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    Motorola, Inc. 2008 Annual Report


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    About Motorola We are a global communications leader powered by a passion to invent and an unceasing commitment to advance the way the world connects. Our communication solutions allow people, businesses and governments to be more connected and more mobile. Motorola (NYSE: MOT) has been at the forefront of communication inventions and innovations for more than 80 years. We have achieved extraordinary accomplishments along the way – such as making the equipment that carried the first words from the moon and leading the cellular communication revolution with the development of the world’s first handheld cellular phone, the DynaTAC 8000x. More recently, Motorola has staked out a position at the forefront of 4G telecommunications. We hold a market-leading position in WiMAX deployments around the world. In 2008, we demonstrated the world’s first WiMAX 802.16e mobile handoff and the industry's first over-the-air data sessions in the 700 MHz spectrum using the Long Term Evolution standard, the next evolution of mobile broadband. With the rapid convergence of fixed and mobile broadband Internet and the growing demand for next-generation mobile communication solutions, our mission is to lead the next wave of innovative products that meet the expanding needs of our customers around the world. The trends toward media mobility, ubiquitous connectivity, and wireless flexibility coupled with mobile lifestyles and business continue to expand. Today, Motorola has a portfolio of technologies, solutions and services – including wireless handsets, wireless accessories, digital entertainment devices, wireless access systems, voice and data communications systems, and enterprise mobility products. We operate in numerous countries around the globe, tapping the creativity of diverse cultures and individuals. And we demonstrate each day, at every site and in all that we do, that doing business and acting responsibly are not mutually exclusive endeavors. Our history is rich. Our future is dynamic. We are Motorola and the spirit of invention is what drives us.


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    March 2009 Dear Fellow Shareholders: In 2008, amidst the most challenging global economic environment in decades, Motorola delivered solid financial results in our Enterprise Mobility Solutions and Home & Networks Mobility businesses. We also moved forward on our strategy to reposition our Mobile Devices business. Across the company, we focused on the right markets, the right technologies and the right investments to grow our business for the future. Over the past 80 years, Motorola has weathered tough macro environments and reinvented itself many times by being very focused on innovation and customers. We are doing so again. In 2009, we will prudently manage business fundamentals, maintain a strong balance sheet and invest in the technologies and market segments we serve. In 2008, we announced that we were pursuing the creation of two independent, publicly traded companies. Due to the weakened global economic environment and dislocation in the financial markets, as well as changes underway in our Mobile Devices business, we announced that we were no longer targeting the third quarter of 2009 to complete the separation. Nonetheless, we have made progress on various elements of our separation plan and remain committed to creating two independent companies. Business review The Enterprise Mobility Solutions and Home & Networks Mobility businesses that make up our Broadband Mobility Solutions organization continue to be substantial franchises with leadership positions in many markets that are shaping the communications landscape of the 21st century. Our Enterprise Mobility Solutions business performed well and grew in key international markets. In a time of tight infrastructure budgets, our mission-critical communication solutions remain a top- priority for homeland security and public safety customers. In enterprise, our products address the need for converged enterprise communications and productivity enhancing solutions. Our Home & Networks Mobility business continues to lead in market share in digital entertainment devices for cable and IPTV deployments. We also provide fully integrated and customizable media solutions to deliver personalized, rich media experiences to the consumer. Our strategy to make ‘broadband everywhere’ a reality no matter the network topology continues to pan out around the globe. And we are helping customers optimize their networks to reduce cost and maximize bandwidth for their subscribers, which makes richer, more personalized media both portable and secure for consumers. Our vision for the Mobile Devices business is to be a profitable, leading supplier of wireless handsets. We have taken actions to reduce the size and cost structure of the business, including actions to simplify handset platforms and enhance the product portfolio. New products that we plan to introduce are already getting positive feedback from several key customers. We have also increased our focus on priority markets, including the Americas and parts of Asia. We will build on continued –


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    our initial progress as we continue our efforts to improve time to market and deliver compelling new products and mobile experiences to consumers. We responded quickly to the global economic downturn in the latter half of 2008 with tough decisions to conserve cash and reduce costs through workforce reductions, employee benefit and compensation changes and facility rationalization. In 2009, we will continue to focus on our cost structure to help improve our financial performance. Looking forward Key objectives for 2009 include both near and longer-term perspectives. Clearly, we must execute on our operating plans to optimize business results in the midst of a very challenging economic climate. We also must prudently invest for the future to position ourselves for opportunities that will come with the next growth cycle. During 2009 we will focus on: • Listening to customers and creating value — We have long-standing relationships with our customers, who depend upon an innovative partner to anticipate emerging trends and collaborate on technology roadmaps. We are committed to helping all of our customers succeed. • Differentiating our products through innovation and experiences — Our unique combination of technology, design and functionality create high-value end-to-end solutions for our customers. We will take a leadership role in emerging consumer and enterprise demand trends and technology transitions through prioritized investments and an uncompromising commitment to quality. • Expanding our brand strength — Motorola enjoys one of the most recognized brands in the world. We will continue leveraging our global brand across our Broadband Mobility Solutions businesses as well as Mobile Devices. • Demonstrating our corporate responsibility — We believe that doing business and doing the right thing are not mutually exclusive for responsible companies. We will continue to invest in our communities through our support for education and the volunteer efforts of our employees. We will further reduce our environmental impact through expanding recycling programs, reducing our carbon footprint and developing products like the MOTOTM W233 Renew handset, our new mobile phone made from recycled plastic water bottles. It is through the hard work of our people and their dedication to our customers that we will meet our objectives and continue to advance the way the world connects. In doing so, we will provide a path for profitable growth and improved results for our business and our shareholders. Regards, Greg Brown Sanjay Jha Co-CEO, Motorola Co-CEO, Motorola CEO, Broadband Mobility Solutions CEO, Mobile Devices


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    MOTOROLA, INC. 2008 FORM 10-K


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    UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2008 or n 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 1-7221 MOTOROLA, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-1115800 (State of Incorporation) (I.R.S. Employer Identification No.) 1303 East Algonquin Road, Schaumburg, Illinois 60196 (Address of principal executive offices) (847) 576-5000 (Registrant’s telephone number) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, $3 Par Value per Share New York Stock Exchange Chicago Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¥ No n Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes n No ¥ 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 ¥ No n Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. n Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¥ Accelerated filer n Non-accelerated filer n Smaller reporting company n (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes n No ¥ The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 28, 2008 (the last business day of the Registrant’s most recently completed second quarter) was approximately $16.7 billion (based on closing sale price of $7.35 per share as reported for the New York Stock Exchange-Composite Transactions). The number of shares of the registrant’s Common Stock, $3 par value per share, outstanding as of January 31, 2009 was 2,276,565,942. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive Proxy Statement to be delivered to stockholders in connection with its Annual Meeting of Stockholders to be held on May 4, 2009, are incorporated by reference into Part III.


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    Table of Contents Page PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 1 Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 1 Business Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 1 Mobile Devices Segment . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 1 Home and Networks Mobility Segment. . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 5 Enterprise Mobility Solutions Segment . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 10 Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 15 Financial Information About Segments . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 15 Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 15 Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 16 Research and Development . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 16 Patents and Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 16 Environmental Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 16 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 16 Financial Information About Geographic Areas . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 16 Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 16 Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 18 Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 30 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 30 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 30 Item 4. Submission of Matters to a Vote of Security Holders . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 34 Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. . .. .. .. .. .. .. . .. .. .. .. .. . 34 PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. . . . . 38 Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . 133 Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . 135 Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 PART IV . . ................................................... .. .. .. .. .. . .. .. .. .. .. . 136 Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . .. .. .. .. .. . .. .. .. .. .. . 136 15 (a) (1) Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. . .. .. .. .. .. . 136 15 (a) (2) Financial Statement Schedule and Independent Auditors’ Report. . .. .. .. .. .. . .. .. .. .. .. . 136 15 (a) (3) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. . .. .. .. .. .. . 136


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    1 PART I Throughout this 10-K report we “incorporate by reference” certain information in parts of other documents filed with the Securities and Exchange Commission (the “SEC”). The SEC allows us to disclose important information by referring to it in that manner. Please refer to such information. We are making forward-looking statements in this report. In “Item 1A: Risk Factors” we discuss some of the risk factors that could cause actual results to differ materially from those stated in the forward-looking statements. “Motorola” (which may be referred to as the “Company,” “we,” “us,” or “our”) means Motorola, Inc. or Motorola, Inc. and its subsidiaries, or one of our segments, as the context requires. “Motorola” is a registered trademark of Motorola, Inc. Item 1: Business General We provide technologies, products and services that make a broad range of mobile experiences possible. Our portfolio includes wireless handsets, wireless accessories, digital entertainment devices, wireless access systems, voice and data communications systems, and enterprise mobility products. With the rapid convergence of fixed and mobile broadband Internet and the growing demand for next-generation mobile communications products by people, businesses and governments, we are focused on high-quality, innovative products that meet the expanding needs of our customers around the world. We operate in the following businesses: • The Mobile Devices business designs, manufactures, sells and services wireless handsets with integrated software and accessory products, and licenses intellectual property. • The Home and Networks Mobility business designs, manufactures, sells, installs and services: (i) digital video, Internet Protocol video and broadcast network interactive set-tops, end-to-end video delivery systems, broadband access infrastructure platforms, and associated data and voice customer premise equipment to cable television and telecom service providers, and (ii) wireless access systems, including cellular infrastructure systems and wireless broadband systems, to wireless service providers. • The Enterprise Mobility Solutions business designs, manufactures, sells, installs and services analog and digital two-way radio, voice and data communications products and systems for private networks, wireless broadband systems and end-to-end enterprise mobility solutions to a wide range of enterprise markets, including government and public safety agencies, as well as retail, energy and utilities, transportation, manufacturing, healthcare and other commercial customers. Motorola is a corporation organized under the laws of the State of Delaware as the successor to an Illinois corporation organized in 1928. Motorola’s principal executive offices are located at 1303 East Algonquin Road, Schaumburg, Illinois 60196. Business Segments We report financial results for the following three operating business segments: Mobile Devices Segment The Mobile Devices segment (“Mobile Devices” or the “segment”) designs, manufactures, sells and services wireless handsets with integrated software and accessory products, and licenses intellectual property. In 2008, the segment’s net sales represented 40% of the Company’s consolidated net sales. Principal Products and Services Our wireless subscriber products include wireless handsets and related software and accessory products. We also sell and license our intellectual property. We market our products globally to carriers and consumers through direct sales, distributors, retailers and, in certain markets, through licensees.


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    2 Our Industry Total industry shipments of wireless handsets (also referred to as industry “sell-in”) increased to approximately 1.2 billion units in 2008, a 5% increase compared to 2007. Demand from new subscribers was strong in emerging markets, led by India and China. During the second half of 2008, a global economic downturn impacted the wireless handset industry, resulting in the slowing of end-user demand. The ongoing downturn in the global economy has many industry forecasters predicting a challenging 2009 for the wireless handset industry, with many predicting industry handset unit shipments to decline approximately 10% for the full year 2009 compared to 2008. This would be the first decline in annual industry handset unit shipments since 2001. The expected decline would be a result of both slowing growth in the emerging markets and lower replacement sales in highly-penetrated markets. Beyond 2009, we expect growth to return to the wireless handset industry. We believe growth rates will be in the mid single digits for the years 2010 and 2011, compared to the 15% CAGR experienced by the industry from 2004 through 2008. Although slowing, growth is expected to continue to be driven primarily by demand from new subscribers in emerging markets and replacement sales from the current subscriber base. As growth in the overall industry for mobile wireless handsets slows, we expect smartphones (devices that primarily have an open operating system and provide the opportunity to develop and run native applications) to be the fastest growing market segment. Our Strategy Motorola seeks to be a leading supplier of wireless handsets and mobile experiences to customers globally. To accomplish this objective, our strategy is focused on simplifying product platforms, enhancing our mid- and high-tier product portfolio, and strengthening our position in priority markets. We have taken significant actions in 2008 to simplify our wireless handset platforms and enhance our product portfolio, while reducing the size and cost structure of the Mobile Devices business. These actions will accelerate our speed to market with new products, allow us to offer richer consumer experiences and improve our financial performance. Simplifying product platforms is an essential component of our overall strategy. We have reduced the number of product platforms that we support, increasing our emphasis on 3G and smartphone devices and maintaining our focus on CDMA and iDEN. We are implementing aggressive plans to rationalize both hardware and software platforms in order to reduce the complexity of our product platforms and system architectures. Our hardware platforms will leverage fewer chipset suppliers for our handsets. In addition, our software platforms will focus on Android (a Google-developed, royalty-free platform), Windows Mobile (a Microsoft platform) and P2K (a Motorola internal, proprietary platform). We will also continue to focus on our proprietary iDEN technology and the CDMA software platforms. CDMA and iDEN are technologies in which our segment has traditionally maintained a strong market share position. Success in these technologies also aligns with our focus on priority markets. These steps will provide Mobile Devices with the ability to streamline our portfolio, emphasizing product development and innovation, while also addressing the changing marketplace. As the market evolves to reflect the emergence of converged wireless devices, mobile internet, social networking, navigation and messaging, the shift from “voice-centric” devices to “data-centric” devices is expected to continue. These devices, which include smartphones, deliver unique consumer experiences and require complete “end-to-end” solutions that incorporate various applications and services. By utilizing the smartphone platforms, we will provide a broad array of devices, targeted at delivering computer-like functionality, such as web browsing and email, in both our mid- and high-tier offerings. Over the next 12 to 18 months our primary smartphone development will be based on the Android operating system. As new generations of Windows Mobile enter the market, we intend to increase our focus on this platform as well. We will also leverage relationships with partners and developers in order to provide the necessary applications and services to support the “end-to-end” solutions desired by our consumers. We intend to utilize our experience with the Linux / Java platform and leverage our assets from previous Linux/Java investments, to deliver compelling applications and user experiences, such as more highly integrated social networking experiences. In addition to our portfolio streamlining and enhancement efforts, over the next year we will also increase our focus in priority markets. These markets will include North America, Latin America and parts of Asia, including China. Historically, these are regions in which we have experienced strong market share and brand position. Additionally, these regions have represented a significant portion of the segment’s overall business. We will also continue to leverage our brand position in these markets. In other geographies, we will prioritize and make


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    3 investments commensurate with the competitiveness of our portfolio. Longer term, we plan to compete in all major markets. Along with our mobile handset initiatives, we have also increased focus in our accessories portfolio to deliver complete mobile experiences and to complement the features and functionalities of wireless handsets. Expanding our accessory compatibility across all brands of wireless handsets and Bluetooth-enabled devices, as well as into spaces such as navigation, will provide greater opportunities for growth. We continue to invest in next-generation technologies for wireless devices based on WiMAX, High-Speed Downlink Packet Access (“HSDPA”) and Long-Term Evolution (“LTE”). We believe a strong intellectual property portfolio is critical to our long-term success and to ensuring that we maintain a favorable strategic position that demonstrate unique experiences and value for consumers. In application services, we continue to work with third parties to improve upon and develop our services and applications, which will deliver rich experiences to the customer. Motorola is committed to investing in evolving technologies to ensure that we continue to deliver enhanced and differentiated wireless handset experiences to consumers. Customers The segment has several large customers located throughout the world. In 2008, aggregate net sales to the segment’s five largest customers represented approximately 41% of the segment’s net sales. The loss of one or more of these customers could have a material adverse effect on the segment’s business. In addition to selling directly to carriers and operators, our Mobile Devices business also sells products through a variety of third-party distributors and retailers, which account for approximately 24% of the segment’s net sales. Uncertainty about current and future global economic conditions may cause, and in some cases has caused, our customers to maintain tighter inventory management. We experienced this beginning in the fourth quarter of 2008 and expect this trend to continue into 2009, which could impact the timing of future sales. The U.S. market continued to be the segment’s largest individual market, accounting for approximately 44% of the segment’s net sales in 2008, compared to approximately 46% of the segment’s net sales in 2007. Approximately 56% of the segment’s net sales in 2008 were to markets outside the U.S., the largest of which were Brazil, China and Mexico. Compared to 2007, the segment experienced sales declines in each of its four major sales regions: North America, the Europe, Middle East and Africa (“EMEA”) region, Asia and Latin America. Competition The segment believes its overall market share for the full year 2008 was approximately 8%, making it the fourth-largest worldwide supplier of wireless handsets on a full-year basis. For full year 2007, the segment’s overall market share was approximately 14%. We estimate our market share in the fourth quarter of 2008 to be approximately 6%, a decrease of approximately 6 percentage points versus the fourth quarter of 2007. The significant decrease was primarily driven by the segment’s limited product offerings in critical market segments, particularly 3G products, including smartphones, and very low-tier products. The segment experiences intense competition in worldwide markets from numerous global competitors, such as Nokia, Samsung, LG and Sony-Ericsson. In 2008, the five largest handset manufacturers together held an aggregate market share of approximately 80%, compared to 83% at the end of 2007. Smartphones emerged as a major product in the wireless handset market during 2008. Manufacturers with strong smartphone portfolios have benefited from this. Motorola is committed to enhancing its smartphone portfolio to compete more effectively and will focus on Android and Windows Mobile software platforms for these products, while also continuing to focus on our proprietary iDEN technology and the CDMA software platforms. General competitive factors in the market for the segment’s products include: overall quality of user experience; design; time-to-market; brand awareness; technology offered; price; product features, performance, quality, delivery and warranty; the quality and availability of service; and relationships with key customers. Payment Terms The segment’s customers and distributors buy from us regularly with payment terms that are competitive with current industry practices. These terms vary globally and generally range from cash-with-order to 60 days.


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    4 Extended payment terms beyond 60 days are provided to certain customers on a limited basis. A customer’s outstanding credit at any point in time is limited to a predetermined amount as established by the Company. Regulatory Matters Radio frequencies are required to provide wireless services. The allocation of frequencies is regulated in the U.S. and other countries, and limited spectrum space is allocated to wireless services. The growth of the wireless and personal communications industry may be affected if adequate frequencies are not allocated or, alternatively, if new technologies are not developed to better utilize the frequencies currently allocated for such use. Industry growth may also be affected by the cost of the new licenses required to use frequencies and any related frequency relocation costs. The U.S. leads the world in spectrum deregulation, allowing new wireless communications technologies to be developed and offered for sale. Examples include wireless local area network systems, such as WiFi, and wide area network systems, such as WiMAX and LTE. Other countries have also deregulated portions of their available spectrum to allow deployment of these and other new technologies. In addition, Mobile WiMAX was approved in 2007 as a global IMT (International Mobile Telecommunications) standard. This action lays the foundation to further expand mobile WiMAX in key bands, making additional spectrum available globally. Deregulation may introduce new competition and new opportunities for Motorola and our customers. In 2008, the Federal Communications Commission (“FCC”) conducted its auction of 700 MHz band spectrum licenses in the United States. This spectrum can carry large amounts of data across long distances and penetrate walls easier than higher frequencies, enhancing in-building coverage. The spectrum is being recovered from television broadcast use as a result of the transition from analog to digital television. The spectrum was expected to be fully available for mobile operations as of February 17, 2009, however the date of the transition from analog to digital has been moved to June 12, 2009. This delay is not expected to significantly delay the deployment of services. However, any additional delays may have a greater impact on service deployment. The FCC has imposed open-access conditions that prevent the licensee from blocking devices or applications that are compatible with the network on approximately one-third of the 700 MHz spectrum that was auctioned. These conditions are intended to help foster innovation in handsets and applications. However, the actual impact of the new licenses remains unclear. In January 2009, China’s Ministry of Industry and Information Technology issued licenses for its 3G mobile data network to the three key operators in China. With the Company’s focus on 3G products and smartphones and its focus on China as a high-priority market, we believe that we will benefit from the 3G transition in China. Backlog The segment’s backlog was $290 million at December 31, 2008, compared to $647 million at December 31, 2007. This decrease in backlog is primarily due to a decline in customer demand, driven by the segment’s limited product portfolio, as well as the global economic downturn. The 2008 backlog is believed to be generally firm and 100% of that amount is expected to be recognized as revenue in 2009. The forward-looking estimate of the firmness of such orders is subject to future events that may cause the amount recognized to change. Intellectual Property Matters Patent protection is extremely important to the segment’s operations. The segment has an extensive portfolio of patents relating to its products, technologies and manufacturing processes. The segment licenses certain of its patents to third parties and generates revenue from these licenses. Motorola is also licensed to use certain patents owned by others. Royalty and licensing fees vary from year to year and are subject to the terms of the agreements and sales volumes of the products subject to licenses. The protection of these licenses is also important to the segment’s operations. Reference is made to the material under the heading “Other Information” for additional information relating to patents and trademarks and research and development activities with respect to this segment. Inventory, Raw Materials, Right of Return and Seasonality The segment’s practice is to carry reasonable amounts of inventory in manufacturing and distribution centers in order to meet customer delivery requirements in a manner consistent with industry standards. At the end of


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    5 2008, the segment had a lower inventory balance than at the end of 2007. The decrease reflects the continued decline in sales volumes during 2008. Availability of materials and components required by the segment is relatively dependable, but fluctuations in supply and market demand could cause selective shortages and affect results. We currently source certain materials and components from single vendors. Any material disruption from a single-source vendor may have a material adverse impact on our results of operations. If certain key suppliers were to become capacity constrained or insolvent as a result of the ongoing global financial crisis, it could result in a reduction or interruption in supplies or an increase in the price of supplies and adversely impact the segment’s financial results. Natural gas, electricity, and, to a lesser extent, oil are the primary sources of energy required for the segment’s manufacturing operations. Each of these resources are currently in generally adequate supply for the segment’s operations. In addition, the cost to operate our facilities and freight costs are dependent on world oil prices, which fluctuated significantly during 2008 and impacted our manufacturing and shipping costs. Labor is generally available in reasonable proximity to the segment’s manufacturing facilities. However, difficulties in obtaining any of the aforementioned items or a significant cost increase could affect the segment’s results. The segment permits returns under limited circumstances to remain competitive with current industry practices. The segment typically experiences higher sales in the fourth calendar quarter and lower sales in the first calendar quarter of each year due to seasonal trends in the wireless handset industry. Our Facilities/Manufacturing Our headquarters are located in Libertyville, Illinois. Our other major facilities are located in Plantation, Florida; Beijing, Hangzhou, Nanjing and Tianjin, China; Seoul, South Korea; Chennai, India; and Jaguariuna, Brazil. We also use several electronics manufacturing suppliers (“EMS”) and original design manufacturers (“ODM”) to enhance our ability to lower our costs and/or deliver products that meet consumer demands in the rapidly- changing technological environment. A significant portion of our handsets are manufactured either completely or substantially by non-affiliated EMS and ODM manufacturers, primarily by two third-party manufacturers in China. In 2008, our handsets were primarily manufactured in Asia and Brazil, and we expect this to continue in 2009. Our largest manufacturing facilities are located in China and Brazil. Each of these facilities serves multiple countries and regions of the world. Home and Networks Mobility Segment The Home and Networks Mobility segment (“Home and Networks Mobility” or the “segment”) designs, manufactures, sells, installs and services: (i) digital video, Internet Protocol (“IP”) video and broadcast network interactive set-tops (“digital entertainment devices”), end-to-end video delivery systems, broadband access infrastructure platforms, and associated data and voice customer premise equipment (“broadband gateways”) to cable television and telecom service providers (collectively, referred to as the “home business”), and (ii) wireless access systems (“wireless networks”), including cellular infrastructure systems and wireless broadband systems, to wireless service providers (collectively, referred to as the “networks business”). In 2008, the segment’s net sales represented 33% of the Company’s consolidated net sales. Principal Products and Services In the home business, the segment is a leading provider of end-to-end networks used for the delivery of video, data and voice services over hybrid fiber coaxial (“HFC”) networks, digital subscriber line (“DSL”) networks and passive optical networks (“PON”). Our portfolio includes: MPEG video encoding equipment for standard- definition and high-definition television (“HDTV” or “HD”); video processing and multiplexing systems; and video-on-demand, switched digital video and conditional access systems used by network operators and programmers to deliver video programming. We provide a broad array of digital entertainment devices supporting analog, digital and IP video delivery, including HD and digital video recording (“DVR”) (together, “HD/DVR”) applications. We support the delivery of high-speed data and voice services with head-end and central office


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    6 equipment, along with data and voice modems and gateways for HFC and DSL networks and optical line and optical node terminals for PON networks. In the networks business, the segment provides end-to-end cellular networks, including radio base stations, base station controllers, associated software and services, application platforms and third-party switching for CDMA, GSM, iDEN» and UMTS technologies. The segment also offers a portfolio of WiMAX products and is in trials with customers to provide our LTE technology to enable next-generation mobile IP broadband access. WiMAX and LTE will make mobile bandwidth more affordable and accessible for mainstream consumer adoption. Our products are marketed primarily to cable television operators, telecom operators, wireless service providers, television programmers and other communications providers worldwide and are sold primarily by our internal sales force. Our Industry The home market is evolving rapidly as cable and telecom network operators expand their video, data and voice services (commonly known as the “triple play”) to grow their subscriber base. The competition between cable and telecom service providers continues to increase. Telecom operators are expanding their broadband networks and beginning to offer advanced video and data services using IPTV and PON technologies. Cable operators are responding by expanding their investment in HD programming, bundling voice-over-IP services, expanding their broadband data service through Data Over Cable Service Interface Specifications (“DOCSIS”) 3.0 channel bonding, and maximizing utilization of network bandwidth using switched digital video technology. Our home business is subject to regulation by the FCC in the United States and other governmental communication regulators throughout the world. FCC regulations requiring separation of security functionality from cable set-tops became effective in 2007. This has resulted in increased competition for sales of set-top boxes to cable operators and has enabled a retail distribution of devices capable of accessing encrypted cable programming. Our home business offers a cablecard that allows third-party consumer electronic devices to be deployed on a network using the Motorola conditional access system. Motorola also offers a portfolio of cable card host set-tops that allows our digital video set-tops to be deployed in service provider networks using third- party encryption technology. In the wireless networks market, the majority of installed cellular infrastructure systems are based on CDMA, GSM, UMTS and iDEN technologies. We supply systems based on each of these technologies and are the sole supplier of proprietary iDEN networks. Advanced infrastructure systems based on these technologies include GPRS, CDMA-1X and EDGE. In addition, some segments of the cellular infrastructure industry have installed, or are in the process of migrating to, 3G networks, which are high-capacity radio access wireless networks providing enhanced data services, improved Internet access and increased voice capacity. The primary 3G technologies are W-CDMA (based on either UMTS or Freedom of Mobile Multimedia Access (“FOMA”) technologies) and CDMA 2000 1xEVDO. We supply 3G systems based on UMTS and CDMA 2000 1xEVDO technologies. An additional 3G technology standard, TD- SCDMA, has been driven primarily by the Chinese government and local Chinese vendors. China’s Ministry of Industry and Information Technology awarded 3G licenses in early 2009, which is driving regional network upgrades. Industry standards bodies are in the process of defining the next generation of wireless broadband systems after 3G. The Institute of Electrical and Electronics Engineers (“IEEE”) has developed fixed and mobile broadband standards (802.16d and 802.16e) based on orthogonal frequency division multiplexing (“OFDM”) technology, which will utilize wider channels and enable triple play services (voice, data, video). These standards are the basis for WiMAX, a market that experienced strong growth in 2008. Motorola has been awarded a number of WiMAX contracts and customers in various markets have started to offer commercial WiMAX services utilizing Motorola infrastructure equipment. We are an early leader in WiMAX technology. The International Telecommunications Union (“ITU”) has also adopted next-generation cellular wireless access standards (“4G”) for the cellular infrastructure industry, also based on OFDM technology and known commonly as LTE. LTE has widespread industry support, not only from current GSM and UMTS operators, but also from CDMA/EV-DO based carriers. Licensing bodies of governments around the world are making spectrum available for advanced wireless technologies, including 4G, in recognition of growing demand for wireless broadband services. Currently, Motorola estimates that there are over 1,200 licenses available worldwide for advanced wireless technologies with over 800 licenses outside of North America.


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    7 Demand for our products depends primarily on capital spending by providers of cellular and broadband services for constructing, rebuilding or upgrading their communications systems, as well as the marketing of advanced communications services by those providers. The amount of spending by these providers, and therefore a majority of our sales and profitability, are affected by a variety of factors, including: (i) the continuing trend of consolidation within the cable, wireline and wireless industries, (ii) the financial condition of operators and alternative providers, including their access to financing, (iii) technological developments, (iv) standardization efforts that impact the deployment of new equipment, (v) new legislation and regulations affecting the equipment sold by the segment, and (vi) general economic conditions. During 2008, wireless operators’ expenditures globally for 2G technology and related services, such as GSM, GPRS and EDGE, were comparable to 2007, while similar expenditures for iDEN technology were down. Global expenditures for 3G technology and related services, such as UMTS, increased in 2008, while similar expenditures for CDMA/EV-DO technology were comparable to 2007. Global expenditures for next-generation technologies, such as WiMAX, and related services increased in 2008. Forecasted industry trends point to an overall decline in operator expenditures globally in 2009, as growth in UMTS and WiMAX are not expected to offset the decline in expenditures for legacy technologies, such as GSM and CDMA. Motorola expects the overall wireless network market to be down in 2009 compared to 2008. In 2008, the home business benefited from continued spending by operators on our products due to the increase in the number of video and data subscribers and the deployment of advanced video platforms by cable operators for HD/DVR applications, as well as from spending by telecom operators upgrading their networks and adding video services. The growth of broadband connectivity is expected to continue as cable operators upgrade to DOCSIS 3.0 and telecom service providers continue to deploy very high speed digital subscriber line (“VDSL”) and PON data services. While continued growth is expected in these video and data markets, industry analysts have been reducing their outlooks for capital spending due to the ongoing uncertainty in the global economy. Our Strategy The Home and Networks Mobility segment is focused on leadership in next-generation broadband solutions to accelerate the delivery of personal media experiences. Key elements in the segment’s strategy include: (i) providing for seamless convergence of services and applications across delivery platforms within the home and across wireline and wireless networks, (ii) innovating and optimizing our end-to-end network portfolio, and (iii) developing new services that leverage our platforms to provide revenue generating applications and services to our operator customers while enabling consumers to experience media mobility. As part of our strategy, we have made and will continue to make strategic acquisitions. In the home business, we are focused on accelerating the rate of digital penetration by broadband operators in North America through an enhanced suite of digital entertainment devices. These products include basic models supporting the industry movement to all-digital delivery and advanced units supporting HD/DVR functions, as well as whole home video networking. We continue to invest to differentiate our products and services and add value for our customers in areas of software and applications, content on-demand and targeted advertising. We are capitalizing on telecom operators decisions to offer IPTV to their subscribers globally, with products that support delivery of video content using both copper-outside-plant and fiber-to-the-premises (“FTTP”) networks. The segment continues to provide video infrastructure, FTTP access network equipment, advanced digital entertainment devices and IP interactive set-tops to leading telecommunication companies around the world. During 2008, we completed the acquisition of the set-top box and associated chipset assets of Zhejung Dahua Digital Technology Co., LTD and Hangzhou Image Silicon, known collectively as Dahua Digital to increase our position in the rapidly growing cable market in China. We are also an industry leader in broadband data and voice products. We are delivering DOCSIS 3.0 channel bonding on our cable modem termination systems (“CMTS”) and cable modems, and commercially deploying our Gigabit PON platform. In the networks business, the segment provides equipment and services to over 125 GSM, CDMA, and iDEN networks globally. The segment is investing to be a leader in next-generation wireless broadband technologies with its WiMAX and LTE systems. WiMAX and LTE are evolved wireless broadband technologies that enable operators to provide improved data performance at lower operating cost. These technologies offer similar advantages for existing operators and emerging broadband service providers and vary in selection depending on the desired application and available spectrum. In 2008, the segment delivered WiMAX network equipment to over 25 WiMAX networks throughout the world. In addition, at the end of 2008, the segment was participating in over


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    8 20 WiMAX trials globally, representing new business opportunities in 2009. As a leader in the baseline OFDM technology used for WiMAX, the segment is leveraging this expertise to accelerate our LTE product offering which will support both frequency division duplex (“FDD”) and time division duplex (“TDD”) modes. The LTE standard was ratified in December 2008, enabling operators and vendors to accelerate testing and deployment. The segment is participating in the LTE system architecture evolution trial initiative. Customers In 2008, aggregate net sales to the segment’s five largest customers, primarily large cable operators and telecommunication companies located throughout the world, represented approximately 45% of the segment’s net sales. The loss of any of the segment’s large customers could have a material adverse effect on the segment’s business. Further, because many of the segment’s contracts are long-term, the loss of a major customer could impact revenue and earnings over several quarters. The segment’s proportion of sales outside of North America increased to 50% in 2008, compared to 48% in 2007. This reflected 5% aggregate growth in net sales outside of North America and a 3% decline in net sales in North America. Competition The businesses in which the segment operates are highly competitive. The rapid technological changes occurring in each of the markets in which the segment competes are expected to lead to the entry of many new competitors. Competitive factors in the market for the segment’s products and systems include: technology offered; product and system performance; price; product features; quality; delivery and availability. We believe that we are competitively positioned because of our solid relationships with major communication system operators worldwide, our technological leadership and our new product development capabilities. Price is a major area of competition and often impacts margins for initial system bids, particularly in emerging markets. Time-to-market has also been an important competitive factor, especially for new systems and technologies. We compete with many equipment suppliers and several consumer electronics companies located throughout the world. In our home business, we compete worldwide in the market for digital entertainment devices and cable and wireline infrastructure equipment for broadband networks. Our largest competitor is Cisco. Based on 2008 annual sales, we are the leading provider of digital cable and IPTV set-tops worldwide. Our digital entertainment devices and infrastructure equipment compete with products from a number of different companies, including: (i) those that develop and sell products that are distributed by direct broadcast satellite service providers through retail channels, (ii) those that develop, manufacture and sell products of their own design, and (iii) those that license technology from us or other competitors. Traditionally, cable service providers have leased set-tops to their customers. FCC regulations requiring separation of security functionality from set-tops became effective in 2007. To meet this requirement, we provide security modules to cable operators for use with both our own and third-party set-tops, as well as in consumer products designed to accept them. The initial implementation limited consumer products to broadcast-delivered channels including premium services. A full two-way security interface specification that allows retail customers access to all programming available on the operator’s network without the need for a set-top box has been adopted by a few television manufacturers. They began shipping television sets that incorporate this capability in 2008. We also compete worldwide in the market for broadband data and voice products. We believe that we are a leading provider of cable modems worldwide, competing with several consumer electronic companies and original design manufacturers worldwide. In the wireless networks market, there is widespread competition from numerous competitors, ranging from some of the world’s largest diversified companies to foreign telecommunications companies to many small, specialized firms. Ericsson is the market leader, followed by the Nokia-Siemens joint venture, Alcatel-Lucent, Huawei and Motorola, along with other vendors with similar market share. We believe we are a leading provider of WiMAX technologies. Many of the major competitors who compete across various wireless technologies also compete in WiMAX. The segment’s networks business is confronting several factors that could impact its business, including price competition, continuing consolidation among competitor telecommunications equipment providers, consolidation among customers, the potential impact of global economic conditions, and vendor financing by competitors as customers continue to look to vendors as an additional source of financing.


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    9 Payment Terms Payment terms vary worldwide, depending on the arrangement. In North America, payment is generally due 30 to 60 days from the invoice date. In regions outside of North America, terms vary widely but are typically limited to no more than 90 days. Contracts for wireless networks typically include implementation milestones, such as delivery, installation and system acceptance, which generally take 30 to 180 days to complete. Invoicing the customer is dependent on the completion of the milestone. As required for competitive reasons, extended payment terms are provided to customers from time-to-time on a limited basis. The segment’s payment terms are consistent with industry practice, as many of our contracts are awarded through a competitive bid process. When required for competitive reasons, we may provide long-term financing in connection with equipment purchases. Financing may cover all or a portion of the purchase price. Regulatory Matters Many of our products are subject to regulation by the FCC in the United States and other communications regulatory agencies around the world. In addition, our customers, and their networks into which our products are incorporated, are subject to government regulation. Government regulatory policies affecting either the willingness or the ability of cable and telecom operators, wireless operators and wireline operators to offer certain services, or the terms on which these operators offer the services and conduct their business, may have a material adverse effect on the segment’s results. Motorola has developed products using trunking and data communications technologies to enhance spectral efficiencies. The growth and results of the wireless communications industry may be affected by regulations impacting access to allocated spectrum for wireless communications users, especially in urban areas where the spectrum is heavily used. Historically, reception of digital television programming from a cable broadband network has required a set- top with security technology. This security technology has limited the availability of set-tops to those manufactured by a few cable network manufacturers, including Motorola. FCC regulations requiring separation of security functionality from set-tops that are aimed at increasing competition and encouraging the sale of set-tops in the retail market became effective for most customers in 2007. Traditionally, cable service providers sold or leased their set-top to their customer. As the retail market develops for set-tops and televisions capable of accepting the security modules, sales of our set-tops which are sold to cable providers may be negatively impacted. The U.S. leads the world in spectrum deregulation, allowing new wireless communications technologies to be developed and offered for sale. Examples include wireless local area network systems, such as WiFi, and wide area network systems, such as WiMAX and LTE. Other countries have also deregulated portions of their available spectrum to allow deployment of these and other technologies. Deregulation may introduce new competition and new opportunities for Motorola and our customers. As more fully described under “Enterprise Mobility Solutions — Regulatory Matters”, as television transmission and reception technology transitions from analog to more efficient digital modes, various countries around the world are examining, and in some cases already pursuing, the redevelopment of portions of the television spectrum. Certain segments of the spectrum that have historically been utilized for analog television have now been designated to support new commercial communications systems and, therefore, are expected to generate new business opportunities for Motorola in wireless and video technologies. In the U.S., the FCC conducted an auction of spectrum for the 700 MHz band that is expected to be reclaimed by the government on June 12, 2009. License for this spectrum may be used for flexible fixed, mobile and broadcast applications. Although the auction winners will determine the best utilization of the acquired spectrum, both LTE and WiMAX are candidates for technology selection. In addition, a contiguous portion of this spectrum has generated interest for mobile TV applications. Backlog The segment’s backlog was $2.3 billion at December 31, 2008, compared to $2.6 billion at December 31, 2007. The 2008 order backlog is believed to be generally firm and 100% of that amount is expected to be recognized as revenue during 2009. The forward-looking estimate of the firmness of such orders is subject to future events that may cause the amount recognized to change. Intellectual Property Matters Patent protection is extremely important to the segment’s operations. The segment has an extensive portfolio of patents relating to its products, systems, technologies and manufacturing processes.


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    10 The segment seeks to build upon our core enabling technologies, such as digital compression, encryption and conditional access systems, and wireless air-interface technology in order to lead worldwide growth in the market for wired and wireless communications networks. Our policy is to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications to protect technology and improvements that we consider important to the development of our business. We also rely on our proprietary knowledge and ongoing technological innovation to develop and maintain our competitive position and will periodically seek to include our proprietary technologies in certain patent pools that support the implementation of standards. We are a founder of MPEG LA, the patent licensing authority established to foster broad deployment of MPEG-2-compliant systems, and we have recently joined the MPEG4-Visual patent pool as a licensor. In addition, we have licensed our digital conditional access technology, DigiCipher» II, to other equipment suppliers and continue our joint ventures with Comcast for development and licensing of conditional access technology. We also enter into other license agreements, both as licensor and licensee, covering certain products and processes with various companies. These license agreements require the payment of certain royalties that are not expected to be material to the segment’s financial results. Royalty and licensing fees vary from year to year and are subject to the terms of the agreements and sales volumes of the products subject to licenses. Reference is made to the material under the heading “Other Information” for information relating to patents, trademarks and research and development activities with respect to this segment. Inventory, Raw Materials, Right of Return and Seasonality The segment’s practice is to carry reasonable amounts of inventory in order to meet customer delivery requirements in a manner consistent with industry standards. At the end of 2008, the segment had higher inventory balances than at the end of 2007, primarily due to a change in manufacturing strategy to increase in- house manufacturing and reduce outsourced manufacturing by third-party providers. Availability of materials and components required by the segment is relatively dependable, but fluctuations in supply and market demand could cause selective shortages and affect results. We currently procure certain materials and components from single-source vendors. Any material disruption from a single-source vendor may have a material adverse impact on our results of operations. If certain key suppliers were to become capacity constrained or insolvent as a result of the ongoing global financial crisis, it could result in a reduction or interruption in supplies or an increase in the price of supplies and adversely impact the segment’s financial results. Natural gas, electricity, and, to a lesser extent, oil are the primary sources of energy required for our manufacturing operations. Each of these resources are currently in generally adequate supply for the segment’s operations. In addition, the cost to operate our facilities and freight costs are dependent on world oil prices, which fluctuated significantly during 2008 and impacted our manufacturing and shipping costs. Labor is generally available in reasonable proximity to the segment’s manufacturing facilities. However, difficulties in obtaining any of the aforementioned items or a significant cost increase could affect the segment’s results. Generally, we do not permit customers to return products, other than under standard warranty provisions. The segment has not experienced seasonal buying patterns for its products. Our Facilities/Manufacturing Our headquarters are located in Horsham, Pennsylvania. Our other major facilities are located in: Arlington Heights, Illinois; San Diego, California; Taipei, Taiwan; Bangalore, India; Beijing and Tianjin, China; and Reynosa, Mexico. In addition to our own manufacturing, we utilize non-affiliated electronics manufacturing suppliers and original design manufacturers, primarily in Asia, in order to enhance our ability to lower costs and/or deliver products that meet consumer demands. Enterprise Mobility Solutions Segment The Enterprise Mobility Solutions segment (“Enterprise Mobility Solutions” or the “segment”) designs, manufactures, sells, installs and services analog and digital two-way radio, voice and data communications products and systems for private networks, wireless broadband systems and end-to-end enterprise mobility systems for a wide range of enterprise markets, including government and public safety agencies (which, together with all sales to distributors of two-way communication products, is referred to as the “government and public safety market”), as well as retail, energy and utilities, transportation, manufacturing, healthcare and other commercial


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    11 customers (which, collectively, are referred to as the “commercial enterprise market”). In 2008, the segment’s net sales represented 27% of the Company’s consolidated net sales. Principal Products and Services We are the world’s leading provider of advanced mission-critical and commercial enterprise mobility networks, services, applications and devices. In the government and public safety market, Motorola offers an extensive portfolio of standard products and services that meet evolving public safety and security needs, including products based on both TETRA (terrestrial trunked radio) and APCO 25 (Association for Public Safety Communications Officials) standards, with nearly 80 years of experience in this space. In the commercial enterprise market, our products and systems provide better information at the point of business activity, connect seamlessly, and present tools to control the mobile experience. Our products include: two-way radios, mobile computing products, advanced data capture products including barcode scanners and imagers, radio frequency identification (“RFID”) infrastructure, software management, security tools and wireless infrastructure. The segment’s products and services are sold stand-alone or as an integrated solution through Motorola’s direct sales force and through independent and authorized distributors, dealers and value-added resellers, independent software vendors, original equipment manufacturers and service operators. Distributors and value- added resellers may provide a service or add components in order to resell our product to end users. The segment provides systems engineering, installation and other technical and systems management services to meet its customers particular needs. The customer may also choose to install and maintain the equipment with its own employees, or may obtain installation, service and parts from a network of the segment’s authorized service centers or from other non-Motorola service centers. Our Industry We compete in the mobile segment of the communications industry, providing wireless products and services to public safety, government and enterprise customers. Within our government and public safety market, interoperability and natural disaster preparedness continue to be important issues for our customers worldwide. Our extensive portfolio of products includes integration services, equipment and support packages for both of the major standards-based private network technologies, APCO 25 and TETRA, as well as wireless broadband applications. As new and better spectrum utilization evolves, we expect to see more demand and greater potential for broadband solutions and data applications, such as video surveillance and other data-based products, in 2009 and beyond. While mission-critical communications and homeland security remain high priorities for our customers, we have seen reduced spending in the construction and manufacturing markets due to the global market conditions, and expect this to continue in 2009. Within our commercial enterprise market, we believe there continues to be long-term opportunity for growth as the global workforce continues to become more mobile and the industries and markets that purchase our products continue to expand. The markets in which Motorola competes include mobile computing products and services, enterprise wireless infrastructure, bar code scanning, RFID products and services, and mobile network management platforms. Organizations looking to increase productivity and derive benefits from mobilizing their applications and workforces are driving adoption in this market. In 2009, given the current global economic conditions and customer capital expenditure constraints, we expect reduced spending in the commercial enterprise market. Our Strategy The segment’s strategy is to maintain our global leadership positions in the government and public safety and commercial enterprise markets through the continued delivery of mobile products and services and systems that meet our customers’ demand for real-time information everywhere. Our strategy in the government and public safety market is to enable our customers to focus on their missions, not the technology. This is accomplished by providing mission-critical systems, seamless connectivity through highly reliable voice and data networks and a suite of advanced applications that provide real-time information to end users. Key objectives in maintaining our leadership position include: (i) continuing investment in our analog radio portfolio while leading the ongoing migration to digital products, (ii) leveraging our wireless broadband portfolio to drive growth and enter new markets, (iii) managing the potential public/private convergence of


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    12 700MHz public safety systems in the U.S. and digital dividend spectrum worldwide, and (iv) continuing to lead the market in APCO 25 and TETRA standards-based voice and data networking systems around the world. We continue to actively manage our portfolio, investing to expand into attractive, complementary markets, and divesting non-strategic businesses. In the commercial enterprise market, our approach is to deliver products and services that are designed to empower the mobile workforce to increase productivity, drive cost effectiveness, and promote faster execution of critical business processes. Our solutions architecture focuses on three areas: (i) portfolio of devices and applications that provide real time information at the point of business activity, (ii) enterprise wireless networks that allocate seamless connectivity inside and outside the enterprise, and (iii) a set of management, security and mobility tools that provide a controlled deployment of the enterprise mobility applications. Customers Our products and services are sold worldwide to a diverse set of customers, including government and public safety agencies (police, fire, and emergency management services) and militaries, as well as retail, utility, transportation and logistics, manufacturing, wholesale and distribution, healthcare and other commercial customers. Our sales model emphasizes both direct sales by our in-house sales force and indirect sales through our channel of value-added resellers and distributors. We believe this dual sales approach allows us to meet customer needs effectively, build strong, lasting relationships and broaden our penetration across various markets. Our channel sales force extends the reach of our products and services to meet demand in market segments where our direct sales force does not sell. Resellers and distributors each have their own sales organizations which complement and extend our sales organization. With deep expertise about specific customers’ operations, resellers are very effective in promoting sales of the Company’s products. Our independent software vendor and value- added resale channels offer customized applications that meet specific needs in each market segment we serve. Our largest customer is the U.S. Government, which represented approximately 8% of the segment’s net sales. The loss of this customer could have a material adverse effect on the segment’s revenue and earnings over several quarters, because some of our contracts with the U.S. Government are long-term. Net sales to customers in North America represented 57% of the segment’s net sales in 2008. A majority of our sales are made directly by our in-house sales force, and the remainder of our sales are made through global resellers and distributors. Given the current global economic conditions, we expect reduced spending by certain customers, particularly retail, transportation and logistics, construction and manufacturing, to continue into 2009. Competition The businesses in which we operate are highly competitive. Continued evolution in the industry, as well as technological migration, is opening up the market to increased competition. Other key competitive factors include: technology offered; price; availability of vendor financing; product and system performance; product features, quality, availability and warranty; the quality and availability of service; company reputation; relationship with key customers; and time-to-market. We believe we are uniquely positioned in the industry due to our strong customer relationships, our technological leadership and capabilities, and our comprehensive range of offerings. The segment experiences widespread competition in the government and public safety market from a growing number of new and existing competitors, including large system integrators. In this market, the segment provides communications and information systems compliant with both APCO 25 and TETRA industry digital standards. Major competitors include: M/A-Com, EADS, Kenwood, EF Johnson and Cisco. Large system integrators are seeking to move further into the public safety area, specifically in the federal government market. Competitors in this segment, including the Company, may also serve as subcontractors to large system integrators and are selected based on a number of competitive factors and customer requirements. Where favorable to the Company, we may partner with large system integrators to make available our portfolio of advanced mission-critical services, applications and devices. Several other competitive factors may have an impact on the business, including: the consolidation among telecommunications equipment providers, evolving developments in the 700 MHz band, and increasing encroachment by broadband and IP solution providers and new low-tier entrants. As demand for fully-integrated


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    13 voice, data, and broadband systems continues, the segment may face additional competition from public telecommunications carriers. Within the commercial enterprise market, many firms are engaged in the manufacturing and marketing of mobile computing devices, products in bar code reading equipment and wireless networks. Numerous companies, including present manufacturers of scanners, lasers, optical instruments, microprocessors, wireless networks, notebook computers, handheld devices and telephonic and other communication devices, have the technical potential to compete with the business. Competitors such as Intermec, Honeywell and Cisco deliver products in certain parts of the commercial enterprise market. Payment Terms Payment terms vary worldwide, depending on the arrangement. Generally, contract payment terms range from 30 to 45 days from the invoice date within North America and are typically limited to 90 days in regions outside of North America. A portion of the contracts in the government and public safety market include implementation milestones, such as delivery, installation and system acceptance, which generally take 30 to 180 days to complete. Invoicing the customer is dependent on completion of the milestone. We generally do not grant extended payment terms. As required for competitive reasons, we may provide long-term financing in connection with equipment purchases. Financing may cover all or a portion of the purchase price. Regulatory Matters The use of wireless voice, data and video communications systems requires radio spectrum, which is regulated by governmental agencies throughout the world. In the U.S., the FCC and the National Telecommunications and Information Administration (“NTIA”) regulate spectrum use by non-federal entities and federal entities, respectively. Similarly, countries around the world have one or more regulatory bodies that define and implement the rules for use of the radio spectrum, pursuant to their respective national laws and international coordination under the International Telecommunications Union (“ITU”). Consequently, the business and results of this segment could be affected by the rules and regulations adopted by the FCC, NTIA or regulatory agencies in other countries from time to time. The availability of additional radio spectrum may provide new business opportunities. Regulatory changes in current spectrum bands may also provide opportunities or may require modifications to some of our products so they can continue to be manufactured and marketed. The segment manufactures and markets products in spectrum bands already made available by regulatory bodies. These include voice and data infrastructure, mobile radios and portable or handheld units. Our products span the public safety, enterprise, commercial and consumer markets and operate both on licensed and unlicensed spectrum. In addition, new spectrum bands and modified regulations provide possible opportunities for new business. As television transmission and reception technology transitions from analog to more efficient digital modes, various countries around the world are examining, and in some cases already pursuing, the redevelopment of portions of the television spectrum. In the U.S., pursuant to federal legislation, analog television stations must cease operation in the broadcast television spectrum by June 12, 2009. As a result of this transition, 108 MHz of spectrum historically used for broadcast television is being redeveloped for new uses (the so-called “digital dividend” spectrum), including broadband and narrowband wireless communications. This soon-to-be available spectrum can provide new opportunities for Motorola and for our competitors. Under rules adopted by the FCC, this portion of the spectrum under redevelopment (the 700 MHz band) will support new commercial and public safety communications systems. Licenses for the majority of this spectrum have already been issued and as of February 2009, over 40 public safety customers are already implementing narrowband 700 MHz systems in areas where television incumbency is not an issue. Additional agencies are expected to begin deploying systems once broadcast television is cleared from the 700 MHz band in mid-2009. The FCC is also making provisions for a 700 MHz band nationwide public safety broadband network that may be built over the next 10-15 years. Canada also released a consultation requesting industry input on making additional spectrum available for public safety use in the 700 MHz band. Segments of the spectrum have been auctioned for commercial use and Motorola could see new business opportunities as auction winners implement broadband systems on that spectrum. However, since many analog television operations will continue transmitting in this spectrum until June 12, 2009, it is premature for auction winners to deploy in most markets. This delay may temporarily delay opportunities for the Company.


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    14 In addition to reallocating TV spectrum at 700 MHz for public safety and commercial use, in November 2008 the FCC issued a decision to open unused portions of the television spectrum below 700 MHz for unlicensed uses, including broadband. The amount and specific location in the TV band of this “whitespace” spectrum available varies by geographic location. Also, its use is governed by technical rules adopted to protect incumbent operations from interference. For example, the FCC decision relies on geolocation, a technology recommended by Motorola, to protect incumbent television stations. This decision to open the TV whitespace spectrum provides additional potential opportunities for wireless broadband systems. The FCC decision also advised that these initial TV whitespace rules are conservative with regard to protection of broadcast incumbents and that relaxation to provide greater TV whitespace opportunities may be possible once additional experience is gained. Internationally, the ITU World Radio Conference held in Geneva in November 2007 identified spectrum that could be made available as part of a “digital dividend” as television transitions from analog to digital technology globally. Countries around the world are studying the potential size, timing and use of this potentially available spectrum. In November 2007, the European Commission issued a statement promoting a common European approach to its use. The United Kingdom has already decided to redevelop spectrum as a result of the digital transition and is making available 112 MHz of spectrum through auctions. Canada has released a consultation requesting industry input on making additional spectrum available for public safety use in the 700 MHz band. A number of other countries around the world have also indicated their intention to pursue the availability of digital dividend spectrum. In addition, some of our operations use substances regulated under various federal, state, local and international laws governing the environment and worker health and safety, including those governing the discharge of pollutants into the ground, air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. Certain of our products are subject to various federal, state, local and international laws governing chemical substances in electronic products. Backlog The segment’s backlog was $2.4 billion as of December 31, 2008, compared to $2.3 billion as of December 31, 2007. The 2008 order backlog is believed to be generally firm and approximately 70% of that amount is expected to be recognized as revenue during 2009. The forward-looking estimate of the firmness of such orders is subject to future events that may cause the amount recognized to change. Intellectual Property Matters Patent protection is extremely important to the segment’s operations. The segment has an extensive U.S. and international portfolio of patents relating to its products, systems, technologies and manufacturing processes, including recent research developments in scanning, information collection, network communications and network management. We have also filed additional patent applications in the U.S. Patent and Trademark Office as well as in foreign patent offices. The segment licenses some of its patents to third parties and this revenue is not significant. Motorola is also licensed to use certain patents owned by others. Royalty and licensing fees vary from year to year and are subject to the terms of the agreements and sales volumes of the products subject to licenses. We actively participate in the development of open standards for interoperable, mission-critical digital two- way radio systems. We have published our technology and licensed patents to signatories of the industry’s two primary memorandums of understanding defined by the Telecommunications Industry Association (“TIA”), Project 25, and European Telecommunications Standards Institute (“ETSI”), TETRA. Notwithstanding the expiration of certain patents and the resulting potential for increased competition for some of our products in the future, we believe that our extensive patent portfolio will continue to provide us with a competitive advantage. Furthermore, we believe we are not dependent upon a single patent, or a few patents. Our success depends more upon our proprietary know-how, innovative skills, technical competence and marketing abilities. In addition, because of changing technology, our present intention is not to rely primarily on patents or other intellectual property rights to protect or establish our market position. However, the segment continues to litigate against competitors to enforce its intellectual property rights in certain technologies and is currently involved in several such lawsuits. Reference is made to the material under the heading “Other Information” for information relating to patents, trademarks and research and development activities with respect to this segment.


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    15 Inventory, Raw Materials, Right of Return and Seasonality The segment’s practice is to carry reasonable amounts of inventory to meet customers’ delivery requirements in a manner consistent with industry standards. The segment provides custom products which requires the stocking of inventories and large varieties of piece parts and replacement parts in order to meet delivery and warranty requirements. To the extent suppliers’ product life cycles are shorter than the segment’s, stocking of lifetime buy inventories is required to meet long-term warranty and contractual requirements. In addition, replacement parts are stocked for delivery on customer demand within a short delivery cycle. At the end of 2008, the segment had a higher inventory balance than at the end of 2007, primarily as a result of the Company acquiring a controlling interest in Vertex Standard Co, Ltd., in January 2008. Availability of materials and components required by the segment is relatively dependable, but fluctuations in supply and market demand could cause selective shortages and affect results. We currently procure certain materials and components from single-source vendors. A material disruption from a single-source vendor may have a material adverse impact on our results of operations. If certain key suppliers were to become capacity constrained or insolvent as a result of the ongoing global financial crisis, it could result in a reduction or interruption in supplies or an increase in the price of supplies and adversely impact the segment’s financial results. Natural gas, electricity and, to a lesser extent, oil are the primary sources of energy for our manufacturing operations, which are currently in adequate supply. In addition, the cost to operate our facilities and freight costs are dependent on world oil prices, which fluctuated significantly during 2008 and impacted our manufacturing and shipping costs. Labor is generally available in reasonable proximity to the segment’s manufacturing facilities. However, difficulties in obtaining any of these items or a significant cost increase could affect the segment’s results. Generally, the segment’s contracts do not include a right of return, other than for standard warranty provisions. For new product introductions in our government and public safety market, we may enter into milestone contracts providing that the product could be returned if we do not achieve the milestones. Due to buying patterns in the markets we serve, sales tend to be somewhat higher in the fourth quarter. Our Facilities/Manufacturing Our primary offices are located in Schaumburg, Illinois and Holtsville, New York. Our other major facilities are located in: Penang, Malaysia; Reynosa, Mexico; Krakow, Poland; Berlin, Germany; and Arad, Israel. In addition to our own manufacturing, we utilize non-affiliated electronics manufacturing suppliers and distribution and logistics services providers in order to enhance our ability to lower costs and deliver products that meet consumer demands. Other Information Financial Information About Segments. The response to this section of Item 1 incorporates by reference Note 12, “Information by Segment and Geographic Region,” of Part II, Item 8: Financial Statements and Supplementary Data of this document. Customers. Motorola has several large customers, the loss of one or more of which could have a material adverse effect on the Company. In 2008, aggregate net sales to the Company’s five largest customers represented approximately 25% of the Company’s sales. No single customer accounted for more than 10% of the Company’s net sales in 2008. Approximately 2% of Motorola’s net sales in 2008 were to various branches and agencies, including the armed services, of the U.S. Government. All contracts with the U.S. Government are subject to cancellation at the convenience of the Government. Government contractors, including Motorola, are routinely subjected to numerous audits and investigations, which may be either civil or criminal in nature. The consequences of these audits and investigations may include administrative action to suspend business dealings with the contractor and to exclude it from receiving new business. In addition, Motorola, like other contractors, reviews aspects of its government contracting operations, and, where appropriate, takes corrective actions and makes voluntary disclosures to the U.S. Government. These audits and investigations could adversely affect Motorola’s ability to obtain new business from the U.S. Government.


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    16 Backlog. Motorola’s aggregate backlog position for all Motorola segments, as of the end of the last two fiscal years was approximately as follows: December 31, 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5.0 billion December 31, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5.5 billion Except as previously discussed in this Item 1, the orders supporting the 2008 backlog amounts shown in the foregoing table are believed to be generally firm, and approximately 90% of the backlog on hand at December 31, 2008 is expected to be recognized as revenue in 2009. The forward-looking estimate of the firmness of such orders is subject to future events that may cause the amount recognized to change. Research and Development. Motorola’s business segments participate in very competitive industries with constant changes in technology. Throughout its history, Motorola has relied, and continues to rely, primarily on its research and development (“R&D”) programs for the development of new products, and on its production engineering capabilities for the improvement of existing products. Technical data and product application ideas are exchanged among Motorola’s business segments on a regular basis. Management believes, looking forward, that Motorola’s commitment to R&D programs should allow each of its segments to remain competitive. R&D expenditures relating to new product development or product improvement were $4.1 billion in 2008, compared to $4.4 billion in 2007 and $4.1 billion in 2006. R&D expenditures decreased 7% in 2008 as compared to 2007, after increasing 8% in 2007 as compared to 2006. Motorola continues to believe that a strong commitment to research and development is required to drive long-term growth. As of December 31, 2008, approximately 27,000 professional employees were engaged in such R&D activities. Patents and Trademarks. Motorola seeks to obtain patents and trademarks to protect our proprietary position whenever possible and practical. As of December 31, 2008, Motorola, Inc. and its wholly owned subsidiaries owned approximately 9,907 utility and design patents in the U.S. and 12,793 patents in foreign countries. These foreign patents are mostly counterparts of Motorola’s U.S. patents, but a number result from research conducted outside the U.S. and are originally filed in the country of origin. During 2008, Motorola, Inc. and its wholly owned subsidiaries were granted 644 U.S. utility and design patents. Many of the patents owned by Motorola are used in its operations or licensed for use by others, and Motorola is licensed to use certain patents owned by others. Royalty and licensing fees vary from year to year and are subject to the terms of the agreements and sales volumes of the products subject to licenses. Environmental Quality. During 2008, compliance with federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, did not have a material effect on capital expenditures, earnings or the competitive position of Motorola. Employees. At December 31, 2008, there were approximately 64,000 employees of Motorola and its subsidiaries, compared to 66,000 employees of Motorola and its subsidiaries at December 31, 2007. Financial Information About Geographic Areas. The response to this section of Item 1 incorporates by reference Note 11, “Commitments and Contingencies” and Note 12, “Information by Segment and Geographic Region” of Part II, Item 8: Financial Statements and Supplementary Data of this document, the “Results of Operations—2008 Compared to 2007” and “Results of Operations — 2007 Compared to 2006” sections of Part II, “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item A: Risk Factors” of this document. Available Information We make available free of charge through our website, www.motorola.com/investor, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, other reports filed under the Securities Exchange Act of 1934 (“Exchange Act”) and all amendments to those reports simultaneously or as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). Our reports are also available free of charge on the SEC’s website, www.sec.gov. Also available free of charge on our website are the following corporate governance documents: • Motorola, Inc. Restated Certificate of Incorporation • Motorola, Inc. Amended and Restated Bylaws • Motorola, Inc. Board Governance Guidelines • Motorola, Inc. Director Independence Guidelines


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    17 • Principles of Conduct for Members of the Motorola, Inc. Board of Directors • Motorola Code of Business Conduct, which is applicable to all Motorola employees, including the principal executive officers, the principal financial officer and the controller (principal accounting officer) • Audit and Legal Committee Charter • Compensation and Leadership Committee Charter • Governance and Nominating Committee Charter All of our reports and corporate governance documents may also be obtained without charge by contacting Investor Relations, Motorola, Inc., Corporate Offices, 1303 East Algonquin Road, Schaumburg, Illinois 60196, E-mail: investors@motorola.com. Our Annual Report on Form 10-K and Definitive Proxy Statement may also be requested in hardcopy by clicking on “Printed Materials” at www.motorola.com/investor. Our Internet website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.


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    18 Item 1A: Risk Factors We wish to caution the reader that the following important risk factors, and those risk factors described elsewhere in this report or our other Securities and Exchange Commission filings, could cause our actual results to differ materially from those stated in forward-looking statements contained in this document and elsewhere. These risks are not presented in order of importance or probability of occurrence. We have had substantial operating losses in 2008 and 2007 and may continue to incur losses as we reposition our Mobile Devices business. In 2008 and 2007, Motorola had substantial operating losses as a result of the financial performance of our Mobile Devices business. While we have plans in place intended to improve the performance of this business, we cannot be certain that we will be successful or that we will be profitable in 2009. The wireless mobile handset market experienced slowing growth in 2008 and the market is expected to decline in 2009 which could negatively impact transition plans for our Mobile Devices business. In 2009, worldwide wireless handset industry unit shipments are expected to decline by approximately 10%. This would be the first annual decline in industry handset unit shipments since 2001. A declining mobile handset market may make it more difficult to improve our business, due to excess manufacturing capacity, increased price competition and other market factors. We have lost significant market share in our Mobile Devices businesses and such loss has negatively impacted our performance and may continue to negatively impact our financial results. Our share of the worldwide wireless handset market has declined significantly in the last two years, from approximately 22% in 2006, to 14% in 2007, to 8% in 2008. While we reduced our costs during this period of time, these market share declines and resulting volume reductions have had an adverse effect on our results of operations. If market share in our Mobile Devices business continues to decline, it will adversely impact our financial results. The uncertainty of current economic and political conditions makes budgeting and forecasting difficult and may reduce demand for our products. Current conditions in the domestic and world economies are very uncertain. The global financial crisis, as well as ongoing political conflicts in the Middle East and elsewhere, have created many economic and political uncertainties that have impacted worldwide markets. As a result, it is difficult to estimate changes in various parts of the world economy, including the markets in which we participate. Because all components of our budgeting and forecasting are dependent upon estimates in the markets we serve and demand for our products, the prevailing economic uncertainties render estimates of future income and expenditures difficult. We have manufacturing operations and engineering resources in Israel that could be disrupted as a result of hostilities in the region. We also sell our products and services throughout the Middle East and demand for our products and services could be adversely impacted by hostilities in this region. The potential for future terrorist attacks, increased global conflicts and the escalation of existing conflicts and public health issues has created worldwide uncertainties that have negatively impacted, and may continue to negatively impact, demand for certain of our products. We operate in highly competitive markets and our financial results will be affected if we are not able to compete effectively. The markets for our products are highly competitive with respect to, among other factors: pricing, product features, product and service quality, and the time required to introduce new products and services. We are constantly exposed to the risk that our competitors may implement new technologies before we do, or may offer lower prices, additional products or services or other incentives that we cannot or will not offer. We can give no assurances that we will be able to compete successfully against existing or future competitors. Our success depends in part on our timely introduction of new products and technologies and our results can be impacted by the effectiveness of our significant investments in new products and technologies. The markets for our products are characterized by rapidly changing technologies, frequent new product introductions, short product life cycles and evolving industry standards. We face intense competition in these


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    19 markets from both established companies and new entrants. Product life cycles can be short and new products are expensive to develop and bring to market. Our success depends, in substantial part, on the timely and successful introduction of new products and upgrades of current products to comply with emerging industry standards and to address competing technological and product developments carried out by our competitors. The research and development of new, technologically-advanced products is a complex and uncertain process requiring high levels of innovation and investment, as well as the accurate anticipation of technology and market trends. We may focus our resources on technologies that do not become widely accepted or are not commercially viable. In addition, our products may contain defects or errors that are detected only after deployment. If our products are not competitive or do not work properly, our business will suffer. Our results are subject to risks related to our significant investment in developing and introducing new products, such as: advanced wireless handsets, including smartphones; WiMAX, LTE and other advanced technologies for wireless broadband networks; products for transmission of telephony and high-speed data over hybrid fiber coaxial cable systems; integrated digital radios; and integrated public safety systems. These risks include: (i) difficulties and delays in the development, production, testing and marketing of products; (ii) customer acceptance of products; (iii) the development of, approval and compliance with industry standards; (iv) the significant amount of resources we must devote to the development of new technology; and (v) the ability to differentiate our products and compete with other companies in the same markets. We face a number of risks related to the ongoing financial crisis and severe tightening in the global credit markets. The ongoing global financial crisis affecting the banking system and financial markets has resulted in a severe tightening in the worldwide credit markets, a low level of liquidity in many financial markets and extreme volatility in credit and equity markets. This financial crisis has impacted, and could continue to impact, Motorola’s business in a number of ways, including: • Potential Deferment or Cancellation of Purchases and Orders by Customers: Uncertainty about current and future global economic conditions may cause, and in some cases has caused, consumers, businesses and governments to defer or cancel purchases in response to tighter credit, decreased cash availability and declining consumer confidence. If future demand for our products declines, it will adversely impact our financial results. • Customers’ Inability to Obtain Financing to Make Purchases from Motorola and/or Maintain Their Business: Some of our customers require substantial financing in order to fund their operations and make purchases from Motorola. The inability of these customers to obtain sufficient credit to finance purchases of our products and/or meet their payment obligations to us could have, and in some cases has had, an adverse impact on our financial results. In addition, if the financial crisis results in insolvencies for our customers, it will adversely impact our financial results. • Increased Requests by Customers for Vendor Financing by Motorola: Certain of the Company’s customers, particularly, but not limited to, those who purchase large infrastructure systems, request that their suppliers provide financing in connection with equipment purchases. In response to the recent tightening in the credit markets, these types of requests continue to increase in volume and scope. Motorola has increased its commitments to provide financing in light of these requests and a continuation of the current credit crisis could force Motorola to choose between further increasing its level of vendor financing or potentially losing sales to these customers. • Negative Impact from Increased Financial Pressures on Third-Party Dealers, Distributors and Retailers: A number of our businesses make sales in certain regions through third-party dealers, distributors and retailers. Although many of these third parties have significant operations and maintain access to available credit, others are smaller and more likely to be impacted by the significant decrease in available credit that has resulted from the current financial crisis. If credit pressures or other financial difficulties result in insolvency for important third parties and Motorola is unable to successfully transition end-customers to purchase our products from other third parties or from us directly, it will adversely impact our financial results. • Negative Impact from Increased Financial Pressures on Key Suppliers: Our ability to meet customers’ demands depends, in part, on our ability to obtain timely and adequate delivery of quality materials, parts and components from our suppliers. Certain of our components are available only from a single source or limited sources. If certain key suppliers were to become capacity constrained or insolvent as a result of the financial crisis, it could result in a reduction or interruption in supplies or an increase in the price of


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    20 supplies and adversely impact our financial results. In addition, credit constraints at key suppliers have resulted in accelerated payment of accounts payable by Motorola, impacting our cash flow. This trend could continue and may even accelerate, impacting our cash flow. • Increased Risk of Losses or Impairment Charges Related to Debt Securities and Equity and Other Investments Held by Motorola: The current volatility in the financial markets and overall economic uncertainty increases the risk that the actual amounts realized in the future on our debt and equity investments will differ significantly from the fair values currently assigned to them. In 2008, Motorola has recognized $186 million of impairment charges and $101 million of temporary unrealized losses on debt securities held in its Sigma Fund, a broadly diversified portfolio of highly rated, short-duration debt securities. There can be no assurance that the value of Sigma Fund investments will not decline further in the future. Also, many of the Company’s equity investments are in early-stage technology companies and, therefore, may be particularly subject to substantial price volatility and heightened risk from the tightening in the credit markets. • Increased Risk of Financial Counterparty Failures Could Negatively Impact our Financial Position: The Company uses financial instruments to reduce its overall exposure to the effects of currency fluctuations on cash flows. The Company is exposed to credit loss in the event of nonperformance by the counterparties to these financial instruments. In order to minimize this risk, the contracts are distributed among several leading financial institutions, all of whom presently have investment grade credit ratings. Although the Company has not experienced and does not anticipate nonperformance by its counterparties, in light of the ongoing threats to financial institutions from the global financial crisis, there can be no assurance of performance by the counterparties to these financial instruments. • Returns on Pension and Retirement Plan Assets and Interest Rate Changes Could Affect Our Earnings in Future Periods: The funding position of our pension plans is impacted by the performance of the financial markets, particularly the equity markets, and the discount rates used to calculate our pension obligations for funding and expense purposes. Recent significant declines in the financial markets have negatively impacted the value of the assets in the Company’s pension plans. In addition, lower bond yields may reduce our discount rates resulting in increased pension contributions and expense. Funding obligations are determined under government regulations and are measured each year based on the value of assets and liabilities on a specific date. If the financial markets do not provide the long-term returns that are expected under the governmental funding calculations, we could be required to make larger contributions. The equity markets can be, and recently have been, very volatile, and therefore our estimate of future contribution requirements can change dramatically in relatively short periods of time. Similarly, changes in interest rates can impact our contribution requirements. In a low interest rate environment, the likelihood of higher contributions in the future increases. • Impact on Ability to Sell Receivables: The Company sells accounts receivable and long-term receivables to third parties. Sales are made both on a one-time, non-recourse basis and under committed facilities that involve contractual commitments from third parties to purchase qualifying receivables up to monetary limits. These sales of receivables provide the Company the ability to accelerate cash flow when it is prudent to do so. The ability to sell (or “factor”) receivables, particularly under committed facilities, is often subject to the credit quality of the obligor and the Company’s ability to obtain sufficient levels of credit insurance from independent insurance companies. In early 2009, a $400 million committed facility expired and was not renewed. Although the Company is negotiating replacement facilities, there is no assurance that the Company will be able to implement these facilities. Reduction in the volume of committed receivable purchasing facilities could limit the Company’s ability to sell receivables in the future. Further, the severe tightening in the credit markets due to the ongoing global financial crisis could limit the Company’s ability to sell receivables in the future, particularly if the creditworthiness of our customers declines. • Impact on Ability to Purchase Sufficient Credit Insurance: We purchase a large amount of credit insurance to mitigate some of our credit risks. In particular, our ability to sell receivables, particularly under committed receivables facilities, is often subject to obtaining sufficient levels of credit insurance from independent insurance companies. Accordingly, our ability to sell certain of our receivables, and therefore our cash flows, could be negatively impacted if we are not able to continue to purchase credit insurance in certain countries and in sufficient quantities. Although credit insurance remains generally available to the Company, it has become more expensive to obtain and often requires higher deductibles than in the past.


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    21 There can be no assurances that the Company will be able to obtain sufficient quantities of credit insurance in the necessary locations in the future. We face a number of risks related to the recent downgrade of the Company’s long-term debt to non-investment grade by one credit rating agency: In December, Standard and Poor’s downgraded the Company’s long-term debt to BB+ (one level below investment grade) from BBB and removed the short-term rating. In February 2009, Fitch Ratings downgraded the Company’s long-term debt to BBB- from BBB and downgraded the short-term debt rating to F-3 from F-2. Also in February 2009, Moody’s Investor Service downgraded the Company’s long-term debt to Baa3 from Baa2 and downgraded the short-term debt rating to P-3 from P-2. Since the Company has a non-investment grade rating from one rating agency, it is referred to as a “split rated credit”. • Our access to short-term borrowing in the commercial paper market is very limited: While the Company did not issue commercial paper in 2008, if the Company needs access to very short-term borrowing, it may no longer be able to access the unsecured commercial paper market because of its P-3/F-3 short-term ratings. Other sources of short-term borrowing may be more limited, if available at all, and will have higher cost to borrow than the commercial paper market. • Our access to the long-term debt market may be limited: As a split rated credit, our ability to issue long- term debt is more limited and the market into which split rated debt is offered can be very volatile and can be unavailable for periods of time. As a result, it may be more difficult for us to quickly issue long-term debt and any debt issued may be more costly. These factors may impact our operating flexibility. • Our ability to provide performance bonds, bid bonds, standby letters of credit and surety bonds could be severely limited: Commercial contracts with Motorola’s customers often require performance bonds, bid bonds, standby letters of credit and surety bonds (collectively, referred to as “Performance Bonds”) to be issued on behalf of the Company by banks and insurance companies. As a split rated credit, issuers of these Performance Bonds may be less likely to provide Performance Bonds on the Company’s behalf in the future, unless the Company provides collateral. These limitations on issuance may apply to the renewal and extension of existing Performance Bonds, as well as the issuance of new Performance Bonds. Such collateral requirements could result in less liquidity for other operational needs. Also, as a result of the Company’s current credit ratings, there has been an increase in the cost of issuance of Performance Bonds. • Our ability to hedge foreign exchange risk could be severely limited: As a split rated credit, counterparties may be unwilling to provide trading and derivative lines for the Company without cash collateral. This would severely limit our ability to reduce volatility in earnings and cash flow. Should cash collateral be provided, less liquidity would be available for operational needs. • Our ability to fund our foreign affiliates could be limited: The Company relies on uncommitted lines of credit from banks to provide daylight overdraft, short-term loans and other sources of liquidity for foreign affiliates. As a split rated credit, lenders may be unwilling to provide credit to our foreign affiliates. This could result in the Company using U.S. cash to make loans to these affiliates or provide permanent equity where loans are not possible. • Trade terms with suppliers could become less favorable: Given the Company’s split rating, suppliers may require letters of credit, cash collateral or other forms of security as part of standard payment conditions. This could result in reduced liquidity and less leverage in pricing negotiations. • Our ability to sell receivables could be impacted: As a split rated credit, the conditions placed on us by the parties that we sell our receivables to will become more stringent. If we are unable, or choose not to, meet these new conditions, our ability to sell the receivables will be negatively impacted. We may not be able to borrow funds under our credit facility if we are not able to meet the conditions for borrowing required by our facility. Our existing $2 billion five-year domestic syndicated revolving credit facility contains various conditions, covenants and representations with which we must be in compliance in order to borrow funds. Although there are no borrowings outstanding under the facility, if we wish to borrow under this facility in the future, there can be no assurance that we will be in compliance with these conditions, covenants and representations.


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    22 We may not generate sufficient future taxable income, which may require additional deferred tax asset valuation allowances. If the Company is unable to generate sufficient future taxable income in the U.S. and certain other jurisdictions, or if there is a significant change in the actual effective tax rates or the time period within which the underlying temporary differences become taxable or deductible, the Company could be required to increase its valuation allowances against its deferred tax assets resulting in an increase in its effective tax rate and an adverse impact on future operating results. We may be required to record additional goodwill or amortizable intangible assets impairment charges, which could result in an additional significant charge to earnings. Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at least annually. Factors that may be considered in assessing whether goodwill or intangible assets may not be recoverable include a decline in the Company’s stock price or market capitalization, reduced estimates of future cash flows, and slower growth rates in our industry. During 2008, the Company recorded goodwill impairment charges of $1.6 billion and intangible assets impairment charges of $129 million. The goodwill impairment charges resulted from lower asset values in the overall market and the impact of the macroenvironment on the Company’s near-term forecasts. The intangible asset impairments resulted from a change in a technology platform strategy. Further declines in the Company’s stock price, the markets or reductions in the Company’s future cash flow estimates and future operating results may require the Company to record significant additional goodwill or intangible asset impairment charges in our financial statements in future periods, negatively impacting our financial results. Our strategy to separate our businesses into two publicly-traded companies may have an adverse effect on business operations and our assets. The Company has announced a strategy to separate into two publicly-traded companies in the future, if and when market and businesses conditions support a separation. There are various uncertainties and risks relating to the proposed separation of our businesses into two publicly-traded companies, which are enhanced because we have not announced a target date for the separation or determined the structure that will best serve the strategic realignment. The uncertainties and risks that could have an adverse effect on our business operations or assets include: (i) the distraction of management and disruption of operations, which could have a material adverse effect on our operating results; (ii) perceived uncertainties as to our future direction may result in increased difficulties in recruiting and retaining employees, particularly highly qualified employees; (iii) perceived uncertainties as to our future direction may have a negative impact on our relationships with our customers, suppliers, vendors and partners and may result in the loss of business opportunities; (iv) the process of exploring strategic alternatives may be time consuming and expensive and may result in the loss of business opportunities; and (v) we may not be able to successfully achieve the benefits of any strategic alternative undertaken by us. Our future financial results may be negatively impacted if we do not execute on our hardware and software strategy for our Mobile Devices business. As part of our ongoing effort to improve the product portfolio of our Mobile Devices business, we are in the process of rationalizing our hardware and software platforms to reduce the complexity of our product platforms and system architecture to lower our cost to produce devices and to enable richer consumer experiences. Failure to execute these rationalization plans in a timely and effective manner may cause us to be competitively disadvantaged in many areas, including but not limited to, cost, time to market and the ability to ramp-up production in a timely fashion with acceptable quality and improved/additional features. If our operating system strategy is not successful, our Mobile Devices business could be negatively impacted. We have made a strategic decision to use third-party and/or open source operating systems, such as Google’s Android operating system and Microsoft’s Windows Mobile operating system in our wireless products. As a result of this, we are at risk due to our dependency on third parties continued development of operating systems and third parties’ software application ecosystem infrastructures. With respect to Google’s Android operating system which is a newer operating system for wireless handsets, in the event that Google’s Android team no longer develops the Android code base and this development is not taken up by the open source community, this would increase the burden of development on Motorola. From an overall risk perspective, the industry is currently engaged in an extremely competitive phase with respect to operating system platforms and software generally.


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    23 Android is viewed as a competitive platform in the Linux and smartphone categories. If Android fails to gain operator and/or developer adoption, the Company’s financial results could be negatively impacted. We have taken, and continue to take, cost-reduction actions. Our ability to complete these actions and the impact of such actions on our business may be limited by a variety of factors. The cost-reduction actions, in turn, may expose us to additional production risk and have an adverse effect on our sales, profitability and ability to attract and retain employees. We have been reducing costs and simplifying our product portfolios in all of our businesses, with sizable reductions in our Mobile Devices business. We have discontinued product lines, exited businesses, consolidated manufacturing operations, increased manufacturing with third parties, reduced our employee population and changed our compensation and benefit programs. The impact of these cost-reduction actions on our sales and profitability may be influenced by many factors including, but not limited to: (i) our ability to successfully complete these ongoing efforts; (ii) our ability to generate the level of cost savings we expect or that are necessary to enable us to effectively compete; (iii) delays in implementation of anticipated workforce reductions in highly-regulated locations outside the United States, particularly in Europe and Asia; (iv) decline in employee morale and the potential inability to meet operational targets due to the loss of employees; (v) our ability to retain or recruit key employees, particularly as a result of recent actions to suspend the Company’s 401(k) contributions to employee accounts, permanently freeze all future benefit accruals under U.S. pension plans and eliminate merit increase programs in the U.S. and many other markets; (vi) the adequacy of our manufacturing capacity, including capacity provided by third parties; and (vii) the performance of other parties under contract manufacturing arrangements on which we rely for the manufacture of certain products, parts and components. All of our businesses have consolidated or exited certain facilities and our products are manufactured in fewer facilities than in the past. While we have business continuity and risk management plans in place in case capacity is significantly reduced or eliminated at a given facility, the reduced number of alternative facilities could cause the duration of any manufacturing disruption to be longer. As a result, we could have difficulties fulfilling our orders and our sales and profits could decline. The demand for our products depends, in part, on the continued growth of the industries in which we participate. A market decline in any one of these industries could have an adverse effect on our business. The rate at which the portions of the telecommunications industry in which we participate continue to grow is critical to our ability to improve our overall financial performance and we could be negatively impacted by a slowdown. Our business was very negatively impacted by the economic slowdown and the corresponding reduction in capital spending by the telecommunications industry from 2001 to 2003, and we are forecasting declines and slower growth in 2009 for the industries we compete in. Our customers and suppliers are located throughout the world and, as a result, we face risks that other companies that are not global may not face. Our customers and suppliers are located throughout the world and more than half of our net sales are made to customers outside the U.S. In addition, we have many manufacturing, administrative and sales facilities outside the U.S. and more than half of our employees are employed outside the U.S. Most of our suppliers’ operations are outside the U.S., and most of our products are manufactured outside the U.S. As with all companies that have sizeable sales and operations outside the U.S., we are exposed to risks that could negatively impact sales or profitability, including but not limited to: (i) tariffs, trade barriers and trade disputes, customs classifications and certifications, including but not limited to changes in classifications or errors or omissions related to such classifications and certifications; (ii) changes in U.S. and non-U.S. rules related to trade, environmental, health and safety, technical standards & consumer protection; (iii) longer payment cycles; (iv) tax issues, such as tax law changes, variations in tax laws from country to country and as compared to the U.S., obligations under tax incentive agreements, and difficulties in repatriating cash generated or held abroad in a tax-efficient manner; (v) currency fluctuations, particularly in the Chinese renminbi, Euro, Brazilian real, Taiwan dollar and Japanese yen; (vi) foreign exchange regulations, which may limit the Company’s ability to convert or repatriate foreign currency; (vii) challenges in collecting accounts receivable; (viii) cultural and language differences; (ix) employment regulations and local labor conditions; (x) difficulties protecting IP in foreign countries; (xi) instability in economic or political conditions, including inflation, recession and actual or anticipated military or political conflicts; (xii) natural disasters; (xiii) public health issues or outbreaks;


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    24 (xiv) changes in laws or regulations that adversely impact benefits being received by the Company; and (xv) the impact of each of the foregoing on our outsourcing and procurement arrangements. Many of our products that are manufactured outside the U.S. are manufactured in Asia and Mexico. If manufacturing in these regions is disrupted, our overall capacity could be significantly reduced and sales or profitability could be negatively impacted. Furthermore, the legal system in China is still developing and is subject to change. Accordingly, our operations and orders for products in China could be adversely impacted by changes to, or interpretation of, Chinese law. We also have presence in emerging markets such as India and Russia. We face challenges in emerging markets, including creating demand for our products and the negative impact of changes in the laws, or the interpretation of the laws, in those countries. Changes in our operations or sales outside the U.S. markets could result in lost benefits in impacted countries and increase our cost of doing business. The Company has entered into various agreements with non-U.S. governments, agencies, or similar organizations under which the Company receives certain benefits relating to its operations and/or sales in the jurisdiction. If the Company’s circumstances change and operations or sales are not at levels originally anticipated, the Company may be at risk of losing some or all of these benefits and increasing our cost of doing business. If the quality of our products does not meet our customers’ expectations, then our sales and operating earnings, and ultimately our reputation, could be adversely affected. Some of the products we sell have quality issues resulting from the design or manufacture of the product, or from the software used in the product. Sometimes, these issues may be caused by components we purchase from other manufacturers or suppliers. Often these issues are identified prior to the shipment of the products and may cause delays in shipping products to customers, or even the cancellation of orders by customers. Sometimes, we discover quality issues in the products after they have been shipped to our customers, distributors or end-users, requiring us to resolve such issues in a timely manner that is the least disruptive to our customers. Such pre- shipment and post-shipment quality issues can have legal and financial ramifications, including: delays in the recognition of revenue, loss of revenue or future orders, customer-imposed penalties on Motorola for failure to meet contractual requirements, increased costs associated with repairing or replacing products, and a negative impact on our goodwill and brand name reputation. In some cases, if the quality issue affects the product’s safety or regulatory compliance, then such a “defective” product may need to be recalled. Depending on the nature of the defect and the number of products in the field, it could cause the Company to incur substantial recall costs, in addition to the costs associated with the potential loss of future orders, and the damage to the Company’s goodwill or brand/reputation. In addition, the Company may be required, under certain customer contracts, to pay damages for failed performance that might exceed the revenue that the Company receives from the contracts. Recalls involving regulatory agencies could also result in fines and additional costs. Finally, recalls could result in third-party litigation, including class action litigation by persons alleging common harm resulting from the purchase of the products. If the volume of our sales decrease or do not reach projected targets, we could face increased materials and manufacturing costs that may make our products less competitive. We have negotiated favorable pricing terms with many of our suppliers, some of which have volume-based pricing. In the case of volume-based pricing arrangements, we may experience higher than anticipated costs if current volume-based purchase projections are not met. Some contracts have minimum purchase commitments and we may incur large financial penalties if these commitments are not met. We also may have unused production capacity if our current volume projections are not met, increasing our production cost per unit. In the future, as we establish new pricing terms, our volume demand could adversely impact future pricing from suppliers. All of these outcomes may result in our products being more costly to manufacture and less competitive. Our future operating results depend on our ability to purchase a sufficient amount of materials, parts and components to meet the demands of our customers. Our ability to meet customers’ demands depends, in part, on our ability to obtain timely and adequate delivery of quality materials, parts and components from our suppliers. We have experienced shortages in the past that have adversely affected our operations. Although we work closely with our suppliers to avoid these types of shortages, there can be no assurances that we will not encounter these problems in the future. Furthermore, certain


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    25 of our components are available only from a single source or limited sources. We may not be able to diversify sources in a timely manner. A reduction or interruption in supplies or a significant increase in the price of supplies could have a material adverse effect on our businesses. Our success is dependent, in part, upon our ability to form successful strategic alliances. If these arrangements do not develop as expected, our business may be adversely impacted. We currently partner with industry leaders to meet customer product and service requirements and to develop innovative advances in design and technology. Some of our partnerships allow us to supplement internal manufacturing capacity and share the cost of developing next-generation technologies. Other partnerships allow us to offer more services and features to our customers. If such arrangements do not develop as expected, our business could be adversely impacted. We rely on third-party distributors, representatives and retailers to sell certain of our products. In addition to our own sales force, we offer our products through a variety of third-party distributors, representatives and retailers. Certain of our distributors or representatives may also market other products that compete with our products. The loss, termination or failure of one or more of our distributors or representatives to effectively promote our products, or changes in the financial or business condition of these distributors, representatives or retailers, could affect our ability to bring products to market. We face many risks relating to intellectual property rights. Our business will be harmed if: (i) we, our customers and/or our suppliers are found to have infringed intellectual property rights of third parties, (ii) if the intellectual property indemnities in our supplier agreements are inadequate to cover damages and losses due to infringement of third-party intellectual property rights by supplier products, (iii) if we are required to provide broad intellectual property indemnities to our customers, or (iv) if our intellectual property protection is inadequate to protect our proprietary rights. We may be harmed if we are forced to make publicly available, under the relevant open-source licenses, certain internally developed software-related intellectual property as a result of either our use of open-source software code or the use of third-party software that contains open-source code. Because our products are comprised of complex technology, much of which we acquire from suppliers through the purchase of components or licensing of software, we are often involved in or impacted by litigation regarding patent and other intellectual property rights. Third parties have asserted, and in the future may assert, intellectual property infringement claims against us and against our customers and suppliers. Defending claims may be expensive and divert the time and efforts of our management and employees. Increasingly, third parties have sought broad injunctive relief which could limit our ability to sell our products in the U.S. or elsewhere with intellectual property subject to the claims. If we do not succeed in any such litigation, we could be required to expend significant resources to pay damages, develop non-infringing intellectual property or to obtain licenses to the intellectual property that is the subject of such litigation. However, we cannot be certain that any such licenses, if available at all, will be available to us on commercially reasonable terms. In some cases, we might be forced to stop delivering certain products if we or our customer or supplier are subject to a final injunction. We attempt to negotiate favorable intellectual property indemnities with our suppliers for infringement of third-party intellectual property rights, but there is no assurance that we will be successful in our negotiations or that a supplier’s indemnity will cover all damages and losses suffered by Motorola and our customers due to the infringing products or that a supplier may choose to accept a license or modify or replace its products with non- infringing products which would otherwise mitigate such damages and losses. Further, Motorola may not be able to participate in intellectual property litigation involving a supplier and may not be able to influence any ultimate resolution or outcome that may adversely impact Motorola’s sales if a court enters an injunction that enjoins the supplier’s products or if the International Trade Commission issues an exclusionary order that blocks Motorola products from importation into the U.S. In addition, our customers increasingly demand that we indemnify them broadly from all damages and losses resulting from intellectual property litigation against them. Because our customers often derive much larger revenue streams by reselling or leasing our products than we generate from the same products, these indemnity claims by our customers have the potential to expose us to damages that are much higher than we would be exposed to if we were sued directly. Our patent and other intellectual property rights are important competitive tools and may generate income under license agreements. We regard our intellectual property rights as proprietary and attempt to protect them


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    26 with patents, copyrights, trademarks, trade secret laws, confidentiality agreements and other methods. We also generally restrict access to and distribution of our proprietary information. Despite these precautions, it may be possible for a third party to obtain and use our proprietary information or develop similar technology independently. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries. Unauthorized use of our intellectual property rights by third parties and the cost of any litigation necessary to enforce our intellectual property rights could have an adverse impact on our business. As we expand our business, including through acquisitions, and compete with new competitors in new markets, the breadth and strength of our intellectual property portfolio in those new areas may not be as developed as in our longer-standing businesses. This may expose us to a heightened risk of litigation and other challenges from competitors in these new markets. We face risks related to ongoing patent-related disputes between Qualcomm and Broadcom. Motorola is a purchaser of CDMA EV-DO baseband processor chips and chipsets from Qualcomm Incorporated (“Qualcomm”), and we previously announced an intention to design certain of Qualcomm’s W- CDMA chipsets into certain of our 3G handsets. Qualcomm and Broadcom Corporation (“Broadcom”) are engaged in several patent-related legal actions. In certain of these actions, Broadcom is seeking orders to ban the importation into the U.S. of Qualcomm’s infringing EV-DO and W-CDMA baseband processor chipsets and certain “downstream” products that contain them (including Motorola handsets) and/or limit Qualcomm’s ability to provide certain services and products in the U.S. relating to such infringing chipsets. A final outcome adverse to Qualcomm in any of the patent-related legal actions could have a material adverse impact on Motorola’s performance by making it difficult, more expensive or impossible for Motorola to make and/or import products destined for the U.S. market that use certain infringing Qualcomm chipsets. While we continue to work with Qualcomm and others on contingency plans relating to these cases, there is no guarantee that such plans will prove successful or avoid further legal challenge. Our future financial results may be negatively impacted if we are not successful in licensing our intellectual property. As part of the business strategy of some of our business segments, primarily our Mobile Devices business, we generate revenue through the licensing of intellectual property rights. The licensed rights include those that are essential to telecommunications standards, such as the GSM standard. Previously agreed-upon terms of some of our long-standing license agreements and the aging of our essential patent portfolio have reduced our royalty revenue over the past several years and are likely to continue to reduce that revenue. Uncertainty in the legal environment makes it difficult to assure that we will be able to enter into new license agreements that will be sufficient to offset that reduction in our revenue. Many of our components and products are designed or manufactured by third parties and if third-party manufacturers lack sufficient quality control or if there are significant changes in the financial or business condition of such third-party manufacturers, it may have a material adverse effect on our business. We rely on third-party suppliers for many of the components used in our products and we rely on third-party manufacturers to manufacture many of our assemblies and finished products. If we are not able to engage such manufacturers with the capabilities or capacities required by our business, or if such third parties lack sufficient quality control or if there are significant changes in the financial or business condition of such third parties, it could have a material adverse effect on our business. We also have third-party arrangements for the design or manufacture of certain products, parts and components. If we are not able to engage such parties with the capabilities or capacities required by our business, or if these third parties fail to deliver quality products, parts and components on time and at reasonable prices, we could have difficulties fulfilling our orders and our sales and profits could decline. We may continue to make strategic acquisitions of other companies or businesses and these acquisitions introduce significant risks and uncertainties, including risks related to integrating the acquired businesses and achieving benefits from the acquisitions. In order to position ourselves to take advantage of growth opportunities, we have made, and may continue to make, strategic acquisitions that involve significant risks and uncertainties. These risks and uncertainties include: (i) the difficulty in integrating newly-acquired businesses and operations in an efficient and effective manner; (ii) the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions; (iii) the risk


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    27 that our markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets; (iv) the potential loss of key employees of the acquired businesses; (v) the risk of diverting the attention of senior management from our operations; (vi) the risks of entering new markets in which we have limited experience; (vii) risks associated with integrating financial reporting and internal control systems; (viii) difficulties in expanding information technology systems and other business processes to accommodate the acquired businesses; and (ix) future impairments of goodwill of an acquired business. Acquisition candidates in the industries in which we participate may carry higher relative valuations (based on their earnings) than we do. This is particularly evident in software and services businesses. Acquiring a business that has a higher valuation than Motorola may be dilutive to our earnings, especially when the acquired business has little or no revenue. In addition, we may not pursue opportunities that are highly dilutive to near-term earnings and have, in the past, foregone certain of these acquisitions. Key employees of acquired businesses may receive substantial value in connection with a transaction in the form of change-in-control agreements, acceleration of stock options and the lifting of restrictions on other equity- based compensation rights. To retain such employees and integrate the acquired business, we may offer additional retention incentives, but it may still be difficult to retain certain key employees. The value of our investments in the securities of various companies fluctuates and it may be difficult for us to realize the value of these investments. We hold a portfolio of investments in various companies. Since the majority of these securities represent investments in technology companies, the fair market values of these securities are subject to significant price volatility. In addition, the realizable value of these securities is subject to market and other conditions. We also have invested in numerous privately-held companies, many of which can still be considered in startup or developmental stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. We could lose all or substantially all of the value of our investments in these companies, and in some cases have. The Sigma Fund holds U.S. Dollar-denominated debt obligations which include, among other securities, corporate bonds, asset- and mortgage-backed securities. As issuers of these securities continue to be negatively impacted by the weakened global economic environment and dislocation in the financial markets, the total fair value of the Sigma Fund holdings is less than its total original cost. The fair value of these holdings may experience further declines due to the widening credit spreads in several debt market segments or if the underlying debtors should default on their obligations. Such events could result in additional temporary unrealized losses or impairment charges in the Sigma Fund investments. It may be difficult for us to recruit and retain the types of highly-skilled employees that are necessary to remain competitive. Competition for key technical personnel in high-technology industries is intense. We believe that our future success depends in large part on our continued ability to hire, assimilate, retain and leverage the skills of qualified engineers and other highly-skilled personnel needed to compete and develop successful new products. We may not be as successful as our competitors at recruiting, assimilating, retaining and utilizing these highly-skilled personnel. In particular, we may have more difficulty attracting or retaining highly-skilled personnel during periods of poor operating performance, and as a result of recent actions to suspend the Company’s 401(k) contributions to employee accounts, permanently freeze all future benefit accruals under U.S. pension plans and eliminate merit increase programs in the U.S. and many other markets. The unfavorable outcome of litigation pending or future litigation could materially impact the Company. Our financial results could be materially adversely impacted by unfavorable outcomes to any pending or future litigation. See “Item 3—Legal Proceedings.” There can be no assurances as to the favorable outcome of any litigation. In addition, it can be very costly to defend litigation and these costs could negatively impact our financial results. We are subject to a wide range of product regulatory and safety, consumer, worker safety and environmental laws. Our operations and the products we manufacture and/or sell are subject to a wide range of global laws. Compliance with existing or future laws could subject us to future costs or liabilities, impact our production capabilities, constrict our ability to sell, expand or acquire facilities, and generally impact our financial


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    28 performance. Some of these laws relate to the use, disposal, clean up of, and exposure to hazardous substances. In the United States, laws often require parties to fund remedial studies or action regardless of fault. Motorola continues to incur disposal costs and has ongoing remediation obligations. Changes to U.S. environmental laws or our discovery of additional obligations under these laws could have a negative impact on Motorola. Over the last several years, laws focused on: the energy efficiency of electronic products and accessories; recycling of both electronic products and packaging; and reducing or eliminating certain hazardous substances in electronic products have expanded significantly. Laws pertaining to accessibility features of electronic products, standardization of connectors and power supplies, sound levels of music playing devices, and other aspects are also proliferating. These laws impact our products and make it more expensive to manufacture and sell product. It may also be difficult to comply with the laws in a timely way and we may not have compliant products available in the quantities requested by our customers, thereby impacting our sales and profitability. We expect these trends to continue. In addition, we anticipate increased demand to meet voluntary criteria related to reduction or elimination of certain hazardous constituents from products, increasing energy efficiency, and providing additional accessibility. We are exposed to risks under large multi-year system contracts that may negatively impact our business. We enter into large multi-year system contracts with large customers. This exposes us to risks, including: (i) the technological risks of such contracts, especially when the contracts involve new technology, and (ii) financial risks under these contracts, including the estimates inherent in projecting costs associated with large contracts and the related impact on operating results. We are also facing increasing competition from traditional system integrators and the defense industry as system contracts become larger and more complicated. Political developments also can impact the nature and timing of these large contracts. It is important that we are able to obtain many different types of insurance, and if we are not able to obtain insurance we are forced to retain the risk. The Company has many types of insurance coverage and also self-insures for some risks and obligations. The insurance market was disrupted after the events of September 11, 2001 and the 2005 hurricanes. While the cost and availability of most insurance has stabilized, there are still certain types and levels of insurance that remain unavailable. Natural disasters and certain risks arising from securities claims and public liability are potential self- insured events that could negatively impact our financial results. Government regulation of radio frequencies may limit the growth of the wireless communications industry or reduce barriers to entry for new competitors. Radio frequencies are required to provide wireless services. The allocation of frequencies is regulated in the U.S. and other countries and limited spectrum space is allocated to wireless services. The growth of the wireless and personal communications industry may be affected: (i) by regulations relating to the access to allocated spectrum for wireless communication users, especially in urban areas, (ii) if adequate frequencies are not allocated, or (iii) if new technologies are not developed to better utilize the frequencies currently allocated for such use. Industry growth has been and may continue to be affected by the cost of new licenses required to use frequencies and any related frequency relocation costs. The U.S. leads the world in spectrum deregulation, allowing new wireless communications technologies to be developed and offered for sale. Examples include wireless local area network systems, such as WiFi, mesh technologies and wide area network systems, such as WiMAX and LTE. Other countries have also deregulated portions of their available spectrum to allow deployment of these and other technologies. Deregulation may introduce new competition and new opportunities for Motorola and our customers. Changes in government policies and laws or economic conditions may adversely affect our financial results. Our results may be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations. Our results may also be affected by social and economic conditions, which impact our operations, including in emerging markets in Asia, India, Latin America and Eastern Europe, and in markets subject to ongoing political hostilities and war, including the Middle East.


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    29 In addition, the laws and regulations that apply directly to access to, or commerce on, the Internet are still evolving. We could be adversely affected by any such regulation in any country where we operate, including under the new presidential administration in the U.S. The adoption of such measures could decrease demand for our products and at the same time increase the cost of selling such products. Consolidations in both the cable and telecommunication industries may adversely impact our business. The cable and telecommunication industries have experienced consolidation and this trend is expected to continue according to industry estimates. Industry consolidation could result in delays of purchases or in the selection of new suppliers by the merged companies. This could adversely impact equipment suppliers like Motorola and our competitors. Due to continuing consolidation within the cable and telecommunications industries worldwide, a small number of operators own a majority of cable television systems and account for a significant portion of the capital spending made by cable telecommunications systems operators. The effects of FCC regulations requiring separation of security functionality from set-tops could negatively impact our sales of set-tops to cable providers. Historically, reception of digital television programming from a cable broadband network has required a set- top with security technology. Traditionally, cable service providers sold or leased their set-top to their customer. This security technology has limited the availability of set-tops to those manufactured by a few cable network manufacturers, including Motorola. FCC regulations requiring separation of security functionality from set-tops that are aimed at increasing competition and encouraging the sale of set-tops in the retail market became effective for most customers in 2007. As the retail market develops for set-tops and televisions capable of accepting the security modules, sales of our set-tops to cable providers may be negatively impacted. In addition, a full two-way security interface specification that allows retail customers access to all programming available on a cable operator’s network without the need for a set-top box has been adopted by a few television manufacturers. They began shipping television sets that incorporate this capability in 2008. We rely on complex information technology systems and networks to operate our business. Any significant system or network disruption could have a material adverse impact on our operations, sales and operating results. We rely on the efficient and uninterrupted operation of complex information technology systems and networks, some of which are within Motorola and some are outsourced. All information technology systems are potentially vulnerable to damage or interruption from a variety of sources, including but not limited to computer viruses, security breach, energy blackouts, natural disasters, terrorism, war and telecommunication failures. There also may be system or network disruptions if new or upgraded business management systems are defective or are not installed properly. We have implemented various measures to manage our risks related to system and network disruptions, but a system failure or security breach could negatively impact our operations and financial results. In addition, we may incur additional costs to remedy the damages caused by these disruptions or security breaches. Our share price has been and may continue to be volatile. Our share price has been volatile due, in part, to generally volatile securities markets, and the volatility in the telecommunications and technology companies’ securities markets in particular. Factors other than our financial results that may affect our share price include, but are not limited to, market expectations of our performance, spending plans of our customers, and the level of perceived growth in the industries in which we participate. The outcome of currently ongoing and future examinations of our income tax returns by the IRS could impact our financial results. We are subject to continued examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuing examinations will not have an adverse effect on future operating results. Failure of our suppliers to use acceptable ethical business practices could negatively impact our business. It is our policy to require our suppliers to operate in compliance with applicable laws, rules and regulations regarding working conditions, employment practices, environmental compliance and trademark and copyright licensing. However, we do not control their labor and other business practices. If one of our suppliers violates labor or other laws or implements labor or other business practices that are regarded as unethical, the shipment of finished products to us could be interrupted, orders could be canceled, relationships could be terminated and our


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    30 reputation could be damaged. If one of our suppliers fails to procure necessary license rights to trademarks, copyrights or patents, legal action could be taken against us that could impact the salability of our inventory and expose us to financial obligations to a third party. Any of these events could have a material adverse effect on our sales and results of operations. Copyright levies in numerous countries for the sale of products may adversely impact our business. Motorola faces the possibility of substantial copyright levies from collecting societies in numerous countries for the sale of products that might be used for the private copying of copyright protected works such as mobile phones, memory cards, and set top boxes. The collecting societies argue that such levies should apply to such products because they include audio/video recording functionality, such as an MP3 player or DVR or storage capability, despite the fact that such products are not primarily intended to act as a recording device. As of this date, to our knowledge, no copyright levies have been paid to any collecting societies anywhere by any manufacturer. Motorola is currently working with other major mobile communications companies to challenge the applicability of these levies to mobile phones, and is also engaged in aggressive lobbying efforts against the levies in general at the European Union level. However, if these levies are imposed, our financial results will be negatively impacted. Item 1B: Unresolved Staff Comments None. Item 2: Properties Motorola’s principal executive offices are located at 1303 East Algonquin Road, Schaumburg, Illinois 60196. Motorola also operates manufacturing facilities and sales offices in other U.S. locations and in many other countries. (See “Item 1: Business” for information regarding the location of the major facilities for each of Motorola’s business segments.) Motorola owns 35 facilities (manufacturing, sales, service and office), 21 of which are located in the Americas Region (USA, Canada, Mexico and Latin America) and 14 of which are located in other countries. Motorola leases 321 facilities, 140 of which are located in the Americas Region and 181 of which are located in other countries. Motorola primarily utilizes 10 major facilities for the manufacturing and distribution of its products. These facilities are located in: Hangzhou and Tianjin, China; Taipei, Taiwan; Chennai, India; Penang, Malaysia; Schaumburg, Illinois; Jaguariuna, Brazil; Reynosa, Mexico; Arad, Israel; and Berlin, Germany. During 2008 and the beginning of 2009, facilities in: Flensburg, Germany; Bohemia, New York; Glen Rock, New Jersey; Beijing, China; and Taunesstein, Germany were sold. Sites at Chandler, Arizona; Arlington Heights, Illinois; and Nogales, Mexico are currently for sale. Motorola generally considers the productive capacity of the plants operated by each of its business segments to be adequate and sufficient for the requirements of each business group. The extent of utilization of such manufacturing facilities varies from plant to plant and from time to time during the year. A substantial portion of Motorola’s products are manufactured in Asia, primarily China, either in our own facilities or in the facilities of others who manufacture and assemble products for Motorola. If manufacturing in the region was disrupted, Motorola’s overall productive capacity could be significantly reduced. Item 3: Legal Proceedings Telsim-Related Cases In April 2001, Telsim Mobil Telekomunikasyon Hizmetleri A.S. (“Telsim”), a wireless telephone operator in Turkey, defaulted on the payment of approximately $2 billion of loans owed to Motorola and its subsidiaries (the “Telsim Loans”). The Uzan family controlled Telsim until 2004 when an agency of the Turkish government took over control of Telsim. In December 2005, Telsim was sold by the Turkish government to Vodafone and Motorola received an aggregate payment from the sale of $910 million. The Company continues its efforts to collect on its judgment of $2.13 billion (the “U.S. Judgment”) for compensatory damages rendered by the United States District Court for the Southern District of New York (the “District Court”) against the Uzans on July 31, 2003 and affirmed by the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) in 2004 and in connection with foreign proceedings against the Uzan family. However, the Company believes that the ongoing litigation, collection and/or settlement processes against the Uzan


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    31 family will be very lengthy in light of the Uzans’ continued resistance to satisfy the judgments against them and their decision to violate various courts’ orders, including orders holding them in contempt of court. Following a remand from the Second Circuit of the U.S. Judgment, on February 8, 2006, the District Court awarded a judgment in favor of Motorola for $1 billion in punitive damages against the Uzan family and their co-conspirator, Antonio Luna Bettancourt. That decision was affirmed by the Second Circuit on November 21, 2007. The District Court, on April 10, 2007, denied the Uzans’ motion to vacate the U.S. Judgment. The Uzans have appealed that decision to the Second Circuit. Howell v. Motorola, Inc., et al. A class action, Howell v. Motorola, Inc., et al., was filed against Motorola and various of its directors, officers and employees in the United States District Court for the Northern District of Illinois (“Illinois District Court”) on July 21, 2003, alleging breach of fiduciary duty and violations of the Employment Retirement Income Security Act (“ERISA”). The complaint alleged that the defendants had improperly permitted participants in the Motorola 401(k) Plan (the “Plan”) to purchase or hold shares of common stock of Motorola because the price of Motorola’s stock was artificially inflated by a failure to disclose vendor financing to Telsim in connection with the sale of telecommunications equipment by Motorola. The plaintiff sought to represent a class of participants in the Plan and sought an unspecified amount of damages. On September 30, 2005, the district court dismissed the second amended complaint filed on October 15, 2004 (the “Howell Complaint”). Three new purported lead plaintiffs have since intervened in the case, and have filed a motion for class certification seeking to represent a class of Plan participants. On September 28, 2007, the Illinois District Court granted the motion for class certification but narrowed the requested scope of the class. On October 25, 2007, the Illinois District Court modified the scope of the class, granted summary judgment dismissing two of the individually-named defendants in light of the narrowed class, and ruled that the judgment as to the original named plaintiff, Howell, would be immediately appealable. The class as certified includes all Plan participants for whose individual accounts the Plan purchased and/or held shares of Motorola common stock from May 16, 2000 through May 14, 2001, with certain exclusions. On February 15, 2008 plaintiffs and defendants each filed motions for summary judgment in the Illinois District Court. On February 22, 2008 the appellate court granted defendants’ motion for leave to appeal from the Illinois District Court’s class-certification decision. In addition, the original named plaintiff, Howell, has appealed the dismissal of his claim. Silverman/Williams Federal Securities Lawsuits and Related Derivative Matters A purported class action lawsuit on behalf of the purchasers of Motorola securities between July 19, 2006 and January 5, 2007, Silverman v. Motorola, Inc., et al., was filed against the Company and certain current and former officers and directors of the Company on August 9, 2007, in the United States District Court for the Northern District of Illinois. The complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 as well as, in the case of the individual defendants, the control person provisions of the Securities Exchange Act. The factual assertions in the complaint consist primarily of the allegation that the defendants knowingly made incorrect statements concerning Motorola’s projected revenues for the third and fourth quarter of 2006. The complaint seeks unspecified damages and other relief relating to the purported inflation in the price of Motorola shares during the class period. An amended complaint was filed December 20, 2007 and Motorola moved to dismiss that complaint in February 2008. On September 24, 2008, the district court granted this motion in part to dismiss Section 10(b) claims as to two individuals and certain claims related to forward looking statements, among other things, and denied the motion in part. In addition, on August 24, 2007, two lawsuits were filed as purportedly derivative actions on behalf of Motorola, Williams v. Zander, et al., and Cinotto v. Zander, et al., in the Circuit Court of Cook County, Illinois against the Company and certain of its current and former officers and directors. These complaints make similar factual allegations to those made in the Silverman complaint and assert causes of action for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment. The complaints seek unspecified damages associated with the alleged loss to the Company deriving from the defendants’ actions and demand that Motorola make a number of changes to its internal procedures. An amended complaint was filed on December 14, 2007. On January 27, 2009, Motorola’s motion to dismiss the amended complaint was granted in part and denied in part.


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    32 In re Adelphia Communications Corp. Securities and Derivative Litigation On December 22, 2003, Motorola was named as a defendant in two cases relating to the In re Adelphia Communications Corp. Securities and Derivative Litigation (the “Adelphia MDL”). The Adelphia MDL consists of at least fourteen individual cases and one purported class action that were filed in or have been transferred to the United States District Court for the Southern District of New York. First, Motorola was named as a defendant in the Second Amended Complaint in the individual case of W.R. Huff Asset Management Co. L.L.C. v. Deloitte & Touche LLP, et al. (the “Huff Complaint”). This case was originally filed by W.R. Huff Asset Management Co. L.L.C. on June 7, 2002, in the United States District Court for the Western District of New York and was subsequently transferred to the Southern District of New York as related to the Adelphia MDL. Motorola and several other individual and corporate defendants are named in the amended complaint. As to Motorola, the complaint alleges a claim arising under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder relating to Adelphia securities, and seeks recovery of the consideration paid by plaintiff for Adelphia debt securities, compensatory damages, costs and expenses of litigation and other relief. Motorola filed a motion to dismiss this complaint on March 8, 2004, which was granted on January 29, 2009. Plaintiff’s motion to file an amended complaint is pending at this time. Also on December 22, 2003, Motorola was named as a defendant in Stocke v. John J. Rigas, et al. This case was originally filed in Pennsylvania and was subsequently transferred to the Southern District of New York as related to the Adelphia MDL. Motorola and several other individual and corporate defendants are named in the amended complaint. As to Motorola, the complaint generally makes the same allegations as the Huff Complaint and a state law claim of aiding and abetting fraud relating to Adelphia securities. The complaint seeks return of the consideration paid by plaintiff for Adelphia securities, punitive damages and other relief. Motorola filed a motion to dismiss this complaint on April 12, 2004. In March 2008, the Stocke plaintiff agreed to become a member of the purported class in Argent and the Stocke action was dismissed by the court as a stand-alone action. On July 23, 2004, Motorola was named as a defendant in Argent Classic Convertible Arbitrage Fund L.P., et al. v. Scientific-Atlanta, Inc., et al. (the “Argent Complaint”). The Argent Complaint was filed against Scientific Atlanta and Motorola in the Southern District of New York. The Argent Complaint generally makes the same allegations as the other previously-disclosed cases relating to the In re Adelphia Communications Corp. Securities and Derivative Litigation that have been transferred to the Southern District of New York. The complaint seeks compensatory damages and other relief. Motorola filed a motion to dismiss the Argent Complaint on October 12, 2004, which is awaiting decision. On September 14, 2004, a complaint filed in state court in Los Angeles, California, named Motorola, Scientific-Atlanta and certain officers of Scientific-Atlanta as defendants, Los Angeles County Employees Retirement Association et al. v. Motorola, Inc., et al. The complaint raises claims under California law for aiding and abetting fraud and conspiracy to defraud and generally makes the same allegations as the other previously disclosed cases relating to the In re Adelphia Communications Corp. Securities and Derivative Litigation that have been transferred to the Southern District of New York. There are no new substantive allegations. The complaint seeks compensatory damages, opportunity-cost damages, punitive and other exemplary damages and other relief. In late 2004, the Multi-District Litigation Panel transferred the case to federal court in New York, which transfer is now final. Motorola filed a motion to dismiss the complaint in this action on September 19, 2005, which is awaiting decision. On October 25, 2004, Motorola was named in a complaint filed in state court in Fulton County, Georgia, naming Motorola and Scientific-Atlanta and certain officers of Scientific-Atlanta, AIG DKR SoundShore Holdings, Ltd., et al. v. Scientific-Atlanta Inc., et al. The complaint raises claims under Georgia law of conspiracy to defraud and generally makes the same allegations as the other previously disclosed cases relating to the In re Adelphia Communications Corp. Securities and Derivative Litigation that have already been filed and transferred to the Southern District of New York. The complaint seeks damages and statutory compensation, punitive damages and other relief. On April 18, 2005, the Multi-District Litigation Panel issued a final order transferring the case to New York and that transfer is final. Motorola filed a motion to dismiss the complaint in this action on September 19, 2005, which is awaiting decision. Adelphia Communications Corp.—Bankruptcy Court Lawsuit On June 23, 2006, Adelphia, on behalf of the estate and the various classes of Adelphia creditors, objected to Motorola’s claim for payment of $67 million and asserted causes of action against Motorola including preferences,


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    33 avoidance of liens, fraudulent transfers, equitable subordination and aiding and abetting fraud as part of the ongoing Adelphia bankruptcy action in the Bankruptcy Court for the Southern District of New York. Plaintiff is alleging damages in excess of $1 billion against Motorola for the above-stated causes of action. The bankruptcy action is still pending. Intellectual Property Related Cases Tessera, Inc. v. Motorola, Inc., et al. Motorola is a purchaser of semiconductor chips with certain ball grid array (“BGA”) packaging from suppliers including Qualcomm, Inc. (“Qualcomm”), Freescale Semiconductor, Inc. (“Freescale Semiconductor”), ATI Technologies, Inc. (“ATI”), Spansion Inc. (“Spansion”), and STMicroelectronics N.V. (“STMicro”). On April 17, 2007, Tessera, Inc. (“Tessera”) filed patent infringement legal actions against Qualcomm, Freescale Semiconductor, ATI, Spansion, STMicro and Motorola in the U.S. International Trade Commission (the “ITC”) (In the Matter of Certain Semiconductor Chips with Minimized Chip Package Size and Products Containing Same, Inv. No. 337-TA-605) and the United States District Court, Eastern District of Texas, Tessera, Inc. v. Motorola, Inc., Qualcomm, Inc., Freescale Semiconductor, Inc. and ATI Technologies, Inc., alleging that certain BGA packaged semiconductors infringe patents that Tessera claims to own. Tessera is seeking orders to ban the importation into the U.S. of certain semiconductor chips with BGA packaging and certain “downstream” products that contain them (including Motorola products) and/or limit suppliers’ ability to provide certain services and products or take certain actions in the U.S. relating to the packaged chips. On December 1, 2008, an Administrative Law Judge issued an initial determination that Tessera failed to prove that BGA packaged semiconductors contained in Motorola products infringe Tessera’s patent claims. On January 30, 2009, the International Trade Commission issued a notice that it will review the Administrative Law Judge’s initial determination and a final determination on the merits is expected on or before April 14, 2009. The patent claims being asserted by Tessera are subject to reexamination proceedings in the U.S. Patent and Trademark Office (“PTO”). Motorola is a defendant in various other suits, claims and investigations that arise in the normal course of business. In the opinion of management, and other than discussed above with respect to the Iridium cases, the ultimate disposition of the Company’s pending legal proceedings will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.


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    34 Item 4: Submission of Matters to a Vote of Security Holders Not applicable. Executive Officers of the Registrant Following are the persons who were the executive officers of Motorola as of February 28, 2009, their ages as of January 1, 2009, their current titles and positions they have held during the last five years: Gregory Q. Brown; age 48; Co-Chief Executive Officer, Motorola, Inc. and Chief Executive Officer of Broadband Mobility Solutions since August 2008; President and Chief Executive Officer, Motorola, Inc. from January 2008 to August 2008; President and Chief Operating Officer from June 2007 to January 2008; Executive Vice President, President, Networks and Enterprise from June 2006 to June 2007; Executive Vice President and President, Government and Enterprise Mobility Solutions from January 2005 to June 2006; Executive Vice President and President, Commercial, Government and Industrial Solutions Sector from January 2003 to January 2005. Dr. Sanjay K. Jha; age 45; Co-Chief Executive Officer, Motorola, Inc. and Chief Executive Officer, Mobile Devices since August 2008; Executive Vice President and Chief Operating Officer, Qualcomm, Inc. from December 2006 to August 2008; Executive Vice President, Qualcomm, Inc. and President, Qualcomm CDMA Technologies from January 2003 to December 2006. Eugene A. Delaney; age 52; Executive Vice President, President, Enterprise Mobility Solutions since January 2009; Senior Vice President, Government and Public Safety from May 2007 to January 2009; Senior Vice President, International Sales Operations, Networks and Enterprise from May 2006 to May 2007; Senior Vice President, International Sales Operations, Government and Enterprise Mobility Solutions from May 2005 to May 2006; Executive Vice President and President, Global Relations and Resources Organization, Government and Enterprise Mobility Solutions from February 2005 to May 2005; Executive Vice President and President, Global Relations and Resources Organization from January 2003 to February 2005. Edward J. Fitzpatrick; age 42; Senior Vice President, Corporate Controller and Acting Chief Financial Officer since February 2009; Senior Vice President, Corporate Controller since January 2009; Corporate Vice President, Finance, Home and Networks Mobility from January 2008 to January 2009; Vice President, Finance, Home and Networks Mobility from June 2007 to January 2008; Vice President, Finance and Controller, Networks and Enterprise from April 2006 to June 2007; Vice President, Finance and Controller, Government and Enterprise Mobility Solutions from July 2005 to April 2006; Senior Director and Controller, Connected Home Solutions from February 2000 to July 2005. A. Peter Lawson; age 62; Executive Vice President, General Counsel and Secretary since May 1998. Gregory A. Lee; age 59; Senior Vice President, Human Resources since January 2008; Senior Vice President, Human Resources, Coca Cola Enterprises from August 2006 to January 2008; Independent Consultant, Talent Management Strategies from May 2005 to August 2006; Senior Vice President, Human Resources, Sears, Roebuck and Co., from January 2001 to May 2005. Daniel M. Moloney; age 49; Executive Vice President, President, Home and Networks Mobility since April 2007; Executive Vice President, President, Connected Home Solutions from January 2005 to April 2007; Executive Vice President and President, Broadband Communications Sector from June 2002 to January 2005. Karen P. Tandy; age 55; Senior Vice President, Public Affairs and Communications since July 2008; Senior Vice President, Global Government Affairs & Public Policy from November 2007 to July 2008; Administrator to the U.S. Drug Enforcement Agency from July 2003 to November 2007. The above executive officers will serve as executive officers of Motorola until the regular meeting of the Board of Directors in May 2009 or until their respective successors shall have been elected. There is no family relationship between any of the executive officers listed above.


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    35 PART II Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Motorola’s common stock is listed on the New York and Chicago Stock Exchanges. The number of stockholders of record of Motorola common stock on January 31, 2009 was 76,858. Information regarding securities authorized for issuance under equity compensation plans is incorporated by reference to the information under the caption “Equity Compensation Plan Information” of Motorola’s Proxy Statement for the 2009 Annual Meeting of Stockholders. The remainder of the response to this Item incorporates by reference Note 17, “Quarterly and Other Financial Data (unaudited)” of the Notes to Consolidated Financial Statements appearing under “Item 8: Financial Statements and Supplementary Data”. The following table provides information with respect to acquisitions by the Company of shares of its common stock during the quarter ended December 31, 2008. ISSUER PURCHASES OF EQUITY SECURITIES (d) Maximum Number (c) Total Number (or Approximate Dollar of Shares Purchased Value) of Shares that (a) Total Number (b) Average Price as Part of Publicly May Yet be Purchased of Shares Paid per Announced Plans Under the Plans or Period Purchased Share or Programs(1) Programs(1) 9/28/08 to 10/24/08 0 0 $3,629,062,576 10/25/08 to 11/21/08 0 0 $3,629,062,576 11/22/08 to 12/31/08 0 0 $3,629,062,576 Total 0 0 (1) Through actions taken on July 24, 2006 and March 21, 2007, the Board of Directors has authorized the Company to repurchase an aggregate amount of up to $7.5 billion of its outstanding shares of common stock over a period ending in June 2009. The timing and amount of future repurchases, if any, will be based on market and other conditions.


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    36 PERFORMANCE GRAPH The following graph compares the five-year cumulative total returns of Motorola, Inc., the S&P 500 Index and the S&P Communications Equipment Index. This graph assumes $100 was invested in the stock or the Index on December 31, 2003 and also assumes the reinvestment of dividends. This graph assumes reinvestment of the Company’s distribution to its shareholders of 0.110415 shares of Class B common stock of Freescale Semiconductor, Inc. (“Freescale Class B Shares”) on December 2, 2004 for each share of Motorola common stock. For purposes of this graph, the Freescale Semiconductor, Inc. distribution is treated as a non-taxable cash dividend of $2.06 (the value of 0.110415 Freescale Class B Shares, based on Freescale Semiconductor’s December 2, 2004 closing price of $18.69) that would have been reinvested in Motorola common stock at the close of business on December 2, 2004. Five-Year Performance Graph 200 184.5 180 160 169.5 140 133.9 127.4 132.1 139.5 120 112.3 126.5 128.5 109.0 100 103.9 106.4 81.3 80 81.2 60 40 38.6 20 0 2003 2004 2005 2006 2007 2008 Motorola S&P 500 S&P Communications


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    37 Item 6: Selected Financial Data Motorola, Inc. and Subsidiaries Five-Year Financial Summary Years Ended December 31 (Dollars in millions, except as noted) 2008 2007 2006 2005 2004 Operating Results Net sales $ 30,146 $ 36,622 $ 42,847 $ 35,310 $ 29,680 Costs of sales 21,751 26,670 30,120 23,881 19,715 Gross margin 8,395 9,952 12,727 11,429 9,965 Selling, general and administrative expenses 4,330 5,092 4,504 3,628 3,508 Research and development expenditures 4,109 4,429 4,106 3,600 3,316 Other charges (income) 2,347 984 25 (404) 149 Operating earnings (loss) (2,391) (553) 4,092 4,605 2,992 Other income (expense): Interest income (expense), net 48 91 326 71 (200) Gains on sales of investments and businesses, net 82 50 41 1,845 460 Other (376) 22 151 (109) (140) Total other income (expense) (246) 163 518 1,807 120 Earnings (loss) from continuing operations before income taxes (2,637) (390) 4,610 6,412 3,112 Income tax expense (benefit) 1,607 (285) 1,349 1,893 1,013 Earnings (loss) from continuing operations (4,244) (105) 3,261 4,519 2,099 Earnings (loss) from discontinued operations, net of tax — 56 400 59 (567) Net earnings (loss) $ (4,244) $ (49) $ 3,661 $ 4,578 $ 1,532 Per Share Data (in dollars) Diluted earnings (loss) from continuing operations per common share $ (1.87) $ (0.05) $ 1.30 $ 1.79 $ 0.87 Diluted earnings (loss) per common share (1.87) (0.02) 1.46 1.81 0.64 Diluted weighted average common shares outstanding (in millions) 2,265.4 2,312.7 2,504.2 2,527.0 2,472.0 Dividends paid per share $ 0.20 $ 0.20 $ 0.18 $ 0.16 $ 0.16 Balance Sheet Total assets $ 27,869 $ 34,812 $ 38,593 $ 35,802 $ 30,922 Long-term debt 4,092 3,991 2,704 3,806 4,581 Total debt 4,184 4,323 4,397 4,254 5,298 Total stockholders’ equity 9,507 15,447 17,142 16,673 13,331 Other Data Capital expenditures $ 504 $ 527 $ 649 $ 548 $ 405 % of sales 1.7% 1.4% 1.5% 1.6% 1.4% Research and development expenditures $ 4,109 $ 4,429 $ 4,106 $ 3,600 $ 3,316 % of sales 13.6% 12.1% 9.6% 10.2% 11.2% Year-end employment (in thousands) 64 66 66 69 68


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    38 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 7: 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 each of the three years in the period ended December 31, 2008. This commentary should be read in conjunction with our consolidated financial statements and the notes thereto appearing under “Item 8: Financial Statements and Supplementary Data.” Executive Overview What businesses are we in? Motorola reports financial results for the following three operating business segments: • The Mobile Devices segment designs, manufactures, sells and services wireless handsets with integrated software and accessory products, and licenses intellectual property. The segment’s net sales in 2008 were $12.1 billion, representing 40% of the Company’s consolidated net sales. • The Home and Networks Mobility segment designs, manufactures, sells, installs and services: (i) digital video, Internet Protocol video and broadcast network interactive set-tops, end-to-end video delivery systems, broadband access infrastructure platforms, and associated data and voice customer premise equipment to cable television and telecom service providers (collectively, referred to as the “home business”), and (ii) wireless access systems, including cellular infrastructure systems and wireless broadband systems, to wireless service providers (collectively, referred to as the “network business”). The segment’s net sales in 2008 were $10.1 billion, representing 33% of the Company’s consolidated net sales. • The Enterprise Mobility Solutions segment designs, manufactures, sells, installs and services analog and digital two-way radio, voice and data communications products and systems for private networks, wireless broadband systems and end-to-end enterprise mobility solutions to a wide range of enterprise markets, including government and public safety agencies (which, together with all sales to distributors of two-way communication products, are referred to as the “government and public safety market”), as well as retail, energy and utilities, transportation, manufacturing, healthcare and other commercial customers (which, collectively, are referred to as the “commercial enterprise market”). The segment’s net sales in 2008 were $8.1 billion, representing 27% of the Company’s consolidated net sales. What were our 2008 financial results? • Net Sales were $30.1 Billion: Our net sales were $30.1 billion in 2008, down 18% compared to net sales of $36.6 billion in 2007. Net sales decreased 36% in the Mobile Devices segment, increased 1% in the Home and Networks Mobility segment and increased 5% in the Enterprise Mobility Solutions segment. • Operating Loss of $2.4 Billion: We incurred an operating loss of $2.4 billion in 2008, compared to an operating loss of $553 million in 2007. Operating margin was (7.9)% of net sales in 2008, compared to (1.5)% of net sales in 2007. Contributing to the operating loss were: (i) $1.8 billion of goodwill and other asset impairment charges, (ii) $393 million of net charges for reorganization and separation-related transaction costs, (iii) excess inventory and other related charges of $370 million due to a decision to consolidate software and silicon platforms in the Mobile Devices segment, and (iv) a $150 million charge related to the settlement of a purchase commitment. • Loss from Continuing Operations of $4.2 Billion, or $1.87 per Share: We incurred a loss from continuing operations of $4.2 billion, or $1.87 per diluted common share, in 2008, compared to a loss from continuing operations of $105 million, or $0.05 per diluted common share, in 2007. Contributing to the loss from continuing operations in 2008 were: (i) a $2.4 billion operating loss, (ii) a $2.1 billion reserve related to our deferred tax asset valuation allowance, (iii) $365 million of other-than-temporary investment impairment charges, (iv) $186 million of impairment charges on Sigma Fund investments, and (v) $101 million of temporary unrealized losses of Sigma Fund investments, partially offset by: (i) the tax benefit resulting from our operating loss, and (ii) a $237 million curtailment gain associated with the decision to freeze benefit accruals in the U.S. pension plans.


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    MANAGEMENT’S DISCUSSION AND ANALYSIS 39 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS • 2008 Global Handset Market Share Estimated at 8%, based on Annual Handset Shipments of 100.1 Million Units: We estimate our share of the global handset market in 2008 was approximately 8%, a decrease of approximately 6 percentage points versus 2007. We shipped 100.1 million handsets in 2008, a 37% decrease compared to shipments of 159.1 million handsets in 2007. We estimate our market share in the fourth quarter of 2008 was approximately 6%, a decrease of approximately 6 percentage points versus the fourth quarter of 2007. We shipped 19.2 million handsets in the fourth quarter of 2008, a 53% decrease compared to shipments of 40.9 million handsets in the fourth quarter of 2007. • Digital Entertainment Device Shipments were 18.0 Million: We shipped 18.0 million digital entertainment devices in 2008, an increase of 19% compared to shipments of 15.1 million units in 2007. • Operating Cash Flow of $242 Million: We generated operating cash flow of $242 million in 2008, compared to operating cash flow of $785 million in 2007. What were the financial results for our three operating business segments in 2008? • In Our Mobile Devices Business: Net sales were $12.1 billion in 2008, a decrease of 36% compared to net sales of $19.0 billion in 2007. On a geographic basis, net sales decreased substantially in North America, the Europe, Middle East and Africa region (“EMEA”), and Asia and, to a lesser extent, decreased in Latin America. The decrease in net sales was primarily driven by a 37% decrease in unit shipments. The segment incurred an operating loss of $2.2 billion in 2008, compared to an operating loss of $1.2 billion in 2007. The increase in the operating loss was primarily due to a decrease in gross margin, driven by: (i) the 36% decrease in net sales, (ii) excess inventory and other related charges of $370 million in 2008 due to a decision to consolidate software and silicon platforms, and (iii) a $150 million charge in 2008 related to the settlement of a purchase commitment, partially offset by: (i) the absence in 2008 of a $277 million charge for a legal settlement in 2007, and (ii) savings from supply chain cost-reduction initiatives. The decrease in gross margin was partially offset by decreases in: (i) selling, general and administrative (“SG&A”) expenses, primarily due to lower marketing expenses and savings from cost- reduction initiatives, and (ii) research and development (“R&D”) expenditures, reflecting savings from cost- reduction initiatives. • In Our Home and Networks Mobility Business: Net sales were $10.1 billion in 2008, an increase of 1% compared to net sales of $10.0 billion in 2007. On a geographic basis, net sales increased in Latin America and Asia, and decreased in North America and EMEA. The increase in net sales primarily reflects a 16% increase in net sales by the home business, partially offset by an 11% decrease in net sales by the networks business. Operating earnings were $918 million, an increase of 29% compared to operating earnings of $709 million in 2007. The increase in operating earnings was primarily due to: (i) decreases in both SG&A and R&D expenditures, primarily related to savings from cost-reduction initiatives, and (ii) a decrease in reorganization of business charges, relating primarily to lower employee severance costs. These factors were partially offset by a decrease in gross margin, primarily due to: (i) an unfavorable product mix, and (ii) the absence of net sales by embedded communication computing group (“ECC”) that was divested at the end of 2007. • In Our Enterprise Mobility Solutions Business: Net sales were $8.1 billion in 2008, an increase of 5% compared to net sales of $7.7 billion in 2007. On a geographic basis, net sales increased in EMEA, Asia and Latin America and decreased in North America. The increase in net sales reflects an 8% increase in net sales to the government and public safety market, partially offset by a 2% decrease in net sales to the commercial enterprise market. Operating earnings were $1.5 billion, an increase of 23% compared to operating earnings of $1.2 billion in 2007. The increase in operating earnings was primarily due to an increase in gross margin, driven by: (i) the 5% increase in net sales, (ii) a favorable product mix, (iii) the absence in 2008 of an inventory-related charge in connection with the acquisition of Symbol Technologies, Inc. (“Symbol”) during the first quarter of 2007, and (iv) a decrease in SG&A expenses, primarily related to savings from cost- reduction initiatives. The increase in gross margin was partially offset by increased R&D expenditures, primarily due to developmental engineering expenditures for new product development and investment in next-generation technologies.


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    40 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS What were our major challenges and accomplishments in 2008? • In our Mobile Devices Business: 2008 was a very difficult year for our Mobile Devices business. Demand for Motorola’s wireless handsets declined in 2008 primarily due to limited product offerings in critical market segments, particularly 3G products, including smartphones, as well as very low-tier products. We also were impacted by the worldwide economic downturn in the second half of 2008, as the overall market for handsets grew at a slower rate than in 2007, particularly in the fourth quarter. Motorola believes it lost approximately 6 percentage points of market share and estimates its global market share was approximately 8% for the full year 2008. During 2008, the Mobile Devices business launched a number of new products, including: new feature phones for GSM, CDMA and UMTS technologies; additions to the ROKR family of music devices; additions to the smartphone portfolio, including Q and MING devices, for consumers who multi-task and want flexibility in today’s business environment; and several handsets at affordable price points for consumers with everyday communications needs. The Mobile Devices business has taken significant actions in 2008 to reduce its size and cost structure, including actions to simplify its wireless handset platforms and enhance its product portfolio. To that end, we announced that our silicon strategy is to use two primary silicon providers to achieve faster time to market and reduce costs. Our software platforms will focus on fewer operating systems, including Android (a Google-developed, royalty-free platform) and Windows Mobile (a Microsoft platform). Our portfolio focus will be increasingly on 3G and smartphone devices, particularly in the mid- and high-price tiers, while continuing to focus on our proprietary iDEN technology and CDMA software platforms. In addition to our portfolio streamlining and enhancement efforts, over the next year we will also increase our focus in priority markets. These markets will include North America, Latin America and parts of Asia, including China. Actions taken throughout the year, including the decisions to reduce platforms and focus on key markets, resulted in a lower operating expense cost structure in 2008 compared to 2007. • In our Home and Networks Mobility Business: The Home and Networks Mobility business improved its operating margin and remained the world’s leading provider of digital entertainment devices. Total net sales in the home business grew by 16% in the year, which included significant business growth outside of the U.S. The business enhanced its portfolio of advanced video, voice, and data platforms with several new product introductions, including DOCSIS 3.0 products, MPEG-4 compression technology, and the DCX- series of multimedia digital entertainment devices. The home business completed the acquisition of Dahua Digital to increase our position in the rapidly growing cable market in China. Net sales in the networks business were lower primarily due to the absence of net sales by ECC that was divested at the end of 2007. The networks business also experienced a decline in sales of iDEN, CDMA and GSM technologies, while sales of WiMAX and UMTS technologies and related services increased. Motorola continued its investments in and focus on next-generation wireless broadband technologies, including WiMAX and LTE. Our first sales for WiMAX network equipment were recorded in the fourth quarter of 2008. In addition, Motorola was the first wireless networks infrastructure supplier to demonstrate a handoff between CDMA EV-DO rev. A and LTE, as well as the first over-the-air session of LTE in the 700MHz band. Despite the challenges facing the wireless infrastructure industry, Motorola’s networks business improved its profitability compared to 2007 and demonstrated leadership in next-generation technologies. • In our Enterprise Mobility Solutions Business: In 2008, the Enterprise Mobility Solutions business delivered solid results, including an improvement in operating margin. The business continued to maintain leading market share positions in several highly competitive markets. Within the government and public safety market, sales grew as demand for integrated, interoperable public safety communications increased. As new and better spectrum utilization evolves, demand and sales have increased for high-speed data applications, such as video surveillance, dual-mode devices, including the MOTOTRBO product family, and other data-based products. In addition to our continued success in the U.S., our largest market, the business experienced significant growth in all markets outside of the U.S. The business acquired a controlling interest in Vertex Standard Co., Ltd. to further expand its two-way radio portfolio and open up new market opportunities, both in the U.S. and internationally. We also announced


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    MANAGEMENT’S DISCUSSION AND ANALYSIS 41 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS the industry leading APX family of products, including mobile and portable radios and infrastructure, and received very positive customer response. During the year, the commercial enterprise business enhanced its product portfolio by launching several new mobile computing, wireless computing and advanced data capture products that further strengthened our position in the commercial enterprise marketplace. The enhanced mobile computing offerings included the MC75 product lines, which had very successful product launches and were well received in all regions. The portfolio was also strengthened by the acquisition of AirDefense, a leading provider of premium software security applications for wireless LAN networks. Looking Forward Adverse economic conditions around the world have impacted many customers and consumers and resulted in slowing demand for many of our businesses. However, the longer-term, fundamental trend regarding the dissolution of boundaries between the home, work and mobility continues to evolve. We believe our focus on designing and delivering differentiated wireless communications products, unique experiences and powerful networks, as well as complementary support services, will enable consumers to have a broader choice of when, where and how they connect to people, information, and entertainment. While many markets we serve will have little to no growth, or even contraction in 2009, there still remain large numbers of businesses and consumers around the world who have yet to experience the benefits of converged wireless communications, mobility, and the Internet. As economies, financial markets and business conditions improve, this will present new opportunities to extend our brand, to market our products and services, and to pursue profitable growth. In 2008, the Company announced that it was pursuing the creation of two independent, publicly traded companies: one comprised of our Mobile Devices business, and the other comprised of our Home and Networks Mobility and Enterprise Mobility Solutions businesses (collectively, referred to as “Broadband Mobility Solutions businesses”). The Company also indicated that it was targeting the third quarter of 2009 for the separation to occur. However, due to the weakened global economic environment and dislocation in the financial markets, as well as changes underway in the Mobile Devices business, the Company is no longer targeting the third quarter of 2009 to complete the separation. The Company has made progress on various elements of its separation plan. Management and the Board of Directors remain committed to separation in as expeditious a manner as possible and continue to believe this is the best path for the Company. Goldman Sachs & Co., the Company’s primary financial advisor on this matter, supports this direction. The Board continues to work with its financial advisors on potential alternative separation structures. The Board further believes that in working with its financial advisors the Company will be able to find a structure which will permit separation in a way that maximizes value for all shareholders. We expect the overall global handset market to remain intensely competitive with lower total demand due to the continued adverse economic environment around the world. Our strategy is focused on simplifying product platforms, enhancing our product portfolio in the mid- and high-tier, reducing cost structure and strengthening our position in priority markets. To this end, in 2008, we have reduced the number of product platforms that we support, increasing our emphasis on 3G and smartphone devices while maintaining our focus on CDMA and iDEN technologies. We expect our transition to a more competitive portfolio will show progress by the fourth quarter 2009 and continue in 2010. In addition to our portfolio streamlining and enhancement efforts, over the next year we will also increase our focus in priority markets. These markets will include North America, Latin America and parts of Asia, including China. Along with our mobile handset initiatives, we have also increased focus on our accessories portfolio to deliver complete mobile experiences and to complement our handset features and functionalities. In addition to our efforts to dramatically improve the product portfolio, we have implemented cost-reduction initiatives to ensure that we have a more competitive cost structure. These actions will accelerate our speed to market with new products, allow us to offer richer consumer experiences and improve our financial performance. In our Home and Networks Mobility business, we are focused on delivering personalized media experiences to consumers at home and on-the-go and enabling service providers to operate their networks more efficiently and profitably. We will build on our market leading position in digital entertainment devices and video delivery systems to capitalize on demand for high definition TV, personalized video services, broadband connectivity and higher speed. We will also deliver broadband access systems and gateway products for video, voice and data services. However, due to the impact that economic conditions, especially in the U.S., may have on demand for services provided by some of our customers, demand is likely to slow in 2009 in the home business. We will continue to make investments to position ourselves as a leading infrastructure provider of next-generation wireless technologies. As more networks are commercialized, we expect an increase in WiMAX sales opportunities beginning in 2009. We expect the overall 2G and 3G wireless infrastructure market to decline compared to 2008 and to remain highly competitive. The Home and Networks Mobility business will continue to optimize its cost structure and prioritize investments in innovation and future growth opportunities. This will position the business


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    42 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for future opportunities in emerging technologies, including video and wireline and wireless broadband, and enable the business to maintain profitability in mature technologies. In our Enterprise Mobility Solutions business, we will build on our leadership position in mission-critical communications solutions and develop next-generation products and services for our government and public safety customers around the world. This will enable us to address the continued high priority placed on public safety and homeland security by our customers. Our business-critical enterprise communications products, including two-way communications, mobile computing, and advanced data capture products and services, allow our customers to reduce cost, increase worker mobility and productivity, and enhance their customers’ experiences. We offer this leading portfolio across a broad spectrum of commercial enterprise markets, including retail, transportation, utility, manufacturing, and healthcare industries. Our government and enterprise customers are facing uncertainty and volatility as a result of the ongoing global financial crisis. This will likely lead to lower capital spending by these customers and slowing demand in the markets served by our Enterprise Mobility Solutions business. Over 40 U.S. states and many local governments are facing budget deficits in 2009, and some states may be required to significantly curtail spending. Additionally, many governments outside the U.S. are facing 2009 budget deficits. Although we continue to believe that our government customers will prioritize public safety and homeland security spending, budget constraints could impact the timing and volume of purchases by these customers. We believe that our comprehensive portfolio of products and services, leadership positions in government and public safety and commercial enterprise markets and global network of channel partners and distributors make our Enterprise Mobility Solutions business well positioned to meet these challenges. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the “Stimulus Package”) became law. The Stimulus Package implements $787 billion of spending and investment by the U.S. federal government, including spending in areas of infrastructure and technology that may benefit our customers and Motorola. Our domestic government and public safety customers may benefit from additional funding for state and local law enforcement agencies and homeland defense initiatives. Opportunities for our Home and Networks Mobility business may result from Stimulus Package funding for broadband and wireless internet initiatives. In addition, as many foreign governments consider similar packages as a way to combat the ongoing global financial crisis, our foreign customers may benefit from additional funding from stimulus packages applicable to them. During 2008 and in January 2009, the Company initiated a number of global actions to reduce its cost structure. These actions were primarily focused on our Mobile Devices business, but also included the other businesses and corporate functions. Actions included workforce reductions, prioritization of investments, spending controls and changes to compensation and benefit programs. These actions are expected to result in a further reduction in the Company’s cost structure in 2009. To ensure alignment with changing market conditions, the Company will continually review its cost structure as it aggressively manages costs throughout 2009 while maintaining investments in innovation and future growth opportunities. Our investment priorities include: next-generation wireless converged communications products and services for enterprise markets; advanced technologies and applications for mission-critical communications in government and public safety markets; broadband video systems for service providers; and next-generation wireless handsets with application services. These investments, together with the acquisitions of recent years, are designed to foster continued innovation and position us for future profitable growth opportunities. In light of the ongoing global financial crisis and the severe tightening in the worldwide credit markets, the Company is very focused on the strength of its balance sheet and its overall liquidity position. In 2009, operating cash flow improvement, working capital management and preservation of total cash will continue to be major focuses for the Company. We will continue to direct our available funds, including our Sigma Fund investments, primarily into cash or very highly-rated, short-term securities. In February 2009, the Company announced that its Board of Directors suspended the declaration of quarterly stock dividends. We also plan to reduce capital expenditures in 2009 compared to 2008. In addition to the $2.0 billion of cash, cash equivalents, short-term investments and Sigma Fund investments (“Cash and Sigma Funds”) the Company held in the U.S. at the end of 2008, the Company held $5.4 billion of Cash and Sigma Funds in foreign jurisdictions. The Company repatriated over $2 billion to the U.S. in 2008 at minimal cash tax cost and expects to continue to efficiently repatriate funds from international jurisdictions to the U.S. in 2009. Given the level of Cash and Sigma Funds, the Company believes it has more than sufficient liquidity to operate its business.

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