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    2009 ANNUAL REPORT MOTOROLA, INC.


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    About Motorola Motorola (NYSE: MOT) is 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 better connected and more mobile. We have 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. More recently, Motorola has taken leadership positions in solutions for public safety, enterprises, mobile computing, 4G communications and high definition video. Today, Motorola offers a broad portfolio of technologies, solutions and services – including wireless handsets and smartphones, digital entertainment devices, video distribution systems, two-way radios, mission critical solutions, wireless and wireline broadband solutions, and end-to-end enterprise mobility solutions. We operate in numerous countries around the globe, tapping the creativity of diverse cultures and individuals. The trends toward media mobility, ubiquitous connectivity and wireless flexibility, coupled with mobile lifestyles and business, continue to expand. 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. At Motorola, our history is rich, our future is filled with opportunity, and the spirit of innovation is what drives us.


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    7JAN201013065306 March 2010 Dear Fellow Shareholders: In 2009, we navigated through very challenging global economic conditions. We focused on our customers, developed innovative products and solutions, increased total cash to more than $8 billion, and reduced our cost structure by $1.9 billion. In Mobile Devices, we substantially reduced our operating loss. In Enterprise Mobility Solutions and Home and Networks Mobility, we maintained market leadership and delivered solid operating profitability. In February 2010, we provided an update on our plans to pursue the creation of two independent, publicly traded companies. We expect to complete the separation in the first quarter of 2011, with one company comprised of our Mobile Devices and Home businesses and the other company comprised of our Enterprise Mobility Solutions and Networks businesses. We believe that the separation will best position each business to successfully pursue its respective strategies and opportunities for growth. Business review 2009 was a year of significant progress for our Mobile Devices business. Execution of our smartphone strategy showed tangible results with the launch of CLIQTM/DEXTTM with MOTOBLURTM and DROID by Motorola/MILESTONETM, our first Android-based smartphones. During the year, Mobile Devices significantly reduced its cost structure and sharpened its focus in priority markets. With plans to further expand our portfolio of smartphones in 2010, we are well positioned to address the fastest growing segment of the handset market. Our Enterprise Mobility Solutions business is a substantial franchise with leadership positions in many business and mission-critical communications markets. In 2009, our research and development continued to focus on delivering innovative products and solutions, such as our industry-leading APXTM two-way radio communications systems. We believe that our comprehensive product portfolio and market leadership make our Enterprise Mobility Solutions business well positioned for profitable growth as market conditions improve. In Home and Networks Mobility, we remained the world’s leading provider of digital entertainment devices in 2009 and shipped our 100 millionth digital entertainment device. We prioritized our research and development to deliver innovative video solutions for both consumers and operators and, through our acquisition activity, enhanced our portfolio with leading video-on-demand and digital security solutions. We also continued to invest in WiMAX and LTE, 4G wireless broadband solutions that deliver higher bandwidth speeds and enable richer mobile experiences. continued –


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    Looking ahead In 2010, we believe that improving market conditions and customer demand, as well as the continued convergence of mobility, computing, communications and the Internet, will provide the foundation for renewed growth. As two separate companies, we have the opportunity to strengthen our leadership positions for both companies in their respective markets. They will operate in attractive and growing industries and offer solutions that solve consumer needs, improve security, increase productivity and enable an increasingly mobile world. As we prepare for separation, we will continue to focus on: • Customers—Our customers depend on Motorola as an innovative partner that anticipates emerging trends and collaborates on technology roadmaps. We will continue to listen to our customers and create solutions that help them succeed. • Innovation—We will differentiate 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. • Brand—Motorola enjoys one of the most recognized brands in the world. We will continue to expand our brand strength across all of our businesses. • Corporate responsibility—We believe that doing business and doing the right thing are not mutually exclusive for responsible global companies. We will continue to demonstrate our corporate responsibility by investing in our communities as well as reducing our environmental impact. • People—We remember that people are at the heart of everything we do—from the incredibly innovative and dedicated Motorola team to the end users and consumers that we serve. We will continue to advance the way the world connects by focusing on the value we provide to people around the world. We are excited about the opportunity ahead of us and look forward to providing a path for improved financial results and increased long-term shareholder value. Regards, 7JAN201013025805 7JAN201013030770 Greg Brown Sanjay Jha Co-CEO, Motorola, Inc. Co-CEO, Motorola, Inc. CEO, Enterprise Mobility Solutions CEO, Mobile Devices 7JAN201012561341 and Networks business 7JAN201012570420 and Home business


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    MOTOROLA, INC. 2009 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, 2009 or អ 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, $.01 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 អ 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 អ 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 អ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ፤ No អ 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. អ 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 អ Non-accelerated filer អ Smaller reporting company អ (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 អ No ፤ The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of July 4, 2009 (the last business day of the Registrant’s most recently completed second quarter) was approximately $14.2 billion (based on the closing sale price of $6.19 per share as reported for the New York Stock Exchange-Composite Transactions). The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of January 31, 2010 was 2,312,879,064. 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 3, 2010, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Patents and Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Environmental Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Financial Information About Geographic Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 33 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 34 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . .. . . . . 35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . .. . . . . 74 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 77 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . .. . . . . 130 Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 130 Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 132 PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . .... 132 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 132 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 132 Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . .... 132 Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 132 PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 15(a)(1) Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 15(a)(2) Financial Statement Schedule and Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . 133 15(a)(3) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133


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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, set-top boxes and video distribution systems, analog and digital two-way radios, wireless and wireline broadband network products, and end-to-end 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, including smartphones, with integrated software and accessory products, and licenses intellectual property. • The Home and Networks Mobility business designs, manufactures, sells, installs and services: digital video, Internet Protocol video and broadcast network interactive set-tops, end-to-end video distribution systems, broadband access infrastructure platforms, data and voice customer premise equipment, wireless and wireline cable and cellular broadband networks. • The Enterprise Mobility Solutions business designs, manufactures, sells, installs and services analog and digital two-way radios, wireless LAN and security products, voice and data communications products and systems for private networks, wireless broadband systems and end-to-end enterprise mobility solutions. 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, including smartphones, with integrated software and accessory products, and licenses intellectual property. In 2009, the segment’s net sales represented 32% 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 license our intellectual property. We market our products globally to carriers and consumers through direct sales, distributors and retailers.


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    2 Our Industry In 2009, total industry shipments of wireless handsets decreased approximately 6% compared to 2008, primarily as a result of the global economic downturn. This was the first annual decline in handset industry unit shipments since 2001. The economic downturn resulted in slower growth in the emerging markets and lower replacement sales in highly-penetrated markets, primarily in the U.S. and Western Europe. By the fourth quarter of 2009, the industry began showing signs of recovery with positive quarterly year-over-year growth. With many customers maintaining tight inventory management during 2009, a strengthening global economy and improving consumer demand, the recent handset market recovery is expected to continue through 2010. Analysts are predicting total industry handset shipments to increase approximately 9% (on average) for the full-year 2010 compared to 2009. Growth is expected to be driven from new subscribers in emerging markets and increasing demand for smartphones. Smartphones are expected to be the fastest growing and the most profitable segment of the mobile handset industry over the next several years. Key drivers of this growth include: (i) consumer desires for feature-rich devices that provide access to mobile Internet, media, social networking, navigation and messaging at anytime and anyplace, (ii) operators drive to increase data ARPU (average revenue per user) to offset declining voice ARPU, (iii) the trend toward open operating systems that provide computer-like functionality to handsets, and (iv) the evolution of networks to support high-speed Internet access (3G and 4G). Our Strategy The Mobile Devices segment is focused on delivering compelling, mobile experiences to consumers while becoming the hub of people’s lives and the gateway to the mobile Internet. With the Android operating platform and our MOTOBLURTM software solution and MotoDEV application development program, we intend to provide applications and services to support end-to-end, customizable solutions desired by consumers. As the market evolves to reflect the emergence of converged wireless devices, mobile Internet, media/video, social networking, navigation and messaging, the shift from voice-centric devices to data-centric devices continues to accelerate. These devices, which include smartphones developed on open platforms, deliver unique consumer experiences and require complete end-to-end solutions that incorporate various applications and services. By utilizing the smartphone, we are able to deliver computer-like functionality, such as web browsing and email, across our portfolio. We believe that open platforms foster innovation and encourage the development of applications suited to consumers, wherever they are located. Our primary smartphone development is based on the Android operating system (a Google-developed, royalty-free open platform). The Android platform is a modular operating system which enables multiple simultaneous operations. It provides a well-developed ecosystem that continues to grow with a broad range of applications. We are differentiating our Android smartphone experience through our unique MOTOBLUR software solution. MOTOBLUR utilizes cloud-based services to help ensure that our users digital lives can be accessed from anywhere. It combines content-forward, deeply integrated software applications and a unique interface with a server-based back-end solution that gathers, organizes and delivers fresh content and data automatically. In addition to MOTOBLUR, we are enabling third-party solutions through our MotoDEV application development programs. MotoDEV leverages partner ecosystems to deliver customizable content to consumers. This content can be pre-loaded, embedded or downloaded on Android-powered devices. In some markets, as in China, we offer our SHOP4APPS application store to provide consumers additional applications and service choices. As the segment creates stronger software solutions and capabilities, we continue to invest in next-generation technologies for wireless devices based on High-Speed Downlink Packet Access (HSDPA) and Long-Term Evolution (LTE). These investments provide opportunities to differentiate our products as we develop smartphones that support the migration toward higher network bandwidth. In addition to our smartphone portfolio and focus on delivering key experiences, we are also (i) maintaining our technological leadership in our proprietary iDEN technology, (ii) focusing on priority markets, (iii) selectively offering voice-centric devices through third-party original design manufacturer (‘‘ODM’’) development, and (iv) leveraging companion products to deliver complete mobile experiences.


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    3 The Mobile Devices segment continues to maintain a strong market position with its iDEN technology. Increased demand in North America, as well as internationally, drove iDEN growth in 2009. Our iDEN strategy aligns with our focus on priority regions. We are increasing our focus in priority markets, which include North America, parts of Asia, including China, and Latin America. Historically, these are regions in which we have experienced strong market share and brand position. In other regions, we will prioritize and make investments commensurate with the competitiveness of our portfolio. In the long term, we plan to compete in all major markets. In order to successfully compete in our prioritized regions, maintain brand awareness and provide products at multiple price points, we are working with ODM partners to generate lower-end, voice-centric devices. Along with our mobile handset initiatives, we will leverage our companion products portfolio to extend smartphone experiences through companion devices. Customers The segment has several large customers located throughout the world. In 2009, aggregate net sales to the segment’s five largest customers represented approximately 54% 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 accounted for approximately 21% of the segment’s net sales in 2009. Beginning in late 2008 and throughout 2009, uncertainty about current and future global economic conditions caused our customers to maintain tighter inventory management. We expect this inventory management trend to continue in 2010. The U.S. market continued to be the segment’s largest individual market, accounting for approximately 58% of the segment’s net sales in 2009, compared to approximately 44% of the segment’s net sales in 2008. In 2009, the segment’s largest markets outside the U.S. were Brazil, China, Mexico and Korea. In 2009 compared to 2008, 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 wireless handset market is highly competitive and many new competitors have entered the market in the last several years. As the market continues to move toward smartphones, this trend may result in even more competition. The segment experiences increasingly intense competition in worldwide markets from numerous global competitors. In 2009, the three largest handset manufacturers together held an aggregate market share of approximately 69%. In addition, non-traditional device manufacturers continue to enter the marketplace while second-tier vendors, in regions such as Asia, provide another layer of competition. In 2009, the segment’s overall market share decreased significantly and the segment was the fifth-largest worldwide supplier of wireless handsets on a full-year basis. 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. 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


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    4 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. Deregulation may introduce new competition and new opportunities for Motorola and our customers. Backlog The segment’s backlog (excluding any deferred revenue) was $409 million at December 31, 2009, compared to $290 million at December 31, 2008. This increase in backlog is primarily due to demand for our smartphones that were launched in the fourth quarter of 2009. The 2009 backlog is believed to be generally firm and 100% of that amount is expected to be recognized as revenue in 2010. 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. For additional information relating to patents and trademarks and research and development activities with respect to this segment, see the discussion under ‘‘Other Information.’’ 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 2009, the segment had a significantly lower inventory balance than at the end of 2008. The decrease reflects lower sales requirements and significant improvements in inventory management processes. Availability of materials and components required by the segment is relatively dependable; however, 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, 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 steadily increased during 2009 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 resources 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 The segment’s headquarters are located in Libertyville, Illinois. Our other major facilities are located in Beijing and Tianjin, China; Jaguariuna, Brazil; Seoul, South Korea; and Plantation, Florida. A significant portion of our handsets are manufactured either completely or substantially by a small number of electronics manufacturing suppliers (‘‘EMSs’’) and ODMs. The segment relies on these third-party providers to deliver products that meet consumer demands in the rapidly-changing technological environment. In 2009, our


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    5 handsets were primarily manufactured in China and Brazil, and we expect this to continue in 2010. 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 distribution 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 2009, the segment’s net sales represented 36% 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 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 continues to evolve rapidly as cable and telecom network operators expand video, data, voice and mobile services to create ‘‘triple play’’ or ‘‘quad play’’ bundles to grow their subscriber base. The competition between cable and telecom service providers continues to increase. Telecom operators are expanding their broadband networks by offering advanced video and data services using IPTV and PON technologies in a growing number of markets. Cable operators are responding by increasing their 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 beginning to launch mobile data services. Our home business is subject to regulation by the Federal Communications Commission (‘‘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 retail distribution of televisions and other video devices capable of accessing encrypted cable programming. Our home business offers a cablecard that allows third-party consumer electronic devices to be deployed on an operator’s 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.


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    6 In 2009, the overall market for the home business declined as operators constrained spending due to difficult macroeconomic conditions and the resulting slowdown in data and digital video subscriber additions, particularly in more mature markets. Declines in spending primarily occurred for infrastructure products, data consumer premise equipment (CPE) products and digital set-tops in North America. These market declines were partially offset by increases in international sales of IP set-tops. Spending will be influenced by video and data subscribers’ increasing demand for advanced video platforms and applications, as well as from telecom operators’ upgrading their networks and adding video services. The growth of broadband connectivity is expected to continue as demand for high-speed data causes cable operators to upgrade to DOCSIS 3.0 and telecom service providers to deploy very high speed digital subscriber line (‘‘VDSL’’) and PON data services. 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, many cellular service providers have migrated 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 has assigned 3G licenses for three different 3G standards, driving regional network upgrades. The International Telecommunications Union (‘‘ITU’’) that develops the global framework for information and communications networks has established performance requirements for its IMT-Advanced standard, commonly referred as 4th generation (4G) wireless access. Standards bodies are developing specifications to meet the 4G requirements based on orthogonal frequency division multiplexing (‘‘OFDM’’) technology which will utilize wider channels and offer higher data rates to expand broadband access offerings. Today, the standards bodies are evolving the WiMAX and LTE standards towards meeting the IMT-Advanced specifications. The 3rd Generation Partnership Project (‘‘3GPP’’), which defined the industry’s GSM specifications, is developing an LTE-Advanced standard to address the IMT-Advanced requirements. The Institute of Electrical and Electronics Engineers (‘‘IEEE’’), which defined standards known as fixed WiMAX (802.16d) and mobile WiMAX (802.16e), is also developing the 802.16m standard to address the IMT-Advanced requirements. 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 1,700 license holders worldwide for broadband wireless access technologies. The WiMAX market, which now totals over 500 WiMAX networks in 147 different countries, has experienced strong growth since commercial deployments began. While WiMAX has been the early leader in broadband access deployments, LTE has widespread industry support, not only from current GSM and UMTS operators, but also from CDMA/EV-DO based carriers. 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) technology advancements, (iv) standardization efforts that impact the deployment of new technology, (v) new legislation and regulations affecting the equipment sold by the segment, and (vi) general economic conditions. During 2009, wireless operators’ expenditures globally for 2G GSM and CDMA technology and related services declined compared to 2008. Similar expenditures for iDEN technology were also down in 2009. Global expenditures for 3G technology and related services, such as W-CDMA/HPSA and CDMA2000/1xEV-DO technology, were up compared to 2008. The continued expansion of broadband access networks also drove global growth in 2009 for next-generation technologies, such as WiMAX, and related services. Overall wireless infrastructure spending was down slightly in 2009 compared to 2008. Forecasted industry trends point to a slight increase in operator expenditures globally in 2010, as growth in wireless data access demand drives networks expansion.


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    7 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 convergence of IP Media content in the home. We continue to invest to differentiate our products and services 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 2009, we signed a definitive agreement to acquire BitBand, a leading provider of content management and delivery systems specializing in video-on-demand for IPTV. 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 deploying our Gigabit PON platform and Very High Speed Digital Subscriber Line (‘‘VDSL’’) gateways. In the networks business, the segment provides equipment and services to over 135 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 2009, the segment delivered WiMAX network equipment to 39 WiMAX networks throughout the world. In addition, at the end of 2009, the segment was participating in 12 WiMAX trials globally, representing new business opportunities in 2010. 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 2009, 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 was 51% in 2009, compared to 50% in 2008. 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 technology 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.


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    8 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 2009 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 leased set-tops to their customers with an integrated conditional access content security system. In 2007, FCC regulations requiring the separation of security functionality from set-tops became effective. In meeting 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. Several major cable operators are working to support full two-way security interface architecture that allows retail customers access to all programming available on the operator’s network without the need for a set-top box. A few television and video device manufacturers have begun shipping or are developing such devices. If they achieve a meaningful volume of sales they could negatively impact our sales of set-tops to cable providers. 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. Our largest competitors for cable and telco broadband data and voice devices include Technicolor (formerly Thomson), Huawei and Arris. 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 equipment vendors to many small, specialized firms. Ericsson is the market leader, followed by the Nokia-Siemens joint venture, followed by Alcatel-Lucent, Huawei and Motorola, along with other vendors with similar market share. We believe we are a leading provider of WiMAX technologies. The segment’s networks business is confronting several factors that could impact its business, including, 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. 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.


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    9 The FCC continues to examine ways to promote commercial availability of retail video CPE devices that can deliver Multichannel Video Programming Distributor (MVPD) content to consumers. While the FCC has not formally proposed any new regulatory mandates in this area, changes to the existing framework could impact our set-top box business. 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 reclaimed by the government in June 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 $2.1 billion at December 31, 2009, compared to $2.3 billion at December 31, 2008. The 2009 order backlog is believed to be generally firm and 100% of that amount is expected to be recognized as revenue during 2010. 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. 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. The protection of these licenses is also important to the segment’s operations. For additional information relating to patents, trademarks and research and development activities with respect to this segment, see the discussion under ‘‘Other Information’’. 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 2009, the segment had lower inventory balances than at the end of 2008, primarily due to lower sales levels as well as manufacturing strategies to reduce inventory levels.


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    10 Availability of materials and components required by the segment is relatively dependable, however, 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 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 steadily increased during 2009 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 resources 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 The segment’s headquarters are located in Horsham, Pennsylvania. Our other major facilities are located in: Arlington Heights, Illinois; San Diego, California; Taipei, Taiwan; Bangalore, India; Beijing, Hangzhou and Tianjin, China; and Reynosa, Mexico. A portion of the segment’s manufacturing is done by a small number of non-affiliated electronics manufacturing suppliers and original design manufacturers, primarily in Asia. The segment relies on these third- party manufacturers in order to enhance its 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 radios, wireless LAN and security products, 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 customers, 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’’). In 2009, the segment’s net sales represented 32% 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. We offer 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. The segment also provides products and systems for the advanced exchange of information at the point of business activity. Our products include two-way radio systems and devices, mobile computing products, advanced data capture products including barcode scanners and imagers, radio frequency identification (‘‘RFID’’) infrastructure, software management, security tools and wireless infrastructure. Our 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. Our segment provides systems engineering, installation and other technical and systems management services to meet our 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.


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    11 Our Industry We compete in the mobile segment of the communications industry, providing wireless products and services to government, public safety and enterprise customers. For customers within our government and public safety market, interoperability and natural disaster preparedness continue to be important issues 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. In 2010 and beyond, 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. While mission-critical communications and homeland security remain high priorities for our customers, we have seen reduced spending in a number of industries within the government and public safety market, due to the difficult global economic conditions. We expect this spending reduction to continue in 2010. We believe that long-term growth opportunities exist within our commercial enterprise market as the global workforce continues to become more mobile and the industries and markets that purchase our products continue to expand. Our product and service portfolios within the commercial enterprise market include: mobile computing products, enterprise wireless infrastructure, bar code scanning, RFID products, and mobile network management platforms. Organizations looking to increase productivity and derive benefits from mobilizing their applications and workforces are driving adoption in these markets. Our Strategy The segment’s strategy is to maintain our global leadership positions in the markets we serve through the continued delivery of mobile products, services and systems that meet our customers’ demand for real-time information everywhere. Our strategy for our government and public safety market is to enable customers to focus on their missions, not the technology. This is accomplished by providing technology that is ‘‘second nature’’, including: 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 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. Our strategy for customers in our commercial enterprise market is to deliver products and services that empower the mobile workforce and transform the enterprise by increasing productivity, driving cost effectiveness, and promoting faster execution of critical business processes. Our solutions architecture focuses on three areas: (i) a portfolio of devices and applications that provide real-time information at the point of business activity; (ii) enterprise wireless networks that deliver seamless connectivity inside and outside the four walls of an enterprise; and (iii) a broad portfolio of management, security and mobility tools, products and applications that transform the enterprise by empowering users closest to the point of business impact to make decisions. 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. 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 (through its various branches and agencies, including the armed services), which represented approximately 8% of the segment’s net sales in 2009. 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 58% of the segment’s net sales in 2009.


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    12 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. While many industries we serve have shown little to no growth, or may have even contracted, during 2009, there remains a large number of businesses and consumers globally who have yet to experience the benefits of converged wireless communications, mobility and the Internet. As the worldwide economies, financial markets and business conditions improve, the Company will have new opportunities to extend our brand, to market our products and services and to pursue profitable growth. Competition The markets in which we operate are highly competitive. Continued evolution in our industry and technological migration is opening up the market to increased competition. 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. We experience widespread competition from a growing number of new and existing competitors, including: large system integrators, manufacturers of mobile computing devices and manufacturers of products in bar code reading equipment and wireless networks. The segment provides communications and information systems compliant with both APCO 25 and TETRA industry digital standards. Major competitors include: Harris, EADS, Kenwood, EF Johnson, Intermec, Honeywell and Cisco. Large system integrators are seeking to move further into the federal government market. The Company and competitors in this segment 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 our segment, including: the consolidation among telecommunications equipment providers; evolving developments in the 700 MHz band; increasing encroachment by broadband and IP solution providers; and new low-tier entrants. Numerous companies, including present manufacturers of scanners, lasers, optical instruments, microprocessors, wireless networks, notebook computers, handheld devices and telephonic and other communication devices may have the technical potential to compete with our business. As demand for fully-integrated voice, data, and broadband systems continues, the segment may face additional competition from public telecommunications carriers. 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 within our 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.


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    13 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 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 ceased operation in the broadcast television spectrum on June 12, 2009. As a result of this transition, 108 MHz of spectrum historically used for broadcast television is being redeveloped and deployed for new uses (the so-called ‘‘digital dividend’’ spectrum), including broadband and narrowband wireless communications. This spectrum can provide new opportunities for Motorola and for our competitors. Under rules adopted by the FCC, this portion of the spectrum (the 700 MHz band) will support new commercial and public safety communications systems. Licenses for the majority of this spectrum have already been issued. Prior to the end of the transition from analog to digital television on June 12, 2009, over 40 public safety customers were already implementing narrowband 700 MHz systems in areas where television incumbency was not an issue. Additional agencies are planning for deployment of systems now that broadcast television is cleared from the 700 MHz band. 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. Public safety organizations have endorsed the use of Long Term Evolution (LTE) technology, a technology in which Motorola is investing, for this broadband network. Canada also released a consultation requesting industry input on making additional spectrum available for public safety use in the 700 MHz band and decisions are expected to be released during 2010. In addition to reallocating TV spectrum at 700 MHz for public safety and commercial use, in April 2009 the FCC initiated an inquiry on developing a national broadband plan. The FCC indicated that this inquiry’s focus is ‘‘to enable the build-out and utilization of high-speed broadband infrastructure.’’ Over the remainder of 2009, the FCC released a series of requests for input regarding various aspects of broadband across multiple markets including healthcare, education, public safety and consumers. The FCC is required to provide a report to Congress on its findings during 2010. In addition, Congress passed the American Recovery and Reinvestment Act (ARRA) which includes federal funding for broadband deployment and Smart Grid deployment. These initiatives to increase the availability of broadband and to support Smart Grid deployment may provide new business opportunities. 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. During 2009, the European Commission issued a mandate to the pan-European regulatory body CEPT asking for the best way to utilize the digital dividend spectrum, which in Europe is located at 790 - 862 MHz. The CEPT provided a preferred bandplan for this digital dividend spectrum. The European Commission is now preparing a spectrum decision expected to be offered to the European Parliament for adoption. If adopted, the decision would be legally binding on the 27 member states of the European Union, providing a harmonized plan in that area and potential opportunities for new commercial mobile broadband services and equipment sales going forward. A number of other countries around the world have also indicated their intention to pursue the availability of digital dividend spectrum. 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 at both December 31, 2009 and December 31, 2008. The 2009 order backlog is believed to be generally firm and approximately 75% of that amount is expected to be recognized as revenue during 2010. The forward-looking estimate of the firmness of such orders is subject to future events that may cause the amount recognized to change.


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    14 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, mission critical two-way radio communication, 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, European Telecommunications Standards Institute (‘‘ETSI’’), and 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. For additional information relating to patents, trademarks and research and development activities with respect to this segment, see the discussion under ‘‘Other Information’’. 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 require 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 2009, the segment had a lower inventory balance than at the end of 2008, as the Company implemented several initiatives to efficiently utilize its on-hand inventory. Availability of materials and components required by the segment is relatively dependable, however, 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. Each of these resources are currently in 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 steadily increased during 2009 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 resources 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, 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 The segment’s 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. A portion of the segment’s manufacturing is done by a small number of non-affiliated electronics manufacturing


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    15 suppliers and distribution and logistics services providers. The segment relies on these third-party providers in order to enhance its 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 2009, aggregate net sales to the Company’s five largest customers represented approximately 29% of the Company’s sales. During 2009, approximately 11% of net sales were to one customer, Verizon Communications Inc. (including Verizon Wireless). Approximately 2% of Motorola’s net sales in 2009 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. 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, 2009 $4.9 billion December 31, 2008 $5.0 billion Except as previously discussed in this Item 1, the orders supporting the 2009 backlog amounts shown in the foregoing table are believed to be generally firm, and approximately 90% of the backlog on hand at December 31, 2009 is expected to be recognized as revenue in 2010. 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 $3.2 billion in 2009, compared to $4.1 billion in 2008 and $4.4 billion in 2007. R&D expenditures decreased 23% in 2009 as compared to 2008, after decreasing 7% in 2008 as compared to 2007. Motorola continues to believe that a strong commitment to research and development is required to drive long-term growth. As of December 31, 2009, approximately 22,000 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, 2009, Motorola and its wholly owned subsidiaries owned approximately 9,992 utility and design patents in the U.S. and 13,027 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 2009, Motorola, Inc. and its wholly owned subsidiaries were granted 587 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.


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    16 Motorola has a large portfolio of trademarks, owned in various countries around the world. These marks are valuable corporate assets. Motorola’s increasing focus on marketing products directly to consumers is reflected in an increasing emphasis on brand equity creation and protection. Environmental Quality. During 2009, 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, 2009, there were approximately 53,000 employees of Motorola and its subsidiaries, compared to 64,000 employees of Motorola and its subsidiaries at December 31, 2008. 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—2009 Compared to 2008’’ and ‘‘Results of Operations—2008 Compared to 2007’’ 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 • 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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    17 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 in 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. Our strategy to separate our businesses into two publicly-traded companies may have a negative impact on our business operations, operating results and assets. In March 2008, the Company announced a strategy to separate into two publicly-traded companies. In February 2010, the Company announced that it is targeting the first quarter of 2011 for the completion of this separation. There are various uncertainties and risks relating to this proposed separation that could have, and in some cases have had, a negative impact on our business operations, operating results or assets, including: (i) the distraction of management and disruption of operations; (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 completing the separation 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. The uncertainty of current economic and political conditions makes budgeting and forecasting very difficult and may reduce demand for our products. Current conditions in the domestic and world economies remain very uncertain. The global financial crisis, U.S. unemployment levels and 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 of 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 negatively 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 face a number of risks related to the financial crisis and severe tightening in the global credit markets that began in late 2008 and continued throughout 2009. The global financial crisis that affected the banking system and financial markets during late 2008 and throughout 2009 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 due to global economic conditions, it will negatively 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, a negative impact on our financial results. In addition, if global economic conditions result in insolvencies for our customers, it will negatively 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


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    18 provide financing in connection with equipment purchases. In response to limited availability of financing from banks and other lenders, these types of requests have increased in volume and scope. Motorola has increased its commitments to provide financing in light of these requests and a continuation of the current tightening in the credit markets 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 resulted from the 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 may cause, and in some cases has caused, a negative 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 global economic conditions, it could result in a reduction or interruption in supplies or an increase in the price of supplies and negatively 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. If this trend continues, it will negatively impact 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, including those held in the Sigma Fund, will differ significantly from the fair values currently assigned to them. 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 derivative 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 derivative 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 global economic conditions, 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. Although there was some recovery in value during 2009, significant declines in the financial markets in 2008 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


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    19 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. The volume of accounts receivable sold in 2009 was significantly lower than in prior years, driven by both lower net sales and the Company’s strategic decision to reduce accounts receivable sales. In addition, the availability of committed facilities to sell accounts receivable decreased due to the global financial crisis and related tightening in the credit markets. Although the Company is not currently capacity constrained in its ability to sell receivables, it could be limited in its 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. 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 because the Company’s long-term debt rating is rated non-investment grade by one credit rating agency resulting in the Company being a ‘‘split rated credit’’ and because our short-term debt is rated of F-3/P-3: Standard and Poor’s rates the Company’s long-term debt as BB+ (one level below investment grade). Fitch Ratings and Moody’s Investor Service each rate the Company’s (i) long-term debt as BBB-/Baa3 (the lowest rating for investment grade debt) and (ii) short-term debt as F-3/P-3. Since the Company has a non-investment grade rating from one rating agency, it is referred to as a ‘‘split rated credit’’. As a ‘‘split rated credit’’, the Company’s business could be impacted in a number of ways including: • Our access to the long-term debt market is more limited: Our ability to issue long-term debt may be more limited and the market into which split rated debt is offered can be very volatile and can be unavailable for periods of time. Although there has been some improvement in the capital markets in the second half of 2009, as a split rated credit, it may be more difficult for us to quickly issue long-term debt and any debt issued is likely to be more costly. These factors may impact our operating and financial flexibility. • Our ability to provide performance bonds, bid bonds, standby letters of credit and surety bonds could be 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, and the costs for issuance may be higher. 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. • Our ability to hedge foreign exchange risk could be limited: Counterparties may be unwilling to provide trading and derivative lines for the Company without cash collateral. This would limit our ability to reduce volatility in earnings and cash flow. Should cash collateral be provided, less liquidity would be available for operational needs and financial flexibility would be reduced. • 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. If this occurs, less liquidity would be available for other operational needs and financial flexibility would be reduced. • 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. Such requests could result in reduced liquidity and less leverage in pricing negotiations.


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    20 • Our ability to sell receivables could be impacted: The conditions placed on us by the parties that we sell our receivables to may 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. Although in 2009 Motorola made a strategic decision to reduce accounts receivable sales and, therefore, has not been capacity constrained in receivable sales, if the Company elects to return to historic levels of receivable sales its ability to do so may be limited. • Our access to short-term borrowing in the commercial paper market is very limited: While the Company has not issued commercial paper since 2007 and does currently view the commercial paper markets as a source of liquidity, 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 F-3/P-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. The Company’s ability to borrow funds under its credit agreement could be constrained by the level of eligible domestic receivables and inventory. As amended in June 2009, availability under the Company’s existing domestic syndicated revolving credit facility is the lesser of: (i) $1.5 billion, or (ii) an amount determined based on eligible domestic accounts receivable and inventory. If the value of eligible accounts receivable and inventory were to decrease, the amount available under the facility would decrease. 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 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 of, and compliance with industry standards; (iv) the significant amount of resources we must devote to the development of new technologies; and (v) the ability to differentiate our products and compete with other companies in the same markets. 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 a negative impact 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


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    21 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 the suspension of the Company’s 401(k) contributions to employee accounts, the permanent freeze of all future benefit accruals under U.S. pension plans and the elimination of 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 a negative impact on our business. The growth rate in the portions of the telecommunications industry in which we participate 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 continuing economic slowdown and the corresponding reduction in capital spending by the telecommunications industry in 2008 and 2009. 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) import/export regulations, 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 and 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, Japanese yen and Korean won; (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; (xiv) changes in laws or regulations that negatively impact benefits being received by the Company; and (xv) the impact of each of the foregoing on our outsourcing and procurement arrangements and (xvi) litigation in foreign court systems and foreign administrative proceedings. Many of our products that are manufactured outside the U.S. are manufactured in Asia (primarily China) and Latin America (primarily Mexico and Brazil). 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 this and other legal systems around the world are subject to change. Accordingly, our operations and orders for products in China could be negatively impacted by changes to, or interpretation of, Chinese law.


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    22 We also have presence in emerging markets such as Brazil, India and Russia. We face additional 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. We also are subject to risks that our operations outside the U.S. could be conducted by our employees, contractors, representatives or agents in ways that violate the Foreign Corrupt Practices Act or other similar anti-bribery laws. While we have polices and procedures to comply with these laws, our employees, contractors, representatives and agents may take actions that violate our policies. Any such violations could have a negative impact on our business. Moreover, we face additional risks that our anti-bribery policy and procedures may be violated by third party sales representatives or other agents that help sell our products or provide other services, because such representatives or agents are not our employees and it may be more difficult to oversee their conduct. 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. 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 are significant changes in tax laws or 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 a negative impact on future operating results. If the quality of our products does not meet our customers’ expectations, then our sales and operating earnings, and ultimately our reputation, could be negatively impacted. Some of the products we sell may 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


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    23 future, as we establish new pricing terms, our volume demand could negatively impact future pricing from suppliers. All of these outcomes may result in our products being more costly to manufacture and less competitive. Industry convergence between telecom, data and media presents opportunities for our business, but also presents risks. We are affected by market conditions within the telecommunications, cable and broadband industries. We are also affected by the convergence of the telecom, data and media industries, which is largely driven by technological development related to IP-based communications. This change impacts our addressable market, competition and our objective setting and strategies, as well as the need to consider risks to achieve our set objectives. Should we not succeed in understanding the market development or acquiring the necessary competence to develop and market products and solutions that are competitive in this changing market, our business would be negatively impacted. 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 negatively impacted 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 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 negative impact on our businesses. 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 a negative impact on future operating results. 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 negative impact 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 negative impact 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 be required to record additional goodwill or other long-lived asset impairment charges, which could result in an additional significant charge to earnings. Under generally accepted accounting principles, we review our long-lived 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. No goodwill or long-lived assets impairment charges were recorded during 2009. During 2008, the Company recorded goodwill impairment charges of $1.6 billion and intangible asset impairment charges of $136 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 or reductions in the Company’s future cash flow estimates and future operating results


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    24 may require the Company to record significant additional goodwill or other long-lived asset impairment charges in our financial statements in future periods, which could negatively impact our financial 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 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 negative impact on our sales and results of operations. 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 negatively 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 negatively 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) 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) we are required to provide broad intellectual property indemnities to our customers, (iv) our intellectual property protection is inadequate to protect our proprietary rights, or (v) our competitors negotiate significantly more favorable terms for licensed intellectual property. 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 assertions, including both requests for licenses and 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. These assertions against Motorola, and its customers and suppliers have been increasing as the complexity of our products have increased. Many of these assertions are brought by non-practicing entities whose principle business model is to secure patent licensing-based revenue from product manufacturing companies. The patentees often make broad and sweeping claims regarding the applicability of their patents to Motorola products, seeking a percentage of sales as licenses fees, seeking injunctions to pressure Motorola into taking a license, or a combination thereof. 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, each of which could have a negative impact on Motorola’s financial results. 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.


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    25 We attempt to negotiate favorable intellectual property indemnities with our suppliers for infringement of third-party intellectual property rights. However, 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 negatively 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 as proprietary and attempt to protect them 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 a negative 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. Further, competitors may be able to negotiate significantly more favorable terms for licensed intellectual property than we are able to, which puts them at a competitive advantage. 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, 3G and 4G standards. Previously agreed-upon terms of some of our long-standing license agreements 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. Copyright levies in numerous countries for the sale of products may negatively 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.


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    26 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 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 and asset- and mortgage-backed securities. The fair value of these holdings may experience further declines due to widening credit spreads in several debt market segments or if the underlying debtors should default on their obligations. Such events could result in additional losses in the Sigma Fund investments. It may be difficult for us to recruit and retain the types of engineers and other 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 develop successful new products. We may not be as successful as our competitors at recruiting, assimilating, retaining and utilizing these highly-skilled personnel. We may have more difficulty attracting or retaining highly-skilled personnel during periods of poor operating performance. For example, in response to the Company’s performance in the last several years, we have temporarily suspended the Company’s 401(k) contributions to employee accounts, permanently froze all future benefit accruals under U.S. pension plans and temporarily suspended merit increase programs in the U.S. and many other markets. Our success depends in part upon our ability to attract, retain and prepare succession plans for senior management and key employees. The performance of our Co-CEOs, senior management and other key employees is critical to our success. If we are unable to retain talented, highly qualified senior management and other key employees or attract them when needed, it could negatively impact the Company. We rely on the experience of our senior management, who have specific knowledge relating to us and our industry that is difficult to replace and competition for


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    27 management with experience in the technology industry is intense. A loss of a Co-CEO, a member of senior management or key employee particularly to a competitor could also place us at a competitive disadvantage, Further, if we fail to adequately plan for the succession of our Co-CEOs, senior management and other key employees, the Company could be negatively impacted. The unfavorable outcome of any pending or future litigation or administrative action could negatively impact the Company. Our financial results could be negatively impacted by unfavorable outcomes to any pending or future litigation or administrative actions, including those related to the Foreign Corrupt Practices Act and other anti-bribery laws. 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 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. 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 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 actions 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; reducing or eliminating certain hazardous substances in electronic products; and the transportation of batteries have expanded significantly. Laws pertaining to accessibility features of electronic products, standardization of connectors and power supplies, sound levels of music playing devices, the transportation of lithium-ion batteries and other aspects are also proliferating. These laws impact our products and make it more expensive to manufacture and sell products. 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. 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


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    28 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 negatively impact 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. In addition, the laws and regulations that impact access to, content on or commerce conducted on the Internet are still evolving. We could be negatively impacted 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. We rely on complex information technology systems and networks to operate our business. Any significant system or network disruption could have a negative 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. In our Mobile Devices business specifically: We have had substantial operating losses in each of the last three years and may continue to incur losses as we continue to reposition our Mobile Devices business. In each of the last three years, 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 this business will be profitable in 2010. The worldwide wireless mobile handset market contracted in 2009 compared to 2008 and further declines in this worldwide market could negatively impact transition plans for our Mobile Devices business. In 2009, worldwide wireless handset industry unit shipments declined by approximately 6%. This is the first annual decline in industry handset unit shipments since 2001. A declining mobile handset market in 2010, particularly if it impacts smartphone sales, may make it more difficult to improve the performance of our Mobile Devices business. Our strategy for the Mobile Devices business may be too concentrated on certain products. The product portfolio in the Mobile Devices business is extensively targeted at the smartphone market, with particular concentration on smartphones using an Android-based operating system. These products are an important part of the business plan. If such Android-based smartphones do not remain competitive in the marketplace, our financial performance would suffer and a shift in strategy would be costly and difficult.


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    29 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 several years. While we reduced our costs during this period of time, our significantly lower sales volume and the resulting market share declines have had a negative impact on our results of operations. Although our primary focus is profitable growth, if our market share of smartphone shipments does not increase our strategy to return our Mobile Devices business to profitability will be negatively impacted. 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 have been rationalizing our hardware and software platforms to reduce the complexity of our product platforms and system architecture. This allows us to lower our costs to produce devices and to enable richer consumer experiences. Failure to continue 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 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. Android is viewed as a competitive platform in the Linux and smartphone categories. If (i) Android fails to continue to gain operator and/or developer adoption, or (ii) any updated versions or new releases of Google’s Android operating system are not made available to Motorola in a timely fashion, Motorola could be competitively disadvantaged and the Company’s financial results could be negatively impacted. In our Home and Networks business specifically: Consolidations in both the cable and telecommunication industries may negatively 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 negatively 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 required a set-top with security technology. Traditionally, cable service providers leased their set-top to their customer. This security technology limited the availability of set-tops to those manufactured by a few cable network manufacturers, including Motorola. In 2007, FCC regulations requiring separation of security functionality from set-tops became effective. Several major cable operators are working to support full two-way security interface architecture that allows retail customers access to all programming available on a cable operator’s network without the need for a set-top box and a few television and video device manufacturers have begun shipping or are developing such devices. If these manufacturers achieve a meaningful volume of sales it could negatively impact Motorola’s sales of set-tops. Item 1B: Unresolved Staff Comments None.


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    30 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 22 facilities (manufacturing, sales, service and office), 12 of which are located in the Americas Region (USA, Canada, Mexico, Central and South America) and 10 of which are located in other countries. Motorola leases 322 facilities, 131 of which are located in the Americas Region and 191 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. Since the beginning of 2009, facilities in: Chandler, Arizona; Libertyville, Illinois; Flensburg, Germany; Nogales, Mexico; and Gurgaon, India were sold. Sites in Singapore and Swindon, England are currently for sale or under contract. 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 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 Mobil Telekomunikasyon Hizmetleri A.S. (‘‘Telsim’’) in connection with the sale of telecommunications equipment by Motorola. Telsim had subsequently defaulted on the payment of approximately $2 billion of such vendor financing, approximately half of which the Company has recovered to date. The plaintiff sought to represent a class of participants in the Plan and sought an unspecified amount of damages. On September 30, 2005, the Illinois District Court dismissed the second amended complaint filed on October 15, 2004 (the ‘‘Howell Complaint’’). Three new purported lead plaintiffs subsequently intervened in the case, and filed a motion for class certification seeking to represent a class of Plan participants. 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. The court granted leave to defendants to appeal the class certification and granted leave to lead plaintiff Howell to appeal an earlier dismissal of his individual claim. Each party filed those appeals. On June 17, 2009, the Illinois District Court granted summary judgment in favor of all defendants on all counts. On June 25, 2009, the Seventh Circuit Court of Appeals (the ‘‘Seventh Circuit’’) dismissed as moot defendants’ class certification appeal and stayed Howell’s appeal. On July 14, 2009, plaintiffs appealed the summary judgment decision. By order of the Seventh Circuit on August 17, 2009, Howell’s individual appeal and plaintiffs’ appeal of the summary judgment decision (now cited as Howell v. Motorola, Inc. et al. and Lingis et al. v. Rick Dorazil et al.) have been consolidated with Spano et al. v. Boeing Company et al. and Beesley et al. v. International Paper Company for argument and decision. 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) and Rule 10b-5 of the Securities Exchange Act of 1934, 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


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    31 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. On August 25, 2009, the district court granted plaintiff’s motion for class certification. 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. St. Lucie County Fire District Firefighters’ Pension Trust Fund Securities Class Action Case A purported class action lawsuit on behalf of the purchasers of Motorola securities between December 6, 2007 and January 22, 2008, St. Lucie County Fire District Firefighters’ Pension Fund v. Motorola, Inc., et al., was filed against the Company and certain current and former officers and directors of the Company on January 21, 2010, in the United States District Court for the Northern District of Illinois. The complaint alleges violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, as well as, in the case of the individual defendants, the control person provisions of the Securities Exchange Act. The primary factual assertions in the complaint are that the defendants knowingly or recklessly made materially misleading statements concerning Motorola’s financial projections and sales demand for Motorola phones during the class period. The complaint seeks unspecified damages and other relief relating to the purported inflation in the price of Motorola shares during the class period. Groussman v. Motorola et al. and Orlando v. Motorola et al. ERISA Class Action Cases Two purported class action lawsuits on behalf of all participants in or beneficiaries of the Motorola 401(k) Plan (the ‘‘Plan’’) between July 1, 2007 and the present and whose accounts included investments in Motorola stock, Joe M. Groussman v. Motorola, Inc. et al. and Angelo W. Orlando v. Motorola, Inc. et al., were filed against the Company and certain current and former officers, directors, and employees of the Company, the Motorola 401(k) Plan Committee, the Advisory Committee of Motorola and other unnamed defendants on February 10, 2010, in the United States District Court for the Northern District of Illinois. The identical complaints allege violations of Sections 404 and 405 of the Employee Retirement Income Security Act of 1974 (‘‘ERISA’’). The primary claims in the complaints are that, in connection with alleged incorrect statements concerning Motorola’s financial projections and demand for Motorola phones during the class period, various of the defendants failed to prudently and loyally manage the Plan by continuing to offer Motorola stock as a Plan investment option, failed to provide complete and accurate information regarding the performance of Motorola stock to the Plan’s participants and beneficiaries, failed to avoid conflicts of interest, and/or failed to monitor the Plan fiduciaries. The complaints seek unspecified damages and other relief relating to the purported losses to the Plan and individual participant accounts. Motorola is a defendant in various other suits, claims and investigations that arise in the normal course of business. In the opinion of management, 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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    32 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 15, 2010, their ages as of January 1, 2010, their current titles and positions they have held during the last five years: Gregory Q. Brown; age 49; Co-Chief Executive Officer, Motorola, Inc. and Chief Executive Officer of Enterprise Mobility Solutions and Networks business since February 2010; Co-Chief Executive Officer, Motorola, Inc. and Chief Executive Officer of Broadband Mobility Solutions from August 2008 to February 2010; 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. Dr. Sanjay K. Jha; age 46; Co-Chief Executive Officer, Motorola, Inc. and Chief Executive Officer of Mobile Devices and Home business since February 2010; Co-Chief Executive Officer, Motorola, Inc. and Chief Executive Officer of Mobile Devices from August 2008 to February 2010; 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. Michele A. Carlin; age 48; Senior Vice President, Human Resources since November 2009; Corporate Vice President, Human Resources, Global Rewards and HR Shared Services from July 2008 to October 2009; Vice President, Global Compensation, Benefits & HR Technology, Campbell Soup Company from June 2006 to July 2008; Vice President of HR Rewards & Operations, TIAA-CREF from June 2005 to May 2006; Vice President, Compensation & Benefits, Sears, Roebuck and Co. from November 2002 to May 2005. Eugene A. Delaney; age 53; Executive Vice President, President, Enterprise Mobility Solutions since January 2009; Senior Vice President, 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 1, 2003 to February 2005. Edward J. Fitzpatrick; age 43; Senior Vice President and Chief Financial Officer since October 2009; Senior Vice President, Corporate Controller and Acting Chief Financial Officer from February 2009 to October 2009; Senior Vice President and Corporate Controller from January 2009 to February 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 63; Executive Vice President, General Counsel and Secretary since May 1998. Daniel M. Moloney; age 50; Executive Vice President, President, Home since February 2010; Executive Vice President, President, Home and Networks Mobility from April 2007 to February 2010; Executive Vice President, President, Connected Home Solutions from January 2005 to April 2007. Karen P. Tandy; age 56; 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. John K. Wozniak; age 38; Corporate Vice President and Chief Accounting Officer since November 2009; Vice President and Assistant Controller from March 2008 to November 2009; Senior Director of Technical Accounting and International Controller, Home and Networks Mobility from June 2007 to March 2008; Senior Director of Accounting and Transaction Support, Networks and Enterprise from May 2006 to June 2007; Director of Technical Accounting and External Reporting from October 2005 until May 2006; Manager, Technical Accounting from September 2002 until October 2005. The above executive officers will serve as executive officers of Motorola until the regular meeting of the Board of Directors in May 2010 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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    33 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, 2010 was 73,085. 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 2010 Annual Meeting of Stockholders. The remainder of the response to this Item incorporates by reference Note 16, ‘‘Quarterly and Other Financial Data (unaudited)’’ of the Notes to Consolidated Financial Statements appearing under ‘‘Item 8: Financial Statements and Supplementary Data’’. 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, 2004 and also assumes the reinvestment of dividends. Five-Year Performance Graph 140 132.3 122.6 123.6 120 121.5 117.3 121.2 116.1 103.0 100 102.3 96.0 92.0 78.2 80 74.5 60 48.8 40 27.7 20 0 2004 2005 2006 2007 2008 2009 Motorola S&P 500 S&P Communications 9MAR201022373994


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    34 Item 6: Selected Financial Data Motorola, Inc. and Subsidiaries Five-Year Financial Summary Years Ended December 31 (Dollars in millions, except as noted) 2009 2008 2007 2006 2005 Operating Results Net sales $ 22,044 $ 30,146 $ 36,622 $ 42,847 $ 35,310 Costs of sales 14,987 21,751 26,670 30,120 23,881 Gross margin 7,057 8,395 9,952 12,727 11,429 Selling, general and administrative expenses 3,381 4,330 5,092 4,504 3,628 Research and development expenditures 3,183 4,109 4,429 4,106 3,600 Other charges (income) 641 2,347 984 25 (404) Operating earnings (loss) (148) (2,391) (553) 4,092 4,605 Other income (expense): Interest income (expense), net (132) 48 91 326 71 Gains on sales of investments and businesses, net 88 82 50 41 1,845 Other 27 (372) 36 160 (95) Total other income (expense) (17) (242) 177 527 1,821 Earnings (loss) from continuing operations before income taxes (165) (2,633) (376) 4,619 6,426 Income tax expense (benefit) (77) 1,607 (285) 1,349 1,893 Earnings (loss) from continuing operations (88) (4,240) (91) 3,270 4,533 Earnings from discontinued operations, net of tax 60 — 56 400 59 Net earnings (loss) (28) (4,240) (35) 3,670 4,592 Less: Earnings attributable to noncontrolling interests 23 4 14 9 14 Net earnings (loss) attributable to Motorola, Inc. $ (51) $ (4,244) $ (49) $ 3,661 $ 4,578 Amounts attributable to Motorola, Inc. common share- holders Earnings (loss) from continuing operations, net of tax $ (111) $ (4,244) $ (105) $ 3,261 $ 4,519 Earnings from discontinued operations, net of tax 60 — 56 400 59 Net earnings (loss) $ (51) $ (4,244) $ (49) $ 3,661 $ 4,578 Per Share Data (in dollars) Diluted earnings (loss) from continuing operations per common share $ (0.05) $ (1.87) $ (0.05) $ 1.30 $ 1.79 Diluted earnings (loss) per common share (0.02) (1.87) (0.02) 1.46 1.81 Diluted weighted average common shares outstanding (in millions) 2,295.6 2,265.4 2,312.7 2,504.2 2,527.0 Dividends paid per share $ 0.05 $ 0.20 $ 0.20 $ 0.18 $ 0.16 Balance Sheet Total assets $ 25,603 $ 27,869 $ 34,812 $ 38,593 $ 35,802 Long-term debt 3,365 4,092 3,991 2,704 3,806 Total debt 3,901 4,184 4,323 4,397 4,254 Total stockholders’ equity 9,883 9,595 15,525 17,186 16,709 Other Data Capital expenditures $ 275 $ 504 $ 527 $ 649 $ 548 % of sales 1.2% 1.7% 1.4% 1.5% 1.6% Research and development expenditures $ 3,183 $ 4,109 $ 4,429 $ 4,106 $ 3,600 % of sales 14.4% 13.6% 12.1% 9.6% 10.2% Year-end employment (in thousands) 53 64 66 66 69


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 35 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, 2009. 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, including smartphones, with integrated software and accessory products, and licenses intellectual property. The segment’s net sales in 2009 were $7.1 billion, representing 32% 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 (‘‘digital entertainment devices’’), end-to-end video distribution 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 2009 were $8.0 billion, representing 36% of the Company’s consolidated net sales. • The Enterprise Mobility Solutions segment designs, manufactures, sells, installs and services analog and digital two-way radios, wireless LAN and security products, 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 customers, 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 2009 were $7.0 billion, representing 32% of the Company’s consolidated net sales. What were our 2009 financial results? • Net Sales were $22.0 Billion: Our net sales were $22.0 billion in 2009, down 27% compared to net sales of $30.1 billion in 2008. Net sales decreased 41% in the Mobile Devices segment, decreased 21% in the Home and Networks Mobility segment and decreased 13% in the Enterprise Mobility Solutions segment. • Operating Loss of $148 Million: We incurred an operating loss of $148 million in 2009, compared to an operating loss of $2.4 billion in 2008. The operating loss in 2009 was smaller than in 2008 primarily due to: (i) the absence in 2009 of a comparable $1.6 billion charge in 2008 related to goodwill impairments, (ii) lower excess inventory and other related charges in 2009 than in 2008, when the charges included a $370 million charge due to a decision to consolidate software and silicon platforms in the Mobile Devices segment, and (iii) the absence in 2009 of a comparable $150 million charge in 2008 related to settlement of a purchase commitment. • Loss from Continuing Operations of $111 Million, or $0.05 per Share: We incurred a loss from continuing operations of $111 million, or $0.05 per diluted common share, in 2009, compared to a loss from continuing operations of $4.2 billion, or $1.87 per diluted common share, in 2008. • 2009 Annual Handset Shipments of 55.1 Million Units: We shipped 55.1 million handsets in 2009, a 45% decrease compared to shipments of 100.1 million handsets in 2008. We shipped 12.0 million handsets in the fourth quarter of 2009, a 38% decrease compared to shipments of 19.2 million handsets in the fourth quarter of 2008. • Digital Entertainment Device Shipments were 14.7 Million: We shipped 14.7 million digital entertainment devices in 2009, a decrease of 18% compared to shipments of 18.0 million units in 2008. • Operating Cash Flow of $629 Million: We generated operating cash flow of $629 million in 2009, an increase of 160% compared to operating cash flow of $242 million in 2008. The primary contributors to


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    MANAGEMENT’S DISCUSSION AND ANALYSIS 36 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS the improvement in cash flow from operations in 2009 were: (i) a $1.3 billion decrease in net inventory, (ii) a $960 million decrease in other current assets, and (iii) income from continuing operations (adjusted for non-cash items) of $892 million, partially offset by a $2.6 billion decrease in accounts payable and accrued liabilities. What were the financial results for our three operating business segments in 2009? • In Our Mobile Devices Business: Net sales were $7.1 billion in 2009, a decrease of 41% compared to net sales of $12.1 billion in 2008. The decrease in net sales was primarily driven by a 45% decrease in unit shipments, partially offset by an 8% increase in average selling price (‘‘ASP’’). On a product technology basis, net sales decreased substantially for GSM, CDMA and 3G technologies, partially offset by an increase in net sales for iDEN technology. On a geographic basis, net sales decreased substantially in Latin America, the Europe, Middle East and Africa region (‘‘EMEA’’) and Asia and, to a lesser extent, decreased in North America. The segment incurred an operating loss of $1.1 billion in 2009, an improvement of 51% compared to an operating loss of $2.2 billion in 2008. The decrease in the operating loss was primarily due to: (i) lower selling, general and administrative (‘‘SG&A’’) expenses, primarily due to lower marketing expenses and savings from cost-reduction initiatives, (ii) lower research and development (‘‘R&D’’) expenditures, reflecting savings from cost-reduction initiatives, (iii) lower excess inventory and other related charges in 2009 than in 2008, when the charges included a $370 million charge due to a decision to consolidate software and silicon platforms, and (iv) the absence in 2009 of a comparable $150 million charge in 2008 related to settlement of a purchase commitment, partially offset by a decrease in gross margin, driven by the 41% decrease in net sales. • In Our Home and Networks Mobility Business: Net sales were $8.0 billion, a decrease of 21% compared to net sales of $10.1 billion in 2008. The decrease in net sales reflects a 22% decrease in net sales in the networks business and a 21% decrease in net sales in the home business. On a geographic basis, net sales decreased in all regions. Operating earnings were $558 million in 2009, a decrease of 39% compared to operating earnings of $918 million in 2008. The decrease in operating earnings was primarily due to a decrease in gross margin, driven by the 21% decrease in net sales, partially offset by a favorable product mix. Also contributing to the decrease in operating earnings was: (i) a $75 million charge related to a legal settlement, and (ii) $39 million of charges related to a facility impairment. These factors were partially offset by decreases in both R&D and SG&A expenses, reflecting savings from cost-reduction initiatives. • In Our Enterprise Mobility Solutions Business: Net sales were $7.0 billion in 2009, a decrease of 13% compared to net sales of $8.1 billion in 2008. On a geographic basis, net sales decreased in North America, EMEA and Latin America, partially offset by increased net sales in Asia. Operating earnings were $1.1 billion in 2009, a decrease of 29% compared to operating earnings of $1.5 billion in 2008. The decrease in operating earnings was primarily due to a decrease in gross margin, driven by the 13% decrease in net sales and an unfavorable product mix. Also contributing to the decrease in operating earnings was an increase in reorganization of business charges, relating primarily to higher employee severance costs. These factors were partially offset by decreased SG&A and R&D expenditures, primarily related to savings from cost-reduction initiatives. What were our major challenges and accomplishments in 2009? • In Our Mobile Devices Business: 2009 was a year of significant change in the Mobile Devices business, including transitioning the product portfolio, restructuring the business and implementing operational improvements. From a portfolio perspective, the Mobile Devices business made significant progress on its 3G smartphone strategy by reducing the number of software platforms across the product portfolio, using Android, a Google-developed, royalty-free operating system platform for smartphones, and reducing the number of feature phone devices in the portfolio. During this period of change, Mobile Devices increased its focus in priority markets, including North America and Latin America, and parts of Asia, including China. Demand for Mobile Devices’ wireless handsets declined in 2009 primarily due to limited product offerings in feature phones and smartphones as the Company implemented its strategy to transition its


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 37 product portfolio. In 2009, the Company lost market share and was the fifth-largest worldwide supplier of wireless handsets. During the year, Mobile Devices reduced its cost structure by over $1.5 billion, including reductions in research and development and selling, general and administrative costs. Reductions were the result of eliminating product platforms, focusing on key markets and other efficiencies. In addition, operational improvements were made in the supply chain, resulting in improved inventory management and reduced levels of excess and obsolete inventory. In the fourth quarter of 2009, the Mobile Devices business launched CLIQTM/DEXTTM with MOTOBLURTM and DROID by Motorola/MILESTONETM, our first Android-based smartphones. These phones represent the beginning of the transition of our portfolio to smartphones, the fastest growing segment of the handset market. Our new products begin to address consumer demand for smartphones with higher quality displays, broadband connectivity everywhere, over-the-air update capability, and enhanced mobile experiences enabled by a multi-tasking, graphical operating system. Consumer reception of our first smartphones was very strong, resulting in shipments of two million Android-based smartphones in the fourth quarter of 2009. From a financial perspective, the Mobile Devices segment significantly reduced its operating loss and cash consumption in 2009 compared to 2008. This improvement was due primarily to the reduction in its cost structure, improvement in operating and supply chain efficiencies, and implementation of its portfolio transition, including the launch of new smartphones. • In Our Home and Networks Mobility Business: The Home and Networks Mobility business was impacted by a decline in the market for its home business. This was attributable largely to economic conditions in the U.S. which negatively impacted consumer spending and housing. During 2009, the business remained the world’s leading provider of digital entertainment devices and shipped its 100 millionth digital entertainment device, improved its gross margin percentage, reduced operating expenses, maintained operating profitability and generated cash. While market conditions contributed to a decline in sales in the home business compared to 2008, the longer term demand fundamentals for end-to-end video distribution systems, digital entertainment devices and video network infrastructure remain intact. Continued prioritization of research and development resulted in the business further enhancing its portfolio of advanced video products. This included the launch of innovative digital entertainment devices, including multi-room DVR products. Portfolio enhancements also included high-performance video servers and transcoding devices to enable operators to provide more advanced viewing experiences and services. The home business also announced the acquisition of BitBand, a leading provider of content management and delivery systems, specializing in video-on-demand for IPTV. As anticipated, the networks business experienced a decline in sales for all 2G and 3G technologies in 2009 compared to 2008. Motorola continued its investments and leadership in next-generation wireless broadband technologies, including WiMAX and LTE. In WiMAX, we maintained a leading portfolio of customers around the world and generated over $600 million in sales, making us the market leader. In LTE, KDDI in Japan selected us for development and implementation of their LTE mobile broadband network and we participated in several LTE trial activities with leading operators around the world. • In Our Enterprise Mobility Solutions Business: In 2009, sales in the Enterprise Mobility Solutions business were lower than in 2008. This was primarily due to a decline in demand in certain industries served, resulting from adverse economic conditions. Enterprise Mobility Solutions maintained its leading global market share position, reduced operating expenses, maintained a high level of operating profitability and generated cash. Despite the budget challenges facing many of the U.S. states, demand for our products and solutions by customers in the government and public safety market in the U.S. was relatively consistent with 2008. By leveraging our thought leadership, comprehensive portfolio and strong customer relationships, we maintained market share in the U.S., our largest market. In the latter half of 2009, demand in the commercial enterprise market, specifically in the retail vertical, for mobile computing and data capture products began to improve. With the benefit of cost reductions implemented in the first half of 2009 and improving demand trends, we were able to significantly improve the operating profitability of our Enterprise Mobility Solutions business in the second half of the year.


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    MANAGEMENT’S DISCUSSION AND ANALYSIS 38 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During the year, we enhanced our product portfolio with the introduction of several innovative products. With our APX family of products, we are the only manufacturer to offer interoperable mobile and portable multi-band radios and related infrastructure equipment. We continued our market leadership in TETRA products outside the U.S., and reached an industry leading milestone by shipping our one millionth TETRA subscriber radio. We also enhanced our leading rugged mobile computing portfolio with the launch of the MC9500, MC3100 and MC55 product lines. In the advanced data capture portfolio, we announced the MT2000 series of rugged, hand-held bar code scanners that incorporate the benefits of a mobile computer, an industry first. These products have all received very positive customer response. Looking Forward During 2009, challenging economic conditions around the world impacted many of our customers and consumers, resulting in reduced demand in many of our businesses. In the latter half of 2009, although sales levels in our businesses remained well below 2008 levels, there were signs of stabilization in the markets that we serve. In 2010, we expect demand to increase in the market for handsets, particularly smartphones, as well as certain markets for the Enterprise Mobility Solutions business. Demand in other markets, including the markets for the Home and Networks Mobility business, are expected to have little to no growth, or may even contract. As worldwide economic conditions, financial markets and overall business conditions improve, we will have opportunities to extend our brand, to sell our products and services and to pursue profitable growth. For the longer term, we believe the fundamental trends toward convergence of mobility, computing and communications, the need for faster wireless broadband speeds, and evolution of the mobile Internet will continue. We are focused on designing and delivering innovative wired and wireless communications products and systems, unique mobile experiences and powerful networks, as well as complementary support services. We believe this positions us to provide customers and consumers with differentiated products and solutions for when, where and how they connect to people, information and entertainment. In our Mobile Devices business, we expect the overall global handset market to remain intensely competitive. We expect an increase in total industry handset demand in 2010 compared to 2009, particularly in smartphones. Our strategy is focused on enhancing our smartphone portfolio, optimizing our cost structure and strengthening our position in priority markets. Our transition to a more competitive portfolio began in the fourth quarter of 2009 with the introduction of new smartphones based on the Android operating system and MOTOBLURTM, our proprietary applications and services suite. In 2010, a significant number of our new devices will be smartphones as we expand our portfolio across a broader set of price points and address a wider set of customers. Our initial market focus includes North America, parts of Asia, including China, and Latin America. Based upon our performance in these markets, we will look to expand our presence in other geographic regions, including Western Europe. We will continue to deliver a feature phone portfolio, albeit more limited than in the past, by leveraging our ODM partnerships to meet carrier and retail customer requirements and extend our brand. Overall in 2010, feature phone sales including IDEN, are expected to be lower. We also are continuing our focus on our accessories portfolio to deliver complete mobile experiences. Cost-reduction initiatives implemented in 2009 allowed the Mobile Devices business to enter 2010 with a more competitive cost structure. In 2010, we will further optimize our cost structure as we reduce our investment in certain areas and reinvest in smartphone innovation, as well as MOTOBLUR. Collectively, these actions are designed to accelerate our speed to market and to allow us to offer richer consumer experiences, build our brand 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. Due to economic conditions in the U.S., particularly related to consumer spending and the housing market, demand slowed in 2009 in the markets served by our home business. While the longer term fundamentals for the home business remain intact, we expect the soft demand environment to continue in the near term. As U.S. economic conditions improve, and as operators’ need for more bandwidth and upgraded infrastructure for the provisioning of advanced services to consumers increases, demand trends for our home business are expected to improve. We will leverage our market leading position in digital entertainment devices and video delivery systems and prioritize our research and development efforts to ensure that we are well positioned for growth when demand levels recover. In our networks business, we are investing in next-generation wireless broadband technologies, including WiMAX and LTE, while continuing to optimize our 2G and 3G business. In WiMAX, we are building upon a strong portfolio of customers and leveraging our market leadership. In LTE, we will continue to evolve our competitive radio access network solution (RAN) while focusing on leading wireless network customers around


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 39 the world, including those in the U.S., Japan, China and the Middle East and Africa region. We expect the overall 2G and 3G wireless infrastructure market to decline in 2010 compared to 2009 and to remain highly competitive. In the Home and Networks Mobility segment, we will continue to optimize our overall cost structure while prioritizing investments in next-generation technologies commensurate with opportunities for profitable growth. This positions the business for future opportunities in emerging technologies, including video and wireline and wireless broadband, and enables the business to maintain profitability in mature technologies. In our Enterprise Mobility Solutions business, we have market leading positions in both mission-critical and business-critical communications solutions for customers around the world. We continue to develop next-generation products and solutions for customers in our government and public safety and commercial enterprise markets. Many U.S. states and local governments are facing budget deficits in 2010 and some states may be required to significantly curtail spending. Additionally, many governments outside the U.S. are facing budget deficits. We believe that these customers will continue to place a high priority on mission-critical communications and homeland security products and solutions. In 2009, while we experienced relatively stable levels of demand from these customers, continued budget constraints, especially in the U.S. market, could impact the timing and volume of purchases in 2010. Our research and development focus continues to be on delivering innovative products and solutions that meet our customers’ needs, such as our industry leading APXTM two-way radio communications systems. These systems have multi-band functionality that provides interoperability across various communication systems, reducing the number of devices our customers carry and enhancing communications efficiency. The focus for customers in our commercial enterprise market includes converged communication and computing products that increase worker mobility and productivity, as well as enhanced end-user experiences. During 2009, many of these customers faced challenging economic conditions. These conditions have largely stabilized in recent months. Due to the postponement of capital purchases in 2009, we believe many of our customers will upgrade their technology in 2010 to improve supply-chain efficiencies, increase productivity of associates and improve end-customer buying experiences. We believe that our comprehensive portfolio of products and solutions and market leadership make our Enterprise Mobility Solutions business well positioned for profitable growth as economic conditions across our markets improve. In 2009, we implemented a number of global actions across the Company to significantly reduce its cost structure. To ensure alignment with market conditions, we will continually review our cost structure as we aggressively manage costs while maintaining investments focused on innovation and future growth opportunities. We remain very focused on the strength of our balance sheet and our overall liquidity position. We believe we have more than sufficient liquidity to operate our business. We conduct our business in highly competitive markets, facing both new and established competitors. The markets for many of our products are characterized by rapidly changing technologies, frequent new product introductions, changing consumer trends, short product life cycles and evolving industry standards. Market disruptions caused by new technologies, the entry of new competitors, and consolidations among our customers and competitors, among other matters, can introduce volatility into our businesses. We face challenging, but stabilizing, global economic conditions with more limited visibility than historical norms. Meeting all of these challenges requires consistent operational planning and execution and investment in technology, resulting in innovative products that meet the needs of our customers around the world. As we execute on meeting these objectives, we remain focused on taking the necessary action to design and deliver differentiated and innovative products and services that will advance the way the world connects by simplifying and personalizing communications and enhancing mobility. What is the status of our plan to separate into two independent, publicly traded companies? In March 2008, the Company announced that it was pursuing the creation of two independent, publicly traded companies. On February 11, 2010, the Company announced that it is now targeting the first quarter of 2011 for the completion of this planned separation. The Company currently expects that, upon separation, one public company will be comprised of the Company’s Mobile Devices and Home businesses and the other public company will be comprised of the Company’s Enterprise Mobility Solutions and Networks businesses. The Company intends to effect the separation through a tax-free pro rata stock dividend of shares in the new company to Motorola shareholders. Following the separation, the Company intends that both businesses will be well capitalized so that each of the companies can execute their respective business plans and be able to address future opportunities. The Company expects that, post-separation, the Enterprise Mobility and Networks business


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    MANAGEMENT’S DISCUSSION AND ANALYSIS 40 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS will be capitalized in a manner that will achieve an investment grade rating and will be the entity responsible for Motorola’s outstanding public market debt at the time of separation. Following the separation, both entities will use the Motorola brand. The Mobile Devices and Home business is expected to own the Motorola brand and license it royalty free to the Enterprise Mobility Solutions and Networks business. Completion of the separation is subject to a number of conditions. There can be no assurance that any separation transaction will ultimately occur or, if one does occur, there can be no assurances as to its terms or timing. Results of Operations Years Ended December 31 % of % of % of (Dollars in millions, except per share amounts) 2009 sales 2008 sales 2007 sales Net sales $22,044 $30,146 $36,622 Costs of sales 14,987 68.0% 21,751 72.2% 26,670 72.8% Gross margin 7,057 32.0% 8,395 27.8% 9,952 27.2% Selling, general and administrative expenses 3,381 15.3% 4,330 14.4% 5,092 13.9% Research and development expenditures 3,183 14.4% 4,109 13.6% 4,429 12.1% Other charges 641 3.0% 2,347 7.7% 984 2.7% Operating loss (148) (0.7)% (2,391) (7.9)% (553) (1.5)% Other income (expense): Interest income (expense), net (132) (0.6)% 48 0.1% 91 0.2% Gains on sales of investments and businesses, net 88 0.4% 82 0.3% 50 0.1% Other 27 0.1% (372) (1.2)% 36 0.1% Total other income (expense) (17) (0.1)% (242) (0.8)% 177 0.4% Loss from continuing operations before income taxes (165) (0.7% (2,633) (8.7)% (376) (1.1)% Income tax expense (benefit) (77) (0.3)% 1,607 5.4% (285) (0.8)% (88) (0.4)% (4,240) (14.1)% (91) (0.3)% Less: Earnings attributable to noncontrolling interests 23 0.1% 4 0.0% 14 0.0% Loss from continuing operations* (111) (0.5)% (4,244) (14.1)% (105) (0.3)% Earnings from discontinued operations, net of tax 60 0.3% — 0.0% 56 0.2% Net loss* $ (51) (0.2)% $ (4,244) (14.1)% $ (49) (0.1)% Earnings (loss) per diluted common share: Continuing operations $ (0.05) $ (1.87) $ (0.05) Discontinued operations 0.03 — 0.03 $ (0.02) $ (1.87) $ (0.02) * Amounts attributable to Motorola, Inc. common shareholders. Geographic market sales measured by the locale of the end customer as a percent of total net sales for 2009, 2008 and 2007 are as follows: Geographic Market Sales by Locale of End Customer 2009 2008 2007 United States 54% 49% 51% Latin America 11% 14% 12% Asia, excluding China 11% 10% 9% Europe 9% 13% 13% China 6% 7% 7% Other Markets 9% 7% 8% 100% 100% 100%


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 41 Results of Operations—2009 Compared to 2008 Net Sales Net sales were $22.0 billion in 2009, down 27% compared to net sales of $30.1 billion in 2008. The decrease in net sales reflects: (i) a $5.0 billion, or 41%, decrease in net sales in the Mobile Devices segment, (ii) a $2.1 billion, or 21%, decrease in net sales in the Home and Networks Mobility segment, and (iii) a $1.1 billion, or 13%, decrease in net sales in the Enterprise Mobility Solutions segment. The 41% decrease in net sales in the Mobile Devices segment was primarily driven by a 45% decrease in unit shipments, partially offset by an 8% increase in ASP. The 21% decrease in net sales in the Home and Networks Mobility segment reflects a 22% decrease in net sales in the networks business and a 21% decrease in net sales in the home business. The 13% decrease in net sales in the Enterprise Mobility Solutions segment reflects a 21% decrease in net sales to the commercial enterprise market and a 10% decrease in net sales to the government and public safety market. Gross Margin Gross margin was $7.1 billion, or 32.0% of net sales, in 2009, compared to $8.4 billion, or 27.8% of net sales, in 2008. Gross margin decreased in all segments. The decrease in gross margin in the Mobile Devices segment was primarily driven by the 41% decrease in net sales, partially offset by: (i) lower excess inventory and other related charges in 2009 than in 2008, when the charges included a $370 million charge due to a decision to consolidate software and silicon platforms, and (ii) the absence in 2009 of a comparable $150 million charge in 2008 related to settlement of a purchase commitment. The decrease in gross margin in the Enterprise Mobility Solutions segment was primarily driven by the 13% decrease in net sales and an unfavorable product mix. The decrease in gross margin in the Home and Networks Mobility segment was primarily driven by the 21% decrease in net sales, partially offset by a favorable product mix. The increase in gross margin as a percentage of net sales in 2009 compared to 2008 was primarily driven by increases in gross margin percentage in the Mobile Devices and Home and Networks Mobility segments, partially offset by a decrease in gross margin percentage in the Enterprise Mobility Solutions segment. The Company’s overall gross margin as a percentage of net sales can be impacted by the proportion of overall net sales generated by its various businesses. In 2009, the proportion of overall sales by our Mobile Devices business was smaller than in previous years. Since Mobile Devices has the lowest gross margin percentage of the Company’s businesses, this positively impacted overall gross margin percentage in 2009. Selling, General and Administrative Expenses Selling, general and administrative (‘‘SG&A’’) expenses decreased 22% to $3.4 billion, or 15.3% of net sales, in 2009, compared to $4.3 billion, or 14.4% of net sales, in 2008. SG&A expenses decreased in all segments. The decrease in SG&A expenses in the Mobile Devices segment was primarily driven by lower marketing expenses and savings from cost-reduction initiatives. The decreases in SG&A expenses in the Enterprise Mobility Solutions and Home and Networks Mobility segments were primarily due to savings from cost-reduction initiatives. SG&A expenses as a percentage of net sales increased in the Enterprise Mobility Solutions and Home and Networks Mobility segments and decreased in the Mobile Devices segment. Research and Development Expenditures Research and development (‘‘R&D’’) expenditures decreased 23% to $3.2 billion, or 14.4% of net sales, in 2009, compared to $4.1 billion, or 13.6% of net sales, in 2008. R&D expenditures decreased in all segments, primarily due to savings from cost-reduction initiatives. R&D expenditures as a percentage of net sales increased in all segments. The Company participates in very competitive industries with constant changes in technology and, accordingly, the Company continues to believe that a strong commitment to R&D is required to drive long-term growth. Other Charges The Company recorded net charges of $641 million in Other charges in 2009, compared to net charges of $2.3 billion in 2008. The net charges in 2009 included: (i) $278 million of charges relating to the amortization of intangibles, (ii) $258 million of net reorganization of business charges included in Other charges, (iii) $42 million of costs related to the proposed separation of the Company into two independent, publicly traded companies, (iv) $39 million of charges related to a facility impairment, and (v) $24 million of charges related to an environmental reserve. The net charges in 2008 included: (i) $1.8 billion of goodwill and other asset impairment


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    MANAGEMENT’S DISCUSSION AND ANALYSIS 42 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS charges, (ii) $318 million of charges relating to the amortization of intangible assets, (iii) $248 million of net reorganization of business charges included in Other charges, and (iv) $59 million of separation-related transaction costs, partially offset by a $48 million gain on the sale of property, plant and equipment. The net reorganization of business charges are discussed in further detail in the ‘‘Reorganization of Businesses’’ section. The goodwill and other asset impairment charges are discussed in further detail in the ‘‘Valuation and Recoverability of Goodwill and Long-lived Assets’’ section. Net Interest Income (Expense) Net interest expense was $132 million in 2009, compared to net interest income of $48 million in 2008. Net interest expense in 2009 includes interest expense of $213 million, partially offset by interest income of $81 million. Net interest income in 2008 included interest income of $272 million, partially offset by interest expense of $224 million. The significant decline in interest income reflects: (i) the significant decrease in average short-term interest rates in 2009 compared to 2008, (ii) a change in the investment mix of the Sigma Fund to more liquid securities with shorter maturities and lower interest rates, and (iii) the decrease in average cash, cash equivalents and Sigma Fund balances in 2009 compared to 2008. This decline in interest income was slightly offset by a decrease in interest expense, primarily driven by a decrease in the Company’s level of outstanding debt during 2009. Gains on Sales of Investments and Businesses Gains on sales of investments and businesses were $88 million in 2009, compared to gains of $82 million in 2008. In 2009, the net gain primarily relates to sales of certain of the Company’s equity investments, of which $32 million of gain was attributed to a single investment. These gains were partially offset by a net loss from the sale of specific businesses. In 2008, the net gain primarily related to sales of a number of the Company’s equity investments, of which $29 million of gain was attributed to a single investment. Other Net income classified as Other, as presented in Other income (expense), was $27 million in 2009, compared to net charges of $372 million in 2008. The net income in 2009 was primarily comprised of: (i) $80 million of gains from Sigma Fund investments, and (ii) a $67 million gain related to the extinguishment of a portion of the Company’s outstanding long-term debt, partially offset by: (i) $77 million of investment impairment charges, and (ii) $52 million of foreign currency losses. The net charges in 2008 were primarily comprised of: (i) $365 million of investment impairment charges, of which $138 million related to a single strategic investment, (ii) $186 million of impairment charges on Sigma Fund investments, (iii) $101 million of losses on Sigma Fund investments, and (iv) $84 million of foreign currency losses, partially offset by: (i) a $237 million curtailment gain associated with the decision to freeze benefit accruals for U.S. pension plans, (ii) $56 million of gains related to the extinguishment of a liability, (iii) $24 million of gains relating to several interest rate swaps not designated as hedges, and (iv) a $14 million gain related to the extinguishment of a portion of the Company’s outstanding long- term debt. Effective Tax Rate The Company recorded $77 million of net tax benefits in 2009, resulting in an effective tax rate of 47%, compared to $1.6 billion of net tax expense, resulting in a negative effective tax rate of (61)%, in 2008. The Company’s effective tax rate for 2009 was higher than the U.S. statutory tax rate of 35% primarily due to research tax credits, including a reduction in valuation allowances relating to refundable general business credits and a reduction in unrecognized tax benefits for facts that now indicate the extent to which certain tax positions are more-likely-than-not of being sustained. The Company’s 2008 effective tax rate was less than the U.S. statutory tax rate of 35% primarily due to the recording of a $2.1 billion non-cash tax charge to establish deferred tax valuation allowances against a portion of the Company’s U.S. deferred tax assets and the recording of non-deductible goodwill impairment charges. The Company’s effective tax rate will change from period to period based on non-recurring events, such as the settlement of income tax audits, changes in valuation allowances and the tax impact of significant unusual or extraordinary items, as well as recurring factors including changes in the geographic mix of income before taxes and effects of various global income tax strategies.

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