UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission File number 1-7221

MOTOROLA, INC.

(Exact name of registrant as specified in its charter)

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:

Securities registered pursuant to Section 12(g) of the Act:

None

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

      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.     x

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

      The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of July 2, 2004 was approximately $42.0 billion (based on closing sale price of $17.77 per share as reported for the New York Stock Exchange-Composite Transactions).

      The number of shares of the registrant’s Common Stock, $3 par value per share, outstanding as of January 31, 2005 was 2,450,481,840.

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 2, 2005 are incorporated by reference into Part III.

Table of Contents

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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. Beginning on page 70 we discuss some of the business risks and 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

      Motorola, Inc. is a global leader in wireless, broadband and automotive communications technologies and embedded electronic products.

      In April 2004, the Company separated its semiconductor operations into a separate subsidiary, Freescale Semiconductor, Inc. (“Freescale Semiconductor”). In July 2004, an initial public offering of a minority interest of approximately 32.5% of Freescale Semiconductor was completed. On December 2, 2004, Motorola completed the spin-off of Freescale Semiconductor from the Company by distributing its remaining 67.5% equity interest in Freescale Semiconductor to Motorola shareholders. As of that date, Freescale Semiconductor is an entirely independent company. In general, discussions of the Company contained in this document reflect the Company’s structure at December 31, 2004, after the complete spin-off of Freescale Semiconductor.

      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.

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Business Segments

      Motorola reports six segments as described below.

Personal Communications Segment

      The Personal Communications segment (“PCS” or the “segment”) designs, manufactures, sells and services wireless handsets with integrated software and accessory products. In 2004, PCS net sales represented 54% of the Company’s consolidated net sales.

      Our wireless subscriber products include wireless handsets, with related software and accessory products. We market our products worldwide to carriers and consumers through direct sales, distributors, dealers, retailers and, in certain markets, through licensees.

      We believe that total industry shipments of wireless handsets (also referred to as industry “sell-in”) increased in 2004 by approximately 25% compared to 2003. Demand from new subscribers was strong in emerging markets, including China, Latin America and Eastern Europe. Replacement sales in highly-penetrated markets were also strong due to generally improved economic conditions and compelling new phone designs and attractive features, such as cameras, large color displays, expanded software applications, advanced messaging functionality, advanced gaming features and an increased opportunity for personalization.

      In this environment, we were able to grow faster than the market and increase our overall market share. The industry forecasters predict that the wireless handset industry will continue to grow over the next several years as the transition to next-generation data-rich services, such as point-to-point video and higher speed data, continues.

      PCS is focused on profitable and sustainable growth through close partnerships with our carrier customers, technology leadership and improving cost competitiveness. We are investing in the development of industry-leading GSM, CDMA, iDEN®, and 3G UMTS products, with an emphasis on winning greater market share through compelling designs, more feature-rich handsets, including handsets with large color displays and cameras, and on-time delivery of products to our customers.

      We are focused on enhanced partnerships with our customers by aligning with their business strategies and objectives. A core component of our customer partnership strategy is the expansion of opportunities for carrier customers to increase average revenue per user (ARPU). By utilizing customizable platforms, we enable our carrier customers to go to market with handsets that feature differentiated user interfaces, such as consumer personalization, to help them build consumer loyalty. These platforms also generate revenue opportunities for our carrier customers by supporting data productivity applications, gaming, music and other entertainment offerings and customized content.

      During 2004, we continued to build on our technology leadership with the launch of 60 new products, resulting in a strong, well-balanced portfolio across regions, technologies, price tiers and form factors. The new portfolio includes iconic models such as the RAZR V3 and the StarTac Classic; the continued delivery of 3G UMTS handsets; the introduction of EDGE-enabled GSM handsets; and products using Open Source technologies such as Linux and Java^tm, as well as products featuring the Microsoft Windows Mobile^tm operating system. We believe we have the most comprehensive and proven line-up of 3G UMTS handsets in the industry. We introduced many products based on our platform design strategy that leverages design effectiveness and supply chain operations, improving product quality and time to market. Many of our products feature Bluetooth® technology to support advanced wireless functions, including wireless headsets. For handsets using iDEN technology, we

Note: When discussing the net sales for each of our six segments, we express the segment’s net sales as a percentage of the Company’s consolidated net sales. Because certain of our segments sell products to other Motorola businesses, $963 million of intracompany sales were eliminated as part of the consolidation process in 2004. As a result, the percentages of consolidated net sales for each of our business segments sum to greater than 100% of the Company’s consolidated net sales.

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introduced the first product with an integrated camera, increased our portfolio of GPS-enabled handsets and expanded the portfolio of handsets targeted specifically at the prepaid market.

      As part of our efforts to improve our brand, we are developing youth-driven brand partnerships that will support a consumer-centric design philosophy and further reinforce the brand strength generated by our MOTO marketing activities. Additionally, PCS product offerings have played a key role in reinvigorating the Motorola brand among consumers worldwide, which we expect will help fuel demand for new products and experiences during 2005 and beyond.

      The success of our strategy is evidenced by our continued market leadership in several key markets and significant sales growth for the full year 2004 compared to the full year 2003. We attribute this success to our strong replacement sales in developed markets and sales to new subscribers in developing countries.

      The PCS customer partnership strategy continues to focus on strengthening relationships with our top customers. PCS has several large customers, worldwide, the loss of one or more of which could have a negative impact on our results. In 2004, purchases of iDEN® products by Nextel Communications, Inc. (“Nextel”) and its affiliates comprised approximately 14% of our segment’s net sales. In addition to Nextel, the largest of our end customers include Cingular, China Mobile and Vodafone. Besides selling directly to carriers and operators, PCS also sells products through a variety of third-party distributors and retailers, which account for approximately 30% of the segment’s net sales. The largest of these represented approximately 5% of the segment’s net sales in 2004 and is our primary distributor in Latin America.

      Although the U.S. market continued to be the segment’s largest individual market, many of our customers, and more than 60% of our net sales, are outside the U.S. The largest of these international markets are China, the United Kingdom and Brazil. Compared to 2003, the segment saw substantial sales growth in all regions of the world as a result of an improved product portfolio, strong market growth in the emerging markets, and high replacement sales in the more mature markets.

      In North America, the industry saw consolidation of some major carriers, including some of the segment’s largest customers. The segment did not see any significant impact on its business in 2004 as a result of these consolidations, nor do we foresee any significant impact from these consolidations in the future.

      Nextel is our largest customer and we have been their sole supplier of iDEN handsets and core network infrastructure equipment for over ten years. Nextel uses Motorola’s proprietary iDEN technology to support its nationwide wireless service business. In December 2004, Motorola announced that it reached an agreement with Nextel to extend the companies’ iDEN infrastructure and iDEN subscriber supply agreements for a period from January 1, 2005 through December 31, 2007. Motorola also announced an agreement with Nextel for implementation of Next Generation Dispatch, a new Internet Protocol-based call processing engine designed to replace the current call-processing system. In addition, Motorola has developed a new 6:1 vocoder which will allow Nextel to increase capacity on its current system. Nextel has announced its intention to activate the 6:1 vocoder in substantially all of its markets in 2005. In December 2004, Nextel and Sprint Corp. (“Sprint”) announced an intended merger of their companies. The segment does not anticipate any significant impact to its business in 2005 as compared to 2004 as a result of this merger.

      The segment believes it increased overall market share in 2004 and solidified its hold on the second-largest worldwide market share of wireless handsets. The segment experiences intense competition in worldwide markets from numerous global competitors, including some of the world’s largest companies. The segment’s primary competitors are European and Asian manufacturers. Currently, its largest competitors include Nokia, Samsung, LG, Siemens and Sony Ericsson.

      We believe the ability to differentiate our products and provide additional value to our customers will be increasingly realized, primarily through the continued introduction of unique and compelling product designs, the addition of new features to enhance our products and through consumer experiences. These consumer experiences will be shaped by the user interface and software applications that can be delivered on handsets at point of purchase and beyond. The segment utilizes Java^tm technology to better leverage the largest wireless developer community in the world. The segment also uses the Microsoft Windows Mobile^tm operating system for its MPx product line.

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      General competitive factors in the market for our products include: time-to-market; brand awareness; technology offered; price; product performance, features, design, quality, delivery and warranty; the quality and availability of service; company image and relationship with key customers.

      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 range from cash-with-order to 60 days. Payment terms allow the customer or distributor to purchase products from us on a periodic basis and pay for those products at the end of the agreed term applicable to each purchase. A customer’s outstanding credit at any point in time is limited to a predetermined amount as established by management. Extended payment terms beyond 60 days are provided to customers on a case-by-case basis. Such extended terms are not related to a significant portion of our revenues.

      Radio frequencies are required to provide wireless services. The allocation of frequencies is regulated in the U.S. and other countries throughout the world, and limited spectrum space is allocated to wireless services. The growth of the wireless and personal communications industry may be affected if adequate frequencies are not allocated or, alternatively, if new technologies are not developed to better utilize the frequencies currently allocated for such use. Industry growth may also be affected by the cost of the new licenses required to use frequencies and any related frequency relocation costs.

      The U.S. leads the world in spectrum deregulation, allowing new wireless communications technologies to be developed and offered for sale. Examples include Wireless Local Area Network systems such as WiFi, and Wide Area Network systems such as WiMax. Other countries also deregulated portions of the available spectrum to allow these and other new technologies, which can be offered without spectrum license costs and may introduce new competition and new opportunities for Motorola and our customers.

      The segment’s backlog was $1.5 billion at December 31, 2004, compared to $2.2 billion at December 31, 2003. The 2004 backlog is believed to be generally firm and 100% of that amount is expected to be recognized as revenue in 2005. The forward-looking estimates of the firmness of such orders is subject to future events which may cause the amount recognized to change. In 2004, the segment had strong order growth but backlog decreased as a result of the segment’s improved ability to meet demand for new products in a more timely manner. Backlog at the end of 2003 was above normal due to a key component supply constraint which resulted in the segment’s inability to meet the demand for certain new products in the fourth quarter of 2003.

      Patent protection is extremely important to the segment’s operations. The segment has an extensive portfolio of patents relating to its products, technologies and manufacturing processes. The segment licenses certain of its patents to third parties and generates revenue from these licenses. Motorola is also licensed to use certain patents owned by others. Royalty and licensing fees vary from year to year and are subject to the terms of the agreements and sales volumes of the products subject to licenses. The protection of these licenses is also important to the segment’s operations. Reference is made to the material under the heading “Other Information” for information relating to patents and trademarks and research and development activities with respect to this segment.

      PCS’s practice is to carry reasonable amounts of inventory in distribution centers in order to meet customer delivery requirements in a manner consistent with industry standards. At the end of 2004, the segment had a slightly higher inventory balance than at the end of 2003. The increased inventory is to support anticipated higher first quarter 2005 sales compared to the first quarter of 2004. We also made certain strategic purchases of critical components to support the anticipated sales.

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      Where economically and technically feasible, materials used in the segment’s operations are generally second-sourced to ensure a continuity of supply. Occasionally, shortages or extended delivery periods occur for various component parts, the effects of which are generally short in duration.

      Energy necessary for the segment’s manufacturing facilities consists of electricity, natural gas and gasoline, all of which are currently in generally adequate supply. The segment’s facilities contain automation and, therefore, require a reliable source of electrical power. Labor is generally available in reasonable proximity to the segment’s manufacturing facilities. Difficulties in obtaining any of the aforementioned items could affect the segment’s results.

      The segment permits returns under certain circumstances, generally pursuant to warranties which we consider to be competitive with current industry practices.

      The segment typically experiences increased sales in the fourth calendar quarter and lower sales in the first calendar quarter of each year. Sales of wireless handsets and related products increase during the year-end holiday season.

      Our headquarters are located in Libertyville, Illinois. Our major facilities are located in Libertyville, Illinois; Plantation, Florida; Flensburg, Germany; Tianjin, China; Singapore; Jaguariuna, Brazil; and Seoul, Korea. We also maintain interests in joint ventures in Hangzhou, China. Additional engineering, software development and administration offices are located in San Diego and Sunnyvale, California; South Plainfield, New Jersey; Champaign, Illinois; Fort Worth, Texas; Boynton Beach, Florida; Basingstoke, England; Toulouse, France; Torino, Italy; Taipei, Taiwan; and Beijing, China. As planned, certain manufacturing was ceased in Flensburg, Germany during the first quarter of 2004 and the Boynton Beach, Florida facility was vacated in 2004.

      We also use several electronics manufacturing suppliers (EMS) and original design-manufacturers (ODM) to enhance our ability to lower our costs and deliver products that meet consumer demands in the rapidly-changing technological environment.

      In 2004, our handsets were primarily manufactured in Asia, including products manufactured for us by third parties. We expect this trend to continue in 2005. Our largest manufacturing facilities are located in China, Singapore, Brazil, Malaysia and Korea. Each of these facilities serves multiple countries and regions of the world. In 2004, approximately one-third of our handsets were manufactured by third parties, who primarily manufacture in Asia. In 2005, this percentage is expected to remain consistent.

Global Telecom Solutions Segment

      The Global Telecom Solutions segment (“GTSS” or the “segment”) designs, manufactures, sells, installs and services wireless infrastructure communication systems, including hardware and software. In 2004, GTSS net sales represented 17% of the Company’s consolidated net sales.

      GTSS provides end-to-end wireless networks, including radio base stations, base site controllers, associated software and services, mobility soft switching, application platforms and third-party switching for CDMA, GSM, iDEN® and UMTS technologies. GTSS products are marketed to wireless service providers worldwide through a direct sales force, licensees and agents.

      The wireless infrastructure industry experienced significant growth in 2004 after three years of decline. The segment believes that its 24% increase in net sales outpaced overall sales growth in the industry, and resulted in increased market share for the segment in 2004.

      The industry’s migration to 3G systems, which are high-capacity wireless networks designed to provide enhanced data services, improved Internet access and increased voice capacity, is currently focused primarily on two technologies—CDMA2000 1X and UMTS. GTSS is a supplier for both of these technologies. CDMA markets have begun to deploy CDMA2000 1X-EVDO technology, which provides increased data bandwidth compared to

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CDMA2000 1X. In addition, many GSM markets, particularly those in Western Europe, have begun to deploy UMTS.

      We are executing on a strategy to enhance our position as an end-to-end supplier of wireless infrastructure. GTSS continues to invest in major radio access technologies: CDMA2000 1X, CDMA2000 1X-EVDO, iDEN®, GSM, GPRS (General Packet Radio Service, which is a 2.5G technology), EDGE (a technology that provides data bandwidth higher than GPRS in existing GSM spectrum assignments), UMTS and HSDPA (High Speed Downlink Packet Access, an evolution from UMTS technology that offers improved performance benefits and reduced costs to operators). In 2004, GTSS deployed its soft switch product in certain markets in Asia and Latin America. The market for wireless soft switch continues to grow, and we believe GTSS is a leader in providing these next-generation wireless soft switch IP networks.

      Our network products are further enhanced by a portfolio of services that reduce operator capital expenditure requirements, increase network capacity and improve system quality. These quality improvements benefit operators through increased customer satisfaction, greater usage and lower churn, all of which can have a positive impact on operator financial results. GTSS also expanded its market presence in emerging markets, many of which have higher subscriber growth rates than those in mature markets.

      We also continue to build on our industry-leading position in push-to-talk over cellular (PoC) technology. We have executed agreements to launch our PoC product application on both GPRS and CDMA2000 1X networks. To date, the segment has 23 contracts in 27 countries.

      Due to the nature of the segment’s business, the agreements it enters into are primarily long-term contracts with major operators that require sizeable investments by customers. In 2004, five customers represented approximately 54% of the segment’s net sales (China Mobile; China Unicom; KDDI, a service provider in Japan; Nextel and its affiliates; and Verizon). The loss of any of the segment’s large customers, in particular these customers, could have a material adverse effect on the segment’s business. Further, because contracts are long-term, the loss of a major customer would impact revenue and earnings over several quarters.

      Nextel is our largest customer, representing 17% of the segment’s net sales in 2004, and we have been their sole supplier of iDEN handsets and core network infrastructure equipment for over ten years. Nextel uses Motorola’s proprietary iDEN technology to support its nationwide wireless service business. In December 2004, Motorola announced that it reached an agreement with Nextel to extend the companies’ iDEN infrastructure and iDEN subscriber supply agreements for a period from January 1, 2005 through December 31, 2007. Motorola also announced an agreement with Nextel for implementation of Next Generation Dispatch, a new Internet Protocol-based call processing engine designed to replace the current call-processing system. In addition, Motorola has developed a new 6:1 vocoder which will allow Nextel to increase capacity on its current system. Nextel has announced its intention to activate the 6:1 vocoder in substantially all of its markets in 2005. In December 2004, Nextel and Sprint announced an intended merger of their companies. The segment does not anticipate any significant impact to its business in 2005 as compared to 2004 as a result of this merger.

      KDDI has been successful with its all-Motorola 800MHZ CDMA2000 1X network in Japan. In 2004, Motorola and KDDI began deployment of a CDMA2000 1X network in the 2GHZ band. This new packet-based 2GHz network is expected to allow KDDI to provide more advanced features and expand its subscriber base.

      GTSS experiences competition in worldwide markets from numerous competitors, ranging in size from some of the world’s largest companies to small, specialized firms. Ericsson has maintained its market leadership position. Five vendors with similar market share positions including Motorola, Nokia, Siemens, Lucent and Nortel trail Ericsson. Alcatel, Samsung and NEC are also significant competitors. Competition will continue to intensify as new Chinese infrastructure vendors like Huawei and ZTE enter the market.

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      We have experienced significant competition in the markets for our products and services, especially as the industry transitions to 3G technologies. GTSS is a supplier of 3G equipment for both CDMA2000 1X and UMTS technologies, although we have a much stronger position in CDMA2000 1X.

      Competitive factors in the market for the segment’s products include: technology offered; price; payment terms; availability of vendor financing; product and system performance; product features, quality, delivery, availability and warranty; the quality and availability of service; company image; relationship with key customers; and time-to-market. 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.

      GTSS contracts typically include implementation milestones, such as delivery, installation and system acceptance. Generally, these milestones can take anywhere from 30 to 180 days to complete. Customer payments are typically tied to the completion of these milestones. Once a milestone is reached, payment terms are generally 30 to 60 days. As required for competitive reasons, we may arrange or provide for extended payment terms or long-term financing in connection with equipment purchases. We directly provided long-term financing of approximately $23 million to one customer in 2004; approximately $16 million to two customers in 2003; and approximately $47 million to four customers in 2002.

      Radio frequencies are required to provide wireless services. The allocation of frequencies is regulated in the U.S. and other countries throughout the world, and limited spectrum space is allocated to wireless services. The growth of the wireless and personal communications industry may be affected if adequate frequencies are not allocated or, alternatively, if new technologies are not developed to better utilize the frequencies currently allocated for such use. Industry growth may also be affected by the cost of the new licenses required to use frequencies and any related frequency relocation costs.

      The U.S. leads the world in spectrum deregulation, allowing new wireless communications technologies to be developed and offered for sale. Examples include Wireless Local Area Network systems such as WiFi, and Wide Area Network systems such as WiMax. Other countries also deregulated portions of the available spectrum to allow these and other new technologies, which can be offered without spectrum license costs and may introduce new competition and new opportunities for Motorola and our customers.

      The segment’s backlog was $1.9 billion at December 31, 2004, compared to $1.6 billion at December 31, 2003. The 2004 order backlog is believed to be generally firm and 100% of that amount is expected to be recognized as revenue during 2005. The forward-looking estimates of the firmness of such orders are subject to future events that may cause the amount recognized to change.

      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 licenses certain of its patents to third parties and generates modest revenue from these licenses. Motorola is also licensed to use certain patents owned by others. Royalty and licensing fees vary from year to year and are subject to the terms of the agreements and sales volumes of the products subject to licenses. The protection of these licenses is also important to the segment’s operations. Reference is made to the material under the heading “Other Information” for information relating to patents and trademarks and research and development activities with respect to this segment.

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      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 2004, the segment had a 26% increase in inventory as compared to the end of 2003, primarily due to expected increased sales volumes in 2005.

      Where economically and technically feasible, materials used in the segment’s operations are generally second-sourced to ensure a continuity of supply. Occasionally, shortages or extended delivery periods occur for various component parts, the effects of which are generally short in duration.

      Natural gas, electricity and, to a lesser extent, oil are primary sources of energy for the segment’s operations. Current supplies of these forms of energy are generally considered to be adequate for this segment’s operations in both U.S. and non-U.S. locations. Labor is generally available in reasonable proximity to the segment’s manufacturing facilities. However, difficulties in obtaining any of these items 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 wherein if we do not achieve the milestones, the product could be returned.

      Our business does not have seasonal patterns for sales.

      Our headquarters are located in Arlington Heights, Illinois. Major design centers include Arlington Heights and Schaumburg, Illinois; Chandler, Arizona; Fort Worth, Texas; Tewksbury, Massachusetts; Cork, Ireland; Bangalore, India; and Swindon, U.K. We operate manufacturing facilities in Schaumburg, Illinois; Fort Worth, Texas; Hangzhou and Tianjin, China; Swindon, U.K.; and Jaguariuna, Brazil. A majority of our manufacturing is conducted in China, with nearly 100% of printed circuit board assembly for the segment performed by outsourcers in China.

Commercial, Government and Industrial Solutions Segment

      The Commercial, Government and Industrial Solutions segment (“CGISS” or the “segment”) provides customized and commercial off-the-shelf, mission-critical integrated communications and information systems. In 2004, CGISS net sales represented 15% of the Company’s consolidated net sales.

      CGISS designs, manufactures, sells, installs and services analog and digital two-way radio, voice and data communications products and systems to a wide range of public-safety, government, utility, courier, transportation and other worldwide markets. The business continues to invest in the market for broadband data, including infrastructure, devices, service and applications. In addition, the segment participates in the expanding market for integrated information management, mobile and biometric applications and services. These applications and services provide our customers with computer-aided dispatch, field based reporting, records management and fingerprint matching capabilities.

      Our products are sold directly through our own distribution force or through independent authorized distributors and dealers, commercial mobile radio service operators and independent commission sales representatives. Our distribution organization provides systems engineering and 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 our authorized service stations (most of whom are also authorized dealers) or from other non-Motorola service stations.

      Significant events since 2001 have heightened the need for safety and security products and systems worldwide. Public-safety, government and enterprise organizations are seeking a wide range of detection and prevention capabilities; interoperable communications and information sharing across many users; and integrated voice, data and video capabilities. We have been a leader in providing mission-critical communications and information

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products and systems for more than 65 years, and our business is well positioned to continue to benefit from increased spending for safety and security products and systems.

      Spending by the segment’s government and public safety customers is affected by government budgets at the national, state and local levels. In the U.S., where the majority of the segment’s sales occur, the 2005 Department of Homeland Security Appropriations Act was passed in October 2004, providing for an increase over 2004’s discretionary spending budget. However, it is very difficult to tell how much of that funding will be used for communications needs. Also, recent U.S. federal government budget proposals have indicated potential funding reductions to state and local agencies that purchase our products and systems. In addition, even in light of limited budgets for local governments and public safety agencies, the segment sees increased prioritization of limited government funds towards funding of safety and security projects. Particularly, customers in the government market are interested in two-way radio systems and integrated solutions that enhance interoperability and compatibility. Accordingly, the segment does not expect reductions in U.S. federal government funding to state and local agencies to have a material impact on its business in 2005. The segment will continue to work closely with all pertinent government departments and agencies to ensure that two-way radio and wireless communications is positioned as a critical need for homeland security.

      The scope and size of systems requested by some of our customers are increasing, including requests for countrywide and statewide systems. These larger systems are more complex and include a wide range of capabilities. Larger system projects will impact how contracts are bid, which companies compete for bids and how companies partner on projects. In 2004, we were awarded several larger system projects, including projects for the U.S. Postal Service, the Austrian Ministry of Interior and the Commonwealth of Virginia. The scope of these and related projects vary, however, they are: (i) generally longer term arrangements, up to 25 years, (ii) cover a wider geography or a larger user group, and (iii) include the sale of infrastructure, systems integration, subscriber products and/or managed services. In 2005, we expect the trend towards larger systems to continue.

      Key elements in our strategy include: (i) providing integrated voice, data and broadband over wireless systems at the local, state and national government levels globally; (ii) continued migration from analog to digital end-to-end radio systems; (iii) providing Project 25 and TETRA standards-based voice and data networking systems around the world; (iv) the implementation of interoperable communications and information systems, especially related to global homeland security; and (v) increasing sales to enterprise customers. We are working with national governments to design and sell countrywide radio systems that are shared by police, fire, emergency services and, in some cases, military agencies. We are also providing essential integrated software applications. These applications, which have been the result of internal development and acquisitions, enhance our customer’s business processes, enabling them to fulfill their missions in public safety, criminal justice and public service. Our product lines include computer-aided dispatch, records management systems, criminal and civil automated fingerprint identification systems, mobile data applications and devices, corrections management systems, and customer service request systems, as well as other related products.

      The principal customers for two-way radio products and systems include: public-safety agencies, such as police, fire, emergency management services and military; petroleum companies; gas, electric and water utilities; courier companies; telephone companies; diverse industrial companies; transportation companies, such as railroads, airlines, taxicab operations and trucking firms; institutions, such as schools and hospitals; and companies in construction, manufacturing and service businesses. We sell our products to various local, state, provincial and national agencies for many uses, including homeland security. Net sales to customers in North America accounted for 66% of the segment’s net sales in 2004.

      We have a large number of customers worldwide. The combined net sales from our top 5 customers worldwide represent about 11% of 2004 segment net sales. A loss or reduction in purchasing levels by a single customer or a few customers could, but is not likely to, have a material adverse effect on our financial results.

      We are a leading worldwide supplier of two-way radio communications products, services and systems. We provide communications and information systems compliant with both existing industry digital standards, TETRA

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and Project 25. We experience widespread, intense competition from numerous competitors ranging from some of the world’s largest diversified companies to foreign, state-owned telecommunications companies to many small, specialized firms. Many competitors have their principal manufacturing operations located outside the U.S., which may serve to reduce their manufacturing costs and enhance their brand recognition in their locale. Major competitors include: M/ A-Com (Tyco), Nokia, Kenwood, E.F. Johnson, EADS Telecommunications and large system integrators.

      We may also act as a subcontractor to large system integrators based on a number of competitive factors
and customer requirements. As demand for fully-integrated voice, data and broadband over wireless systems
at the local, state and national government levels continues, we may face additional competition from public telecommunications carriers.

      Competitive factors for our products and systems include: price; technology offered and standards compliance; product features, performance, quality, availability, delivery and support; and the quality and availability of support services and systems engineering, with no one factor being dominant. An additional factor is the availability of vendor financing, as customers continue to look to equipment vendors as an additional source of financing.

      Payment terms vary worldwide. Generally, contract payment terms range from net 30 to 60 days. As required for competitive reasons, we may provide or arrange for long-term financing in connection with equipment purchases. Financing may cover all or a portion of the purchase price.

      Users of two-way radio communications are regulated by a variety of governmental and other regulatory agencies throughout the world. In the U.S., users of two-way radios are licensed by the FCC, which has broad authority to make rules and regulations and prescribe restrictions and conditions to carry out the provisions of the Communications Act of 1934. Regulatory agencies in other countries have similar types of authority. Consequently, the business and results of this segment could be affected by the rules and regulations adopted by the FCC or regulatory agencies in other countries from time to time. Motorola has developed products using trunking and data communications technologies to enhance spectral efficiencies. The growth and results of the two-way radio communications industry may be affected by the regulations of the FCC or other regulatory agencies relating to access to allocated frequencies for land mobile communications users, especially in urban areas where such frequencies are heavily used.

      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. Other countries also deregulated portions of the available spectrum to allow these and other technologies, which can be offered without spectrum license costs and may introduce new competition and new opportunities for Motorola and our customers.

      On February 7, 2005, Nextel Communications agreed to a plan by federal regulators designed to address interference from Nextel cellular phones with hundreds of public safety communications systems in the U.S. According to the FCC, the agreement should dramatically reduce the likelihood of interference. Nextel will be required to fund certain costs necessary to relocate those impacted users into the 800MHz spectrum. CGISS will continue to work with our customers that are impacted by this plan and expects that this will have an overall positive impact on the CGISS business over the next several years. However, the impact in the short term is uncertain and yet to be quantified, as all of the details of the plan are not finalized.

      The segment’s backlog was $2.1 billion at December 31, 2004, compared to $1.7 billion as of December 31, 2003. The 2004 backlog amount is believed to be generally firm, and approximately 66% of that amount is expected to be recognized as revenue during 2005. This 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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      Patent protection is very important to the segment’s business. We actively participate in the development of open standards for interoperable, mission critical digital two-way radio systems. We have published our technology and licensed patents to signatories of the industry’s two primary memorandums of understanding defined by the Telecommunications Industry Association (TIA) Project 25 and European Telecommunications Standards Institute (ETSI) Terrestrial Trunked Radio (TETRA). Royalties associated with these licenses are not expected to be material to the segment’s financial results. Reference is made to the material under the heading “Other Information” for information relating to patents and trademarks, and research and development activities with respect to this segment.

      The segment provides custom products based on assembling basic units into a large variety of models or combinations. This requires the stocking of inventories and large varieties of piece parts and replacement parts, as well as a variety of basic level assemblies in order to meet delivery requirements. Relatively short delivery requirements and historical trends determine the amounts of inventory to be stocked. To the extent suppliers’ product life cycles are shorter than the segment’s, stocking of lifetime buy inventories is required. In addition, replacement parts are stocked for delivery on customer demand within a short delivery cycle, including radios that have been canceled within the last 10 years.

      Availability of the materials and components required by the segment is relatively dependable, but normal fluctuations in market demand and supply could cause temporary, selective shortages and affect results. Direct sourcing of materials and components from foreign suppliers is becoming more extensive. We operate certain offshore manufacturing plants, the loss of one or more of which could constrain our production capabilities and affect the segment’s financial results. We currently source certain raw materials from single vendors. Any material disruption from a single-source vendor may have a material adverse impact on our operations.

      Natural gas, electricity and, to a lesser extent, oil are the primary sources of energy for the segment’s operations. Current supplies of these forms of energy are generally considered to be adequate for this segment’s operations. Labor is generally available in reasonable proximity to the segment’s manufacturing facilities. However, difficulties in obtaining any of these items could affect the segment’s results.

      Generally, we do not permit customers to return products. We typically have stronger sales in the fourth quarter of the year because of government and commercial spending patterns, as well as the timing of new product releases.

      Our headquarters are located in Schaumburg, Illinois, and our major manufacturing and distribution facilities are located in Elgin and Schaumburg, Illinois; Tianjin, China; Penang, Malaysia; Berlin and Taunusstein, Germany; and Arad, Israel. The majority of our products are integrated/manufactured in Schaumburg, Illinois; Berlin, Germany; and Penang, Malaysia.

Integrated Electronic Systems Segment

      The Integrated Electronic Systems segment (“IESS” or the “segment”) designs, manufactures and sells: (i) automotive and industrial electronics systems, (ii) telematics systems that enable automated roadside assistance, navigation and advanced safety features for automobiles, (iii) portable energy storage products and systems, and (iv) embedded computing systems. In 2004, IESS net sales represented 9% of the Company’s consolidated net sales.

      The Automotive Communications and Electronic Systems Group (“ACES”) consists of three businesses: the Powertrain Chassis and Systems Group (“PCSG”), the Interior Electronics Division (“IED”), and the Telematics Communications Group (“TCG”). PCSG and IED use application and engineering expertise to design and sell custom electronic systems for original equipment manufacturers (“OEMs”), which may include foreign and domestic automobile manufacturers, heavy vehicle manufacturers, farm equipment manufacturers and industrial customers, as well as first-tier suppliers to such manufacturers. TCG provides automotive customers with embedded

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telematics control units, integrated wireless handsets, navigation and driver safety products and systems controls for automotive vehicles.

      The Energy Systems Group (“ESG”) delivers complete portable energy storage products and systems for many of today’s leading brand-name wireless handsets, handheld computers and other portable electronic products. A significant portion of ESG’s sales are to other businesses within Motorola, including the wireless handset business, PCS, and the public safety and enterprise communications business, CGISS.

      The Embedded Communications Computing Group (“ECCG”), formerly known as the Motorola Computer Group (“MCG”), specializes in standards-based, embedded computing systems that are integrated by OEMs into a wide variety of products in the telecommunications, industrial automation, defense, medical and aerospace industries. In August 2004, the Company acquired Force Computers, a worldwide designer and supplier of open, standards-based and custom embedded computing solutions. Force Computers was integrated with MCG, and the two combined entities were renamed the Embedded Communications Computing Group.

      The segment markets its products through a direct sales force, channel distributors and strategic distribution partners.

      The segment participates in three industries. We provide: (i) products and systems used in automotive vehicles, (ii) portable energy systems, such as batteries used in wireless devices, and (iii) embedded computing systems. Demand for our products is linked to various factors, including consumer demand for cars and wireless devices and industrial demand for embedded computing systems.

      In 2004, net sales were up for ACES due to new electronic controls and telematics products. ESG net sales increased primarily due to increased shipments of wireless handset devices by PCS. ECCG net sales increased due to the Force Computers acquisition and increased demand for commercial, off-the-shelf embedded computing systems.

      The strategy of the businesses that make up the segment is to accelerate growth by increasing share in existing markets and by expanding into related market segments. ACES continues to grow as automotive OEMs expand the electronic content in their vehicle’s powertrain, chassis, sensor, interior electronics and telematics systems. Going forward, the growth in the global automotive electronics market is expected to outpace the growth rate of global vehicle production. ACES is well positioned to take advantage of this growth.

      We expect ECCG to grow by leading the move to higher utilization of standards-based embedded computing systems. Growth also is expected as a result of the acquisition of Force Computers, which we expect to enable ECCG to provide solutions for a wider range of customer applications needs, supported by a broader portfolio of boards, systems and services. These products enable OEMs in telecommunications, industrial automation, defense and aerospace industries to acquire commercial, off-the-shelf computing systems instead of creating these systems with in-house engineering resources. This change enables OEMs to provide more cost-effective computing systems and to focus their own research and development on applications that add value to and differentiate the computing system.

      ESG’s growth is tied to the volume of portable devices in the mobile computing and portable communications markets.

      In 2004, 60% of the segment’s net sales were to four customers: 19% to Motorola, 17% to General Motors, 12% to Ford and 12% to Daimler Chrysler. Our largest customer within Motorola is the wireless handset business, PCS. The loss of a significant portion of any of these customers’ business could have a material adverse effect upon the segment.

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      Demand for the products of ACES is linked to automobile sales in the U.S. and other countries and the level of electronic content per vehicle. Demand for ESG products is strongly linked to the sales of other Motorola businesses, particularly the sales of our wireless handset business, the group’s largest customer. Demand for ECCG products is linked to sales of telecommunications, manufacturing, and other infrastructure systems in the U.S. and other countries. The segment experiences competition from numerous global competitors, including automobile manufacturers’ affiliated electronic control suppliers.

      ACES is the leader for embedded telematics systems and products, as well as a leader for pressure sensor products; key competitors include Delphi and Visteon. ESG is one of the largest providers of portable energy storage products and systems; key competitors include Sony, Panasonic, and Sanyo. ECCG is a leader in VME technology (the industry’s first widely-adopted embedded computing standard) and the leading CompactPCI Systems supplier; key competitors include Radisys and Kontron.

      Competitive factors in the sale of the segment’s products include: price; product quality, performance and delivery; supply integrity; quality reputation; responsiveness; and design and manufacturing technology.

      Generally, contract payment terms range from 30 to 60 days.

      The segment’s backlog was $424 million at December 31, 2004, compared to $347 million at December 31, 2003. The 2004 backlog is believed to be generally firm and approximately 100% of that amount is expected to be recognized as revenue during 2005. This forward looking estimate of the firmness of such orders is subject to future events that may cause the amount recognized to change.

      Patent protection is important to the segment’s business. Reference is made to the material under the heading “Other Information” for information relating to patents and trademarks and research and development activities with respect to this segment.

      The segment does not carry significant amounts of inventory.

      All materials used by our operations are readily available at this time. We use electricity and gas in our operations, which are currently adequate in supply. Labor is generally available in reasonable proximity to the segment’s manufacturing facilities. However, difficulties in obtaining any of the aforementioned items could affect our results.

      In certain circumstances generally pursuant to warranties, we permit customers to return products. We believe that the return policies in all businesses conform to standard industry practices. Our business has not experienced significant seasonal buying patterns.

      Our headquarters are located in Deer Park, Illinois. We also have major facilities located in Tempe, Arizona; Lawrenceville, Georgia; Farmington Hills, Michigan; Elma, New York; Seguin, Texas; Nogales, Mexico; Tianjin, China; Angers, France; Munich, Germany; and Penang, Malaysia. Most of our ACES products are manufactured in our Seguin, Texas and Nogales, Mexico facilities. We manufacture all of our ESG products in Asia, primarily in two of our facilities in China and Malaysia. The manufacture of ECCG products has been transferred to contract manufacturers and our facility in Nogales, Mexico.

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Broadband Communications Segment

      The Broadband Communications segment (“BCS” or the “segment”) designs, manufactures and sells a wide variety of broadband products, including: (i) digital systems and set-top terminals for cable television and broadcast networks, (ii) high speed data products, including cable modems and cable modem termination systems (“CMTS”), as well as Internet Protocol (“IP”)-based telephony products, (iii) access network technology, including hybrid fiber coaxial network transmission systems and fiber-to-the-premise (“FTTP”) transmission systems, used by cable television operators, (iv) digital satellite television systems; (v) direct-to-home (“DTH”) satellite networks and private networks for business communications, and (vi) high-speed data, video and voice broadband systems over existing phone lines. In 2004, BCS net sales represented 7% of the Company’s consolidated net sales.

      The segment is a leading provider of end-to-end networks used in the cable television industry for the delivery of video, voice and data services over hybrid fiber coaxial networks. These broadband networks include products used to transport programming by broadcasters, products used at the cable operator’s headend (central office) and products used at the cable operator’s outside transmission plant. We also sell a suite of interactive digital set-top terminals for the end customer’s home that enable advanced interactive entertainment and informational services, including video-on-demand (“VOD”), digital video recording (“DVR”), Internet access, e-mail, e-commerce, chat rooms, pay-per view, and decoding and processing of high definition television (“HDTV”) to be transmitted over networks using our technology and other IP services. Our interactive digital set-top terminals also deliver advanced interactive services focused on digital video broadcast-compliant (“DVB-compliant”) markets around the world. We also provide digital system control equipment, encoders, access control equipment and a wide range of digital satellite receivers. Our digital business (set top boxes and video infrastructure equipment) accounted for approximately 60% of our revenue in 2004 and is expected to account for a substantial portion of our revenues for the foreseeable future.

      Our Surfboard® family of cable modems delivers high-speed Internet access to subscribers over cable networks. These Surfboard® products also include wireless networking devices with high-speed Internet access for a complete home, small office or small-to-medium enterprise communications system.

      To complete the end-to-end broadband network system, we design and manufacture a diverse family of broadband infrastructure access applications for broadband services including video, voice, and data communications. These products include CMTS, headend products, amplifiers, taps, passives and optoelectronics.

      Our products are marketed primarily to cable television operators, satellite television programmers, and other communications providers worldwide and are sold primarily by our sales personnel who are skilled in the technology of these systems. We have also expanded our traditional distribution channels by selling directly to consumers in a variety of retail markets. Through retail, we market and sell cable modems, cordless telephones, home networking products and advanced digital set-top terminals. We have also expanded our product solutions for specific applications, including home and family monitoring.

      Demand for our products depends primarily on: (i) capital spending by providers of broadband services for constructing, rebuilding or upgrading their communications systems, and (ii) 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) general economic conditions; (ii) the continuing trend of consolidation within the cable and telecommunications industries; (iii) the financial condition of cable television system operators and alternative communications providers, including their access to financing; (iv) the rate of digital penetration; (v) technological developments; (vi) standardization efforts that impact the deployment of new equipment; and (vii) new legislation and regulations affecting the equipment sold by the segment. In 2004, our customers increased their spending on our products, primarily due to the increase in digital video and data subscribers and the deployment of advanced video platforms by cable operators for HDTV/DVR applications.

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      We continue to focus on our strategy to innovate and enhance our end-to-end network portfolio. We are focused on accelerating the rate of digital penetration by broadband operators in North America through the introduction of an enhanced suite of digital set-top terminals, including more cost-effective products designed to increase the number of set-tops per household, as well as higher-end products for premium service, including HDTV and DVR applications. We also continue to focus on opportunities in regions outside of North America, including the development of digital video products designed to be compliant with technology required in these regions.

      We are focused on enhancing and expanding our infrastructure offerings, including next-generation products in the CMTS and fiber optic network markets. Sales of our CMTS infrastructure products increased in 2004 and are expected to continue to increase in 2005 as cable operators build out their networks to accommodate enhanced data and voice over IP applications. We also will continue to expand our portfolio of data products beyond the traditional cable modem business and into voice modems. We are focused on providing home networking and monitoring products, including wireless networking devices with high-speed Internet access for a complete home, small office or small-to-medium enterprise communications system.

      We are dependent upon a small number of customers for a significant portion of our sales. The vast majority of our sales are in the U.S.—where a small number of large cable television multiple system operators (MSOs) own a large portion of the cable systems and account for a significant portion of the total capital spending in the industry. Comcast Corporation accounted for approximately 30% of the segment’s net sales in 2004. The loss of business in the future from Comcast or any of the other major MSOs could have a material adverse effect on the segment’s business.

      The businesses in which we operate are highly competitive.

      The rapid technological changes occurring in each of the markets in which we compete are expected to lead to the entry of many new competitors.

      We compete worldwide in the market for digital set-top terminals for broadband and satellite networks. Based on 2004 annual sales, we believe we are the leading provider of digital cable set-top terminals in North America. Our digital cable set-top terminals compete with products from a number of different companies, including: (i) those that develop and sell substitute products that are distributed by direct broadcast satellite (DBS) 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. In North America, our largest competitor is Scientific-Atlanta. Other competitors in North America include Cisco, Arris, and C-COR. Outside of North America, where we have a smaller market position, we compete with many equipment suppliers, including several consumer electronics companies.

      The traditional competitive environment in the North American cable market continues to change for several reasons. First, based on our customers’ requirements, we have begun and will continue to license certain of our technology to certain competitors. In 2005, we expect to license our technology to more licensees, which may result in increased competition for sales of digital set-top terminals in our markets. Second, per OpenCable specifications, televisions were introduced in 2004 that will no longer require a digital set-top box for one-way broadcast digital services. Future versions of this specification will enable similar devices to access pay-per-view and VOD applications without a set-top box. The FCC also has mandated that digital tuners be incorporated into all television sets sold in the U.S. by 2006. Television manufacturers are expected to integrate technology that is available in our set-top terminals into their products in the future and bypass the need for a set-top terminal for certain applications.

      Historically, reception of digital television programming from the cable broadband network required a set-top terminal with security technology that was compatible with the network. This security technology has limited the availability of set-top terminals to those manufactured by a few cable network manufacturers, including Motorola. The FCC has enacted regulations requiring separation of security functionality from set-top terminals by July 1, 2006. To meet this requirement, we have developed security modules for sale to cable operators for use with our own and third-party set-top terminals. As a step towards this implementation, in 2002, the cable industry and

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consumer electronic manufacturers agreed to a uni-directional security interface that allows third-party devices to access broadcast programming (not pay-per-view or VOD) with a security device. These devices became widely available in 2004. A full two-way security interface specification is in development, and compliant devices are likely to be available in 2006. These changes are expected to increase competition and encourage the sale of set-top terminals to consumers in the retail market. Traditionally, cable service providers have leased the set-top terminal to their customers.

      All of these changes could adversely impact our competitive position and our sales and profitability. Most of our sales and profits arise from the sale of our set-top terminals.

      We also compete worldwide in the market for broadband data products. We believe that we are the leading provider of cable modems worldwide, competing with a number of consumer electronic companies and various original design manufacturers worldwide.

      Competitive factors for our products and systems include: technology offered, product and system performance, features, quality, delivery, availability and price. We believe that we enjoy a strong competitive position because of our large installed cable television equipment base, strong relationships with major communication system operators worldwide, technological leadership and new product development capabilities.

      Generally, our payment terms are consistent with the industry and range from 30 to 60 days. Extended payment terms are provided to customers from time to time on a case-by-case basis. Such extended terms are isolated in nature and historically have not related to a significant portion of our revenues.

      Many of our products are subject to regulation by the FCC or other communications regulatory agencies. 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 operators to offer certain services, or the terms on which the companies offer the services and conduct their business, may affect the segment’s results. Regulatory actions also have impacted competition, as discussed above.

      The segment’s backlog was $314 million at December 31, 2004, compared to $299 million at December 31, 2003. The increase in backlog and related orders primarily reflects increased orders from our customers for advanced set tops. The 2004 order backlog is believed to be generally firm and 100% of that amount is expected to be recognized as revenue in 2005. The forward-looking estimates of the firmness of such orders is subject to future events, which may cause the amount recognized to change.

      We seek to build upon our core enabling technologies, such as digital compression, encryption and conditional access systems, in order to lead worldwide growth in the market for broadband 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. We have also licensed our digital conditional access technology, DigiCipher® II, to other equipment suppliers. 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.

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      Substantially all of our products are manufactured at our facilities in Taipei, Taiwan and Nogales, Mexico. Inventory levels are managed in line with existing business conditions.

      We source our raw materials primarily from large multinational corporations that supply the electronics and telecommunications industries. In general, we have access to several sources of supply for each component in our major products; however, we have some components that are currently available only from limited sources. We have inventory controls and other policies intended to minimize the effect of any interruption in the supply of components. We currently source certain parts from Broadcom Corporation and Texas Instruments Corporation for our digital set-top terminals and cable modems. Any material disruption in supply from Broadcom or Texas Instruments for certain products would have a material adverse impact on our operations.

      Electricity is the primary source of energy required for our manufacturing operations. These operations do not have significant risk relating to the availability of this energy source; however, possible shortages in the supply of electricity would affect the segment’s operations. Labor is generally available in reasonable proximity to the segment’s manufacturing facilities.

      Generally, we do not permit customers to return products. We have not experienced seasonal buying patterns for our products recently. However, as our retail cable modem and digital set-top terminal sales increase, we may have increased sales during the holiday season at the end of each year.

      Our headquarters are located in Horsham, Pennsylvania. We also have research and development and administrative offices in Rohnert Park, San Diego and San Jose, California; Andover and Marlboro, Massachusetts; and Lawrenceville, Georgia. We have several sales offices throughout North America, Europe, Latin America and Asia, and we operate manufacturing facilities in Taipei, Taiwan and Nogales, Mexico. Substantially all of our manufacturing is in Taiwan and Mexico.

Other Products Segment

      The Other Products segment includes: (i) various corporate programs representing developmental businesses and research and development projects, which are not included in any major segment, and (ii) Motorola Credit Corporation (“MCC”), the Company’s wholly-owned finance subsidiary. In 2004, Other Products net sales represented 1% of the Company’s consolidated net sales.

      In December 2004, the Company announced a reorganization of its businesses and functions to align with the Company’s seamless mobility strategy, which was effective on January 1, 2005. The Company will be organized into four main business groups, focused on mobile devices, networks, government and enterprise, and the connected home. The Mobile Devices business will be primarily comprised of the current Personal Communications segment and the Energy Systems group from the Integrated Electronic Systems segment (“IESS”). The Networks business will be primarily comprised of the current Global Telecom Solutions segment, the Embedded Computing and Communications group from IESS, and the next-generation wireline networks business from the Broadband Communications segment (“BCS”). The Government and Enterprise business will be primarily comprised of the current Commercial, Government and Industrial Solutions segment and the Automotive Communications and Electronics Systems group from IESS. The Connected Home business will be primarily comprised of the current BCS, excluding the next generation wireline networks business. In addition, the Company’s key support functions, including supply-chain operations, information technology, finance, human resources, legal, strategy and business development, marketing, quality and technology will be architected centrally and distributed throughout the Company. The Company will be aligned into these four main operating segments with the analysis of reportable segments to be completed in the first quarter of 2005.

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Other Information

      Financial Information About Segments. The response to this section of Item 1 incorporates by reference Note 10, “Information by Segment and Geographic Region,” of Part II, Item 8: Financial Statements and Supplementary Data of this document.

      Customers. Motorola sold approximately 10% of its products and services to Nextel and its affiliates in 2004. In addition to Nextel, Motorola has several other large customers, the loss of one or more of which could have a material adverse effect on Motorola. Based on 2004 annual sales, in addition to Nextel, other large Motorola customers include China Mobile, Cingular and Vodafone.

      Approximately 2% of Motorola’s net sales in 2004 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, including the backlog relating to other Motorola segments, as of the end of the last two fiscal years was approximately as follows:

      Except as previously discussed in this Item 1, the orders supporting the 2004 backlog amounts shown in the foregoing table are believed to be generally firm, and approximately 92% of the backlog on hand at December 31, 2004 is expected to be shipped or earned, with respect to contracts accounted for under percentage-of-completion of accounting, during 2005. However, this is a forward-looking estimate of the amount expected to be shipped, and future events may cause the percentage actually shipped to change.

      Generally, Motorola recognizes revenue for product sales when: (1) title transfers, (2) the risks and rewards of ownership have been transferred to the customer, (3) the fee is fixed and determinable, and (4) collection of the related receivable is probable, which is generally at the time of shipment. Accruals are established, with related reduction to revenue, for allowances for discounts and for price protection, returns and incentive programs for distributors and end customers related to these sales based on actual historical exposure at the time the related reserves are recognized. For long-term contracts, Motorola uses the percentage-of-completion method to recognize revenues and costs based on the percentage of costs incurred to date compared to the total estimated contract costs. For contracts involving new and unproven technologies, revenues and profits are deferred until technological feasibility is established, customer acceptance is obtained and other contract-specific terms have been completed. Provisions for losses are recognized during the period in which the loss first becomes apparent. Revenue for services is recognized ratably over the contract term or as services are performed. Revenue related to licensing agreements is recognized over the licensing period or at the time the Company has fulfilled its obligations and the fee is fixed and determinable.

      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, both to improve existing products and services and to develop new products and services, together with its utilization of state-of-the-art technology, should allow each of its segments to remain competitive.

      R&D expenditures relating to new product development or product improvement were approximately $3.1 billion in 2004, compared to $2.8 billion in both 2003 and 2002. R&D expenditures increased 9% in 2004 as compared to 2003, after increasing 1% in 2003 as compared to 2002. Motorola continues to believe that a strong

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commitment to research and development is required to drive long-term growth. Approximately 21,600 professional employees were engaged in such research activities during 2004.

      Patents and Trademarks. Motorola seeks to obtain patents and trademarks to protect our proprietary position whenever possible and practical.

      As of December 31, 2004, Motorola owned approximately 8,416 utility and design patents in the U.S. and 12,885 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 2004, Motorola was granted 572 U.S. utility and design patents. The numbers of patents reported exclude Freescale Semiconductor. Many of the patents owned by Motorola are used in its operations or licensed for use by others, and Motorola is licensed to use certain patents owned by others. Royalty and licensing fees vary from year to year and are subject to the terms of the agreements and sales volumes of the products subject to licenses.

      Environmental Quality. Compliance with federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has no material effect on capital expenditures, earnings or the competitive position of Motorola.

      Employees. At December 31, 2004, there were approximately 68,000 employees of Motorola and its subsidiaries, as compared to approximately 88,000 employees at December 31, 2003. The employment decrease in 2004 primarily reflects the impact of the spin-off of Motorola’s former semiconductor operations during 2004.

      Financial Information About Foreign and Domestic Operations and Export Sales. Domestic export sales to third parties were $2.7 billion, $1.9 billion and $1.3 billion for the years ended December 31, 2004, 2003 and 2002, respectively. Domestic export sales to affiliates and subsidiaries, which are eliminated in consolidation, were $1.8 billion, $1.8 billion and $1.3 billion for the years ended December 31, 2004, 2003 and 2002, respectively.

      The remainder of the response to this section of Item 1 incorporates by reference Note 9, “Commitments and Contingencies” and Note 10, “Information by Segment and Geographic Region” of Part II, Item 8: Financial Statements and Supplementary Data of this document, the “Results of Operations—2004 Compared to 2003” and “Results of Operations—2003 Compared to 2002” sections of Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 Exchange Act reports and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with 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:

      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, phone: 1-800-262-8509. 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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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 principal manufacturing facilities for each of Motorola’s business segments.) Motorola owns 55 facilities (manufacturing, sales, service and office), 31 of which are located in North America and 24 of which are located in other countries. Motorola leases 295 facilities, 118 of which are located in North America and 177 of which are located in other countries.

      As compared to 2003, the number of facilities owned or leased was reduced primarily because of the spin-off of Freescale Semiconductor, the entity comprised of Motorola’s former semiconductor operations, during 2004. In addition, as part of Motorola’s overall strategy to reduce operating costs and improve the financial performance of the corporation, a number of businesses and facilities have either been sold or are currently for sale. During 2004, facilities in Tempe, Arizona; Northbrook, Illinois; Mesa, Arizona; and Swindon, England were sold. A facility in Harvard, Illinois is currently up for sale.

      Motorola generally considers the productive capacity of the plants operated by each of its business segments to be adequate and sufficient for the requirements of each business group. The extent of utilization of such manufacturing facilities varies from plant to plant and from time to time during the year.

      A substantial portion of Motorola’s products are manufactured in Asia, primarily China, either in our own facilities or in the facilities of others who manufacture and assemble products for Motorola. If manufacturing in the region was disrupted, Motorola’s overall productive capacity could be significantly reduced.

Item 3: Legal Proceedings

Personal Injury Cases

      Motorola has been a defendant in several cases arising out of its manufacture and sale of wireless telephones. Jerald P. Busse, et al. v. Motorola, Inc. et al., filed October 26, 1995 in the Circuit Court of Cook County, Illinois, is a class action alleging the defendants have failed to adequately warn consumers of the alleged dangers of cellular telephones and challenging ongoing safety studies as invasions of privacy. The Circuit Court entered summary judgment in defendants’ favor in 2002. In June 2004, the Illinois Appellate Court affirmed the summary judgment and dismissal of the case. In January 2005, the Illinois Supreme Court denied plaintiffs’ Petition for Leave to Appeal.

      During 2001, the Judicial Panel on Multidistrict Litigation transferred five cases, Naquin, et al., v. Nokia Mobile Phones, et al., Pinney and Colonell v. Nokia, Inc., et al., Gillian et al., v. Nokia, Inc., et al., Farina v. Nokia, Inc., et al., and Gimpelson v. Nokia Inc, et. al., which allege that the failure to incorporate a remote headset into cellular phones rendered the phones defective and that cellular phones cause undisclosed injury to cells and other health risks, to the United States District Court for the District of Maryland for coordinated or consolidated pretrial proceedings in the matter called In re Wireless Telephone Radio Frequency Emissions Products Liability Litigation. On March 5, 2003, the MDL Court dismissed with prejudice, on federal preemption grounds, the five cases. Plaintiffs appealed to the United States Court of Appeals for the Fourth Circuit; the appeal has been briefed and argued, but no decision has been announced.

      During 2002, the MDL panel transferred and consolidated six additional cases, Murray v. Motorola, Inc., et al., Agro et. al., v. Motorola, Inc., et al., Cochran et. al., v. Audiovox Corporation, et al., Schofield et al., v. Matsushita Electric Corporation of America, et al., each of which alleges that use of a cellular phone caused a malignant brain tumor, Dahlgren v. Motorola, Inc., et al., which alleges that defendants manufactured and sold cell phones that increase the risk of adverse cellular reaction and or cellular dysfunction and failed to disclose biological effects, and Brower v. Motorola, Inc., et al., which contains allegations similar to Murray and Dahlgren, with the MDL Proceeding. On July 19, 2004, the District Court for the District of Maryland found that there was no federal court jurisdiction over Murray, Agro, Cochran and Schofield and remanded those cases to the Superior Court for the District of Columbia. On November 30, 2004, defendants moved to dismiss the Murray, Agro, Cochran and Schofield complaints.

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      On January 23, 2004, Motorola was added as a co-defendant with New York City in Virgilio et al. v. Motorola et al., filed in the United States District Court for the Southern District of New York. The suit was originally filed in December 2003 (against New York City alone) on behalf of twelve New York City firefighters who died in the attack on the World Trade Center on September 11, 2001.

      The amended complaint alleges that the twelve firefighters died because the Motorola two-way radios they were using were defective and did not receive evacuation orders and because the City of New York and Motorola committed wrongful acts in connection with a bid process that was designed to provide new radios to the New York City Fire Department. Plaintiffs have asserted claims for wrongful death due to a defect in product design, wrongful death for failure to warn, wrongful death due to fraudulent misrepresentations and deceitful conduct, wrongful death due to negligent misrepresentations, and concerted action against both Motorola and the City of New York. Plaintiffs seek compensatory and punitive damages against Motorola in excess of $5 billion.

      On March 10, 2004, the court, to which all September 11 litigation has been assigned, granted Motorola’s and the other defendant’s motion to dismiss the complaint on the grounds that all of the Virgilio plaintiffs had filed claims with the September 11th Victims’ Compensation Fund, that the statutory scheme clearly required injured parties to elect between the remedy provided by this Fund and the remedy of traditional litigation and that plaintiffs, by pursuing the Fund, had chosen not to pursue litigation. On April 12, 2004, plaintiffs appealed to the United States Court of Appeal for the Second Circuit.

Iridium-Related Cases

      Motorola has been named as one of several defendants in putative class action securities lawsuits arising out of alleged misrepresentations or omissions regarding the Iridium satellite communications business, which on March 15, 2001, were consolidated in the District of Columbia under Freeland v. Iridium World Communications, Inc., et al., originally filed on April 22, 1999. On August 31, 2004, the court denied the motions to dismiss that had been filed on July 15, 2002 by Motorola and the other defendants.

      Motorola was sued by the Official Committee of the Unsecured Creditors of Iridium in the Bankruptcy Court for the Southern District of New York on July 19, 2001. In re Iridium Operating LLC, et al. v. Motorola asserts claims for breach of contract, warranty, fiduciary duty, and fraudulent transfer and preferences, and seeks in excess of $4 billion in damages.

      Motorola and certain of its current and former officers and directors were named as defendants in a private criminal complaint filed by Iridium India Telecom Ltd. (“Iridium India”) in October 2001 in the Court of the Extra Judicial Magistrate, First Class, Khadki, Pune, India. The Iridium India Telecom Ltd. v. Motorola, Inc. et al. complaint alleges that the defendants conspired to, and did, commit the criminal offense of “cheating” by fraudulently inducing Iridium India to purchase gateway equipment from Motorola, acquire Iridium stock, and invest in developing a market for Iridium services in India. Under the Indian penal code, “cheating” is punishable by imprisonment for up to 7 years and a fine of any amount. The court may also require defendants to compensate the victim for its losses, which the complaint estimates at about $100 million. In August 2003, the Bombay High Court granted Motorola’s petition to dismiss the criminal action against Motorola and the individual defendants. Iridium India has petitioned the Indian Supreme Court to exercise its discretion to review that dismissal, and that petition is pending.

      In September 2002, Iridium India also filed a civil suit in the Bombay High Court against Motorola and Iridium. The suit alleges fraud, intentional misrepresentation and negligent misrepresentation by Motorola and Iridium in inducing Iridium India to purchase gateway equipment from Motorola, acquire Iridium stock, and invest in developing a market for Iridium services in India. Iridium India claims in excess of $200 million in damages and interest. Following extensive proceedings in the trial court and on appeal related to Iridium India’s motion for

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interim relief, Motorola has deposited approximately $44 million in a specially designated account in India, and the Indian Supreme Court has accepted for a full hearing at a later date Motorola’s appeal regarding interim relief.

      M&C Partners III v. Galvin, et al., filed January 10, 2002, in the Circuit Court of Cook County, Illinois, is a shareholder derivative action filed derivatively on behalf of Motorola against fifteen current and former members of the Motorola Board of Directors and Motorola as a nominal defendant. The lawsuit alleges that the Motorola directors breached their fiduciary duty to the Company and/or committed gross mismanagement of Motorola’s business and assets by allowing Motorola to engage in improper practices with respect to Iridium. In October 2003, the court dismissed plaintiff’s amended complaint in its entirety without prejudice. In May 2004, plaintiff filed a motion for leave to file a second amended complaint and served a demand on the Motorola Board of Directors to investigate the alleged wrongful conduct. At a July 10, 2004 Special Board Meeting, Motorola’s Board appointed an investigatory committee to: (i) evaluate the plaintiff’s demand, and (ii) report back to the Board with a recommendation.

      An unfavorable outcome in one or more of the Iridium-related cases still pending could have a material adverse effect on Motorola’s consolidated financial position, liquidity or results of operations.

Telsim-Related Cases

      Motorola is owed approximately $2 billion under loans to Telsim Mobil Telekomunikasyon Hizmetleri A.S. (“Telsim”), a wireless telephone operator in Turkey. Telsim defaulted on the payment of these loans in April 2001. The Company fully reserved the carrying value of the Telsim loans in the second quarter of 2002. The Company is involved in the following legal proceedings related to Telsim. The Uzan family formerly controlled Telsim. Telsim and its related companies are now under the control of the Turkish government.

      On January 28, 2002, Motorola Credit Corporation (“MCC”), a wholly-owned subsidiary of Motorola, initiated a civil action with Nokia Corporation (“Nokia”), Motorola Credit Corporation and Nokia Corporation v. Kemal Uzan, et al., against several members of the Uzan family, as well as one of their employees and controlled companies, alleging that the defendants engaged in a pattern of racketeering activity and violated various state and federal laws including Illinois common law fraud and the Racketeer Influenced and Corrupt Organizations Act, commonly known as “RICO”. The suit was filed in the United States District Court for the Southern District of New York (the “U.S. District Court”). The U.S. District Court issued its final ruling on July 31, 2003 as described below.

      Upon filing the action, MCC and Nokia were able to attach various Uzan-owned real estate in New York. Subsequently, this attachment order was expanded to include a number of bank accounts, including those owned indirectly by the Uzans. On May 9, 2002, the U.S. District Court entered a preliminary injunction confirming the prejudgment relief previously granted. These attachments remain in place.

      The U.S. District Court tried the case without a jury to conclusion on February 19, 2003. Subsequent to the trial of the case, and before a final ruling had been issued, the U.S. Court of Appeals for the Second Circuit (“the Appellate Court”) issued an opinion on March 7, 2003 regarding a series of appeals filed by the Uzans from the U.S. District Court’s earlier rulings. In its opinion, the Appellate Court remanded the case back to the U.S. District Court on the grounds that the RICO claims were premature and not yet ripe for adjudication. The Appellate Court directed that the RICO claims be dismissed without prejudice to their being later reinstated. The Appellate Court, however, upheld the May 2002 Preliminary Injunction, finding that it was sufficiently supported by the fraud claims under Illinois law.

      In accordance with the mandate from the Appellate Court, on April 3, 2003, the U.S. District Court dismissed the RICO claims without prejudice. On July 8, 2003, MCC filed a motion seeking to have its RICO claims reinstated on the grounds that pursuing further actions against Telsim would be “futile.”

      On July 31, 2003, the U.S. District Court entered a judgment in favor of MCC for $4.26 billion. The U.S. District Court declined to reinstate the RICO claims (without prejudice to reinstatement), but held that the court had jurisdiction to decide the merits of the Illinois fraud claims. MCC’s fraud claims under Illinois common

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law fraud and civil conspiracy were sufficient to support a full judgment on behalf of MCC in the amount of $2.13 billion in compensatory damages. The U.S. District Court also awarded $2.13 billion in punitive damages. In addition, the preliminary injunction was converted into a permanent injunction, essentially unaltered in scope, and the U.S. District Court also ordered the Uzans arrested and imprisoned if they are found within 100 miles of the court’s jurisdiction for being in contempt of court.

      Thereafter, the Uzans appealed the U.S. District Court decision to the Appellate Court. Over the next nine months, execution on the judgment was, at different times, allowed to go forward and then stayed by the Appellate Court. For some period of time, the Uzans’ appeal was dismissed by the Appellate Court. On April 16, 2004, the Appellate Court reinstated the Uzans’ appeal and reinstated a stay of execution on the judgment.

      On August 11, 2004, the Appellate Court lifted the stay of execution, in part, and allowed MCC to execute on its judgment up to the full amount of the compensatory damages, $2.13 billion. The Appellate Court kept the stay in place with respect to the punitive damages and on that portion of the judgment which would have allowed Motorola to execute against entities owned and controlled by the Uzans. As a result, MCC’s efforts to execute on its judgment against the Uzans were recommenced in the United States, United Kingdom, Bermuda and France, and the Company has begun to realize some collections on its judgment. On October 22, 2004, the Appellate Court affirmed the July 31, 2003 judgment as to the compensatory damages of $2.13 billion. The Appellate Court remanded three issues to the U.S. District Court for additional findings and analysis. The issues are: (1) whether the U.S. District Court was correct in imposing a constructive trust over the stolen shares in favor of Motorola (the constructive trust was affirmed as to Nokia); (2) whether Motorola may collect its judgment against non-party companies owned and controlled by the Uzans, and (3) the amount of punitive damages the U.S. District Court may impose against defendants in favor of Motorola. As a result of this decision, enforcement actions have also recommenced in Switzerland and Germany.

      On November 5, 2004, defendants filed a petition for rehearing and rehearing en banc by the entire Appellate Court. On December 16, 2004, the Appellate Court denied the Uzans’ petition for rehearing and rehearing en banc with respect to the Appellate Court’s October 22, 2004 decision affirming the July 31, 2003 judgment as to compensatory damages of $2.13 billion. The mandate was issued by the Second Circuit on December 30, 2004, making this decision final. A remand to the district court on the issues on which the Appellate Court requested clarification is pending.

      As the result of the lifting of the stay and the re-commencing of the Company’s collection efforts, Motorola realized $44 million in the fourth quarter of 2004 on its judgment against the Uzans.

      The Company continues to believe that the litigation, collection and/or settlement processes will be very lengthy in light of the Uzans’ continued resistance to satisfy the judgment against them and their decision to violate various courts’ orders, including orders holding them in contempt of court. In addition, the Turkish government has asserted control and priority over Telsim and certain other interests and assets of the Uzans and this may make Motorola’s collection efforts in Turkey more difficult.

      In 2002, the United Kingdom’s High Court of Justice, Queen’s Bench Division (the “UK Court”), on motion of MCC, entered a worldwide freezing injunction against Cem Uzan, Hakan Uzan, Kemal Uzan and Aysegul Akay, freezing each of their assets up to a value of $200 million. The Uzans were ultimately held in contempt of court and ordered to be incarcerated for failing to make a full disclosure concerning their worldwide assets. On June 12, 2003, the UK Court of Appeal affirmed the lower court’s decision against Cem Uzan and Aysegul Akay, but concluded that MCC was not able to enforce the freezing order against Hakan Uzan and Kemal Uzan because they had no assets in England and Wales. Consequently, the lower court’s rulings as to Hakan Uzan and Kemal Uzan were reversed. As a result of the Court of Appeal’s decision, the UK assets of Cem Uzan and Aysegul Akay, which total approximately $12.7 million, remain frozen and MCC previously commenced the execution process in satisfaction of the U.S. District Court judgment. A hearing was held on December 6, 2004 at MCC’s request to domesticate its U.S. District Court judgment in the United Kingdom. MCC’s request was granted and the U.S. judgment is now recognized in the United Kingdom, allowing MCC to execute on Uzan assets in the UK.

      Motorola has also filed attachment proceedings in several other foreign jurisdictions resulting in the preliminary seizure of assets owned by the Uzans and various entities within their control. As set forth above, some of these execution proceedings are now ongoing (with some resulting payments to the Company), while others remain stayed.

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      On February 5, 2002, Telsim initiated arbitration against MCC in Switzerland at the Zurich Chamber of Commerce. In Telsim’s request for arbitration, Telsim acknowledged its debt, but has alleged that the disruption in the Turkish economy during 2001 should excuse Telsim’s failure to make payments on the MCC loans as required under the agreements between the parties. Telsim seeks a ruling excusing its failure to adhere to the original payment schedule and establishing a new schedule for repayment of Telsim’s debt to MCC. Telsim has failed to comply with its proposed new schedule, missing the first three payments totaling approximately $85 million. In August 2003, MCC made a motion to the arbitration panel for a partial award, seeking a judgment for the $85 million. On January 26, 2004, the arbitral tribunal granted MCC’s request and entered a Partial Final Award in favor of MCC and against Telsim in the amount of $85 million. MCC has initiated proceedings to enforce this award against Telsim in Turkey. This proceeding has been discontinued (without prejudice) while MCC appeals the Turkish court’s ruling that MCC pay a multi-million dollar court fee. MCC requested a second partial award of $40 million from the arbitration panel to account for a loan payment that would have been due at year-end 2003 even under Telsim’s proposed loan repayment schedule. In June 2004, MCC filed a request for a further award of $1.73 billion based on alleged further breaches of the financing agreements and a reply in support of MCC’s request for the $40 million partial award. On November 25, 2004, the arbitral tribunal granted MCC’s request and entered a Partial Final Award in favor of MCC and against Telsim in the amount of $40 million. Motorola expects to initiate proceedings to enforce this award against Telsim in Turkey. Motorola is awaiting a ruling from the arbitral tribunal with respect to the request for $1.73 billion. In December 2004, a final round of hearings was held on all outstanding issues and the case is now before the panel for final adjudication.

      On June 7, 2002, Rumeli Telfon (“Rumeli”) initiated arbitration against MCC in the Zurich Chamber of Commerce seeking a ruling requiring that MCC consent to Rumeli’s request to place the stock that was pledged to MCC (including improperly issued new shares, that effectively diluted MCC’s pledge from the contractually mandated 66% interest to a 22% interest) into an escrow account in Switzerland. Pursuant to the request of Rumeli, this arbitration was stayed. Upon the Company’s request, the panel has re-started this arbitration.

      On June 19, 2002, Telsim initiated arbitration against Motorola, Ltd. and Motorola Komunikasyon Ticaret v.p. Servis Ltd. Sti., both wholly-owned subsidiaries of Motorola, before the International Chamber of Commerce in Zurich, Switzerland, initially seeking approximately 179 million pounds as damages for the defendants’ alleged sale of defective products to Telsim. Telsim increased the amount of its claim to approximately 300 million pounds. Motorola has denied the claims and has filed a counterclaim valued at approximately $20 million. On July 16, 2004, the arbitral panel ruled in favor of Motorola’s contention that an overall cap of liability applied to Telsim’s claims, but has not yet ruled on how the cap is to be computed.

      On October 13, 2004, Motorola filed an arbitration claim in Washington, D.C., under a United States-Turkey bilateral investment treaty involving the Turkish government, which currently controls Telsim and claims priority over Motorola’s interest in Telsim. Motorola claims that the Turkish government has “expropriated” Motorola’s investment in Telsim by taking over Telsim, obtaining injunctions purportedly prohibiting Telsim from paying MCC’s debt, and passing legislation requiring that Telsim be sold and that the proceeds of the sale be distributed first to the Turkish government, in priority over MCC’s claims. Motorola seeks, among other things, a judgment in the amount of $2 billion. On December 28, 2004, the International Centre for the Settlement of Investment Disputes registered Motorola’s Request for Arbitration, thus finding that, at a minimum, there is a possibility of jurisdiction for Motorola’s claims.

      A purported class action lawsuit, Barry Family LP v. Carl F. Koenemann, was filed against the former chief financial officer of Motorola on December  24, 2002 in the United States District Court for the Southern District of New York, alleging breach of fiduciary duty and violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. It has been consolidated before the United States District Court for the Northern District of Illinois (the “Illinois District Court”) with 18 additional putative class action complaints which were filed in various federal courts against the Company, its former chief financial officer and various other individuals, alleging that 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. In each of the complaints, plaintiffs proposed a class period of February 3, 2000 through May 14, 2001, and sought an unspecified amount of damages. On August 25, 2004, the Illinois District Court issued its decision on Motorola’s motion to dismiss, granting the motion in part and denying it in part. The court dismissed without prejudice the fraud claims against the individual defendants and denied the motion to dismiss as to Motorola. The plaintiffs chose not to file an amended complaint; therefore, the fraud claims against the individual defendants are

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dismissed. The court, however, declined to dismiss the plaintiffs’ claims that the individual defendants were “controlling persons of Motorola.”

      In addition, a purported class action, Howell v. Motorola, Inc., et al., was filed against Motorola and various of its officers and employees in the 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 the defendants had improperly permitted participants in Motorola’s 401(k) Profit Sharing Plan (the “Plan”) to purchase or hold shares of common stock of Motorola because the price of Motorola’s stock was artificially inflated by a failure to disclose vendor financing to Telsim in connection with the sale of telecommunications equipment by Motorola. The plaintiff sought to represent a class of participants in the Plan for whose individual accounts the Plan purchased or held shares of common stock of Motorola from “May 16, 2000 to the present”, and sought an unspecified amount of damages. On October 3, 2003, plaintiff filed an amended complaint asserting three claims for breach of fiduciary duties under ERISA against 24 defendants grouped into five categories. The amended complaint alleges the defendants violated ERISA by: (1) continuing to offer Motorola stock as an investment option under the Plan, even though it had become an imprudent investment due to Motorola’s dealings with Telsim and other third parties; (2) negligently making misrepresentations and negligently failing to disclose material information necessary for Participants to make informed decisions concerning their participation in the Plan; and (3) failing to appoint fiduciaries with the knowledge and expertise necessary to manage Plan assets, failing to monitor those fiduciaries properly, and failing to provide sufficient information to Participants and other Plan fiduciaries. On December 9, 2003, all but one of the defendants filed their motion to dismiss. On September 23, 2004, the Illinois District Court granted the motion in part and denied it in part. The court dismissed the plan committee defendants from the case, without prejudice, and left all other defendants in the lawsuit. On October 15, 2004, Howell filed a second amended complaint and a motion for class certification. On December 3, 2004, Defendants filed a Motion for Summary Judgment seeking to dismiss Plaintiff Howell’s individual claims.

Charter Communications Class Action Securities Litigation

      On August 5, 2002, Stoneridge Investment Partners LLC filed a purported class action in the United States District Court for the Eastern District of Missouri against Charter Communications, Inc. (“Charter”) and certain of its officers, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. This complaint did not name Motorola as a defendant, but asserted that Charter and the other named defendants had violated the securities laws in connection with, inter alia, a transaction with Motorola. In August 2003, the plaintiff amended its complaint to add Motorola, Inc. as a defendant. The amended complaint alleges that Motorola participated in a “scheme” with Charter in connection with this transaction to artificially inflate Charter’s earnings. On October 12, 2004, the court granted Motorola’s motion to dismiss, holding that there is no civil liability under the federal securities laws for aiding and abetting. On October 26, 2004, the plaintiff filed a motion for the reconsideration of the court’s decision. On December  20, 2004, the court issued its ruling denying plaintiff’s motion for reconsideration of its earlier decision to dismiss the complaint against Motorola. The court issued a final judgement dismissing Motorola from the case on February 15, 2005.

In re Adelphia Communications Corp. Securities and Derivative Litigation

      On December 22, 2003, Motorola was named as a defendant in two cases relating to the In re Adelphia Communications Corp. Securities and Derivative Litigation (the “Adelphia MDL”). The Adelphia MDL consists of at least eleven individual cases and one purported class action that were filed in or have been transferred to the United States District Court for the Southern District of New York. First, Motorola was named as a defendant in the Second Amended Complaint in the individual case of W.R. Huff Asset Management Co. L.L.C. v. Deloitte & Touche, et al. This case was originally filed by W.R. Huff Asset Management Co. L.L.C. on June 7, 2002, in the United States District Court for the Western District of New York and was subsequently transferred to the Southern District of New York as related to the Adelphia MDL. Several other individual and corporate defendants are also named in the amended complaint along with Motorola.

      As to Motorola, the complaint alleges a claim arising under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeks recovery of the consideration paid by plaintiff for Adelphia debt securities, compensatory damages, costs and expenses of litigation and other relief. Motorola has recently been served with this complaint, the case is in its early stages, and fact discovery has not yet begun. Motorola filed a motion to dismiss this complaint on March 8, 2004.

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      Also on December 22, 2003, Motorola was named as a defendant in Stocke v. John J. Rigas, et al. This case was originally filed in Pennsylvania and was subsequently transferred to the Southern District of New York as related to the Adelphia MDL. Several other individual and corporate defendants are also named in the amended complaint along with Motorola. As to Motorola, the complaint alleges a federal law claim arising under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and a state law claim of aiding and abetting fraud relating to Adelphia securities. The complaint seeks return of the consideration paid by plaintiff for Adelphia securities, punitive damages, pre-judgment and post-judgment interest, costs and expenses of litigation and other relief. Motorola filed a motion to dismiss this complaint on April 12, 2004.

      On July 23, 2004, Motorola was named as a defendant in Argent Classic Convertible Arbitrage Fund L.P., et al. v. Scientific-Atlanta, Inc., et al. (the “Argent Complaint”). The Argent Complaint was filed against Scientific Atlanta and Motorola in the Southern District of New York. The Argent Complaint alleges a federal law claim arising under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder relating to Adelphia securities. On October 12, 2004, Motorola filed a motion to dismiss the Argent Complaint.

      On September 15, 2004, Motorola was named in a complaint filed in state court in Los Angeles, California, naming Motorola and Scientific Atlanta and certain officers of Scientific Atlanta, Los Angeles County Employees Retirement Association et al. v. Motorola, Inc., et al. The complaint raises claims under California law for aiding and abetting fraud and conspiracy to defraud and generally makes the same allegations as the other previously-disclosed cases relating to the In re Adelphia Communications Corp. Securities and Derivative Litigation that have been transferred to the Southern District of New York. There are no new substantive allegations. On October 8, 2004, Motorola filed a motion to remove the California state court case to federal court in California. On December 1, 2004, the Multi-District Litigation Panel issued a conditional transfer order transferring the case to federal court in New York. Plaintiffs did not object to the conditional transfer order, and the order transferring the case to New York is now final.

      On October 25, 2004, Motorola was named in a complaint filed in state court in Fulton County, Georgia, naming Motorola and Scientific Atlanta and certain officers of Scientific Atlanta, AIG DKR SoundShore Holdings, Ltd., et al. v. Scientific Atlanta, et al. The complaint raises claims under Georgia law of conspiracy to defraud and generally makes the same allegations as the other previously disclosed cases relating to the In re Adelphia Communications Corp. Securities and Derivative Litigation that have already been filed and transferred or are in the process of being transferred to the Southern District of New York. On November 22, 2004, Motorola filed a petition to remove the state court case to federal court in Georgia and a notice with the Multi District Panel requesting the case be transferred to New York. On January 5, 2005, the Multi-District Panel issued a conditional transfer order, transferring the case to federal court in New York. On January 20, 2005, the plaintiffs filed an objection before the Multi District Panel, contesting the conditional transfer order. Motorola has filed an opposition brief to their objection.

      Motorola is a defendant in various other suits, claims and investigations that arise in the normal course of business. In the opinion of management, and other than discussed above with respect to the Iridium cases, the ultimate disposition of the Company’s pending legal proceedings will not have a material adverse effect on the consolidated financial position, liquidity or results of operations.

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

       Not applicable.

Executive Officers of the Registrant

      Following are the persons who were the executive officers of Motorola as of February 28, 2005, their ages as of January 1, 2005, their current titles and positions they have held during the last five years:

      Edward J. Zander; age 57; Chairman and Chief Executive Officer since January 2004. Prior to joining Motorola, Mr. Zander was a managing director of Silver Lake Partners from July 2003 to December 2003. Prior to holding that position, Mr. Zander was President and COO of Sun Microsystems, Inc. from January 1998 until June 2002.

      Gregory Q. Brown; age 44; Executive Vice President and President, Government & Enterprise Mobility Solutions since January 2005; Executive Vice President and President, Commercial, Government and Industrial Solutions Sector from January 2003 to January 2005; Chairman of the Board and Chief Executive Officer of Micromuse, Inc. from February 1999 to December 2002.

      Dennis J. Carey; age 58; Executive Vice President since January 2005; Executive Vice President and President, Integrated Electronic Systems Sector from November 2002 to January 2005; Executive Vice President, Business Development, Strategy and Corporate Operations of The Home Depot, Inc. from May 2001 to March 2002; Executive Vice President and Chief Financial Officer of The Home Depot, Inc. from May 1998 to May 2001.

      Eugene A. Delaney; age 48; Executive Vice President and President, Global Relations and Resources Organization since July 2002; Senior Vice President and President, Global Relations and Resources Organization from February 2002 to July 2002; Senior Vice President and General Manager, Global Customer Solutions Operations Asia/ Pacific from October 2001 to February 2002; Senior Vice President and General Manager, Telecom Carrier Solutions Group, Global Telecom Solutions Sector from August 2000 to October 2001; Senior Vice President and General Manager, Global Telecom Solutions Group, Communications Enterprise from April 1999 to August 2000.

      David W. Devonshire; age 59; Executive Vice President and Chief Financial Officer since April 2002; Executive Vice President and Chief Financial Officer of Ingersoll-Rand Company from January 2000 to January 2002.

      Ruth A. Fattori; age 52; Executive Vice President, Human Resources since November 2004; Senior Vice President, JP Morgan Chase & Co., from April 2003 to November 2004; Executive Vice President, Process and Productivity, Conseco, Inc. from January 2001 to December 2002; Senior Vice President, Human Resources, Siemens Corporation from October 1999 to January 2001.

      Ronald Garriques; age 40; Executive Vice President and President, Mobile Devices since January 2005; Executive Vice President and President, Personal Communications Sector (“PCS”) from September 2004 to January 2005; Senior Vice President and General Manager, Europe, Middle East & Africa, PCS from September 2002 to September 2004; Senior Vice President and General Manager, Worldwide Product Line Management, PCS from February 2001 to September 2002; Corporate Vice President and General Manager, Goal Oriented Product Line, PCS from September 2000 to February 2001; Vice President and Director, Program Management, PCS from April 2000 to September 2000; Vice President and General Manager, Performance Category, Communications Enterprise from December 1998 to April 2000.

      A. Peter Lawson; age 58; Executive Vice President, General Counsel and Secretary since May 1998.

      Daniel M. Moloney; age 45; Executive Vice President and President, Connected Home Solutions since January 2005; Executive Vice President and President, Broadband Communications Sector (“BCS”) from June 2002 to January 2005; Senior Vice President and General Manager, IP Systems Group, BCS from February 2000 to June 2002.

      Adrian R. Nemcek; age 57; Executive Vice President and President, Networks since January 2005; Executive Vice President and President, Global Telecom Solutions Sector (“GTSS”) from August 2002 to January 2005; Senior Vice President and President, GTSS from September 2001 to August 2002; Senior Vice President and General Manager, Office of Strategy, GTSS from August 2000 to September 2001; Senior Vice President and General Manager, Customer Solutions Group, Network Solutions Sector from January 1999 to August 2000.

28

      Richard N. Nottenburg; age 50; Executive Vice President and Chief Strategy Officer since March 2005; Senior Vice President and Chief Strategy Officer from July 2004 to March 2005; Strategic Advisor to Motorola, Inc. February 2004 to July 2004; Vice President and General Manager of Vitesse Semiconductor Corporation from August 2003 to January 2004; Chairman of the Board, President and Chief Executive Officer of Multilink from January 1995 to August 2003.

      Padmasree Warrior; age 44; Executive Vice President and Chief Technology Officer since March 2005; Senior Vice President and Chief Technology Officer from January 2003 to March 2005; Corporate Vice President and General Manager, Energy Systems Group, Integrated Electronic Systems Sector from April 2002 to January 2003; Corporate Vice President and General Manager, Thoughtbeam, Inc., a wholly-owned subsidiary of Motorola, Inc., from October 2001 to April 2002; Corporate Vice President, Chief Technology Officer and Director, DigitalDNA Laboratories, Semiconductor Products Sector (“SPS”) from December 2000 to October 2001; Vice President, Chief Technology Officer and Director, DigitalDNA Laboratories, SPS from July 2000 to December 2000; Vice President and Assistant Director, DigitalDNA Laboratories, SPS from August 1999 to July 2000.

      The above executive officers will serve as executive officers of Motorola until the regular meeting of the Board of Directors in May 2005 or until their respective successors shall have been elected. There is no family relationship between any of the executive officers listed above.

29

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, Chicago and Tokyo Stock Exchanges. The number of stockholders of record of Motorola common stock on January 31, 2005 was 85,517.

      The remainder of the response to this Item incorporates by reference Note 15, “Quarterly and Other Financial Data (unaudited)” of the Notes to Consolidated Financial Statements appearing on page 125 under “Item 8: Financial Statements and Supplementary Data”.

      The following table provides information with respect to acquisitions by the Company of shares of its common stock during the quarter ended December 31, 2004.

ISSUER PURCHASES OF EQUITY SECURITIES

30

Item 6: Selected Financial Data

Motorola, Inc. and Subsidiaries

Five Year Financial Summary

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

       The following is a discussion and analysis of our financial position and results of operations for each of the three years in the period ended December 31, 2004. This commentary should be read in conjunction with our consolidated financial statements and the notes thereto which appear beginning on page 84 under “Item 8: Financial Statements and Supplementary Data.”

Executive Overview

What businesses are we in?

      Motorola reports six segments as described below.

      The Personal Communications segment (“PCS”) designs, manufactures, sells and services wireless handsets with integrated software and accessory products. PCS’s net sales in 2004 were $16.8 billion, representing 54% of the Company’s consolidated net sales.

      The Global Telecom Solutions segment (“GTSS”) designs, manufactures, sells, installs and services wireless infrastructure communication systems, including hardware and software. GTSS provides end-to-end wireless networks, including radio base stations, base site controllers, associated software and services, mobility soft switching, application platforms and third-party switching for CDMA, GSM, iDEN® and UMTS. GTSS’s net sales in 2004 were $5.5 billion, representing 17% of the Company’s consolidated net sales.

      The Commercial, Government and Industrial Solutions segment (“CGISS”) designs, manufactures, sells, installs and services analog and digital two-way radio, voice and data communications products and systems to a wide range of public-safety, government, utility, courier, transportation and other worldwide markets. The business continues to invest in the market for broadband data, including infrastructure, devices, service and applications. In addition, the segment participates in the expanding market for integrated information management, mobile and biometric applications and services. CGISS’s net sales in 2004 were $4.6 billion, representing 15% of the Company’s consolidated net sales.

      The Integrated Electronic Systems segment (“IESS”) designs, manufactures and sells: (i) automotive and industrial electronics systems, (ii) telematics systems that enable automated roadside assistance, navigation and advanced safety features for automobiles, (iii) portable energy storage products and systems, and (iv) embedded computing systems. IESS’s net sales in 2004 were $2.7 billion, representing 9% of the Company’s consolidated net sales.

      The Broadband Communications segment (“BCS”) designs, manufactures and sells a wide variety of broadband products, including: (i) digital systems and set-top terminals for cable television and broadcast networks, (ii) high speed data products, including cable modems and cable modem termination systems, as well as Internet Protocol-based telephony products, (iii) access network technology, including hybrid fiber coaxial network transmission systems and fiber-to-the-premise transmission systems, used by cable television operators, (iv) digital satellite television systems, (v) direct-to-home satellite networks and private networks for business communications, and (vi) high-speed data, video and voice broadband systems over existing phone lines. BCS’s net sales in 2004 were $2.3 billion, representing 7% of the Company’s consolidated net sales.

      The Other Products segment includes: (i) various corporate programs representing developmental businesses and research and development projects that are not included in any major segment and (ii) Motorola Credit Corporation, the Company’s wholly-owned finance subsidiary. The segment’s net sales in 2004 were $387 million, representing 1% of the Company’s consolidated net sales.

      In April 2004, the Company separated its semiconductor operations into a separate subsidiary, Freescale Semiconductor, Inc. (“Freescale Semiconductor”). In July 2004, an initial public offering of a minority interest of approximately 32.5% of Freescale Semiconductor was completed. On December 2, 2004, Motorola completed the spin-off of Freescale Semiconductor from the Company by distributing its remaining 67.5% equity interest in

Note: When discussing the net sales for each of our six segments, we express the segment’s net sales as a percentage of the Company’s consolidated net sales. Because certain of our segments sell products to other Motorola businesses, $963 million of intracompany sales were eliminated as part of the consolidation process in 2004. As a result, the percentages of consolidated net sales for each of our business segments sum to greater than 100% of the Company’s consolidated net sales.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Freescale Semiconductor to Motorola shareholders. As of that date, Freescale Semiconductor is an entirely independent company. The financial results of Freescale Semiconductor have been presented in Motorola’s consolidated financial statements as a discontinued operation.

What were our key 2004 financial results?

What did we focus on in 2004?

      In 2004, we were focused first and foremost on increasing profitable sales and growing market share. We increased our net sales significantly, with 35% growth in 2004 compared to 2003. We also achieved our goal of increasing the profitability of these sales, as evidenced by the 146% increase in operating earnings in 2004, compared to 2003. Operating earnings increased in four of the Company’s five major segments. Contributing to the improvement in profitability were: (i) improvements in supply chain processes in PCS, GTSS and CGISS, (ii) overall cost-structure improvements, (iii) ongoing cost reduction activities, and (iv) improved average selling price (“ASP”) in PCS due to a product mix shift towards higher-end products.

      In addition, we believe we improved our market share position in our two largest businesses, PCS and GTSS. Both the wireless handset and wireless network industries experienced significant growth in 2004. In PCS, total unit shipments outpaced the industry as our market share grew and we solidified our number two position in the worldwide handset market. In GTSS, the business’ net sales growth was larger than the wireless infrastructure industry, also resulting in increased market share. In addition, CGISS remains the market share leader in supplying two-way radio communications systems, and BCS remains the market share leader for both digital set-tops and cable modems.

What challenges and opportunities did our businesses face in 2004?

     

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Focusing on 2005

      In 2005, we will continue to pursue profitable market share growth. After aligning our structure to better enable our vision of seamless mobility, we will serve our customers through four distinct but integrated business units: mobile devices, networks, government & enterprise and connected home.

      Within this framework, we will continue to design and develop devices (consumer and professional) for mobile communications, partnering with retail and enterprise operators to create compelling, “must-have” designs and functionality. We will continue to design and develop networks to connect people to people, people to things

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

and things to things — building the infrastructure that makes communication possible. We will also continue to offer end-to-end solutions for specialized markets such as mission critical, governments and automotive.

      Targeted plans for improving our competitive positioning and operating results include:

      We conduct our business in highly-competitive markets, facing both new and established competitors. However, with our new structure and focus in place, we believe we are well positioned to execute our strategy and, in turn, increase our overall business performance, including higher sales and earnings.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

      Geographic market sales measured by the locale of the end customer as a percent of total net sales for 2004, 2003 and 2002 are as follows:

Geographic Market Sales by Locale of End Customer

Results of Operations—2004 Compared to 2003

Net Sales

      Net sales were $31.3 billion in 2004, up 35% from $23.2 billion in 2003. Net sales increased in all five of the Company’s major segments in 2004 compared to 2003. The overall increase in net sales was primarily related to: (i) a $5.8 billion increase in net sales by the Personal Communications segment (“PCS”), driven by a 39% increase in unit shipments and a 15% increase in average selling price (“ASP”), reflecting strong consumer demand for new products, (ii) a $1.0 billion increase in net sales by the Global Telecom Solutions segment (“GTSS”), driven by a continued increase in spending by the segment’s wireless service provider customers and reflecting sales growth in all

36

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

technologies and regions, (iii) a $478 million increase in net sales by the Broadband Communications segment (“BCS”), primarily due to increased purchases of digital cable set-top boxes by cable operators and an increase in ASP for digital set-top boxes due to a mix shift towards higher-end products, (iv) a $457 million increase in net sales by the Commercial, Government and Industrial Solutions segment (“CGISS”), reflecting increased spending by customers in both the segment’s government market, in response to global homeland security initiatives, and in the segment’s enterprise market, for business-critical communications needs, and reflects increased net sales in all regions, and (v) a $431 million increase in the Integrated Electronic Systems segment (“IESS”), primarily due to increased net sales in the automotive electronics market, particularly telematics products, and additional net sales from the addition of Force Computers, which was acquired in August 2004.

Gross Margin

      Gross margin was $10.5 billion, or 33.5% of net sales, in 2004, compared to $7.6 billion, or 32.7% of net sales, in 2003. Three of the five major segments had a higher gross margin as a percentage of net sales, including: (i) PCS, primarily due to the increase in net sales and cost savings from ongoing cost-reduction activities and improvements in the supply-chain, (ii) GTSS, primarily due to the increase in net sales and cost savings from improvements in the supply-chain, and (iii) CGISS, primarily due to the increase in net sales, cost savings from supply chain efficiencies and overall cost structure improvements. These improvements in gross margin percentage were partially offset by a decrease in gross margin as a percentage of net sales in BCS, primarily due to higher sales of new, higher-tier products carrying lower initial margins.

Selling, General and Administrative Expenses

      Selling, general and administrative (“SG&A”) expenditures increased 19% to $4.2 billion, or 13.4% of net sales, in 2004, compared to $3.5 billion, or 15.2% of net sales, in 2003. Four of the Company’s five major segments had increased SG&A expenditures in 2004 compared to 2003, although SG&A expenditures as percentage of net sales decreased in four of the five major segments. The increase in SG&A expenditures in 2004 compared to 2003 was driven by increased general and selling expenditures, partially offset by a decrease in administrative expenditures. General expenditures increased in all five major segments, primarily due to an increase in employee incentive program accruals. The increase in selling expenditures was due to: (i) increased advertising and promotional expenditures in PCS to support higher sales and promote brand awareness, (ii) increased selling and sales support expenditures, which increased in four of the five major segments, driven by the increase in sales commissions resulting from the increase in net sales, and (iii) increased marketing expenditures in all five of the major segments.

Research and Development Expenditures

      Research and development (“R&D”) expenditures increased 9% to $3.1 billion, or 9.8% of net sales, in 2004, compared to $2.8 billion, or 12.1% of net sales, in 2003. Four of the Company’s five major segments had increased R&D expenditures in 2004 compared to 2003, although R&D expenditures as percentage of net sales decreased in four of the five major segments. The increase in R&D expenditures was primarily due to increased expenditures by: (i) PCS, reflecting an increase in developmental engineering expenditures due to additional investment in new product development, (ii) CGISS, driven by increased investment in new technologies, (iii) the Other Products segment, due to increased spending on developmental businesses and R&D projects, and (iv) IESS, primarily to support business wins across the segment and due to increased expenditures from the addition of Force Computers.

Reorganization of Businesses

      In 2004, the Company recorded net reversals of $12 million for reserves no longer needed, including $15 million of reversals in the consolidated statements of operations under Reorganization of Businesses and $3 million of charges in Costs of Sales. The 2004 net reversals of $12 million included $59 million of charges for employee separation costs, $66 million of reversals for employee separation and exit cost reserves no longer needed, and income of $5 million related to fixed asset adjustments. The $66 million of reversals constitute 2% of the Company’s $3.3 billion in earnings from continuing operations before income taxes in 2004.

      Net reorganization of businesses charges in 2003 were $39 million, including $23 million reflected in the consolidated statements of operations under Reorganization of Businesses and $16 million included in Costs of Sales. The 2003 net charges of $39 million included $174 million of charges for employee separation and exit costs,

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

$145 million of reversals for employee separation and exit cost reserves no longer needed, $38 million in charges for the impairment of assets classified as held-for-sale, and $28 million in fixed asset adjustments, primarily for assets which the Company intends to use that were previously classified as held-for-sale. The $145 million of reversals constituted 11% of the Company’s $1.4 billion in earnings from continuing operations before income taxes in 2003. These charges are discussed in further detail in the “Reorganization of Businesses Programs” section below.

Other Charges (Income)

      The Company recorded net charges of $111 million in Other Charges (Income) in 2004, compared to net income of $57 million in 2003. The net charges of $111 million in 2004 primarily consist of: (i) a $125 million impairment charge related to goodwill associated with a sensor business within the Other Products segment, and (ii) $34 million of charges for in-process research and development (“IPR&D”) related to the acquisitions by CGISS of MeshNetworks, Inc. and CRISNET, Inc., by BCS of Quantum Bridge, and by IESS of Force Computers. These items were partially offset by $44 million in income from the reversal of financing receivable reserves due to the partial collection of the previously-uncollected receivable from Telsim.

      The net income of $57 million in 2003 primarily consisted of: (i) $69 million in income from the reversal of accruals no longer needed due to a settlement with the Company’s insurer on items related to previous environmental claims, (ii) $59 million in income due to the reassessment of remaining reserve requirements as a result of a litigation settlement agreement with The Chase Manhattan Bank regarding Iridium, and (iii) $41 million in income from the sale of Iridium-related assets that were previously written down. These items were partially offset by: (i) a $73 million impairment charge relating to goodwill associated with the infrastructure business of BCS, and (ii) $32 million of IPR&D charges related to the acquisition of Winphoria Networks, Inc. by GTSS.

Net Interest Expense

      Net interest expense was $199 million in 2004, compared to $294 million in 2003. Net interest expense in 2004 included interest expense of $353 million, partially offset by interest income of $154 million. Net interest expense in 2003 included interest expense of $423 million, partially offset by interest income of $129 million. The decrease in net interest expense in 2004 compared to 2003 reflects: (i) a reduction in total debt during 2004, (ii) benefits derived from fixed-to-floating interest rate swaps, and (iii) an increase in interest income due to higher average cash balances.

Gains on Sales of Investments and Businesses

      Gains on sales of investments and businesses were $460 million in 2004, compared to $539 million in 2003. The 2004 net gains were primarily: (i) a $130 million gain on the sale of the Company’s remaining shares in Broadcom Corporation, (ii) a $122 million gain on the sale of a portion of the Company’s shares in Nextel Communications, Inc. (“Nextel”), (iii) an $82 million gain on the sale of a portion of the Company’s shares in Telus Corporation, and (iv) a $68 million gain on the sale of a portion of the Company’s shares in Nextel Partners, Inc. (“Nextel Partners”).

      The 2003 net gains were primarily: (i) a $255 million gain on the sale of a portion of the Company’s shares in Nextel, (ii) an $80 million gain on the sale of the Company’s shares in Symbian Limited, (iii) a $65 million gain on the sale of the Company’s shares in UAB Omnitel of Lithuania, and (iv) a $61 million gain on the sale of a portion of the Company’s shares in Nextel Partners.

Other

      Charges classified as Other, as presented in Other Income (Expense), were $141 million in 2004, compared to $142 million in 2003. The $141 million of charges in 2004 primarily related to: (i) net charges of $81 million for costs related to the redemption of debt, (ii) foreign currency losses of $44 million, (iii) $36 million of investment impairment charges, and (iv) $18 million in minority interest expense. These items were partially offset by: (i) $29 million of equity in net earnings of affiliated companies, and (ii) $20 million in income related to the recovery of a previously-impaired debt holding in a European cable operator.

      The $142 million of charges in 2003 primarily related to: (i) $96 million of investment impairment charges, partially comprised of a $29 million charge to write down to zero the Company’s debt holding in a European cable

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

operator, and (ii) foreign currency losses of $73 million, partially offset by $30 million of equity in net earnings of affiliated companies.

Effective Tax Rate

      The effective tax rate was 33% in both 2004 and 2003, representing tax expense of $1.1 billion and $448 million, in 2004 and 2003, respectively. The 2004 effective tax rate reflects a $241 million benefit from the reversal of previously-accrued income taxes as a result of settlements reached with taxing authorities and a reassessment of tax exposures based on the status of current audits. The 2004 effective tax rate also reflects nondeductible charges of $125 million for the impairment of goodwill related to a sensor business and $31 million for IPR&D charges related to acquisitions.

      The 2003 effective tax rate reflected a $61 million benefit from the reversal of previously-accrued income taxes as a result of settlements reached with taxing authorities and $32 million for IPR&D charges related to acquisitions in 2003.

Earnings from Continuing Operations

      The Company had earnings from continuing operations before income taxes of $3.3 billion in 2004, compared to earnings from continuing operations before income taxes of $1.4 billion in 2003. After taxes, the Company had earnings from continuing operations of $2.2 billion, or $0.90 per diluted share from continuing operations, in 2004, compared to earnings from continuing operations of $928 million, or $0.39 per diluted share from continuing operations, in 2003.

      The $1.9 billion increase in earnings from continuing operations before income taxes is primarily attributed to: (i) a $2.9 billion increase in gross margin, primarily due to the $8.2 billion increase in total net sales, as well as cost savings from improved supply-chain execution, overall cost structure improvements and ongoing cost reduction activities, (ii) a $95 million decrease in net interest expense, driven primarily by the reduction in total debt in 2004, (iii) a $51 million decrease in overall reorganization of businesses charges, including a $13 million decrease in reorganization of businesses costs recognized in Costs of Sales and a $38 million decrease in costs recognized in Reorganization of Businesses. These improvements in earnings were partially offset by: (i) a $680 million increase in SG&A expenditures, primarily driven by increases in: (a) employee incentive program accruals, (b) sales commissions resulting from the increase in net sales, (c) advertising and promotions expenditures in PCS, and (d) marketing expenditures, (ii) a $261 million increase in R&D expenditures, due primarily to an increase in developmental engineering expenditures in PCS due to additional investment in new product development, and increased investment in new technologies by CGISS, (iii) a $168 million increase in Other Charges, primarily due to a $125 million impairment charge related to goodwill associated with a sensor business and $34 million in IPR&D charges related to 2004 acquisitions, and (iv) a $79 million decrease in gains on sales of investments and businesses.

Results of Operations— 2003 Compared to 2002

Net Sales

      Net sales were $23.2 billion in 2003, down 1% from $23.4 billion in 2002. The overall decline in net sales was primarily related to: (i) a $286 million decrease in net sales by BCS, reflecting continued reductions in capital spending by cable service providers, (ii) a $196 million decrease in net sales by PCS, primarily due to: (a) increased competition in Asia, (b) an estimated loss in market share during 2003, resulting from delays in the introduction of new products, driven by supply constraints for a key component, and (c) the discontinued sale of paging products during 2002, and (iii) a $194 million decrease in net sales by GTSS, reflecting continued reductions in capital spending by cellular operators during 2003, specifically in mature markets. These decreases were partially offset by: (i) a $382 million increase in net sales by CGISS, reflecting increased customer spending due to homeland security initiatives in the government market, as well as an increase in sales due to the conflict in the Middle East and the reconstruction of public safety systems in Iraq, and (ii) a $76 million increase in net sales by IESS, primarily due to the success of several new products in the automotive market and increased demand from industrial automation, medical and telecommunications customers.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Gross Margin

      Gross margin was $7.6 billion, or 32.7% of net sales, in 2003, compared to $7.7 billion, or 32.8% of net sales, in 2002. Three of the Company’s five major segments had a higher gross margin and higher gross margin as a percentage of net sales in 2003. The improvement in gross margin as a percentage of net sales reflects: (i) an increase in CGISS, primarily from the increase in net sales and a favorable product mix, as well as continued benefits from prior cost-reduction actions, and (ii) an increase in GTSS, primarily due to benefits from prior cost-reduction actions and a decline in reorganization of business charges reflected in costs of sales, and (iii) an increase in IESS, primarily from the increase in net sales and a decline in reorganization of business charges reflected in costs of sales. These improvements in gross margin percentage were partially offset by declines in BCS and PCS, primarily due to the decline in net sales in these two segments.

      The 2003 gross margin included reorganization of business charges of $16 million, which were included in Costs of Sales and primarily related to direct labor employee severance costs. The 2002 gross margin included reorganization of business charges of $68 million, which were included in Costs of Sales and primarily related to direct labor employee severance costs.

Selling, General and Administrative Expenses

      SG&A expenses declined 12% to $3.5 billion, or 15.2% of net sales, in 2003, compared to $4.0 billion, or 17.0% of net sales, in 2002. Four of the Company’s five major segments had lower SG&A expenses in 2003 than in 2002. The decrease in SG&A expenses was primarily driven by: (i) decreased general and administrative spending by PCS, reflecting benefits from cost-reduction efforts, (ii) decreased selling and sales support costs by GTSS, reflecting benefits from prior cost-reduction efforts, partially offset by an increase in employee incentive program costs, and (iii) decreased general and administrative spending by IESS and BCS, reflecting benefits from prior cost-reduction actions. These benefits were partially offset by increased SG&A expenditures in CGISS, primarily due to an increase in employee incentive program accruals.

Research and Development Expenditures

      R&D expenditures increased slightly to $2.8 billion, or 12.1% of net sales, in 2003, compared to $2.8 billion, or 11.9% of net sales, in 2002. Four of the Company’s five major segments had increased R&D expenditures in 2003. The increase in R&D expenditures was primarily due to increased expenditures by: (i) PCS, reflecting an increase in developmental engineering expenditures due to the high volume of new product offerings, and (ii) IESS, reflecting a reduction in customer funding of R&D. These increased expenditures were partially offset by a decrease in R&D expenditures by GTSS, reflecting benefits from prior restructuring actions.

Reorganization of Businesses

      Net reorganization of businesses charges in 2003 were $39 million, including $23 million reflected in the consolidated statements of operations under Reorganization of Businesses and $16 million included in Costs of Sales. The 2003 net charges of $39 million included $174 million of charges for employee separation and exit costs, $145 million of reversals for employee separation and exit cost reserves no longer needed, $38 million in charges for the impairment of assets classified as held-for-sale, and $28 million in fixed asset adjustments, primarily for assets which the Company intends to use that were previously classified as held-for-sale.

      Net reorganization of businesses charges in 2002 were $673 million, including $605 million reflected under Reorganization of Businesses and $68 million included in Costs of Sales. The 2002 net charges of $673 million included $623 million of charges for employee separation and exit costs, $185 million of reversals for employee separation and exit cost reserves no longer needed, $306 million in charges for the impairment of assets classified as held-for-sale, primarily related to the shut-down of an engineering and distribution center in Illinois, and $71 million in fixed asset adjustments, primarily for assets which the Company intends to use that were previously classified as held-for-sale. These charges are discussed in further detail in the “Reorganization of Businesses Programs” section below.

Other Charges (Income)

      The Company recorded net income of $57 million in Other Charges (Income) in 2003, compared to net charges of $754 million in 2002. The net income of $57 million in 2003 primarily consisted of: (i) $69 million in

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

income from the reversal of accruals no longer needed due to a settlement with the Company’s insurer on items related to previous environmental claims, (ii) $59 million in income due to the reassessment of remaining reserve requirements as a result of a litigation settlement agreement with The Chase Manhattan Bank regarding Iridium, and (iii) $41 million in income from the sale of Iridium-related assets that were previously written down. These items were partially offset by: (i) a $73 million impairment charge relating to goodwill associated with the infrastructure business of BCS, and (ii) $32 million of in-process research and development charges related to the acquisition of Winphoria Networks, Inc. by GTSS.

      The net charge of $754 million in 2002 was primarily comprised of: (i) a $526 million charge for potentially uncollectible finance receivables to fully reserve a loan to Telsim, a wireless service provider in Turkey, that defaulted on a $2.0 billion loan from the Company, (ii) a $325 million intangible asset impairment charge relating to an intellectual property license that enabled the Company to provide national authorization services for digital set-top terminals, and (iii) $12 million for acquired in-process research and development charges, primarily related to the acquisition of Synchronous, Inc. by BCS. These items were partially offset by: (i) $63 million of income from the reduction of accruals, primarily related to termination settlements relating to Iridium, and (ii) $24 million of income from the reduction of accruals no longer needed due to the settlement with the Company’s insurer on items related to previous environmental claims.

Net Interest Expense

      Net interest expense was $294 million in 2003, compared to $355 million in 2002. Net interest expense in 2003 included interest expense of $423 million, partially offset by interest income of $129 million. Net interest expense in 2002 included interest expense of $538 million, partially offset by interest income of $183 million. The decrease in net interest expense in 2003 compared to 2002 reflects: (i) a reduction in total debt during 2003, (ii) benefits derived from fixed-to-floating interest rate swaps due to lower interest rates, (iii) lower rates of interest paid for commercial paper and other short-term borrowings due to the low general interest rate environment during 2003, and (iv) an increase in interest income due to higher average cash balances.

Gains on Sales of Investments and Businesses

      Gains on sales of investments and businesses were $539 million in 2003, compared to $81 million in 2002. The 2003 net gains primarily related to: (i) a $255 million gain on the sale of a portion of the Company’s shares in Nextel, (ii) an $80 million gain on the sale of the Company’s shares in Symbian Limited, (iii) a $65 million gain on the sale of the Company’s shares in UAB Omnitel of Lithuania, and (iv) a $61 million gain on the sale of a portion of the Company’s shares in Nextel Partners.

      The 2002 net gains primarily related to: (i) the sale of equity securities of other companies held for investment purposes, (ii) the sale of the CodeLink^tm bioarray business, and (iii) the reduction of accruals after the settlement of contingencies associated with the prior sales of certain businesses.

Other

      Charges classified as Other, as presented in Other Income (Expense), were $142 million in 2003, compared to $1.4 billion in 2002. These charges or income primarily include: (i) foreign currency transaction gains (losses), (ii) equity in net earnings (losses) of affiliated companies, and (iii) investment impairment charges.

      The $142 million of charges classified as Other in 2003 primarily related to: (i) $96 million of investment impairment charges, partially comprised of a $29 million charge to write down to zero the Company’s debt holding in a European cable operator, and (ii) foreign currency losses of $73 million, partially offset by $30 million of equity in earnings of affiliated companies.

      The $1.4 billion of charges classified as Other in 2002 primarily consisted of $1.2 billion of investment impairment charges. These impairment charges were primarily comprised of: (i) a $464 million writedown in the value of the Company’s investment in Nextel, (ii) a $321 million writedown of the Company’s debt security holdings and associated warrants in a European cable operator, (iii) a $95 million charge to write the value of the Company’s investment in an Argentine cellular operating company to zero, and (iv) a $73 million writedown of the Company’s investment in Telus Corporation. Other charges included: (i) $98 million of debt redemption charges paid in 2002 that related to the $825 million of Puttable Reset Securities (PURS) that were redeemed in February 2003, and (ii) foreign currency losses of $36 million.

41

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Effective Tax Rate

      The effective tax rate was 33% in 2003, representing a $448 million net tax expense, compared to a 35% effective tax rate, representing a $721 million net tax benefit, in 2002. The 2003 effective tax rate reflects a $61 million benefit from the reversal of previously-accrued income taxes. The tax reversal relates to a reassessment of the Company’s income tax requirements given the settlement of certain previously-pending income tax audits. The effective tax rate also reflects nondeductible charges taken of $32 million for IPR&D charges related to the 2003 acquisition of Winphoria Networks, Inc.

Earnings (loss) from continuing operations

      The Company had earnings from continuing operations before income taxes of $1.4 billion in 2003, compared to a net loss from continuing operations before income taxes of $2.1 billion in 2002. After taxes, the Company had earnings from continuing operations of $928 million, or $0.39 per diluted share from continuing operations, in 2003, compared to a loss from continuing operations of $1.4 billion, or ($0.59) per diluted share from continuing operations, in 2002.

      The $3.4 billion improvement in earnings from continuing operations before income taxes is primarily attributed to: (i) a $1.2 billion decrease in charges classified as Other, primarily due to the reduction in investment impairment charges, (ii) an $811 million decrease in Other Charges (Income), primarily due to charges that occurred in 2002 that did not occur in 2003, which primarily consisted of a $526 million charge related to potentially uncollectible finance receivables from Telsim and a $325 million intangible asset impairment charge relating to a license of certain intellectual property, (iii) a $634 million decrease in overall reorganization of business charges, including a $52 million decrease in reorganization of businesses costs recognized in Costs of Sales and a $582 million decrease in costs recognized in Reorganization of Businesses, (iv) a $462 million decline in SG&A expenditures, primarily due to the benefits from prior restructuring actions, (v) a $458 million increase in gains on sales of investments and businesses, primarily due to a $255 million gain from the sale of a portion of the Company’s shares in Nextel and gains from the sale of equity securities of other companies held for investment purposes, and (vi) a $61 million decrease in net interest expense. These items were partially offset by: (i) a $114 million decrease in gross margin, primarily due to the 1% decline in net sales, and (ii) a slight increase in R&D expenditures.

Reorganization of Businesses

      The Company records provisions for employee separation and exit costs when they are probable and estimable. The Company maintains a formal Involuntary Severance Plan (Severance Plan) which permits Motorola to offer eligible employees severance benefits based on years of service in the event that employment is involuntarily terminated as a result of a reduction-in-force or restructuring. Each separate reduction-in-force has qualified for severance benefits under the Severance Plan and, therefore, such benefits are accounted for in accordance with SFAS No. 112, “Accounting for Postemployment Benefits” (SFAS 112). Under the provisions of SFAS 112, the Company recognizes termination benefits based on formulas per the Severance Plan at the point in time that future settlement is probable and can be reasonably estimated based on estimates prepared at the time a restructuring plan is approved by management. Exit costs primarily consist of future minimum lease payments on vacated facilities. At each reporting date, the Company evaluates its accruals for exit costs and employee separation costs to ensure the accruals are still appropriate. In certain circumstances, accruals are no longer required because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were initiated. The Company reverses accruals through the Reorganization of Businesses income statement line item when it is determined they are no longer required.

      The Company realized cost-saving benefits of approximately $5 million in 2004 from the plans that were initiated during 2004, representing $1 million of savings in Costs of Sales, $1 million of savings in R&D expenditures, and $3 million of savings in SG&A expenditures. Beyond 2004, the Company expects the plans implemented in 2004 to provide annualized cost savings of approximately $79 million, representing $25 million of savings in Costs of Sales, $22 million of savings in R&D expenditures and $32 million of savings in SG&A expenditures.

42

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Year Ended December 31, 2004

      For the year ended December 31, 2004, the Company recorded net reversals of $12 million for reserves no longer needed, including $3 million of charges in Costs of Sales and $15 million of reversals under Reorganization of Businesses in the Company’s consolidated statements of operations.

      Included in the aggregate $12 million of net reversals are $59 million of charges for employee separation costs, $66 million of reversals for employee separation and exit cost reserves no longer needed, and income of $5 million related to fixed asset adjustments. The additional charges of $59 million are a result of the Company’s commitment to productivity improvement plans aimed at improving the Company’s ability to meet customer demands and reduce operating costs. The productivity plans are designed to adjust the Company’s workforce to align it with the Company’s focus on seamless mobility and to eliminate positions in its corporate functions in connection with the separation of the Company’s former semiconductor operations into an entirely independent Company, Freescale Semiconductor. Businesses impacted by these plans include the Commercial, Government and Industrial Solutions segment, the Integrated Electronic Systems segment and the Broadband Communications segment, as well as various corporate functions.

Reorganization of Businesses Charges— by Segment

      The following table displays the net charges (reversals) for employee separation and exit cost reserves by segment for the year ended December 31, 2004:

Reorganization of Businesses Accruals

      The following table displays a rollforward of the accruals established for exit costs and employee separation costs from January 1, 2004 to December 31, 2004:

Exit Costs— Lease Terminations

      At January 1, 2004, the Company had an accrual of $143 million for exit costs attributable to lease terminations. The 2004 adjustments of $21 million represent reversals of $32 million for accruals no longer needed, partially offset by an $11 million translation adjustment. The $38 million used in 2004 reflects cash payments. The remaining accrual of $84 million, which is included in Accrued Liabilities in the Company’s consolidated balance sheets, represents future cash payments for lease termination obligations.

43

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Employee Separation Costs

      At January 1, 2004, the Company had an accrual of $116 million for employee separation costs, representing the severance costs for approximately 2,100 employees, of which 1,000 were direct and 1,100 were indirect. Direct employees are primarily non-supervisory production employees and indirect employees are primarily non-production employees and production managers. The 2004 additional charges of $59 million represent additional costs for approximately an additional 900 employees. The adjustments of $34 million represent reversals of accruals no longer needed.

      During 2004, approximately 2,500 employees, of which 1,000 were direct and 1,500 were indirect employees, were separated from the Company. The $95 million used in 2004 reflects cash payments to these separated employees. The remaining accrual of $46 million, which is included in Accrued Liabilities in the Company’s consolidated balance sheets, is expected to be paid to approximately 500 separated employees.

For the Year Ended December 31, 2003

      For the year ended December 31, 2003, the Company recorded net reorganization of businesses charges of $39 million, including $16 million in Costs of Sales and $23 million under Reorganization of Businesses in the Company’s consolidated statements of operations.

      Included in the aggregate $39 million net charge are $212 million of charges and $173 million of reversals of accruals no longer needed. The charges primarily consisted of: (i) $85 million in the Personal Communications segment, primarily related to the exit of certain manufacturing activities in Flensburg, Germany and the closure of an engineering center in Boynton Beach, Florida, (ii) $50 million in the Commercial, Government and Industrial Solutions segment for segment-wide employee separation costs, and (iii) $39 million in General Corporate, primarily for the impairment of assets classified as held-for-sale and employee separation costs. The $212 million of charges were partially offset by reversals of previous accruals of $173 million, consisting of: (i) $125 million relating to unused accruals of previously-expected employee separation costs across all segments, (ii) $28 million, primarily for assets that the Company intended to use that were previously classified as held-for-sale, and (iii) $20 million for exit cost accruals no longer required across all segments.

Reorganization of Businesses Charges— by Segment

      The following table displays the net charges incurred by segment for the year ended December 31, 2003:

44

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Reorganization of Businesses Accruals

      The following table displays a rollforward of the accruals established for exit costs and employee separation costs from January 1, 2003 to December 31, 2003:

Exit Costs — Lease Terminations

      The 2003 additional charges of $11 million were primarily related to the exit of certain manufacturing activities in Germany by the Personal Communications segment. The adjustments of $20 million represent exit cost accruals across all segments which were no longer needed. The 2003 amount used of $57 million reflects cash payments of $52 million and non-cash utilization of $5 million. The remaining accrual of $143 million, is included in Accrued Liabilities in the Company’s consolidated balance sheets. From this remaining accrual, in 2004, the Company paid out $38 million and reversed $32 million. The remaining accrual represents future cash payments, primarily for lease termination obligations.

Employee Separation Costs

      At January 1, 2003, the Company had an accrual of $336 million for employee separation costs, representing the severance costs for approximately 5,700 employees, of which 2,000 were direct employees and 3,700 were indirect employees. The additional charges of $163 million represented the severance costs for approximately 3,200 employees, of which 1,200 were direct employees and 2,000 were indirect employees. The accrual was for various levels of employees. The adjustments of $125 million represent the severance costs for approximately 1,600 employees previously identified for separation who resigned from the Company and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were approved.

      During 2003, approximately 5,200 employees, of which 2,000 were direct employees and 3,200 were indirect employees, were separated from the Company. The 2003 amount used of $258 million reflects $254 million of cash payments to these separated employees and $4 million of non-cash utilization. The remaining accrual of $116 million is included in Accrued Liabilities in the Company’s consolidated balance sheets. From this remaining accrual, in 2004, the Company paid out $69 million, reversed $33 million and expects $14 million of future cash payments to be paid out to separated employees during the first quarter of 2005.

For the Year Ended December 31, 2002

      For the year ended December 31, 2002, the Company recorded net reorganization of businesses charges of $673 million, including $68 million in Costs of Sales and $605 million under Reorganization of Businesses in the Company’s consolidated statements of operations.

      Included in the aggregate $673 million charge is $918 million of additional charges and $245 million of reversals of accruals no longer needed. The additional charges of $918 million were comprised of the following: (i) $275 million in the Personal Communications segment, primarily related to the shut-down of an engineering and distribution center in Illinois, (ii) $224 million in the Global Telecom Solutions segment, primarily related to segment-wide employee separation costs and for exit costs relating to a lease cancellation fee, and (iii) $419 million for employee separation, fixed asset impairments and lease cancellation fees across all other segments. The $918 million charge was offset by $245 million of reversals of previous accruals, consisting of: (i) $108 million relating to unused accruals of previously expected employee separation costs across all segments, (ii) $77 million, primarily for exit cost accruals no longer required across all segments, and (iii) $60 million primarily for assets that the Company intended to use that were previously classified as held-for-sale.

45

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Reorganization of Businesses Charges—by Segment

      The following table displays the net charges incurred by segment for the year ended December 31, 2002:

Reorganization of Businesses Accruals

      The following table displays a rollforward of the accruals established for exit costs and employee separation costs from January 1, 2002 to December 31, 2002:

Exit Costs— Lease Terminations

      The 2002 additional charges of $156 million were related to lease cancellation fees, primarily in Global Telecom Solutions segment. The adjustments of $77 million represented exit costs accruals across all segments which were no longer needed. The 2002 amount used of $164 million reflects cash payments of $161 million and non-cash utilization of $3 million. In 2003 and 2004, the Company utilized $87 million of the $209 million remaining accrual and reversed $51 million. The remaining accrual represents future cash payments, primarily for lease termination obligations.

Employee Separation Costs

      At January 1, 2002, the Company had an accrual of $358 million for employee separation costs, representing the severance costs for approximately 6,500 employees, of which 3,200 were direct employees and 3,300 were indirect employees. The 2002 additional charges of $467 million represented the severance costs for approximately 8,900 employees, of which 2,600 were direct employees and 6,300 were indirect employees. The accrual was for various levels of employees. The reversals into income of $108 million represent the severance costs for approximately 900 employees previously identified for separation who resigned from the Company and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were approved.

      During 2002, approximately 8,800 employees, of which 3,200 were direct employees and 5,600 were indirect employees, were separated from the Company. The 2002 amount used of $381 million reflects $368 million of cash payments to these separated employees and $13 million of non-cash utilization. In 2003 and 2004, the Company utilized $214 million of the $336 million remaining accrual and reversed $122 million.

46

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

       As highlighted in the Consolidated Statements of Cash Flows, the Company’s liquidity and available capital resources are impacted by four key components: (i) current cash and cash equivalents, (ii) operating activities, (iii) investing activities, and (iv) financing activities. Each of these components is discussed below.

Cash and Cash Equivalents

      During 2004, the Company’s cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) increased by $2.8 billion to $10.6 billion at December 31, 2004, compared to $7.8 billion at December 31, 2003. At December 31, 2004, $3.8 billion of this amount was held in the U.S. and $6.8 billion was held by the Company or its subsidiaries in other countries. Repatriation of some of the funds in other countries could be subject to delay and could have potential adverse tax consequences.

      In light of recently-passed tax laws, the Company expects to repatriate cash during 2005, to the extent the repatriation is consistent with business strategy and is economically advantageous. However, the Company has not yet completed its evaluation of the effect of the new tax law on its plans for reinvestment or repatriation of foreign earnings. The Company will evaluate its repatriation plans and the impact of the new tax provision throughout 2005 and will report the repatriation provision effect on financial results in the period the repatriation plan or plans are defined and approved.

Operating Activities

      The Company has generated positive cash flow from operations in each of the last 4 years. The cash provided by operating activities in 2004 was $3.1 billion, compared to $2.0 billion in 2003 and $1.2 billion in 2002. The primary contributors to cash flow from operations in 2004 were: (i) earnings from continuing operations (adjusted for non-cash items) of $3.0 billion, and (ii) a net increase of $1.9 billion in accounts payable and accrued liabilities, primarily attributed to increases in accounts payable, employee incentive program accruals, customer incentive reserves and warranty reserves. These positive contributors to cash flow were partially offset by: (i) an $808 million increase in other current assets, (ii) a $539 million increase in accounts receivable, (iii) a $433 million increase in inventories, and (iv) a $68 million increase in other net operating assets.

      Accounts Receivable: The Company’s net accounts receivable were $4.5 billion at December 31, 2004, compared to $3.8 billion at December 31, 2003. The Company’s days sales outstanding (“DSO”), excluding net long-term receivables, were 44.9 days at December 31, 2004, compared to 49.1 days at December 31, 2003. The decline in DSO reflects the continuing improvement in receivables management across the Company. The other key factor in the reduction of the overall DSO was the reduction in accounts receivable balance and DSO by the Global Telecom Solutions segment (“GTSS”) in 2004 compared to 2003, primarily due to an improvement in achieving payment milestones in Asia. The increase in net accounts receivable was primarily due to the increase in net sales in the fourth quarter of 2004, compared to net sales in the fourth quarter of 2003, primarily in the Personal Communications segment (“PCS”).

      Inventory: The Company’s net inventory was $2.5 billion at December 31, 2004, compared to $2.1 billion at December 31, 2003. The increase in the net inventory balance reflects increased net inventory balances in each of the Company’s five major segments. The increase in the overall net inventory balance was primarily due to increases by: (i) PCS, primarily due to higher levels of components on hand due to the anticipated increase in net sales in the first quarter of 2005 compared to the first quarter of 2004, (ii) the Broadband Communications segment (“BCS”), due to anticipated increased demand in 2005 compared to 2004, (iii) the Integrated Electronic Systems segment (“IESS”), due to anticipated increased demand in 2005 compared to 2004 and the acquisition of Force Computers, and (iv) GTSS, due primarily to anticipated increased demand in 2005 compared to 2004. The Company’s inventory turns increased to 8.9 at December 31, 2004, compared to 7.6 at December 31, 2003. The increase in overall inventory turns was driven by the increase in turns by PCS, primarily due to the significant growth in net sales and effective inventory management programs, and is evidence of benefits from the continued focus on inventory and supply chain management process throughout the Company. Inventory management continues to be an area of focus as the Company balances the need to maintain strategic inventory levels to ensure competitive delivery performance to its customers against the risk of inventory obsolescence due to rapidly changing technology and customer spending requirements.

47

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      Reorganization of Businesses: The Company has implemented substantial reorganization of businesses plans. Cash payments for exit costs and employee separations in connection with these plans were $133 million in 2004, as compared to $306 million in 2003. Of the $130 million reorganization of businesses accrual at December 31, 2004, $46 million relates to employee separation costs and is expected to be paid in 2005. The remaining $84 million in accruals relate to lease termination obligations.

      Pension Plan Contributions: The Company contributed $652 million to its pension plans during 2004, compared to $275 million in 2003. The Company expects to make cash contributions of approximately $195 million to its pension plans during 2005. Retirement-related benefits are further discussed below in the “Significant Accounting Policies—Retirement-Related Benefits” section.

Investing Activities

      The most significant components of the Company’s investing activities are: (i) capital expenditures, (ii) strategic acquisitions of, or investments in, other companies, and (iii) proceeds from dispositions of investments and businesses.

      Net cash used for investing activities was $163 million in 2004, as compared to net cash provided of $64 million in 2003 and net cash used of $251 million in 2002. The $227 million increase in cash used for investing activities in 2004 compared to 2003 was due to: (i) a $197 million increase in cash used for acquisitions and investments, net of cash assumed, and (ii) a $150 million increase in capital expenditures. These items of cash use were partially offset by: (i) a $69 million decrease in purchases of short-term investments, (ii) a $34 million increase in proceeds received from the dispositions of property, plant and equipment, and (iii) a $17 million increase in proceeds received from the sale of investments and businesses.

      Strategic Acquisitions and Investments: The Company used cash for acquisitions and new investment activities of $476 million in 2004, compared to cash used of $279 million in 2003 and $79 million in 2002. The largest components of the $476 million in 2004 expenditures were: (i) $169 million for the acquisition of MeshNetworks, Inc., a leading developer of mobile mesh networking and position-location technologies by the Commercial, Government and Industrial Solutions segment (“CGISS”), (ii) $121 million, net of cash assumed, for the acquisition of Force Computers, a worldwide designer and supplier of open, standards-based and custom embedded computing solutions, by IESS, (iii) the acquisition of Quantum Bridge Communications, Inc., a leading provider of fiber-to-the-premises solutions, by BCS, and (iv) the acquisition of the remaining interest of Appeal Telecom of Korea, a leading designer of CDMA handsets for the global market, by PCS. The largest components of the $279 million in 2003 expenditures were: (i) $179 million for the acquisition of Winphoria Networks, Inc., a core infrastructure provider of next-generation, packet-based mobile switching centers for wireless networks, by GTSS, and (ii) the acquisition of the remaining outstanding shares of Next Level Communications, Inc.

      Capital Expenditures: Capital expenditures were $494 million in 2004, compared to $344 million in 2003 and $387 million in 2002. The increase in capital expenditures was primarily due to an increase by CGISS, driven by investment in large systems what will be built, owned and operated by the Company. Capital expenditures increased in each of the Company’s five major segments in 2004 compared to 2003. The Company’s emphasis in making capital expenditures is to focus on strategic investments driven by customer demand and new design capability.

      Sales of Investments and Businesses: The Company received $682 million in proceeds from the sales of investments and businesses in 2004, compared to proceeds of $665 million in 2003 and $94 million in 2002. The $682 million of proceeds in 2004 were primarily comprised of: (i) $216 million from the sale of the Company’s remaining shares in Broadcom Corporation, (ii) $141 million from the sale of a portion of the Company’s remaining shares in Nextel Communications, Inc. (“Nextel”), (iii) $117 million from the sale of the Company’s remaining shares in Telus Corporation, and (iv) $77 million from the sale of a portion of the Company’s shares in Nextel Partners, Inc. (“Nextel Partners”). The $665 million of proceeds in 2003 were primarily comprised of: (i) $335 million from the sale of a portion of the Company’s shares in Nextel, (ii) $117 million from the sale of the Company’s shares in UAB Omnitel of Lithuania, (iii) $94 million from the sale of the Company’s shares in Symbian Limited, and (iv) $73 million from the sale of a portion of the Company’s shares in Nextel Partners.

      Short-Term Investments: At December 31, 2004, the Company had $152 million in short-term investments (which are highly-liquid fixed-income investments with an original maturity greater than three months but less than one year), compared to $139 million of short-term investments at December 31, 2003.

48

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      Available-For-Sale Securities: In addition to available cash and cash equivalents and short-term investments, the Company views its available-for-sale securities as an additional source of liquidity. The majority of these securities represent investments in technology companies and, accordingly, the fair market values of these securities are subject to substantial price volatility. In addition, the realizable value of these securities is subject to market and other conditions. At December 31, 2004, the Company’s available-for-sale securities portfolio had an approximate fair market value of $2.9 billion, which represented a cost basis of $616 million and a net unrealized gain of $2.3 billion. At December 31, 2003, the Company’s available-for-sale securities portfolio had an approximate fair market value of $2.9 billion, which represented a cost basis of $499 million and a net unrealized gain of $2.4 billion.

      Nextel Investment: In March 2003, the Company entered into three agreements with multiple investment banks to hedge up to 25 million of its shares of Nextel common stock. The three agreements are to be settled over periods of three, four and five years, respectively. Under these agreements, the Company received no initial proceeds, but has retained the right to receive, at any time during the contract periods, the present value of the aggregate contract “floor” price. Pursuant to these agreements, and exclusive of any present value discount, the Company is entitled to receive aggregate proceeds of approximately $333 million. The precise number of shares of Nextel common stock that the Company will deliver to satisfy the contracts is dependent upon the price of Nextel common stock on the various settlement dates. The maximum aggregate number of shares the Company would be required to deliver under these agreements is 25 million and the minimum number of shares is 18.5 million. Alternatively, the Company has the exclusive option to settle the contracts in cash. The Company will retain all voting rights associated with the up to 25 million hedged Nextel shares. Pursuant to customary market practice, the covered shares are pledged to secure the hedge contracts. The Company has recorded $340 million and $310 million as of December 31, 2004 and 2003, respectively, in Other Liabilities in the consolidated balance sheet to reflect the fair value of the Nextel hedge.

      Motorola, together with its wholly-owned subsidiary Motorola SMR, Inc. (“Motorola SMR”) owns 29,660,000 shares of Class B Non-Voting Common Stock of Nextel (the “Nextel Class B Shares”). On December 15, 2004, Nextel and Sprint Corp. (“Sprint”) announced a definitive agreement (the “Merger Agreement”) for a merger of the two companies in a stock-for-stock transaction. Pursuant to a letter agreement dated December 14, 2004 among Motorola, Motorola SMR and Nextel (the “Letter Agreement”), Motorola and Motorola SMR agreed not to dispose of their Nextel Class B Shares (or any shares of non-voting common stock of Sprint/ Nextel issued in exchange therefor pursuant to the Merger Agreement) for a period of up to 2 years. In exchange for the restrictions imposed under the Letter Agreement, Nextel agreed to pay Motorola a fee of $50 million (the “Consent Fee”) on the third business day following the receipt of necessary approvals by the stockholders of Nextel and Sprint for the merger. Nextel has agreed to pay the Consent Fee to Motorola at an earlier date under certain circumstances.

Financing Activities

      The most significant components of the Company’s financing activities are: (i) net proceeds from (or repayment of) commercial paper and short-term borrowings, (ii) net proceeds from (or repayment of) long-term debt securities, (iii) the payment of dividends, (iv) proceeds from the issuance of stock due to exercises of employee stock options and purchases under the employee stock purchase plan, and (v) distributions from (to) discontinued operations.

      Net cash used for financing activities was $237 million in 2004, as compared to $757 million in 2003 and $402 million in 2002. Cash used for financing activities in 2004 was primarily: (i) $1.5 billion to redeem all outstanding 6.75% Debentures due 2006 (the “2006 Debentures”) in July 2004, (ii) $500 million to redeem all outstanding Trust Originated Preferred Securities^sm (the “TOPrS”) in March 2004, (iii) $500 million to repay, at maturity, all outstanding 6.75% Debentures due 2004 in June 2004, (iv) $202 million to redeem a portion of the 7.60% Notes due 2007 (the “2007 Notes”) in July 2004, (v) $115 million for the open market repurchase of a portion of the 6.50% Debentures due 2028 (the “2028 Debentures”) in August 2004, and (vi) $378 million to pay dividends. This cash used for financing activities was partially offset by: (i) net proceeds of $1.3 billion distributed to the Company by Freescale Semiconductor in July 2004 at the time of the initial public offering by Freescale Semiconductor of approximately 32.5% of its total common shares and the issuance of senior debt securities in an aggregate principal amount of $1.25 billion, (ii) net proceeds of $1.2 billion received from the sale of stock pursuant to the terms of 7.00% Equity Security Units (the “MEUs”), and (iii) proceeds of approximately $500 million received from the issuance of common stock in connection with the Company’s employee stock option plans and employee stock purchase plan.

49

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      Cash used for financing activities in 2003 was primarily used: (i) to repay $1.1 billion of total debt (including commercial paper), primarily through the redemption of all of the Company’s $825 million of Puttable Reset Securities (PURS) and the retirement of $98 million of Liquid Yield Option Notes (LYONs), and (ii) to pay dividends of $332 million. These items were partially offset by: (i) net proceeds of $556 million from distributions from Freescale Semiconductor through the cash management system and (ii) proceeds of $158 million from the issuance of common stock in connection with the Company’s employee stock purchase plan and employee stock option plan.

      Short-Term Debt: At December 31, 2004, the Company’s outstanding short-term debt was $717 million, compared to $869 million of outstanding short-term debt at December 31, 2003. The decrease in short-term debt during 2004 primarily reflects the repayment, at maturity, of the $500 million of 6.75% Debentures due 2004, partially offset by the reclassification to current maturities of $398 million of 6.50% Debentures due 2025 that are puttable in 2005. At December 31, 2004, the Company had $300 million of outstanding commercial paper, compared to $304 million outstanding at December 31, 2003. The Company currently expects its outstanding commercial paper balances to average $300 million throughout 2005.

      Long-Term Debt: At December 31, 2004, the Company had outstanding long-term debt of $4.6 billion, compared to $6.7 billion of outstanding long-term debt at December 31, 2003. This reduction in long-term debt, as further described below under “Redemptions and Repurchases of Outstanding Securities in 2004,” consists primarily of: (i) the redemption of the $1.4 billion aggregate principal amount outstanding of 2006 Debentures, (ii) the reclassification to current maturities of $398 million of 6.50% Debentures due 2025 that are puttable in 2005, (iii) the retirement of $182 million of the $300 million aggregate principal amount outstanding of 2007 Notes, (iv) the retirement of $110 million of the $409 million aggregate principal amount outstanding of 2028 Debentures, and (v) the redemption of the $4 million of Liquid Yield Option Notes due September 7, 2009 (the “2009 LYONs”) and the Liquid Yield Option Notes due September 27, 2013 (the “2013 LYONs”) not validly exchanged for stock.

      Remarketing of Senior Note Component of MEUs in August 2004: In August 2004, pursuant to the terms of the MEUs, the $1.2 billion of 6.50% Senior Notes due 2007 (the “2007 MEU Notes”) that comprised a portion of the MEUs were remarketed to a new set of holders. In connection with the remarketing, the interest rate on the 2007 MEU Notes was reset to 4.608%. None of the other terms of the 2007 MEU Notes were changed. Shortly after the remarketing, the Company entered into interest rate swaps to change the characteristics of the interest rate payments from fixed-rate payments to short-term LIBOR-based variable rate payments.

      $500 Million of TOPrS: In March 2004, Motorola Capital Trust I, a Delaware statutory business trust and wholly-owned subsidiary of the Company (the “Trust”), redeemed all outstanding TOPrS plus accrued interest. In February 1999, the Trust sold 20 million TOPrS to the public for an aggregate offering price of $500 million. The Trust used the proceeds from that sale, together with the proceeds from its sale of common stock to the Company, to buy a series of 6.68% Deferrable Interest Junior Subordinated Debentures due March 31, 2039 (the “Subordinated Debentures”) from the Company with the same payment terms as the TOPrS. The sole assets of the Trust were the Subordinated Debentures. Historically, the TOPrS have been reflected as “Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Company-Guaranteed Debentures” in the Company’s consolidated balance sheets. No TOPrS or Subordinated Debentures remain outstanding.

      $4 Million of LYONS: In March 2004, the Company also redeemed all outstanding 2009 LYONs and 2013 LYONs. On March 26, 2004, all then-outstanding 2009 LYONs and 2013 LYONs, not validly exchanged for stock, were redeemed for an aggregate redemption price of approximately $4 million. No 2009 LYONs or 2013 LYONs remain outstanding.

      $500 Million of 6.75% Debentures due 2004: In June 2004, the Company repaid, at maturity, all $500 million aggregate principal amount outstanding of its 6.75% Debentures due 2004.

      $182 Million of 7.60% Notes due 2007: In July 2004, the Company commenced a cash tender offer for any and all of the $300 million aggregate principal amount outstanding of its 2007 Notes. The tender offer expired in August 2004 and an aggregate principal amount of approximately $182 million of 2007 Notes was validly tendered. In August 2004, the Company repurchased the validly tendered 2007 Notes for an aggregate purchase price of approximately $202 million. This debt was repurchased with proceeds distributed to the Company by Freescale Semiconductor.

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      $1.4 Billion of 6.75% Debentures due 2006: In July 2004, the Company called for the redemption of all $1.4 billion aggregate principal amount outstanding of its 2006 Debentures. All of the 2006 Debentures were redeemed in August 2004 for an aggregate purchase price of approximately $1.5 billion. This debt was redeemed partially with proceeds distributed to the Company by Freescale Semiconductor and partially with available cash balances.

      $110 Million of 6.50% Debentures due 2028: In August 2004, the Company completed the open market purchase of $110 million of the $409 million aggregate principal amount outstanding of its 2028 Debentures. The $110 million principal amount of 2028 Debentures was purchased for an aggregate purchase price of approximately $115 million.

      Given the Company’s cash position, it may from time to time seek to opportunistically retire certain of its outstanding debt through open market cash purchases, privately-negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors.

      $1.2 Billion of Proceeds from the Sale of Stock Pursuant to Equity Security Units During 2004: The Company sold $1.2 billion of MEUs during the fourth quarter of 2001. In November 2004, pursuant to the terms of the MEUs the Company sold 69.4 million shares of common stock for $1.2 billion to the holders of the MEUs. Pursuant to the terms of the MEUs, the price per share paid by the holders of the MEUs was based on the applicable market value of the Company’s common stock at the purchase date. The purchase price was $17.30 per share, resulting in the holders purchasing 2.8902 shares of common stock per MEU, for a total of 69.4 million shares.

      Credit Ratings: Three independent credit rating agencies, Standard & Poor’s (“S&P”), Moody’s Investor Services (“Moody’s”) and Fitch Investors Service (“Fitch”), assign ratings to the Company’s short-term and long-term debt.

      The following chart reflects the current ratings assigned to the Company’s senior unsecured non-credit enhanced long-term debt and the Company’s commercial paper by each of these agencies:

      In January 2005, Fitch upgraded the Company’s long-term debt rating to “BBB+” with a “positive” outlook from “BBB” with a “positive” outlook. There was no change in the short-term rating of “F-2”. In August 2004 S&P changed its outlook on the Company’s long-term debt to “BBB” with a “positive” outlook from “BBB” with a “negative” outlook. There was no change in the short-term rating of “A-2.” In July 2004, Moody’s changed its outlook on the Company’s long-term debt to “Baa3” with a “positive” outlook from “Baa3” with a “negative” outlook. There was no change in the short-term rating of “P-3.”

      The Company’s debt ratings are considered “investment grade.” If the Company’s senior long-term debt were rated lower than “BBB-” by S&P or Fitch or “Baa3” by Moody’s (which would be a decline of one level from current Moody’s ratings), the Company’s long-term debt would no longer be considered “investment grade.” If this were to occur, the terms on which the Company could borrow money would become more onerous. The Company would also have to pay higher fees related to its domestic revolving credit facility. The Company has never borrowed under its domestic revolving credit facilities.

      The Company continues to have access to the commercial paper and long-term debt markets. However, the Company generally has had to pay a higher interest rate to borrow money than it would have if its credit ratings were higher. The Company has greatly reduced the amount of its commercial paper outstanding in comparison to historical levels and has maintained commercial paper balances of between $300 million and $500 million for the last 4 years. This reflects the fact that the market for commercial paper rated “A-2/ P-3/ F-2” is much smaller than that for commercial paper rated “A-1/ P-1/ F-1” and commercial paper or other short-term borrowings may be of limited availability to participants in the “A-2/ P-3/ F-2” market from time-to-time or for extended periods.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      As further described under “Customer Financing Arrangements” below, for many years the Company has utilized a receivables program to sell a broadly-diversified group of short-term receivables, through Motorola Receivables Corporation (“MRC”), to third parties. The obligations of the third parties to continue to purchase receivables under the MRC short-term receivables program could be terminated if the Company’s long-term debt was rated lower than “BB+” by S&P or “Ba1” by Moody’s (which would be a decline of two levels from the current Moody’s rating). If the MRC short-term receivables program were terminated, the Company would no longer be able to sell its short-term receivables in this manner, but it would not have to repurchase previously-sold receivables.

Credit Facilities

      At December 31, 2004, the Company’s total domestic and non-U.S. credit facilities totaled $2.9 billion, of which $76 million was considered utilized. These facilities are principally comprised of: (i) a $1.0 billion three-year revolving domestic credit facility maturing in May 2007 (the “3-Year Credit Facility”) which is not utilized, and (ii) $1.9 billion of non-U.S. credit facilities (of which $76 million was considered utilized at December 31, 2004). The 3-Year Credit Facility replaced the Company’s former $700 million 364-day revolving domestic credit facility and $900 million three-year revolving domestic credit facility. Unused availability under the existing credit facilities, together with available cash and cash equivalents and other sources of liquidity, are generally available to support outstanding commercial paper, which was $300 million at December 31, 2004. In order to borrow funds under the 3-Year Credit Facility, the Company must be in compliance with various conditions, covenants and representations contained in the agreements. Important terms of the 3-Year Credit Facility include covenants relating to net interest coverage and total debt to book capitalization ratios. The Company was in compliance with the terms of the 3-Year Credit Facility at December 31, 2004. The Company has never borrowed under its domestic revolving credit facilities.

Contractual Obligations, Guarantees, and Other Purchase Commitments

Contractual Obligations

      Summarized in the table below are the Company’s obligations and commitments to make future payments under debt obligations (assuming earliest possible exercise of put rights by holders), lease payment obligations, and purchase obligations as of December 31, 2004.

      Debt Obligations: At December 31, 2004, the Company’s long-term debt obligations, including current maturities and unamortized discount and issue costs, totaled $5.0 billion, as compared to $7.2 billion at December 31, 2003. A table of all outstanding long-term debt securities can be found in Note 4, “Debt and Credit Facilities,” to the Company’s consolidated financial statements. As previously discussed, the decrease in the long-term debt obligations as compared to December 31, 2003, was due to the redemptions and repurchases of approximately $2.2 billion of outstanding securities in 2004.

      At December 31, 2004, the Company was in a $5.4 billion net cash position. The Company’s ratio of net debt to net debt plus equity was (68.4)% at December 31, 2004, compared to 0.8% at December 31, 2003. The decrease in this ratio is due to: (i) a $2.8 billion increase in cash and cash equivalents and short-term investments, (ii) a $2.7 billion decrease in total debt, and (iii) a $642 million increase in stockholders’ equity. Total debt is equal to notes payable and current portion of long-term debt plus long-term debt plus TOPrS. The ratio is calculated as net debt divided by net debt plus stockholders’ equity. Net debt is equal to notes payable and current portion of long-term debt plus long-term debt plus TOPrS minus cash and cash equivalents minus short-term investments.

      The Company’s management uses the ratio of net debt to net debt plus equity as one measure of the strength of the Company’s balance sheet. This ratio is only one of many possible measures, and investors should analyze the Company’s financial position and results of operations in their entirety to reach their own conclusions about the

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Company’s overall financial strength. In addition, the ratio of net debt to net debt plus equity is measured at a specific point in time. Since certain of its components, in particular the Company’s cash balances, are subject to daily change, investors should recognize that this ratio is subject to volatility.

      The Company expects that from time to time outstanding commercial paper balances may be replaced with short or long-term borrowings. Although the Company believes that it can continue to access the capital markets in 2005 on acceptable terms and conditions, its flexibility with regard to long-term financing activity could be limited by: (i) the Company’s current levels of outstanding long-term debt, and (ii) the Company’s credit ratings. In addition, many of the factors that affect the Company’s ability to access the capital markets, such as the liquidity of the overall capital markets and the current state of the economy, in particular the telecommunications industry, are outside of the Company’s control. There can be no assurances that the Company will continue to have access to the capital markets on favorable terms.

      Lease Obligations: The Company owns most of its major facilities, but does lease certain office, factory and warehouse space, land, and information technology and other equipment under principally non-cancelable operating leases. At December 31, 2004, future minimum lease obligations, net of minimum sublease rentals, totaled $836 million. Rental expense, net of sublease income, was $217 million in 2004, $223 million in 2003 and $218 million in 2002.

      Purchase Obligations: The Company has entered into agreements for the purchase of inventory, license of software, promotional agreements, and research and development agreements which are firm commitments and are not cancelable. The longest of these agreements extends through 2008. Total payments expected to be made under these agreements total $207 million.

      Commitments Under Other Long-Term Agreements: The Company has entered into certain agreements to purchase components, supplies and materials from suppliers. Most of the agreements extend for periods of one to three years, however, generally these contracts can be terminated by either the Company or the supplier with 60 to 90 days notice. If the Company were to terminate these agreements, it would generally be liable for forecasted purchases between the termination notification date and the termination date of the agreements. The Company’s liability would only arise in the event it terminates the agreements for reasons other than cause.

      In 2003, the Company entered into outsourcing contracts for certain corporate functions, such as benefit administration and information technology related services. These contracts generally extend for 10 years and are expected to expire in 2013. The total payments under these contracts are approximately $3 billion over 10 years; however, these contracts can be terminated. Termination would result in a penalty substantially less than the annual contract payments. The Company would also be required to find another source for these services, including the possibility of performing them in-house.

      As is customary in bidding for and completing network infrastructure projects and pursuant to a practice the Company has followed for many years, the Company has a number of performance/bid bonds and standby letters of credit outstanding, primarily relating to projects of CGISS and GTSS. These instruments normally have maturities of up to three years and are standard in the industry as a way to give customers a convenient mechanism to seek resolution if a contractor does not satisfy performance requirements under a contract. A customer can draw on the instrument only if the Company does not fulfill all terms of a project contract. If such an occasion occurred, the Company would be obligated to reimburse the financial institution that issued the bond or letter of credit for the amounts paid. The Company is not generally required to post any cash in connection with the issuance of these bonds or letters of credit. In its long history, it has been extraordinarily uncommon for the Company to have a performance/bid bond or standby letter of credit drawn upon. At December 31, 2004, outstanding performance/bid bonds and standby letters of credit totaled approximately $1.0 billion, compared to $1.3 billion at the end of 2003.

      Off-Balance Sheet Arrangements: Under the definition contained in Item 303(a)(4)(ii) of Regulation S-K, the Company does not have any off-balance sheet arrangements.

      Adequate Internal and External Funding Resources: The Company believes that it has adequate internal and external resources available to fund expected working capital and capital expenditure requirements for the next twelve months as supported by the level of cash and cash equivalents in the U.S., the ability to repatriate cash and cash equivalents from foreign jurisdictions, the ability to borrow under existing or future credit facilities, the ability to issue commercial paper, access to the short-term and long-term debt markets, and proceeds from sales of available-for-sale securities and other investments.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

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Customer Financing Commitments and Guarantees

      Outstanding Commitments: Certain purchasers of the Company’s infrastructure equipment continue to request that suppliers provide financing in connection with equipment purchases. Financing may include all or a portion of the purchase price of the equipment as well as working capital. The Company had outstanding commitments to extend credit to third parties totaling $294 million at December 31, 2004, compared to $149 million at December 31, 2003. During 2004, the Company made loans to customers of $25 million, as compared to loans to customers of $32 million during 2003.

      Guarantees of Third-Party Debt: In addition to providing direct financing to certain equipment customers, the Company also assists customers in obtaining financing directly from banks and other sources to fund equipment purchases. The amount of loans from third parties for which the Company has committed to provide financial guarantees totaled $8 million at December 31, 2004, as compared to $10 million at December 31, 2003. No payments were made pursuant to guarantees during 2004, compared to payments of $28 million made during 2003. Customer borrowings outstanding under these third-party loan arrangements were $4 million at December 31, 2004, as compared to $10 million at December 31, 2003.

      The Company evaluates its contingent obligations under these financial guarantees by assessing the customer’s financial status, account activity and credit risk, as well as the current economic conditions and historical experience. The $8 million of guarantees discussed above are to four customers and are scheduled to expire in 2013. The Company had no accrued liabilities recorded at December 31, 2004 and $1 million at 2003 to reflect management’s best estimate of probable losses of unrecoverable amounts, should these guarantees be called.

Customer Financing Arrangements

      Outstanding Finance Receivables: The Company had net finance receivables of $170 million at December 31, 2004, compared to $301 million at December 31, 2003 (net of allowances for losses of $2.0 billion at December 31, 2004 and $2.1 billion at December 31, 2003). These finance receivables are generally interest bearing, with rates ranging from 3% to 12%. Total interest income recognized on finance receivables was $9 million in 2004, compared to $18 million in 2003 and $28 million in 2002.

      Telsim Loan: At December 31, 2004 and 2003, the Company had $1.9 billion and $2.0 billion, respectively, of gross receivables from one customer, Telsim, in Turkey (the “Telsim Loan”) with the decline representing partial recovery of amounts owed of $44 million due to collection efforts during 2004. As a result of difficulties in collecting the amounts due from Telsim, the Company has previously recorded charges reducing the net receivable from Telsim to zero. At both December 31, 2004 and 2003, the net receivable from Telsim was zero. Although the Company continues to vigorously pursue its recovery efforts, it believes the litigation, collection and/or settlement process will be very lengthy in light of the Uzans’ (the family which previously controlled Telsim) continued resistance to satisfy the judgment against them and their decision to violate various courts’ orders, including orders holding them in contempt of court. In addition, the Turkish government has asserted control over Telsim and certain other interests of the Uzans and this may make the Company’s collection efforts more difficult.

      Sales of Receivables and Loans: From time to time, the Company sells short-term receivables and long-term loans to third parties in transactions that qualify as “true-sales.” Certain of these receivables are sold through a separate legal entity, Motorola Receivables Corporation (“MRC”). The financial results for MRC are fully consolidated in the Company’s financial statements. This receivables funding program is administered through multi-seller commercial paper conduits. Under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (revised), the Company is not required to consolidate those entities.

      The Company sells short-term receivables through the Motorola Receivables Corporation (“MRC”) short-term receivables program, which provides for up to $425 million of short-term receivables to be outstanding with third parties at any time. In October 2004, the Company renewed the MRC short-term receivables program at its current level for one year. In addition, the Company sells short-term receivables directly to third parties. Total short-term receivables sold by the Company (including those sold directly to third parties and those sold through the MRC short-term receivables program) were $3.8 billion in 2004, compared to $2.7 billion in 2003 and $2.9 billion in 2002. There were $1.1 billion and $771 million of short-term receivables outstanding under these arrangements at December 31, 2004 and 2003, respectively (including $255 million and $170 million, respectively, under the MRC program). Under the MRC short-term receivables program, 90% of the value of the receivables sold is covered by credit insurance obtained from independent insurance companies. The credit exposure on the remaining 10% is covered by a retained interest in the sold receivables. The Company’s total credit exposure to

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MANAGEMENT’S DISCUSSION AND ANALYSIS

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outstanding short-term receivables that have been sold was $25 million at both December 31, 2004 and 2003 with reserves of $4 million and $13 million recorded for potential losses on this exposure at December 31, 2004 and 2003, respectively.

Other Contingencies

      Potential Contractual Damage Claims in Excess of Underlying Contract Value: In certain circumstances, our businesses may enter into contracts with customers pursuant to which the damages that could be claimed by the other party for failed performance might exceed the revenue the Company receives from the contract. Contracts with these sorts of uncapped damage provisions are fairly rare, but individual contracts could still represent meaningful risk. Although it has not previously happened to the Company, there is a possibility that a damage claim by a counterparty to one of these contracts could result in expenses to the Company that are far in excess of the revenue received from the counterparty in connection with the contract.

      Legal Matters: The Company has several lawsuits filed against it relating to the Iridium program, as further described under “Item 3: Legal Proceedings” of this document. The Company has not reserved for any potential liability that may arise as a result of litigation related to the Iridium program. While the still pending cases are in very preliminary stages and the outcomes are not predictable, an unfavorable outcome of one or more of these cases could have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

      The Company is a defendant in various other lawsuits, including product-related suits, and is subject to various claims which arise in the normal course of business. In the opinion of management, and other than discussed above with respect to the still pending Iridium cases, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

Segment Information

       The following commentary should be read in conjunction with the financial results of each reporting segment as detailed in Note 10, “Information by Segment and Geographic Region,” to the Company’s consolidated financial statements.

      Net sales and operating results for the Company’s major operations for 2004, 2003 and 2002 are presented below.

      In April 2004, the Company separated its semiconductor operations into a separate subsidiary, Freescale Semiconductor, Inc. (“Freescale Semiconductor”). In July 2004, an initial public offering of a minority interest of approximately 32.5% of Freescale Semiconductor was completed. On December 2, 2004, Motorola completed the spin-off of Freescale Semiconductor from the Company by distributing its remaining 67.5% equity interest in Freescale Semiconductor to Motorola shareholders. As of that date, Freescale Semiconductor is an entirely independent company. The financial results of Freescale Semiconductor have been presented in Motorola’s consolidated financial statements as a discontinued operation.

Personal Communications Segment

      The Personal Communications segment (“PCS”) designs, manufactures, sells and services wireless handsets with integrated software and accessory products. In 2004, PCS’s net sales represented 54% of the Company’s consolidated net sales, compared to 47% in 2003 and 48% in 2002.

Segment Results—2004 Compared to 2003

      In 2004, the segment’s net sales increased 53% to $16.8 billion, compared to $11.0 billion in 2003. The 53% increase in net sales in 2004 was driven by increases in both unit shipments and average selling price (“ASP”)

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MANAGEMENT’S DISCUSSION AND ANALYSIS

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compared to 2003, and reflects strong consumer demand for new products, particularly GSM and 3G handsets. The strong demand for these new handsets was reflected by increased net sales in all regions, driven by an improved product portfolio, strong market growth in the emerging markets, and high replacement sales in the more mature markets.

      The segment’s backlog was $1.5 billion at December 31, 2004, compared to $2.2 billion at December 31, 2003. The decline in backlog was driven primarily by the segment’s improved ability to meet demand for new products in a more timely manner. In addition, the backlog at December 31, 2003 was unusually high due to the impact of a key component supply constraint that resulted in the segment’s inability to meet the demand for certain new products in the fourth quarter of 2003.

      Unit shipments in 2004 increased 39% to 104.5 million, compared to 75.3 million in 2003. For the full year 2004, a record year for the handset industry, the segment believes total industry unit shipments (also referred to as industry “sell-in”) increased approximately 25% compared to 2003. Since the segment’s unit shipment growth outpaced the industry, the segment believes it increased overall market share in 2004 compared to 2003, and solidified its hold on the second-largest worldwide market share of wireless handsets.

      Also contributing to the increase in net sales was the improvement in the segment’s ASP, which increased approximately 15% in 2004 compared to 2003. The overall increase in ASP was driven primarily by a shift in product mix towards higher-tier handsets, which included the introduction of several 3G UMTS handsets and the iconic RAZR. By comparison, ASP declined approximately 8% in 2003 and 5% in 2002. ASP is impacted by factors such as product mix and pricing, as well as market conditions and competitive product offerings. ASP trends over time can vary as market conditions and competition drive changes to these various factors.

      A few customers represent a significant portion of the segment’s net sales. During 2004, purchases of iDEN products by Nextel Communications, Inc. (“Nextel”)and its affiliates comprised approximately 14% of the segment’s net sales, compared to 18% in 2003. We have been the sole supplier of iDEN handsets and core network infrastructure equipment to Nextel for over ten years. Nextel uses Motorola’s proprietary iDEN technology to support its nationwide wireless service business. In December 2004, Motorola announced that it reached an agreement with Nextel to extend the companies’ iDEN infrastructure and iDEN subscriber supply agreements for a period from January 1, 2005 through December 31, 2007. Motorola also announced an agreement with Nextel for implementation of Next Generation Dispatch, a new Internet Protocol-based call processing engine designed to replace the current call-processing system. In addition, Motorola has developed a new 6:1 vocoder which will allow Nextel to increase capacity on its current system. Nextel has announced its intention to activate the 6:1 vocoder in substantially all of its markets in 2005. In December 2004, Nextel and Sprint Corp. (“Sprint”) announced their intention to merge their two companies. The segment does not anticipate any significant impact to its business in 2005 as compared to 2004 as a result of this merger.

      In addition to Nextel, the largest of our end customers include Cingular, China Mobile and Vodafone. Besides selling directly to carriers and operators, the segment also sells products through a variety of third-party distributors and retailers, which account for approximately 30% of the segment’s net sales. The largest of these distributors represented approximately 5% of the segment’s net sales in 2004 and is our primary distributor in Latin America. The loss of any of the segment’s major customers could have a significant impact on the segment’s business. Although the U.S. market continued to be the segment’s largest market, sales into non-U.S. markets represented approximately 60% of the segment’s total net sales in 2004, compared to 52% in 2003. The largest of these international markets are China, the United Kingdom and Brazil. In North America, the industry saw consolidation of some major telecommunications carriers in 2004, involving some of the segment’s largest customers. However, the segment did not see any significant impact on their business in 2004 due to these consolidations, nor do they foresee any significant impact from these consolidations in the future.

      The segment’s operating earnings increased to $1.7 billion in 2004, compared to operating earnings of $479 million in 2003. The 257% increase in operating earnings was primarily related to an increase in gross margin, which was due to: (i) the 53% increase in net sales, and (ii) ongoing cost-reduction activities and improvements in the segment’s supply chain. Also contributing to the increase in operating earnings was a decrease in reorganization of business charges, primarily due to: (i) charges recorded in 2003 for employee severance and exit costs which were primarily related to the exit of certain manufacturing activities in Flensburg, Germany, and (ii) reversals of accruals recorded in 2004 that were related to accruals for exit costs and employee severance which were no longer needed. These improvements to operating results were partially offset by: (i) an increase in SG&A expenditures, reflecting an increase in employee incentive program accruals and increased advertising, promotion and marketing expenditures to support higher sales and brand awareness, and (ii) an increase in R&D expenditures, primarily

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MANAGEMENT’S DISCUSSION AND ANALYSIS

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reflecting increased developmental engineering expenditures due to additional investment in new product development. The segment’s industry typically experiences short life cycles for new products and, therefore, it is vital to the segment’s success that new, compelling products are constantly introduced. Accordingly, a strong commitment to R&D is required to fuel long-term growth.

Segment Results—2003 Compared to 2002

      In 2003, the segment’s net sales decreased 2% to $11.0 billion, compared to $11.2 billion in 2002. The 2% decrease in net sales in 2003 reflected the interaction of a number of factors. In the fourth quarter of 2003, traditionally the segment’s highest sales quarter, the segment was unable to meet demand for shipments of certain products, primarily those featuring integrated cameras, due to supply constraints for a key component. This had an adverse effect on fourth quarter net sales, which were down 3% from the fourth quarter of 2002. As further discussed below, the segment’s net sales in Asia decreased 42% in 2003, due to ongoing intense competition in that region, particularly in China, and the impact of Severe Acute Respiratory Syndrome (“SARS”) during the first half of the year. Also, in 2002, the segment discontinued sales of paging products. The 2002 results included $176 million of net sales of paging products, while 2003 did not include paging product sales.

      The segment’s backlog was $2.2 billion at December 31, 2003, compared to $1.1 billion at December 31, 2002. Backlog increased primarily as a result of demand for new products that were introduced in the second half of 2003, including handsets with integrated cameras. Backlog was also impacted by the component supply constraints, which resulted in the segment’s inability to meet the demand for certain new products in the fourth quarter of 2003.

      For the full year 2003, the segment believes total industry unit shipments (also referred to as industry “sell-in”) increased approximately 20% compared to 2002. This growth was higher than expected by most industry analysts. Unfortunately, the growth in unit shipments in the segment lagged behind the unit growth in the overall industry, as unit shipments for the segment grew by only 7% in 2003 compared to 2002. Correspondingly, the segment’s market share is estimated to have declined in 2003.

      The 7% increase in unit shipments by the segment was offset by a decrease in the segment’s ASP, which declined 8% on an annual basis in 2003. For comparison, the decline in ASP for the segment was 5% in 2002 and 12% in 2001. The overall decline in ASP in 2003 was caused primarily by: (i) a shift in product mix, particularly during the first half of the year, toward lower-priced handsets, (ii) the intense competition from new and existing handset manufacturers in the Asian market, and (iii) unusually high sales of end-of-life products in the third quarter of 2003, reflecting the segment’s aggressive steps to sell aging inventory. During the second half of 2003, the segment introduced several feature-rich, higher-tier products, with features including cameras, large color displays, expanded software applications, messaging functionality, advanced gaming features and an increased opportunity for personalization. These products began to ship in volume during the fourth quarter of 2003 and, as a result, there was a sequential increase in ASP from the third quarter to the fourth quarter in 2003.

      A few customers represented a significant portion of the segment’s net sales in 2003. During 2003, purchases of iDEN products by Nextel comprised approximately 18% of the segment’s net sales, compared to 15% in 2002. In addition, approximately 9% of the segment’s net sales were to the China market and were primarily used on mobile systems operated by China Mobile and China Unicom, the two largest wireless operators in China. In 2003, although the U.S. market continued to be the segment’s largest market, sales into non-U.S. markets represented more than half of the segment’s total revenue.

      The segment’s operating earnings in 2003 were $479 million, compared to operating earnings of $503 million in 2002. The 5% decline in operating earnings was primarily related to: (i) a decline in gross margin, and (ii) an increase in research and development (R&D) expenditures, partially offset by: (i) a decrease in reorganization of business and other charges, and (ii) a decrease in SG&A expenditures. The decline in gross margin primarily reflects the $196 million decline in net sales, which was driven by the 8% decline in ASP and the loss of sales from the exited paging business. These negative influences were partially offset by a decrease in certain manufacturing costs due to benefits from prior and ongoing cost-reduction actions and supply-chain efficiencies. The increase in R&D expenditures reflects an increase in developmental engineering expenditures due to the number of new product offerings by the segment. The segment’s industry typically experiences short life cycles for new products and, therefore, it is vital to the segment’s success that new, compelling products are constantly introduced. Accordingly, a strong commitment to R&D is required to fuel long-term growth. The decrease in SG&A expenditures reflects a decline in overall administrative and general spending, which was driven by benefits from prior and ongoing cost-

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reduction efforts, as well as the absence of charges that occurred in 2002 related to the discontinuance of paging products.

      For the full year 2003, the segment recorded net charges of $51 million related to reorganization of business and other charges. These charges primarily consisted of: (i) $43 million in net charges related to employee severance, mainly related to the planned exit of certain manufacturing activities in Flensburg, Germany, engineering site optimizations, and segment-wide employee severance programs, partially offset by reversals of accruals no longer needed, primarily related to the exit of the Harvard, Illinois facility, and (ii) $7 million in exit costs related to the planned exit of certain manufacturing activities in Flensburg, Germany.

      For the full year 2002, the segment recorded net charges of $301 million related to reorganization of business and other charges. These charges primarily consisted of: (i) a $119 million net charge for fixed asset impairments, primarily relating to implementation of a plan to close an engineering and distribution center in Harvard, Illinois, (ii) a $125 million charge for the segment’s share of a potentially uncollectible finance receivable from Telsim, and (iii) a $70 million net charge related to segment-wide employee severance costs.

Global Telecom Solutions Segment

      The Global Telecom Solutions segment (“GTSS”) designs, manufactures, sells, installs, and services wireless infrastructure communication systems, including hardware and software. GTSS provides end-to-end wireless networks, including radio base stations, base site controllers, associated software and services, mobility soft switching, application platforms and third-party switching for CDMA, GSM, iDEN® and UMTS. In 2004, GTSS’s net sales represented 17% of the Company’s consolidated net sales, compared to 19% in 2003 and 20% in 2002.

*** Percent change not meaningful

Segment Results—2004 Compared to 2003

      In 2004, the segment’s net sales increased 24% to $5.5 billion, compared to $4.4 billion in 2003. The 24% increase in net sales in 2004 was driven by an increase in spending by the segment’s wireless service provider customers and reflects increased net sales in both the segment’s mature and emerging markets. The segment continues to increase its presence in emerging markets, which the segment believes are growing faster than the industry as a whole. Net sales growth occurred in all technologies and in all regions. Sales into non-U.S. markets increased in 2004 and represented approximately 66% of the segment’s total net sales in 2004, compared to approximately 63% in 2003. The segment’s backlog was $1.9 billion at December 31, 2004, compared to $1.6 billion at December 31, 2003.

      The wireless infrastructure industry experienced significant growth in 2004 after three years of decline. The segment believes that its 24% increase in net sales outpaced overall sales growth in the industry, and resulted in increased market share for the segment in 2004.

      The nature of the segment’s business is long-term contracts with major operators that require sizeable investments by its customers. In 2004, five customers— China Mobile; China Unicom; KDDI, a service provider in Japan; Nextel; and Verizon— represented approximately 54% of the segment’s net sales. The loss of one of these major customers could have a significant impact on the segment’s business and, because contracts are long-term, could impact revenue and earnings over several quarters.

      Nextel is the segment’s largest customer, representing 17% of the segment’s net sales in 2004, and we have been the sole supplier of iDEN handsets and core network infrastructure equipment to Nextel for over ten years. Nextel uses Motorola’s proprietary iDEN technology to support its nationwide wireless service business. In December 2004, Motorola announced that it reached an agreement with Nextel to extend the companies iDEN infrastructure and iDEN subscriber supply agreements for a period from January 1, 2005 through December 31, 2007. Motorola also announced an agreement with Nextel for implementation of Next Generation Dispatch, a new Internet Protocol-based call processing engine designed to replace the current call-processing system. In addition, Motorola has developed a new 6:1 vocoder which will allow Nextel to increase capacity on its current system.

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Nextel has announced its intention to activate the 6:1 vocoder in substantially all of its markets in 2005. In December 2004, Nextel and Sprint announced their intention to merge their two companies. The segment does not anticipate any significant impact to its business in 2005 as compared to 2004 as a result of this merger.

      KDDI has been successful with its all-Motorola 800MHZ CDMA2000 1X network in Japan. In 2004, Motorola and KDDI began deployment of a CDMA2000 1X network in the 2GHZ band. This new packet-based 2GHz network is expected to allow KDDI to provide more advanced features and expand its subscriber base.

      The segment’s operating earnings increased to $759 million in 2004, compared to operating earnings of $247 million in 2003. The 207% increase in operating earnings was primarily related to an increase in gross margin, which was due to: (i) the 24% increase in net sales, and (ii) continued cost containment in the segment’s supply chain. The improvements in operating results were partially offset by an increase in SG&A expenditures, primarily due to: (i) an increase in employee incentive program accruals, and (ii) increased selling and sales support expenditures, primarily attributable to the 24% increase in net sales. R&D expenditures remained relatively flat in 2004 compared to 2003, reflecting benefits from improved efficiencies in development engineering.

      The segment continues to build on its industry-leading position in push-to-talk over cellular (“PoC”) technology. To date, the segment has 23 contracts in 27 countries. These contracts offer PoC solutions for both CDMA2000 and GSM/ GPRS networks.

Segment Results—2003 Compared to 2002

      In 2003, the segment’s net sales decreased 4% to $4.4 billion, compared to $4.6 billion in 2002. The segment’s backlog was $1.6 billion at December 31, 2003, compared to $1.2 billion at December 31, 2002.

      The 4% decrease in net sales in 2003 was primarily due to the continued reduction in capital spending by cellular operators, primarily in mature markets. In U.S. dollars, this sales decline was roughly in line with the overall sales decline in the wireless infrastructure industry. Operators spent less on new equipment because of pressure to reduce costs and declines in average revenue per user. In addition, technology enhancements greatly improved network capacity without necessitating corresponding increases in spending by the operators. However, unlike the case in mature markets, many existing operators in emerging markets increased spending on wireless infrastructure and services during 2003. During 2003, the segment established a market presence in the emerging markets, many of which have higher growth rates than those of mature markets.

      The nature of the segment’s business is long-term contracts with major operators that require sizeable investments by its customers. In 2003, five customers— China Mobile Communications Corporation; China Unicom; KDDI, a service provider in Japan; Nextel and its affiliates and Verizon— represented approximately 55% of the segment’s net sales. The loss of one of these major customers could have a significant impact on the segment’s business and, because contracts are long-term, could impact revenue and earnings over several quarters.

      The segment reported operating earnings of $247 million in 2003, compared to an operating loss of $621 million in 2002. The improvement in operating results was primarily related to: (i) a decrease in reorganization of business and other charges, (ii) a decrease in R&D expenditures, reflecting cost savings from prior cost-reduction actions, (iii) a decrease in SG&A expenditures, primarily selling and sales support costs, reflecting cost savings from prior cost-reduction actions, partially offset by an increase in employee incentive program costs, and (iv) an increase in gross margin, primarily due to benefits from prior cost-reduction actions and a reduction in reorganization of business charges included in costs of sales, partially offset by the 4% decline in net sales.

      For the full year 2003, the segment recorded net income of $13 million related to reorganization of business and other charges. The net income primarily consisted of a net reduction of $39 million in accruals for reorganization of business costs that were no longer needed, partially offset by a $32 million charge for in-process research and development related to the acquisition of Winphoria Networks, Inc.

      For the full year 2002, the segment recorded net charges of $610 million related to reorganization of business and other charges, which primarily consisted of: (i) a $401 million charge for the segment’s share of a potentially uncollectible finance receivable from Telsim, (ii) a $128 million net charge for segment-wide employee severance costs, and (iii) a $55 million charge for exit costs related to a lease cancellation.

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Commercial, Government and Industrial Solutions Segment

      The Commercial, Government and Industrial Solutions segment (“CGISS”) designs, manufactures, sells, installs and services analog and digital two-way radio, voice and data communications products and systems to a wide range of public-safety, government, utility, courier, transportation and other worldwide markets. The business continues to invest in the market for broadband data, including infrastructure, devices, service and applications. In addition, the segment participates in the expanding market for integrated information management, mobile and biometric applications and services. In 2004, CGISS’s net sales represented 15% of the Company’s consolidated net sales, compared to 18% in 2003 and 16% in 2002.

Segment Results—2004 Compared to 2003

      In 2004, the segment’s net sales increased 11% to $4.6 billion, compared to $4.1 billion in 2003. The increase in net sales reflects continued emphasis on spending by customers in the segment’s government market, primarily in response to homeland security initiatives, as well as increased spending by the segment’s enterprise customers on business-critical communications needs. The overall increase in net sales reflects net sales growth in all regions. Net sales in North America continue to comprise a significant portion of the segment’s business, accounting for 66% of the segment’s net sales in both 2004 and 2003. The segment’s backlog was $2.1 billion at December 31, 2004, compared to $1.7 billion at December 31, 2003. The increase in backlog was driven by the awarding of large, multi-year projects in the segment’s government market during the latter half of 2004.

      The segment’s operating earnings increased to $753 million in 2004, compared to operating earnings of $562 million in 2003. The 34% increase in operating earnings was primarily due to: (i) the 11% increase in net sales, (ii) cost savings from supply-chain efficiencies, and (iii) overall cost structure improvements. Also contributing to the increase in operating earnings was a decrease in reorganization of business charges, primarily due to a decrease in charges related to segment-wide employee severance. These improvements in operating results were partially offset by: (i) an increase in SG&A expenditures, primarily due to an increase in employee incentive program accruals and an increase in selling and sales support expenditures, due primarily to the 11% increase in net sales, (ii) an increase in R&D expenditures driven by increased investment in new technologies, and (iii) $17 million of in-process research and development charges related to the acquisitions of MeshNetworks, Inc. (“MeshNetworks”) and CRISNET, Inc. (“CRISNET”)

      In the fourth quarter of 2004, the Company completed the acquisitions of MeshNetworks and CRISNET. MeshNetworks is a leading developer of mobile mesh networking and position-location technologies. The technologies make it possible to deploy high-performance Internet Protocol-based wireless networks. The acquisition supports Motorola’s seamless mobility vision and will strengthen the solution portfolio for wireless broadband customers. CRISNET has a suite of advanced software applications for law enforcement, justice and public safety agencies. This group of products will enable Motorola to build upon its customer and technology leadership in the public safety market.

      Spending by the segment’s government and public safety customers is affected by government budgets at the national, state and local levels. In the U.S., where the majority of the segments sales occur, the 2005 Department of Homeland Security Appropriations Act was passed in October 2004, providing for an increase over 2004’s discretionary spending budget. However, it is very difficult to tell how much of that funding will be used for communications needs. Also, recent U.S. federal government budget proposals have indicated potential funding reductions to state and local agencies that purchase our products and systems. In addition, even in light of limited budgets for local governments and public safety agencies, the segment sees increased prioritization of limited government funds towards funding of safety and security projects. Particularly, customers in the government market are interested in two-way radio systems and integrated solutions that enhance interoperability and compatibility. Accordingly, the segment does not expect reductions in U.S. federal government funding to state and local agencies to have a material impact on its business in 2005. The segment will continue to work closely with all pertinent government departments and agencies to ensure that two-way radio and wireless communications is positioned as a critical need for homeland security.

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      The scope and size of systems requested by some of the segment’s customers are increasing, including requests for country-wide and statewide systems. These larger systems are more complex and include a wide range of capabilities. Large-system projects will impact how contracts are bid, which companies compete for bids and how companies partner on projects.

      The segment was awarded a number of major, multi-year contracts in 2004, including: (i) a $329 million contract with the Commonwealth of Virginia for a sophisticated digital voice and wireless data communications system, (ii) a $294 million contract to provide the U.S. Postal Service with data communications capability, and (iii) a contract with the Austrian Ministry of Interior to provide a mission-critical, country-wide TETRA public safety digital radio network.

Segment Results—2003 Compared to 2002

      In 2003, the segment’s net sales increased 10% to $4.1 billion, compared to $3.7 billion in 2002. The segment’s backlog was $1.7 billion at both December 31, 2003 and December 31, 2002. The increase in net sales was primarily due to increased spending by customers in the segment’s government market, primarily due to homeland security initiatives. Net sales were also increased by contracts relating to the conflict in the Middle East and the reconstruction of public safety systems in Iraq. In 2003, $2.7 billion, or 66% of the segment’s net sales, were in North America, as compared to $2.4 billion, or 65% of the segment’s net sales, in 2002.

      The segment’s operating earnings increased to $562 million in 2003, compared to operating earnings of $313 million in 2002. The increase in operating earnings was primarily related to: (i) an increase in gross margin, primarily due to: (a) the 10% increase in net sales, (b) a favorable product mix, reflecting a higher proportion of sales of subscriber equipment and a lower proportion of sales of infrastructure equipment, and (c) continued benefits from prior cost-reduction actions, and (ii) a decrease in reorganization of business charges, primarily due to a decrease in charges related to segment-wide employee severance. These improvements in operating earnings were partially offset by: (i) an increase in SG&A expenditures due to an increase in employee incentive program accruals, and (ii) an increase in R&D expenditures. Although both SG&A and R&D expenditures increased, SG&A and R&D expenditures as a percent of net sales decreased in 2003 compared to 2002.

Integrated Electronic Systems Segment

      The Integrated Electronic Systems segment (“IESS”) designs, manufactures and sells: (i) automotive and industrial electronics systems, (ii) telematics systems that enable automated roadside assistance, navigation and advanced safety features for automobiles, (iii) portable energy storage products and systems, and (iv) embedded computing systems. In 2004, IESS’s net sales represented 9% of the Company’s consolidated net sales, compared to 10% in 2003 and 9% in 2002.

Segment Results—2004 Compared to 2003

      In 2004, the segment’s net sales increased 19% to $2.7 billion, compared to $2.3 billion in 2003. The increase in net sales was primarily due to increased sales in the Automotive Communications and Electronic Systems Group (“ACES”), and additional sales resulting from the acquisition of Force Computers in August 2004. The segment’s backlog was $424 million at December 31, 2004, compared to $347 million at December 31, 2003. The increase in backlog was driven by increased demand in all three primary business groups.

      The three primary business groups within the segment are: (i) ACES, which sells automotive and industrial electronics systems, including telematics, (ii) the Energy Systems Group (“ESG”), which sells portable energy storage products and systems, and (iii) the Embedded Communications Computing Group (“ECCG”), which sells embedded computing systems. As stated below, ECCG consists of the former Motorola Computer Group (“MCG”) and recently-acquired Force Computers. In 2004, ACES, ESG and ECCG represented 62%, 22% and 16% of the segment’s net sales, respectively. In 2003, ACES, ESG, and ECCG represented 64%, 23% and 13% of the segment’s net sales, respectively.

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      In ACES, demand is linked to automobile sales in the U.S. and other countries, as well as the level of electronic content per vehicle. For 2004 compared to 2003, ACES’s net sales increased 15%, primarily due to the success of telematics products, as well as electronic control products launched during the year.

      In ESG, demand is strongly linked to the sales of other Motorola businesses, particularly the sales of the wireless handset business, which is the group’s largest customer. For 2004 compared to 2003, ESG’s net sales increased 17%, primarily due to the increased demand from the Company’s wireless handset business, and the increased demand in the wireless handset industry.

      In ECCG, demand is strongly linked to sales of telecommunications, manufacturing, imaging and other infrastructure systems in the U.S. and other countries. For 2004 compared to 2003, ECCG’s net sales increased 39%, reflecting increased demand for integrated, standards-based embedded computing systems, and additional sales from the acquisition of Force Computers.

      A large part of the segment’s business is dependent upon other Motorola businesses, primarily the wireless handset business, and three external automotive manufacturers—General Motors, Daimler Chrysler and Ford. Sales to other Motorola businesses accounted for 19% of the segment’s net sales in 2004, as compared to 18% in 2003. The net sales to General Motors, Ford and Daimler Chrysler were 17%, 12% and 12% of the segment’s 2004 net sales, respectively. The loss of one of these major customers could have a significant impact on the segment’s business.

      In August 2004, the Company acquired Force Computers, a worldwide designer and supplier of open, standards-based and custom embedded computing solutions. The results of operations of Force Computers were integrated with MCG, and the two combined entities were renamed the Embedded Communications Computing Group. This acquisition is expected to enable ECCG to provide solutions for a wider range of customer application needs, supported by a broader portfolio of boards, systems and services.

      The segment reported operating earnings of $142 million in 2004, compared to operating earnings of $161 million in 2003. The decrease in operating earnings was primarily related to: (i) an increase in SG&A expenditures, primarily due to an increase in employee incentive program accruals and expenses related to the addition of Force Computers. (ii) an increase in R&D expenditures, primarily to support substantial new business wins across the segment and the addition of Force Computers, (iii) an increase in reorganization of business charges due to an increase in employee severance costs, and (iv) $2 million in charges for in-process research and development related to the acquisition of Force Computers. Although R&D expenditures increased in 2004 compared to 2003, R&D expenditures decreased as percentage of net sales. These decreases in operating results were partially offset by an increase in gross margin, driven by the 19% increase in net sales.

Segment Results—2003 Compared to 2002

      In 2003, the segment’s net sales increased 3% to $2.3 billion, compared to $2.2 billion in 2002. The segment’s backlog was $347 million at December 31, 2003, compared to $308 million at December 31, 2002.

      In 2003, ACES, ESG and ECCG represented 64%, 23% and 13% of the segment’s net sales, respectively. In 2002, ACES, ESG, and ECCG represented 60%, 28% and 12% of the segment’s net sales, respectively.

      In 2003 compared to 2002, ACES’s net sales increased 9%, primarily due to the success of several new electronic controls and telematics products launched during the year. ESG’s net sales decreased 15%, primarily due to reductions in the price of batteries for wireless handsets. ECCG’s net sales increased 17%, reflecting increased demand for commercial, off-the-shelf embedded computing applications.

      A large part of the segment’s business in 2003 was dependent upon other Motorola businesses, primarily the wireless handset business, and three external automotive manufacturers—General Motors, Ford and Daimler Chrysler. Sales to other Motorola businesses accounted for 18% of the segment’s net sales in 2003, as compared to 19% in 2002. The net sales to General Motors, Ford and Daimler Chrysler were 17%, 15% and 13% of the segment’s 2003 net sales, respectively.

      The segment reported operating earnings of $161 million in 2003, compared to operating earnings of $52 million in 2002. The improvement in operating results was primarily related to: (i) a decrease in SG&A expenditures, driven by a reduction in general and administrative expenses, reflecting benefits from prior cost-reduction actions, (ii) a reduction in reorganization of business and other charges, and (iii) an increase in gross margin, reflecting the 3% increase in net sales and a reduction in reorganization of business charges included in

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costs of sales. These improvements were partially offset by an increase in R&D expenditures, primarily due to a reduction in customer-funded R&D.

      In 2003, the segment recorded net income of $1 million related to reorganization of businesses and other charges. This income consisted of a net reversal of $1 million in accruals for exit costs that were no longer needed.

      In 2002, the segment recorded net charges of $58 million related to reorganization of businesses and other charges. These charges primarily consisted of: (i) a $24 million net charge for exit costs, (ii) a $23 million net charge for fixed asset impairments, and (iii) a $20 million net charge for segment-wide employee separation costs, partially offset by a reversal of accruals no longer needed.

Broadband Communications Segment

      The Broadband Communications segment (“BCS”) designs, manufactures and sells a wide variety of broadband products, including: (i) digital systems and set-top terminals for cable television and broadcast networks, (ii) high speed data products, including cable modems and cable modem termination systems, as well as Internet Protocol-based telephony products, (iii) access network technology, including hybrid fiber coaxial network transmission systems and fiber-to-the-premise (“FTTP”) transmission systems, used by cable television operators, (iv) digital satellite television systems, (v) direct-to-home satellite networks and private networks for business communications, and (vi) high-speed data, video and voice broadband systems over existing phone lines. In 2004, BCS net sales represented 7% of the Company’s consolidated net sales, compared to 8% in 2003 and 9% in 2002.

      In January 2004, a decision was made to realign the operations of Next Level Communications, Inc. (“Next Level”), a wholly-owned subsidiary of Motorola, within BCS. The financial results of Next Level have been reclassified from the Other Products segment to BCS for all periods presented.

*** Percent change not meaningful

Segment Results—2004 Compared to 2003

      In 2004, the segment’s net sales increased 26% to $2.3 billion, compared to $1.9 billion in 2003. The increase in overall net sales was primarily due to: (i) increased purchases of digital cable set-top boxes by cable operators, (ii) an increase in ASP due to a mix shift in digital set-top boxes towards higher-end products, and (iii) an increase in retail sales. The increase in net sales reflects net sales growth in all regions, primarily in North America. Net sales in North America continue to comprise a significant portion of the segment’s business, accounting for 83% of the segment’s total net sales in 2004, compared to 85% in 2003. The segment’s backlog was $314 million at December 31, 2004, compared to $299 million at December 31, 2003.

      Demand for the segment’s products depends primarily on the level of capital spending by broadband operators for constructing, rebuilding or upgrading their communications systems and services. In recent prior years, cable operators have decreased their capital spending, primarily in an effort to reduce their overall cost structures and improve their cash flow. In 2004, our cable operator customers increased their purchases of the segment’s products and services, primarily due to increased demand for advanced set-tops to provide high-definition/digital video recording (“HD/ DVR”) functionality. In addition to the increased spending by cable operators, retail sales have increased as consumer demand for high-speed cable access continues to increase.

      In 2004, net sales of digital set-top boxes increased 29%, due to increases in both ASP and unit shipments. The increase in ASP was driven by a product-mix shift towards higher-end products, particularly HD/ DVR set-tops. The increase in unit shipments was primarily due to the increased spending by cable operators. The segment continued to be the worldwide leader in market share for digital cable set-top boxes.

      In 2004, net sales of cable modems increased 20%. The increase in net sales was due to an increase in cable modem unit shipments, which was partially offset by the decline in ASP for cable modems. The decrease in ASP was primarily due to increased competition. The segment retained its leading worldwide market share in cable modems.

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      The segment is dependent upon a small number of customers for a significant portion of its sales. Because of continuing consolidation within the cable industry, a small number of large cable television multiple system operators (“MSOs”) own a large portion of the cable systems and account for a significant portion of the total capital spending. In 2004, net sales to the segment’s top five customers represented 47% of the segment’s total net sales. Net sales to the segment’s largest customer, Comcast, accounted for 30% of the total net sales of the segment. The loss of business from any major MSO could have a significant impact on the segment’s business.

      The segment generated operating earnings of $116 million in 2004, compared to an operating loss of $38 million in 2003. The improvement in operating results was due to: (i) an increase in gross margin, which was due to the 26% increase in net sales, (ii) a $73 million charge for impairment of goodwill related to the infrastructure business that occurred in 2003, and (iii) a decrease in SG&A expenditures. The decrease in SG&A expenditures was primarily due to: (i) a decrease in intangible amortization, and (ii) a decrease in administrative expenses due to benefits from prior cost-reduction actions, partially offset by an increase in employee incentive program accruals. These improvements in operating results were partially offset by a $15 million charge for in-process research and development related to the acquisition of Quantum Bridge in May 2004. Although gross margin increased, the segment’s gross margin as a percentage of net sales decreased, primarily due to sales of new higher-tier products carrying lower initial margins, which is typical of the early phases of the segment’s product life cycles.

      In May 2004, the Company completed the acquisition of Quantum Bridge, a leading provider of FTTP solutions. The acquisition complements Motorola’s existing multiservice technology, enabling the Company to offer a full-service access platform that broadband network operators can deploy to deliver the next generation of advanced services. Motorola plans to integrate Quantum Bridge’s field-proven passive optical networking and carrier-class switching technology into its suite of network infrastructure solutions, enhancing the Company’s market position in the end-to-end delivery of broadband products.

Segment Results—2003 Compared to 2002

      In 2003, the segment’s net sales declined 13% to $1.9 billion, compared to $2.1 billion in 2002. The segment’s backlog was $299 million at December 31, 2003, compared to $324 million at December 31, 2002. In 2003, the segment’s customers significantly reduced their capital spending for the second consecutive year, primarily in an effort to reduce cost structures and improve their cash flow. This was reflected in lower purchases of digital set-top terminals, as well as a reduction in purchases of network transmission systems and equipment. The decrease in the segment’s net sales was driven by this reduction in spending by the segment’s customers. The industry also experienced a reduction in ASP for cable modems.

      On a geographic basis, $1.5 billion, or 84%, of the segment’s net sales were in North America in 2003, compared to $1.8 billion, or 85%, in 2002. Of the $286 million decline in net sales in 2003, the majority was in North America. The decline in North America, and other regions, was driven by the decline in sales of digital set-top box units.

      In 2003, net sales of digital set-top boxes decreased 30% compared to 2002. The decrease in net sales was due to a decrease in unit shipments and ASP. The decline in unit shipments and ASP are consistent with the overall decline in the set-top box industry, and the segment retained its leading market share in North America.

      In 2003, net sales of cable modems increased 3% compared to 2002. The increase in net sales was driven by an increase in unit shipments, which were partially offset by a decrease in ASP. The decrease in ASP for cable modems was primarily due to increased competition in low-end cable modems. The segment retained its leading worldwide market share in cable modems.

      In 2003, the segment was dependent upon a small number of customers for a significant portion of its sales. A small number of large cable television multiple system operators own a large portion of the cable systems and account for a significant portion of the total capital spending in the cable equipment industry. Net sales to the segment’s largest customer, Comcast, accounted for 40% of consolidated net sales of the segment in 2003.

      The segment reported an operating loss of $38 million in 2003, compared to an operating loss of $216 million in 2002. The improvement in operating results was primarily related to a decrease in reorganization of businesses and other charges, partially offset by a decrease in gross margin, reflecting the 13% decline in net sales.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      For the full year 2003, the segment recorded net charges of $67 million related to reorganization of businesses and other charges. These charges primarily consisted of: (i) a $73 million charge for impairment of goodwill related to the infrastructure business, partially offset by a reduction in accruals no longer needed, primarily related to segment-wide employee severance costs.

      For the full year 2002, the segment recorded net charges of $369 million related to reorganization of businesses and other charges. These charges primarily consisted of: (i) a $325 million intangible asset impairment charge relating to a license to certain intellectual property that enables the Company to provide national authorization services for digital set-top terminals, (ii) a $37 million net charge for segment-wide employee separation costs, and (iii) an $11 million charge for in-process research and development related to the acquisition of Synchronous, Inc., partially offset by the recognition of a pension curtailment gain of $13 million related to the General Instrument pension plan.

Other

      Other is comprised of the Other Products segment and general corporate items. The Other Products segment includes: (i) various corporate programs representing developmental businesses and research and development projects that are not included in any major segment, and (ii) Motorola Credit Corporation, the Company’s wholly-owned finance subsidiary.

      In January 2004, a decision was made to realign the operations of Next Level Communications, Inc. (“Next Level”), a wholly-owned subsidiary of Motorola, within BCS. The financial results of Next Level have been reclassified from the Other Products segment to BCS for all periods presented.

Segment Results—2004 Compared to 2003

      In 2004, the segment’s net sales increased 20% to $387 million, compared to $323 million in 2003. The Other Products segment’s net sales are predominantly to other Motorola businesses.

      The segment had an operating loss of $393 million in 2004, compared to an operating loss of $141 million in 2003. The decline in operating results was primarily due to: (i) a $125 million goodwill impairment charge related to a sensor business that occurred in 2004, (ii) income of $69 million from the reversal of accruals no longer needed due to a settlement with the Company’s insurer on items related to previous environmental claims that occurred in 2003, (iii) income of $59 million due to a reversal of accruals no longer needed related to the Iridium project that occurred in 2003, (iv) income of $33 million on the gain from the sale of Iridium-related assets that were previously written down that occurred in 2003, (v) an $11 million increase in reorganization of business charges in 2004, primarily due to an increase in employee severance charges. These items were partially offset by $44 million in income in 2004 from the reversal of financing receivable reserves due to the partial collection of a previously-uncollected receivable.

Segment Results—2003 Compared to 2002

      In 2003, the segment’s net sales decreased 25% to $323 million, compared to $430 million in 2002. The Other Products segment’s net sales are predominantly to other Motorola businesses.

      The segment incurred an operating loss of $141 million in 2003, compared to an operating loss of $487 million in 2002. The improvement in operating results was primarily related to: (i) a decrease in reorganization of business and other charges, and (ii) a decrease in SG&A and R&D expenditures resulting from the benefits from cost-reduction activities.

      For the full year 2003, the segment recorded net income of $151 million related to reorganization of businesses and other charges. This net income primarily consisted of: (i) income of $69 million from the reversal of accruals no longer needed due to a settlement with the Company’s insurer on items related to previous environmental claims that occurred in 2003, (ii) income of $59 million due to a reversal of accruals no longer

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OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

needed related to the Iridium project that occurred in 2003, and (iii) income of $33 million on the gain on the sale of Iridium-related assets that were previously written down that occurred in 2003.

      For the full year 2002, the segment recorded net charges of $34 million related to reorganization of businesses and other charges. These net charges primarily consisted of: (i) $56 million in net charges for fixed asset impairments, (ii) $46 million in net charges for segment-wide employee separation costs, and (iii) $16 million in net charges for exit costs, partially offset by: (i) income of $63 million for Iridium vendor termination settlements and the related reduction of accruals no longer needed, and (ii) income of $24 million for the reduction of accruals no longer needed due to the settlement with the Company’s insurer on items related to previous environmental claims.

2005 Change in Organizational Structure

      In December 2004, the Company announced a reorganization of its businesses and functions to align with the Company’s seamless mobility strategy, which was effective on January 1, 2005. The Company will be organized into four main business groups, focused on mobile devices, networks, government and enterprise, and the connected home. The Mobile Devices business will be primarily comprised of the current Personal Communications segment and the Energy Systems group from the Integrated Electronic Systems segment (“IESS”). The Networks business will be primarily comprised of the current Global Telecom Solutions segment, the Embedded Computing and Communications group from IESS, and the next-generation wireline networks business from the Broadband Communications segment (“BCS”). The Government and Enterprise business will be primarily comprised of the current Commercial, Government and Industrial Solutions segment and the Automotive Communications and Electronics Systems group from IESS. The Connected Home business will be primarily comprised of the current BCS, excluding the next-generation wireline networks business. In addition, the Company’s key support functions, including supply-chain operations, information technology, finance, human resources, legal, strategy and business development, marketing, quality and technology will be architected centrally and distributed throughout the Company. The Company will be aligned into these four main operating segments with the analysis of reportable segments to be completed in the first quarter of 2005.

Significant Accounting Policies

      Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period.

      Management bases its estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following significant accounting policies require significant judgment and estimates:

   — Valuation of investments and long-lived assets

   — Restructuring activities

   — Allowance for losses on finance receivables

   — Retirement-related benefits

   — Long-term contract accounting

   — Deferred tax asset valuation

   — Inventory valuation reserves

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Valuation of Investments and Long-Lived Assets

      The Company assesses the impairment of investments and long-lived assets, which includes identifiable intangible assets, goodwill and property, plant and equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which could trigger an impairment review include: (i) underperformance relative to expected historical or projected future operating results; (ii) changes in the manner of use of the assets or the strategy for our overall business; (iii) negative industry or economic trends; (iv) declines in stock price of an investment for a sustained period; and (v) our market capitalization relative to net book value.

      When the Company determines that the carrying value of intangible assets, goodwill and long-lived assets may not be recoverable, an impairment charge is recorded. Impairment is generally measured based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model or prevailing market rates of investment securities, if available.

      At December 31, 2004 and 2003, the net book values of these assets were as follows (in millions):

      The Company did not record any fixed asset impairment charges in 2004, compared to charges of $10 million in 2003. The 2003 charges primarily related to certain information technology equipment that was deemed to be impaired.

      The Company recorded impairment charges related to its investment portfolio of $36 million and $96 million in 2004 and 2003, respectively, representing other-than-temporary declines in the value of the Company’s investment portfolio. The $96 million impairment charge in 2003 was primarily comprised of a $29 million charge to write down to zero the Company’s debt security holding in a European cable operator and other cost-based investment writedowns. Additionally, the available-for-sale securities portfolio reflected a net pre-tax unrealized gain position of $2.3 billion at December 31, 2004, compared to a net pre-tax unrealized gain position of $2.4 billion at December 31, 2003.

      The Company performs a goodwill impairment test at the reporting unit level as of October 1 each year, or more often should triggering events occur. In determining the fair value of the reporting unit, the Company utilizes independent appraisal firms who employ a combination of present value techniques and quoted market prices of comparable businesses. During 2004, the Company determined that goodwill related to a sensor business within the Other Products segment was impaired, resulting in a write-off of goodwill totaling $125 million. During 2003, the Company determined that the goodwill at the infrastructure reporting unit of the Broadband Communications segment was impaired by $73 million.

      The Company cannot predict the occurrence of future impairment-triggering events nor the impact such events might have on these reported asset values. Such events may include strategic decisions made in response to the economic conditions relative to product lines or operations and the impact of the economic environment on our customer base.

Restructuring Activities

      The Company records provisions for employee separation and exit costs when they are probable and estimable. The Company maintains a formal Involuntary Severance Plan (“Severance Plan”) which permits Motorola to offer to eligible employees severance benefits based on years of service in the event that employment is involuntarily terminated as a result of a reduction-in-force or restructuring. Each separate reduction-in-force has qualified for severance benefits under the Severance Plan and, therefore, such benefits are accounted for in accordance with SFAS 112, “Accounting for Postemployment Benefits”. Under the provisions of SFAS 112, the Company recognizes termination benefit formulas per the Severance Plan at the point in time that future settlement is probable and can be reasonably estimated based on estimates prepared at the time a restructuring plan is approved by management.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Exit costs primarily consist of future minimum lease payments on vacated facilities. At each reporting date, the Company evaluates its accruals for exit costs and employee separation costs to ensure the accruals are still appropriate. In certain circumstances, accruals are no longer required because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were initiated. The Company reverses accruals through the Reorganization of Businesses income statement line item when it is determined they are no longer required.

Allowance for Losses on Finance Receivables

      The Company has historically provided financing to certain customers in connection with purchases of the Company’s infrastructure equipment. Financing provided has included all or a portion of the equipment purchase price, as well as working capital for certain purchasers.

      Gross financing receivables were $2.1 billion at December 31, 2004 and $2.4 billion at December 31, 2003, with an allowance for losses on these receivables of $2.0 billion and $2.1 billion, respectively. Of the receivables at December 31, 2004, $2.0 billion ($7 million, net of allowance for losses of $2.0 billion) were considered impaired based on management’s determination that the Company will be unable to collect all amounts in accordance with the contractual terms of the relevant agreement. By comparison, impaired receivables at December 31, 2003 were $2.2 billion ($133 million, net of allowance for losses of $2.1 billion).

      At December 31, 2004 and 2003, the Company had $1.9 billion and $2.0 billion of gross receivables from one customer, Telsim. The decline represents partial recovery of amounts owed of $44 million due to collection efforts during 2004. As a result of difficulties in collecting the amounts due from Telsim, the Company has previously recorded charges reducing the net receivable from Telsim to zero.

      Management periodically reviews customer account activity in order to assess the adequacy of the allowances provided for potential losses. Factors considered include economic conditions, collateral values and each customer’s payment history and credit worthiness. Adjustments, if any, are made to reserve balances following the completion of these reviews to reflect management’s best estimate of potential losses. The resulting net finance receivable balance is intended to represent the estimated realizable value as determined based on: (i) the fair value of the underlying collateral, if the receivable is collateralized, or (ii) the present value of expected future cash flows discounted at the effective interest rate implicit in the underlying receivable.

Retirement-Related Benefits

      The Company accounts for its pension benefits and its postretirement health care benefits using actuarial models required by SFAS No. 87, “Employers’ Accounting for Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” respectively. These models use an attribution approach that generally spreads individual events over the service lives of the employees in the plan. Examples of “events” are plan amendments and changes in actuarial assumptions such as discount rate, expected long-term rate of return on plan assets, and rate of compensation increases. The principle underlying the required attribution approach is that employees render service over their service lives on a relatively consistent basis and, therefore, the income statement effects of pension benefits or postretirement health care benefits are earned in, and should be expensed in, the same pattern.

      There are various assumptions used in calculating the net periodic benefit expense and related benefit obligations. One of these assumptions is the expected long-term rate of return on plan assets. The required use of expected long-term rate of return on plan assets may result in recognized pension income that is greater or less than the actual returns of those plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and therefore result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by the employees. Differences between actual and expected returns are recognized in the net periodic pension calculation over five years.

      The Company uses long-term historical actual return experience with consideration of the expected investment mix of the plans’ assets, as well as future estimates of long-term investment returns to develop its expected rate of return assumption used in calculating the net periodic pension cost and the net retirement healthcare expense. The Company’s investment return assumption for the Regular Pension Plan and Postretirement Health Care Benefits

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Plan was 8.50% in both 2004 and 2003. The investment return assumption for the Officers’ Pension Plan was 6.00% in both 2004 and 2003.

      A second key assumption is the discount rate. The discount rate assumptions used for pension benefits and postretirement health care benefits accounting reflects, at December 31 of each year, the prevailing market rates for high-quality, fixed-income debt instruments that, if the obligation was settled at the measurement date, would provide the necessary future cash flows to pay the benefit obligation when due. The Company’s discount rate for measuring the obligations was 6.00% at December 31, 2004, compared to 6.50% at December 31, 2003.

      A final set of assumptions involves the cost drivers of the underlying benefits. The rate of compensation increase is a key assumption used in the actuarial model for pension accounting and is determined by the Company based upon its long-term plans for such increases. In both 2004 and 2003, the Company’s rate for future compensation increase was 4.00% for non-officer employees and 3.00% for officers. For retiree medical plan accounting, the Company reviews external data and its own historical trends for health care costs to determine the health care cost trend rates. Based on this review, the health care cost trend rate used to determine the December 31, 2004 accumulated postretirement benefit obligation was 10% for 2005 with a declining trend rate of 1% each year until it reaches 5% by 2010, with a flat 5% rate for 2010 and beyond.

      At December 31, 2004, the Regular Pension Plan investment portfolio was predominantly equity investments and the Officers’ Pension Plan investment portfolio was predominantly fixed-income securities.

      Negative financial market returns during 2000-2002 resulted in a decline in the fair-market value of plan assets. This, when combined with declining discount rate assumptions in the last several years, has resulted in a decline in the funded status of the Company’s domestic and certain non-U.S. plans. Consequently, the Company’s accumulated benefit obligation for various plans exceeded the fair-market value of the plan assets for these plans at December 31, 2004. The Company recorded a non-cash, after-tax, net charge of $188 million to equity relating to the Regular Pension Plan, the Officers’ Pension Plan, and certain non-U.S. subsidiaries retirement programs in the fourth quarter of 2004. This charge was included in Non-Owner Changes to Equity in the consolidated balance sheets, and did not impact the Company’s pension expense, earnings or cash contribution requirements in 2004.

      For the Regular Pension Plan, the Company currently estimates 2005 expenses for continuing operations will be approximately $173 million. The 2004 and 2003 actual expenses, which include discontinued operations, were $167 million and $137 million, respectively. Cash contributions of $580 million were made to the Regular Pension Plan in 2004. The Company expects to make cash contributions of $150 million to this plan during 2005. In addition, the Company expects to make cash contributions of $45 million to its Non U.S. pension plans in 2005.

      For the Postretirement Health Care Benefits Plan, the Company currently estimates 2005 expenses for continuing operations will be approximately $35 million. The 2004 and 2003 actual expenses, which include discontinued operations, were $39 million and $43 million, respectively. The Company has partially funded its accumulated benefit obligation of $544 million with Plan assets valued at $188 million at December 31, 2004. Excluded from these accumulated benefit obligations was $217 million, representing post-retirement health care benefit obligations transferred to Freescale Semiconductor, Inc. (“Freescale Semiconductor”) following the spin-off on December 2, 2004. In addition, Motorola is obligated to transfer to Freescale Semiconductor $68 million in cash or plan assets, as permitted by law without adverse tax consequences to Motorola, with such transfer expected to occur in 2005. No cash contributions were required in 2004, 2003 or 2002. The Company expects to make a cash contribution of approximately $50 million to the retiree health care plan in 2005.

      The impact on the future financial results of the Company in relation to retirement-related benefits is dependent on economic conditions, employee demographics, interest rates and investment performance. The Company’s measurement date of its plan assets and obligations is December 31. Thus, during the fourth quarter of each year, management reviews and, if necessary, adjusts the assumptions associated with its benefit plans.

Long-Term Contract Accounting

      The Company applied the percentage-of-completion methodology as stated in Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” to recognize revenues on various long-term contracts involving proven technologies representing approximately 9% of the Company’s net sales in 2004. These contracts primarily involve the design, engineering, manufacturing, and installation of wireless infrastructure communication systems by GTSS and two-way radio voice and data systems by CGISS. These systems are designed to meet specific customer specifications and typically require an extended period of time to construct.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      The Company executes contracts with customers that describe the equipment and system specifications to be delivered, including the consideration to be received. Revenue is recognized as work progresses on each contract and is based on the percentage of costs incurred to date compared to the total estimated contract costs. Estimates of total contract costs and progress toward completion of each contract are prepared using estimates and judgments based on historical experience and on other factors believed to be relevant under the circumstances. Management regularly assesses normal, recurring business risks and uncertainties inherent in these customer contracts and considers the impact, if any, of these uncertainties in the preparation of contract estimates. These uncertainties may include system performance and implementation delays resulting from events both within and outside the control of the Company. Losses on individual contracts, if any, are recognized during the period in which the loss first becomes evident.

      Changes in these estimates could negatively impact the Company’s operating results. In addition, unforeseen conditions could arise over the contract term that may have a significant impact on the operating results. It is reasonably likely that different operating results would be reported if the Company used other acceptable revenue recognition methodologies, such as the completed-contract method, or applied different assumptions.

Deferred Tax Asset Valuation

      The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax-planning strategies. If the Company is unable to generate sufficient future taxable income in certain tax jurisdictions, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, the Company could be required to increase its valuation allowance against its deferred tax assets resulting in an increase in its effective tax rate and an adverse impact on operating results.

      At December 31, 2004 and 2003, the Company’s deferred tax assets related to U.S. tax carryforwards were $1.5 billion and $1.2 billion, respectively. The tax carryforwards are comprised of net operating loss carryforwards, foreign tax credit and other tax credit carryovers. A majority of the net operating losses and other tax credits can be carried forward for 20 years. The carryforward period for foreign tax credits was extended to ten years, from five years, during 2004 due to the enactment of the American Jobs Creation Act of 2004.

      The Company has recorded valuation allowances for certain state deferred tax assets, state tax loss carryforwards with carryforward periods of seven years or less, tax loss carryforwards of acquired entities that are subject to limitations and tax loss carryforwards of certain non-U.S. subsidiaries. The Company believes that the deferred tax assets for the remaining tax carryforwards are considered more likely than not to be realizable based on estimates of future taxable income and the implementation of tax planning strategies.

Inventory Valuation Reserves

      The Company records valuation reserves on its inventory for estimated obsolescence or unmarketability. The amount of the reserve is equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. On a quarterly basis, management in each segment performs an analysis of the underlying inventory to identify reserves needed for excess and obsolescence and for the remaining inventory assesses the net realizable value. Management uses its best judgment to estimate appropriate reserves based on this analysis.

      Net Inventories consisted of the following: