeptember 30,2005
|                                                    |  | Cost ofSales              |     | Reorg ofBusiness  |   | Cost ofSales |  | Reorg ofBusiness |                 |  |  
|U.S. manufacturing                                  |  | $                         | 17  |                   | $ | 1            |  | $                |                |  | $ |                             |  | $ |   |   |  | $ | (13  | ) |  | $ | 5 
|Asia manufacturing                                  |  |                           | 2   |                   |   | 1            |  |                  |                |  |   |                             |  |   |   |   |  |   | (3   | ) |  |   |  
|Europe manufacturing                                |  |                           | 9   |                   |   | 1            |  |                  |                |  |   |                             |  |   |   |   |  |   | (10  | ) |  |   |  
|General and administrative/Research and development |  |                           | 42  |                   |   |             |  |                  | 11              |  |   |                             |  |   | (1 | ) |  |   | (47  | ) |  |   | 5 
|                                                    |  |                           |     |                   |   |              |  |                  |                 |  |   |                              |  |   |    |   |  |   |      |   |  |   |   
|Total                                               |  | $                         | 70  |                   | $ | 3            |  | $                | 11              |  | $ |                             |  | $ | (1 | ) |  | $ | (73  | ) |  | $ | 10
|                                                    |  |                           |     |                   |   |              |  |                  |                 |  |   |                              |  |   |    |   |  |   |      |   |  |   |   
|Related headcount                                   |  |                           | 460 |                   |   | 170          |  |                  | 60              |  |   |                             |  |   |   |   |  |   | (690 | ) |  |   |  
|                                                    |  |                           |     |                   |   |              |  |                  |                 |  |   |                              |  |   |    |   |  |   |      |   |  |   |   



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 nine months ended September 30, 2005, 690 employees were separated
from the Company. The $73 million used in the nine months ended September 30, 2005 reflects the initial cash payments made to these separated employees. For these separated employees, of which 430 are manufacturing employees and 260 are
non-manufacturing employees, an additional $3 million will be paid in the fourth quarter of 2005. The remaining $7 million will be paid for healthcare costs and severance related to previously terminated employees.



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##### Table of Contents

Nine Months Ended October 2, 2004



Pre-2004 Initiated Reorganization of Business Programs



For the nine months ended October 2, 2004, we recorded net reversals of $11 million, of which $1 million was included in
Cost of sales and $10 million was recorded under Reorganization of businesses in the accompanying Statements of Operations. The aggregate $11 million net reversal is comprised of the following:



|                                                |  |                       |   |                                |   |    |                          |  |   |       |   |  |   |     |  
|----------------------------------------------- |  | --------------------- | - | ------------------------------ | - | -- | ------------------------ |  | - | ----- | - |  | - | --- | -
|                                                |  | Exit Costs(Reversals) |   | EmployeeSeparations(Reversals) |   |    | Decommissioningreversals |  |   | Total |  
|Manufacturing and administrative consolidations |  | $                     |  |                                | $ | (4 | )                        |  | $ | (7    | ) |  | $ | (11 | )
|                                                |  |                       |   |                                |   |    |                          |  |   |       |   |  |   |     |  



Manufacturing and Administrative
Consolidations



There were no additional charges for the
nine months ended October 2, 2004. Accruals of $11 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 September 30, 2005, our total Cash and cash equivalents, Short-term
investments and Marketable securities aggregated approximately $2.9 billion. We invested approximately $1.4 billion of our Short-term investments in Marketable securities of longer term duration during the third quarter of 2005.



On September 30, 2005, $2.2 billion of this amount was held by our U.S.
subsidiaries and $0.7 billion was held by our foreign subsidiaries. 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.



Operating Activities



In the first nine months of 2005, we generated positive cash flow from
operations of $813 million, compared to $915 million in the first nine months of 2004. Our positive cash flow from operations in the first nine months of 2005 was driven by Net earnings of $371 million, depreciation and amortization of $528 million
and a decrease in inventory of $101 million. Partially offsetting these items were an increase in Accounts receivable of $58 million and a decrease of $119 million in Accounts payable and Accrued liabilities.



Our net Accounts receivable were $687 million at September 30, 2005, compared
to $636 million at December 31, 2004. Our days sales outstanding were 36 days as of September 30, 2005, compared to 30 days outstanding as of December 31, 2004. The increase to net Accounts receivable as of September 30, 2005 was due to primarily to
the increase in days sales outstanding, which contributed $100 million to the increase, and partially to increased sales, which contributed $11 million to the increase. These increases were partially offset by a decrease in receivables due from
Motorola in connection with the Distribution of $60 million.



Our Inventory decreased $101 million from December 31, 2004 to September 30, 2005. Our days of inventory on hand were 70 as of September 30, 2005, and 76 as of December 31, 2004.



Our Accounts payable were $429 million as of September 30, 2005, compared to $474 million at December 31, 2004. The decrease
is due primarily to a decrease in our accounts payable to Motorola due to the discontinuance of virtually all transition services with Motorola.



Investing Activities



Our net cash used for investing activities was $973 million and $337 million in the first nine months of 2005 and 2004, respectively. Our investing
activities are driven by investment of our excess cash, capital expenditures, strategic acquisitions and investments in other companies and sales of investments and businesses.



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##### Table of Contents

During the three months ended September 30, 2005 we invested $1.4 billion in excess cash from operations
and funds previously invested via a wholly-owned money market fund into Marketable securities with longer maturities than the funds in our money market fund. The average effective maturity of the securities in the new investment portfolio is 1.6
years.



Our capital expenditures were $344 million and $372
million in the first nine months of 2005 and 2004, respectively. Our capital expenditures as a percentage of net sales were 8% and 9% in the first nine months of 2005 and 2004, respectively.



Cash used for strategic acquisitions and new investment activities was $45
million in the first nine months of 2005 and $41 million in the first nine months of 2004. The use in 2005 was primarily due to the acquisition of substantially all of the assets of two businesses, consisting primarily of intellectual property and
licenses. Our expenditures in the first nine 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 $43 million in the first nine months of 2005
and $100 million in the first nine months of 2004. The 2005 proceeds were generated primarily as a result of the sale of our timing solutions business, while the 2004 proceeds were generated from the sale of our SMIC stock.



Financing Activities



Our net cash generated by financing activities in the first nine months of
2005 was $92 million resulting primarily from the proceeds from the exercise of stock options. This compared to our net cash provided by financing activities of $1.5 billion in the first nine months of 2004.



The change in financing activities is due to the IPO in July 2004 resulting
in proceeds, net of IPO offering costs, of $1.6 billion. In conjunction with the spin-off from Motorola we also had proceeds, net of debt issuance costs, of $1.2 billion related to our long-term debt offering in July 2004. In connection with the
spin-off from Motorola we also distributed $1.1 billion to Motorola.



In addition, 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 in the first nine months of 2004.



During the third quarter of 2005 we announced that our Board of Directors has authorized us to repurchase up to $500 million of our outstanding shares of
common stock. The share repurchases will occur from time to time in the open market or privately negotiated transactions subject to market conditions, applicable legal requirements and other factors. The action taken by our Board of Directors does
not obligate us to acquire any particular amount of common stock and may be suspended at any time at our discretion. We did not effect any share repurchases under this plan during the three and nine months ended September 30, 2005. However, we did
obtain approximately 400 thousand shares in the nine months ended September 30, 2005, related to the withholding of shares of our Class A common stock used to satisfy employee tax obligations in connection with the vesting of restricted stock units.



Future Financing Activities



Our primary future cash needs on a recurring basis will be for working
capital, capital expenditures, share repurchases and debt service. We believe that our current net cash balance of approximately $1.6 billion (total Cash and cash equivalents, Short-term investments and Marketable securities less total debt) and
cash flows from operations will be sufficient to fund our working capital needs, capital expenditures, share repurchase program 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, or utilize our Cash and cash equivalents or Short-term investments.



We may need to incur additional debt or issue equity to make strategic acquisitions or investments. We cannot assure you that financing will be available
to us on acceptable terms or that 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 that tax.



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Our ability to make payments to fund working capital, capital expenditures, share repurchases, 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, new guidance recently issued related to accounting for the tax
impact of the adoption of SFAS No. 123R 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 and results of operations.



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.



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 nine 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



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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 September 30, 2005 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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.



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 believe we will be
successful 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 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



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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 our acquisitions
of shares of our Class A common stock during the three months ended September 30, 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 (2)
|7/2/05 to 7/29/05 (1)  |  | 337,732                        |  | $                           | 25.08 |                                                                   |  |                                                                     | 
|7/30/05 to 8/26/05 (1) |  | 11,512                         |  | $                           | 25.03 |                                                                   |  |                                                                     | 
|8/27/05 to 9/30/05 (1) |  | 2,298                          |  | $                           | 24.05 |                                                                   |  |                                                                     | 
|                       |  |                                |  |                             |       |                                                                   |   |                                                                     |  
|Total                  |  | 351,542                        |  | $                           | 25.07 |                                                                   |  |                                                                     | 
|                       |  |                                |  |                             |       |                                                                   |   |                                                                     |  

---

|(1) | Represents shares of Class A common stock withheld by us to satisfy employee tax obligations upon vesting of restricted stock units granted to our employees under our equity
compensation plans.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Our Board of Directors has authorized the repurchase up to $500 million of its outstanding shares of common stock. The share repurchases will occur from time to time in the open
market or privately negotiated transactions subject to market conditions, applicable legal requirements and other factors. This action does not obligate us to acquire any particular amount of common stock and may be suspended at any time our
discretion. We did not affect any purchases of common stock under this authorization during the three months ended September 30, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 3: Defaults Upon Senior Securities.



Not applicable.



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



Not applicable



Item 5: Other Information.



Not
applicable.



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Item 6: Exhibits



|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: October 28, 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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