ZEBRA TECHNOLOGIES CORP/DE - 10-K Annual Report

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Zebra Technologies Corporation
(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share

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 ý Noo

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 the 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. ý

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

As of February 25, 2003, the aggregate market value of each of the registrant's Class A Common Stock and Class B Common Stock held by non-affiliates was approximately $1,713,930,000 and $54,229,000, respectively. The closing price of the Class A Common Stock on February 25, 2003, as reported on the Nasdaq Stock Market, was $62.01 per share. Because no market exists for the Class B Common Stock and the shares of Class B Common Stock are convertible on a one-for-one basis into shares of Class A Common stock, the registrant has assumed for purposes hereof that each share of Class B Common Stock has a market value equal to one share of Class A Common Stock.

As of February 25, 2003, the registrant had outstanding 27,314,296 shares of Class A Common Stock, par value $.01 per share, and 3,881,956 shares of Class B Common Stock, par value $.01 per share.

Certain sections of the registrant's Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on May 20, 2003, as described in the Cross-Reference Sheet and Table of Contents included herewith, are incorporated by reference into Part III of this report.

		PAGE
PART I
Item 1.	Business	3
Item 2.	Properties	12
Item 3.	Legal Proceedings	12
Item 4.	Submission of Matters to a Vote of Security Holders	13
PART II
Item 5.	Market for Registrant's Common Stock and Related Stockholder Matters	14
Item 6.	Selected Consolidated Financial Data	14
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 8.	Financial Statements and Supplementary Data	28
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	28
PART III
Item 10.	Directors and Executive Officers of the Registrant	28
Item 11.	Executive Compensation	28
Item 12.	Security Ownership of Certain Beneficial Owners and Management	28
Item 13.	Certain Relationships and Related Transactions	29
Item 14.	Disclosure Controls and Procedures	29
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	29
SIGNATURES
Signatures	30
EXHIBITS
Index to Exhibits	33
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Index to Consolidated Financial Statements and Schedule	F-1

Forward-looking statements contained in this filing are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995 and are highly dependent upon a variety of important factors which could cause actual results to differ materially from those reflected in such forward looking statements. These factors include market acceptance of the Company's printer and software products and competitors' product offerings. They also include the effect of market conditions in North America and other geographic regions on the Company's financial results. Profits will be affected by the Company's ability to control manufacturing and operating costs. Because of the Company's large investment portfolio, interest rate and financial market conditions will also have an impact on results. Foreign exchange rates will have an effect on financial results due to the large percentage of the Company's international sales. When used in this document and documents referenced, the words "anticipate," "believe," "estimate," "will" and "expect" and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. Readers of this report are also encouraged to review the Risk Factors portion of Management's Discussion and Analysis of Financial Condition and Results of Operations, which discusses additional risks. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this annual report.

Zebra Technologies Corporation and its wholly-owned subsidiaries (the Company or Zebra) design, manufacture and support a broad range of direct thermal and thermal transfer bar code label and receipt printers, plastic card printers, related accessories and support software. The Company markets its products worldwide principally to manufacturing and service organizations and governments for use in applications for automatic identification, data collection and personal identification.

The Company's equipment is designed to operate at the user's location or on a mobile basis to produce and dispense high-quality labels and plastic cards in time-sensitive applications and under a variety of environmental conditions. Applications for the Company's products are extremely diverse, primarily in the areas of routing and tracking, transactions processing, and identification and authentication. They include applications where barcoding is used to identify or track objects or information, particularly in situations that require high levels of data accuracy and where speed and reliability are critical. They also include specialty printing for receipts and tickets where improved customer service and productivity gains may be the primary reason for printing, rather than a barcoding application. Plastic cards are used for secure, reliable personal identification or access control often on an on-demand basis.

Applications for the Company's technology span virtually all industries and geographies. They include, but are not limited to, inventory control, small package delivery, baggage handling, automated warehousing, JIT (Just-In-Time) manufacturing, employee time and attendance records, file management systems, hospital information systems, medical specimen labeling, shop floor control, in-store product labeling, employee ID cards, driver's licenses, and access control systems. As of December 31, 2002, management estimates that almost 3,000,000 Zebra printers were installed in approximately 100 countries throughout the world.

The Company believes competitive forces on businesses worldwide to strengthen security, reduce costs, improve quality, improve customer service, and increase productivity support the growth of its bar code labeling solutions and specialty printing business. Industry-mandated standardization for

compliance labeling is an important catalyst in the deployment of bar code systems. Zebra further believes that companies are also adopting automatic identification systems incorporating barcoding for business improvement applications. Many of these applications make increasing use of enterprise-wide resource planning (ERP) and other process improvement systems in manufacturing and service organizations. The Company believes that greater emphasis on supply chain management, the drive to reduce errors in health care, and heightened concern over safety and security will lead to increased use of automatic identification systems. Still other applications are taking advantage of recent advances in wireless and hand-held computing technologies.

Concern for safety and security and personal identification contribute to demand for the Company's card printer products. This concern has heightened interest in systems that provide personal identification and access control, including secure ID systems for driver's licenses, employee and visitor badges, national identification cards, event passes, club membership cards, and keyless entry systems.

On October 28, 1998, the Company merged with Eltron International, Inc., which manufactured and marketed high-quality, low-cost direct thermal and thermal transfer bar code label printers, card printers, ribbons, self-adhesive labels and related accessories. Financial results for the Company for the periods prior to the merger were restated to reflect the merger as a pooling-of-interests transaction.

On April 3, 2000, Zebra acquired Comtec Information Systems, Inc. for $88,476,000 in cash. Located in Warwick, Rhode Island, Comtec was a privately held company that designed, manufactured and supported a complete line of mobile wireless thermal printing solutions. Since the acquisition, the Company consolidated all mobile printing systems under the Zebra® brand.

The Company completed its initial public offering in August 1991. Zebra is organized under the laws of the State of Delaware, and its principal offices are located at 333 Corporate Woods Parkway, Vernon Hills, Illinois 60061. The Company's telephone number is (847) 634-6700 and its internet web site address is WWW.ZEBRA.COM. All of the Company's filings with the Securities and Exchange Commission are available free of charge through the Investor page on this web site, immediately upon filing.

The Company's products consist of a broad line of computerized printers for the production of bar code labels, receipts and tags, and plastic cards, specialty bar code labeling materials, ink ribbons for bar code and card printers, and bar code label design software. These products are used to provide bar code labeling, personal identification, and specialty printing solutions principally in the manufacturing, retail, service, and government sectors of the economy. The Company's equipment and supplies are designed to operate at the user's location under a variety of work environments. The Company works closely with distributors, resellers and end users of its products to design and implement labeling solutions that meet the technical demands of the end user. To achieve this flexibility, the Company provides its customers with a broad selection of printer models, each of which can be configured for a specific application. Additionally, the Company will select and, if necessary, create appropriate labeling stock, ink ribbons and adhesives to suit a particular application. In-house engineering personnel in software, mechanical, electronic and chemical engineering participate in the creation and development of bar code labeling solutions for particular applications.

Zebra markets its line of bar code label and receipt printers under the Zebra brand. The Company produces the industry's broadest range of on-demand thermal transfer and direct thermal bar code label printers. Zebra's printing systems include hundreds of optional configurations that can be selected to meet particular customer needs. The Company believes this breadth of product is a unique and

significant competitive strength, because it allows the Company to satisfy the wide variety of printing applications in its target market.

The Company offers 40 bar code printer models. At December 31, 2002, the Company's main printer product offerings were as follows:

Performance Tabletop Printers. At the high end of the label printer market, Zebra produces printers targeted at applications requiring continuous operation in high output, mission-critical settings. These units provide a wide variety of optional configurations, features, print widths, speeds and dot densities, including the industry's only standard 600-dpi printer. The Company offers five Zebra models under its XiIII Plus Series line. List prices range from $4,295 to $7,495.

Zebra also manufactures and markets the R-140 and R402 Printer/Encoder. The R-140 and R402 print and encode "smart labels," which are printable labels embedded with an ultra-thin radio frequency transponder, in a single pass. Information encoded in these transponders can then be read and modified by a radio frequency reader. The R-140 and R402 are targeted at the developing market for radio frequency identification (RFID), where line-of-sight reading or scanning a label may not be possible and appending information to the label is important. List prices are $5,695 for the R-140 and $1,695 for the R402.

Mid-Range Tabletop Printers. The Company offers seven printer models designed for less demanding applications. These units offer fewer option configurations and features for a commensurate lower price. Products in this category consist of the Zebra Stripe®, S and Z Series as well as the TLP 2746 and LP/TLP 2684 (Strata) printers. List prices range from $1,395 to $2,995.

Desktop Printers. Applications with low volume suit the Company's desktop printers. Zebra currently offers nine desktop models consisting of the Ht-146, DA402, T402, LP/TLP 2844, LP 2824, LP 2443 (Orion®), LP/TLP 2722, LP/TLP 2742, and TLP 3742 printers. List prices range from $395 to $995.

Mobile Printing Solutions. The Company offers 15 mobile printer models, which provide durability, light weight and wireless connectivity interfaces. These printers print in 2-, 3- and 4-inch widths and are marketed under the Cameo, Encore, QL and PA/PT lines. List prices range from $575 to $1,825.

Print Engines. Zebra's 170PAX3 and 110PAX3 print engines are targeted at manufacturers of high-speed automatic label applicator systems. List prices range from $3,200 to $4,250.

In addition to their use in on-demand automatic identification applications, the Company's bar code label printers can also be used to meet customers' needs for on-site production of small or large quantities of custom bar code labels and other graphics. This capability results in shorter lead times, reduced inventory and more flexibility than can be provided with traditional off-site printing. Management believes that of the major printing technologies, which include ink jet, laser and impact dot matrix, direct thermal and thermal transfer are best suited for most bar code labeling applications. Thermal transfer printing produces dark, solid blacks and sharply defined lines that are important for printing readily scannable bar codes. These images can be printed on a wide variety of labeling materials, which enable users to affix bar code labels to virtually any object. This capability is very important in the industrial and service markets served by the Company. Direct thermal printing is best suited where simplicity, light weight and cost are important factors in the application. Accordingly, this technology is found principally in the Company's wireless and desktop units.

The Company offers seven card printers. Uses for plastic cards printed by these systems include national identity cards, driver's licenses, employee identification badges, smart cards, on-demand access control cards, and customer loyalty card applications. Users can select from a number of printer

options, including monochrome and color printing, single- and two-sided printing, lamination, and magnetic stripe and smart card encoding. The Company's P205, P210, P310, P320i, P420, P520 and P720 plastic card printers are marketed under the Eltron® brand. List prices range from $1,695 to $9,995.

Sales of hardware (bar code and plastic card printers and replacement parts) totaled $360,185,000 in 2002, $339,895,000 in 2001, and $378,093,000 in 2000. These sales represented 75.7%, 75.6%, and 78.5% of net sales in 2002, 2001, and 2000, respectively.

The Company sells supplies, which consist of stock and customized thermal labels and tags, plastic cards, card laminates, and thermal transfer ribbons, to both new and current users of its label and plastic card printing systems worldwide. Zebra promotes the use of genuine Zebra brand supplies with its equipment.

Zebra fully supports its printers, resellers and end users with an extensive line of superior quality, high performance supplies optimized to a particular user's needs. Supplies are chosen in consultation with the reseller and end user based on the specific application, printer and environment in which the labeling system must perform. In the case of bar code labeling solutions, the Company's supplies also include proprietary ribbon and label formulations developed according to the Company's specifications and designed to maximize printer performance and meet the most demanding end user performance criteria. Factors such as adhesion, resistance to scratches, smudges and abrasion and chemical and environmental exposures are all taken into account when selecting the type of ribbon and labeling materials. The use of supplies that are not carefully matched to specific printers can adversely affect printer performance in terms of print speed, and print quality.

Sales of the Company's supplies were $87,981,000 in 2002, $85,266,000 in 2001, and $81,045,000 in 2000 and represented 18.5%, 18.9%, and 16.8% of net sales, respectively.

The Company offers high-performance label design and integration software specifically designed to optimize the performance of Zebra bar code label printers. Known as BAR-ONE®, this software provides the capability to design and integrate sophisticated labels from standalone or legacy applications through a powerful, easy-to-use Windows® interface.

The Company's goal is to provide software that enables high levels of connectivity to all major computer network and software systems. These networks include Ethernet, 802.11 and Bluetooth™ wireless systems and various IBM® systems. Software systems include SAP® and other ERP systems, warehouse management systems (WMS), Windows, Unix® and Linux®. Under an agreement with Accelio Corporation, a provider of electronic forms, workflow and output management software applications, Zebra offers BAR-ONE with Accelio Present Central® (formerly JetForm Central™). This software package enables Zebra printers to receive output directly from many of the popular software packages on the market, including the increasingly used ERP software, without the need to write costly software interfaces. Zebra also offers a BAR-ONE for SAP/R3, which enables users of the SAP/R3 ERP system to print directly to Zebra printers without the need for middleware. To expand the global applications for its software and printers, the Company is developing multi-lingual capabilities in its software and user interfaces.

The goal of improving connectivity has also led to the development and introduction of ZebraLink. This multi-purpose software tool gives users the ability to set up and control Zebra printers remotely using Web-enabled devices. It also enables Zebra printers to provide real-time printer error and status notification via e-mail to a wired or wireless device. In addition, ZebraLink's programming language, ZBI, can be used to control and interpret incoming text and data streams. ZBI gives users the ability to

configure Zebra printers to interpret various non-Zebra printer based languages, as well as to set up operations in which a bar code label printer is needed and eliminate a computer hook-up.

For bar code label and receipt printers, the Company provides service at depot repair centers at its Vernon Hills, Illinois, Camarillo, California, Warwick, Rhode Island, and Preston, U.K. facilities as well as at its Zebra Authorized Service Provider (ZASP) locations. In addition, IBM, Optimal Systems Services and National Service Center (NSC) provide on-site repair services. The Company shares the revenue for on-site service contracts sold by IBM, Optimal and NSC for Zebra printing systems installed in the United States, and with IBM in Europe. Outside of the United States, the Company's distributors in each country provide maintenance service, either directly as ZASPs or through independent service agents. Zebra also provides service and technical support assistance from in-house support personnel located in the United States, the United Kingdom and Singapore, who are available by telephone hotline five days a week during regular business hours. Also, for most Zebra products, the Company provides interactive technical support via the Internet, which can be accessed through the Company's Web site, http://www.zebra.com, 24 hours a day, seven days a week.

The card printer depot repair facilities are located in Camarillo, California and Varades, France, and IBM performs on-site repair services in the United States and Europe. Card printer users can receive technical support assistance from in-house support personnel located in the United States, the United Kingdom, Singapore and France, who are available by telephone during regular business hours. In addition, on-line support for card printers can be accessed through the Web site, http://www.eltroncards.com, 24 hours a day, seven days a week.

All Zebra printing equipment is warranted against defects in material and workmanship for up to one year. Zebra supplies are warranted against defects in material and workmanship for their stated shelf life or twelve months, whichever ends first. Defective equipment and supplies may be returned to the Company for repair, replacement or refund during the applicable warranty periods.

The Company's products use thermal transfer, direct thermal and thermal die sublimation technologies. Each technology has characteristics that provide specific benefits to the end user.

Thermal transfer printing is used in all performance and some mid-range, desktop and portable bar code label printers, as well as the Company's high-speed print engines. This technology creates an image by applying an electrically heated printhead to a ribbon that releases ink onto labeling/ticketing media. The benefits of thermal transfer printing include superior image quality, the ability to print on a wide variety of smooth-surfaced materials, no requirement for specially coated or otherwise specially formulated labeling/ticketing media and the ability to use inks that are not viable with alternative printing technologies.

Direct thermal printing is used in some mid-range, desktop and portable printer products. Direct thermal printing creates an image by applying the heated printhead directly to specially treated paper, which changes color when heated. Direct thermal technology is preferable where image durability is less critical and where the application does not require specialty-labeling materials such as plastics or metal foils.

The Company's plastic card printers incorporate thermal dye sublimation for color printing on polyvinyl chloride (PVC) and polyester cards. This capability allows for the creation of personalized full color, photographic quality plastic cards. These cards can typically be created in less than 30 seconds for under one dollar each. Traditional photographic processes are both more expensive and time

consuming. The Company believes that personalized card applications such as driver's licenses, loyalty cards, school and work identification cards, security access cards and financial transaction cards are well suited to this technology. Bar codes, smart chips and magnetic stripe encoding can be used to record such personal data as health records, financial transactions, security access codes and vital statistics.

Zebra's printing systems incorporate Company-designed computer hardware, electrical mechanisms and software, which operate the printing functions of the system and communicate with the host computer. Zebra's bar code label printers operate using Zebra Programming Language (ZPL®), Zebra Programming Language II (ZPL II®), Eltron Programming Language (EPL) or Comtec Printer Control Language (CPCL), each of which is a proprietary printer driver language. These languages are compatible with virtually all computer operating systems, including UNIX, MS/DOS® and Windows.

The Company guarantees backward compatibility in ZPL and ZPL II to allow users to replace older Zebra printers with newer equipment without costly reprogramming of label design programs. This compatibility also allows users to operate multiple Zebra printers in different applications using standardized programs and to integrate these printers into a local area network. Management believes that ZPL and ZPL II give the Company a competitive advantage by ensuring compatibility across a broad range of the Company's present and future printer products and by facilitating system upgrades and customer loyalty to Zebra products. Some independent software vendors have written label preparation programs with ZPL and ZPL II drivers specifically for Zebra printers. ZPL and ZPL II label format programs can be run on a personal computer with ordinary word processing programs, making ZPL and ZPL II particularly adaptable to PC-based systems.

Users of Zebra's instant-issuance plastic card printers typically operate these printers with software programs designed and sold by independent vendors.

Sales. The Company sells its products in the United States and internationally through distributors, value-added resellers (VARs), original equipment manufacturers (OEMs), international customers and directly to a small number of designated key accounts. For supplies, the Company also sells directly to end users through the Internet and telemarketing operations. Distributors and VARs purchase, warehouse and sell a variety of automatic identification components from different manufacturers and customize systems for end-user applications using their systems integration expertise. Because these sales channels provide specific software, configuration, installation, integration and support services required by end users within various market segments, these relationships allow the Company to reach end users throughout the world in a wide variety of industries. The Company does not experience significant seasonality.

The Company classifies its direct VARs as either Premier Partners or Solution Partners, depending on the size and commitment to Zebra products of a particular VAR. In addition, Zebra offers VARs the opportunity to earn certifications for mobile printers, supplies and service. The Company also sells through distributors, which in turn sell to smaller VARs who may be a part of the Zebra Solutions Associate program. Both categories of VARs, as well as OEMs and systems integrators, provide customers with a variety of automatic identification components including scanners, accessories, applications software and systems integration expertise, and, in the case of some OEMs, then resell the products under their own brands as part of their own product offering. The Company believes that the breadth of this indirect channel network, both in terms of variety and geographic scope, enhances its ability to compete.

In some instances, the Company may designate a customer of label and receipt printers as a key account when purchases of Company products reach specified levels. Zebra sales personnel, either alone or together with the Company's distribution partners, manage these key accounts to ensure their needs, including consistent support for projects and applications, are being met.

Sales to international customers comprised 43.2% of net sales in 2002, 40.0% of net sales in 2001, and 37.4% of net sales in 2000. The Company's products are distributed in about 100 countries throughout the world. Management believes that international sales have the long-term potential to grow faster than domestic sales because of the lower penetration of bar code systems outside the United States. As a result, the Company has invested resources to support its international growth and currently operates facilities and sales offices, or has representation, in 18 different countries.

Marketing. The Company's marketing operations include product management, marketing communications, training, market research and channel marketing functions. The product management group initiates the development of new products and product enhancements and manages product introductions and positioning. The product management group also focuses on strategic planning and market definition and analyzes the Company's competitive strengths and weaknesses.

The marketing communications group operates as an internal advertising and public relations resource. This group, working with advertising agencies and contractors, creates advertisements, and brochures, manages trade show exhibits, maintains the Company's Web sites, and places articles highlighting applications of Zebra products in trade and industry publications.

The Company's market research group is a strategic planning, research-oriented group that focuses on market definition and analysis of the Company's relative competitive strengths and weaknesses. This group identifies and analyzes market opportunities for current, planned and potential products and gathers and analyzes competitive and market information.

The channel marketing group is responsible for the development of new market opportunities and relationships with key customers, vendors and government regulatory and industry standards committees. This group also prepares speeches, application training programs and seminars, which are presented around the world to industry and customer groups.

The Company estimates that almost 3,000,000 bar code label and plastic card printers were installed in approximately 100 countries as of December 31, 2002.

Sales to ScanSource, Inc. accounted for 13.6% of net sales in 2002. No customer accounted for 10% or more of net sales in 2001 or 2000.

The Company's strategy is to produce designs that optimize product performance, quality, reliability, durability and versatility. These designs use cost-efficient materials, sourcing and assembly methods with high standards of workmanship. The Company has pursued a manufacturing strategy of control over the manufacture of its hardware products by developing in-house capability to produce mechanical and electronic assemblies, and it has designed many of its own tools, fixtures and test equipment. The Company's manufacturing engineers are dedicated to co-engineering new products in coordination with Zebra's new product engineers and vendors. This collaborative effort increases manufacturing efficiency by specifying and designing manufacturing processes and facilities simultaneously with product design.

The Company purchases prefabricated component parts and subassemblies for use in the manufacture of its products. Critical subassemblies include printheads, power supplies, integrated circuits, and stepper motors, which are obtained from domestic and foreign suppliers at competitive prices. The Company's purchase contracts provide for price increases in the event of certain increases in the costs of raw materials. The Company maintains multiple sources for its component parts and subassemblies to mitigate against risks of parts shortages or unavailability. The Company does not believe at this time that it faces difficulties in obtaining an adequate supply of these materials.

The Company had research and development expenditures of $29,210,000 in 2002, $28,184,000 in 2001, and $26,746,000 in 2000. These expenditures amounted to 6.1%, 6.3%, and 5.6% of net sales for the corresponding periods. The Company devotes significant resources to developing new printing solutions for its target markets and ensuring that the Company's products maintain high levels of reliability and efficient manufacturing.

Many companies are engaged in the design, manufacture and marketing of bar code label printers and card personalization solutions. The Company considers its direct competition in bar code label and receipt printing to be producers of on-demand thermal transfer and direct thermal label printing systems and supplies. The Company also competes with companies engaged in the design, manufacture and marketing of printing systems that use alternative technologies, such as impact dot matrix, ink-jet and laser printing. Similarly, the Company competes with manufacturers of card personalization systems that are based on a broad range of alternative, competing technologies.

Management believes that the ability to compete effectively depends on a number of factors. These factors include the reliability, quality and reputation of the manufacturer and its products; hardware innovations and specifications; breadth of product offerings; information systems connectivity; price; level of technical support; supplies and applications support offered by the manufacturer; available distribution channels; and financial resources to support new product design and innovation. The Company believes that it presently competes favorably with respect to these factors.

No single competitor competes across the entire breadth of the Company's product line. The Company, however, faces significant competition in each of its product segments. For low-cost desktop label printer products, the Company's principal competitors are Cognitive Solutions, a subsidiary of Axiohm Transaction Solutions, Inc.; Tokyo Electric Company (TEC); Taiwan Semiconductor; Microcom; and Datamax Corporation. In the mid-range printer market, the Company's principal competitors are Datamax; UBI and Intermec Corporations, subsidiaries of Unova, Inc.; Monarch Marking Systems, a subsidiary of Paxar, Inc.; Sato; and TEC. Principal competition in the high end of the market derives from Sato; TEC; Printronix, Inc.; and Intermec. For print engines, the Company's principal competitor is Sato. For portable printers, the Company's principal competitors are Monarch Marking Systems and O'Neil Product Development, Inc. The potential for greater competition is increasing, in the Company's opinion, as companies view mobile printing applications to be an attractive market.

The Company has several competitors in the worldwide market for card personalization equipment using dye sublimation technology. These competitors include Nisca, Datacard, Inc., Fargo Electronics, Inc., ColorX, Atlantek, Polaroid, MagiCard, Evolis, LogickaComp, Printherm, CIM, NBS, Matica, Song Woo Electronics, and Victor Data Systems.

Dye-sublimation, the technology incorporated in the Company's card printers, is only one of several commercially available types of equipment used to personalize cards. The Company also competes with companies that produce identification cards using alternative technologies, which include ink-jet, thermal transfer, embossing, film-based systems, encoders, laser engraving and large-scale dye-sublimation printers. These card personalization technologies offer viable alternatives to the Company's card printers and provide effective competition from a variety of companies, many of which are substantially larger than the Company, including Canon Inc., Hewlett-Packard Company, Hitachi Ltd., and Lexmark International, Inc. In addition, service bureaus compete for end user business and provide an alternative to the purchase of the Company's card printing equipment and supplies.

The Company believes that direct thermal and thermal transfer printing will be the label and receipt printer technology of choice in Zebra's target markets for the foreseeable future. Among the many advantages of direct thermal and thermal transfer printing is the ability to print high-resolution, durable images on a wide variety of label materials at relatively low costs and very high speeds compared with alternative printing technologies. The Company continually assesses competitive and complementary methods of bar code printing and automatic identification. These technologies include ink jet, laser, impact dot matrix, laser etching, and RFID. Currently, the Company believes that direct thermal and thermal transfer print technologies provide the best low-cost, high quality printing solution for its label and receipt printer target markets.

Although there is no assurance that a new technology will not supplant direct thermal and thermal transfer printing for bar code labels and receipts, the Company is not aware of any developing technology that offers the advantages of direct thermal and thermal transfer printing for the Company's label and receipt printer target markets. To complement its thermal printing technology, Zebra produces the R-140 and R402 printer/encoders for printing and encoding "smart labels," which are printable labels embedded with an ultra-thin radio frequency transponder. Information encoded in these transponders can then be read and modified by a radio frequency reader. The R-140 and R402 are targeted at the developing market for RFID, where line-of-sight reading or scanning a label may not be possible. The Company views RFID as a complementary technology to barcoding, offering growth opportunities to Zebra as the technology becomes more widely adopted.

If other technologies were to evolve or become available to the Company, it is possible that those technologies would be incorporated into the Company's products. Alternatively, if such technologies were to evolve or become available to the Company's competitors, the Company's products may become obsolete, which would have a material adverse effect on the Company's business, financial position, results of operations and cash flows.

Zebra relies on a combination of trade secrets, patents, employee and third party nondisclosure agreements, copyright laws and contractual rights to establish and protect its proprietary rights in its products. The Company holds and actively protects a number of trademarks, which are registered domestically and internationally. The Company holds 68 patents and has 21 patents pending pertaining to its products. The duration of these patents ranges from 14 to 20 years. The expiration of any individual patent would not have a material impact on the Company's business.

Despite the Company's efforts to protect its intellectual property rights, it may be possible for unauthorized third parties to copy portions of the Company's products or to reverse engineer or otherwise obtain and use some technology and information that the Company regards as proprietary. Moreover, the laws of some countries do not afford the same protection to the Company's proprietary rights as do United States laws. There can be no assurance that legal protections relied upon by the Company to protect its proprietary position will be adequate. While the Company's intellectual property is valuable and provides the Company with certain competitive advantages, the Company does not believe that the legal protections afforded to its intellectual property are fundamental to the Company's success.

Other trademarks mentioned in this report are the property of their respective holders and include IBM, a registered trademark of International Business Machines Corporation; UNIX, a registered trademark of UNIX Systems Laboratories, Inc.; MS/DOS and Windows, registered trademarks of Microsoft Corporation; SAP, a registered trademark of SAP AG; Linux, a registered trademark of Linus Torvalds; and Accelio Present Central, a registered trademark of Accelio Corporation. Bluetooth is a trademark owned by Bluetooth SIG and used by Zebra Technologies under license.

As of February 28, 2003, the Company employed approximately 2,000 persons. None of these employees is a member of a union. The Company considers its relationship with its employees to be very good.

The Company's corporate headquarters are located in Vernon Hills, Illinois, a northern suburb of Chicago. The Company conducts its operations from a custom-designed facility at this location, which provides approximately 225,000 square feet of space. Approximately 113,000 square feet have been allocated to office and laboratory functions and 112,000 square feet to manufacturing and warehousing. This facility was constructed in 1989 and expanded in 1993, 1995, 1996 and 1999. It is owned and leased to the Company, under a lease terminating on June 30, 2014, by Unique Building Corporation, a corporation owned in part by Edward Kaplan and Gerhard Cless, both executive officers and directors of the Company.

The Company also leases facilities totaling an aggregate of 14,229 square feet, all of which are dedicated to administrative, research and sales functions, in the following locations: Miami, Florida; Minneapolis, Minnesota; Paris, France; Frankfurt, Germany; Milan, Italy; Ballerup, Denmark; Dubai, United Arab Emirates; Singapore; Yokohama, Japan; Seoul, South Korea; Sao Paolo, Brazil; and Hong Kong.

During 1999, the Company consolidated some United Kingdom facilities by moving distribution from the Company's Wokingham and High Wycombe facilities to the Preston location, and transferring Wokingham associates to the renovated High Wycombe location. The vacant Wokingham facility totals 27,000 square feet and has a lease that expires in October 2010. The Company has sub-leased this property through October 2003.

On January 31, 2003, a Writ of Summons was filed in the Nantes Commercial Court, Nantes, France, by Printherm, a French corporation, and several of its shareholders (collectively, "Printherm"), against Zebra Technologies France, a French corporation and wholly-owned subsidiary of the Company. Printherm seeks damages in the amount €15, 304,000 and additional unspecified damages in connection with Zebra France's termination of negotiations in December 2000 with respect to the proposed acquisition by the Company of the capital stock of Printherm. The Company believes that Printherm's claims are without merit, and the Company will vigorously defend the action.

The Company also is litigating a dispute over a 1998 tax assessment in the amount of approximately $2,000,000, including penalties and interest, with the Illinois Department of Revenue for the years 1993 through 1995. The case was filed by the Company in the District Court of Illinois and tried during November 2000. The decision from the court was unfavorable to the Company but has been appealed. The Company does not expect to know the result of the appeal until some time in the second half of 2003. For additional information respecting this matter, see "Critical Accounting Policies

and Estimates—Reserve for tax litigation and tax audits" in Item 7, Management's Discussion and Analysis of Financial Conditions and Results of Operations and Note 9 "Income Taxes" in the Notes to Consolidated Financial Statements annexed to this report.

The Company is named as a defendant in a number of other lawsuits, which are incidental to the ordinary conduct of its business. The Company does not believe that any such matters will have a material adverse effect on the Company's business, financial condition, or results of operations.

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

The Company's Class A Common Stock is traded on the Nasdaq Stock Market under the symbol ZBRA. The following table shows the high and low trade prices for each quarter in 2002 and 2001, as reported by the Nasdaq Stock Market. No market exists for the Company's Class B Common Stock. The shares of Class B Common Stock are convertible on a one-for-one basis into shares of Class A Common Stock at the option of the holder.

At February 25, 2003, the last reported price for the Class A Common Stock was $62.01 per share, and there were 412 registered stockholders of record for the Company's Class A Common Stock and 31 registered stockholders of record for the Company's Class B Common Stock.

Since the Company's initial public offering in 1991, the Company has not declared any cash dividends or distributions on its capital stock. The Company intends to retain its earnings to finance future growth and therefore does not anticipate paying any cash dividends in the foreseeable future.

CONSOLIDATED STATEMENTS OF EARNINGS DATA
(In thousands, except per share amounts)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Sales by product category, related percent changes and percent of total sales for 2002 and 2001 were as follows:

Sales to customers by geographic region, related percent changes, and percent of total sales for 2002 and 2001 were as follows:

During 2001 and 2002, through the downturn in the U.S. economy, the Company implemented its growth strategy by introducing new products, expanding international coverage, and creating new sales and marketing programs. The Company's investments in product development resulted in a stream of product introductions throughout this period. The Company also placed Zebra sales representatives in international territories deemed to have growth potential, thereby allowing the Company to work more closely with its channel partners in those regions. In addition, the Company organized its sales and marketing efforts to support a sales strategy that demonstrates the business benefits associated with implementing bar code labeling and specialty printing solutions. Management believes that these investments contributed to the Company's sales growth in 2002.

In North America, the Company recorded positive sales growth in the second, third and fourth quarters of 2002, compared with the corresponding periods of 2001. Overall, however, the slow U.S. economy continued to limit sales growth of bar code label and receipt printers to rates below the Company's historical average. Sales of supplies, specifically ribbons, were affected by price pressure from increased international competition particularly from Japan. Sales of supplies nevertheless benefited from an increase in unit sales. Management believes that the long-term outlook for bar code label and receipt printing in North America remains favorable but is unable to determine at this time when growth might return to historical levels experienced before the 2001 downturn.

All three of the Company's international regions—Europe, Asia Pacific, and Latin America—had record sales and contributed to the significant growth in international sales in 2002. The Company's increase of the number of Zebra representatives in these regions, including the formation of a sales team in Europe for mobile printing solutions in 2001, was an important factor in the growth of international sales. On a dollar-volume basis, the largest increase occurred in the Company's European region. The strength of the British pound and the euro versus the U.S. dollar increased sales for the Company's European region by approximately $5,565,000, compared with exchange rates that prevailed during 2001. It is difficult for management to accurately forecast the direction of foreign exchange

movements, and therefore, to estimate the impact of foreign exchange rates on future financial results, either positive or negative. Management believes that international territories hold significant growth opportunities for the Company and expects to continue to invest in personnel and infrastructure to support sales growth in these regions.

Gross profit was $230,747,000 for 2002, up 9.9% from $209,893,000 for 2001. In addition, gross profit margin increased to 48.5% from 46.6%. The major contributors to the margin improvement were higher capacity utilization related to the higher sales volume, product cost reductions, and the effect of foreign exchange movements. Management estimates that changes in foreign exchange rates increased gross profit by $4,377,000 in 2002.

Selling and marketing expenses increased 13.1% to $56,176,000, or 11.8% of net sales, from $49,688,000, or 11.0% of net sales. Most of the change can be attributed to an increase in additional headcount and performance-related payroll expenses, specifically commissions and bonuses related to the Company's growth in net sales. Trade show, travel and consulting expenses were also higher compared with 2001.

During 2002, the Company identified vertical markets that management believes offer growth opportunities for Zebra's printing and connectivity technologies. To this end, management expects that a higher level of selling and marketing infrastructure will be required to access these markets and achieve the Company's growth objectives within them, compared with Zebra's historical business model. Increased staffing occurred in marketing functions in 2002 to enable the Company to access vertical markets. Management expects that selling and marketing expenses in future periods will reflect the higher costs related to generating business within vertical markets.

Research and development expenses for 2002 were $29,210,000, up 3.6% from $28,184,000 for 2001, and represented 6.1% of net sales in 2002 versus 6.3% in 2001. Printer products introduced over an 18-month period that ended December 31, 2002 accounted for approximately 22% of printer sales for 2002, compared with 20% for the comparable period ending December 31, 2001. Higher project and personnel expenses were partially offset by lower expenditures for consulting services. The Company considers its ability to develop and introduce new products to be a significant competitive factor. Accordingly, management expects to continue high levels of expenditures on the development of a broad range of printers and related items.

General and administrative expenses increased 19.1% to $38,689,000 from $32,491,000. As a percentage of net sales, general and administrative expenses increased to 8.1% from 7.2%. The Company had higher bonus payments related to the growth in net sales. It also incurred additional consulting expenses for the development and implementation of growth strategies, as well as higher expenditures on information systems and insurance.

During 2002, Zebra recorded $1,494,000 in amortization of intangible assets, compared with $5,233,000 for 2001. During the first quarter of 2002, Zebra implemented SFAS No. 142, Goodwill and Other Intangible Assets, which eliminates the requirements to amortize intangible assets with indefinite lives and goodwill with a requirement for an annual impairment test. SFAS No. 142 also establishes requirements for identifiable intangible assets. As a result, during the first quarter Zebra reclassified $21,272,000 of intangible assets into goodwill, as such assets, which included assembled workforce and customer lists, did not meet the criteria for recognition as an asset apart from goodwill under SFAS No. 142. Operating income for 2001 includes $3,835,000 of amortization of goodwill and other intangible assets that are not included in the 2002 results in conjunction with the implementation of SFAS No. 142.

Also in the first quarter of 2002, the Company terminated the acquisition agreement and tender offer in which the Company would acquire all outstanding shares of common stock (including associated rights to purchase preferred stock) of Fargo Electronics, Inc. for $7.25 per share in cash. In

connection with the termination, the Company recorded $3,300,000 in expenses for acquisition costs that would otherwise have been capitalized. There was no such expense in 2001.

The Company incurred merger costs of $73,000 in 2002 and $1,838,000 in 2001. These costs related to the acquisition of Comtec Information Systems in April 2000. Management expects that future periods will have no further merger costs related to acquisitions completed prior to the date of this report. In the event of future acquisitions, management expects to record merger costs related to those acquisitions, the amount of which cannot be determined at this time.

Investment income was $10,004,000 for 2002, an increase of 84.6% from $5,419,000 for 2001. Favorable investment income was a result of a $1,953,000 pre-tax gain on the sale of 585,000 shares of common stock of Fargo Electronics, in addition to the absence of a $2,242,000 pre-tax write-down of a long-term investment that occurred in 2001. The write-down occurred because the decline in the asset's value was viewed as other than temporary. This write-down reduced 2001 diluted earnings by $0.05 per share. The Company made an additional write-down of $193,000 for this investment in 2002.

Income before income taxes increased 15.3% to $110,883,000 from $96,139,000. As a percentage of net sales, income before income taxes increased to 23.3% from 21.4%.

The effective income tax rate for 2002 was 35.4% versus 36.0% in 2001. This change is the result of implementing tax minimization strategies during the third quarter of 2002. Management expects that these strategies will allow the Company to remain at a 35.0% effective tax rate in future periods.

Net income of $71,595,000, or $2.29 per diluted share, for 2002 was up 16.4% from $61,529,000, or $1.99 per diluted share, for 2001.

Sales by product category, related percent changes and percent of total sales for 2001 and 2000 were as follows:

Sales to customers by geographic region, related percent changes, and percent of total sales for 2001 and 2000 were as follows:

The decline in sales was primarily related to softness in sales of bar code label and receipt printers in North America from deteriorating economic conditions in the U. S., specifically in the manufacturing and technology sectors. A full year's sales of mobile printing systems as a result of the Comtec acquisition, compared with only three quarters in 2000, partially offset the decline from this weakness.

The decline in North American sales was a result of the slowdown in the U.S. economy, which restricted sales of bar code label and receipt printers in North America. This slowdown began in 2000 and became more severe in 2001.

International sales for 2001 showed virtually no growth. Growth in the Company's European region to a record level resulted from the formation of a team dedicated to the sale of mobile printing systems and sales expansion in Eastern Europe. This growth was offset by sales declines in Latin America and Asia Pacific. The strength of the U.S. dollar versus the British pound and the euro reduced sales for the Company's European region by approximately $2,976,000, compared with exchange rates that prevailed during 2000.

Gross profit was $209,893,000 for 2001, down 9.7% from $232,428,000 for 2000. In addition, gross profit margin declined to 46.6% from 48.3%. Lower production volumes and the resulting decline in manufacturing capacity utilization had the predominant effect on the gross profit and gross profit margin declines.

Selling and marketing expenses increased 2.9% to $49,688,000, or 11.0% of net sales, from $48,306,000, or 10.0% of net sales. During 2001, the Company continued to invest in demand-generating activities to support long-term growth. For 2001, higher expenditures for personnel, market research and co-op activities were partially offset by declines in travel and entertainment and other expenses.

Research and development expenses for 2001 were $28,184,000, up 5.4% from $26,746,000 for 2000, and represented 6.3% of net sales in 2001 versus 5.6% in 2000. Lower project expenses partially offset higher expenditures related to engineering personnel and consulting services.

General and administrative expenses declined 3.3% to $32,491,000 from $33,594,000. As a percentage of net sales, general and administrative expenses increased to 7.2% from 7.0%. Higher expenditures on information systems were partially offset by expense declines for personnel-related expenses from benefits and taxes, as well as lower expenditures on outside services for recruiting and consulting.

Amortization of intangible assets totaled $5,233,000, compared with $4,046,000 for 2000. The increase was due to a full year's amortization of intangible assets related to the Comtec acquisition, compared with three quarters in 2000.

As part of the Comtec acquisition, the Company acquired printer and wireless technology. A portion of the purchase price was attributed to acquired in-process technology, as the development work associated with the projects had not yet reached technological feasibility and was believed to have no alternative future use. The Company assessed the fair value of the acquired in-process technology using an income approach. During the second quarter of 2000, the Company recorded a $5,953,000 charge to write off this acquired in-process technology. There was no such charge in 2001.

The Company incurred merger costs of $1,838,000 in 2001 and $5,113,000 in 2000. These costs related to the merger with Eltron International, Inc. in October 1998, which was accounted for as pooling-of-interests, and the Comtec acquisition. These costs exclude certain direct costs of the Comtec acquisition, which were not included as a portion of the purchase price or recorded at the time of the transaction. In 2001, these costs primarily consisted of expenditures on information technology infrastructure to integrate the Comtec and Eltron operations.

Investment income was $5,419,000 for 2001, a decrease of 52.2% from $11,345,000 for 2000. Lower investment returns on invested balances contributed to the decline. In addition, in the third quarter of 2001, the Company recorded a $2,242,000 pre-tax write-down of a long-term investment, in which the decline in value was viewed as other than temporary. This write-down reduced 2001 diluted earnings by $0.05 per share.

Interest expense and other expense, net, for 2001 totaled $1,739,000, compared with $8,104,000 in 2000. The 78.5% decline was primarily attributable to the effectiveness of currency hedging strategies to minimize the effects of foreign currency transactions, which the Company implemented during the second half of 2000. In 2001, losses from foreign currency transactions on the value of euro-denominated cash deposits and receivables from customers and pound sterling-denominated receivables from the Company's U.K. subsidiary totaled $896,000, compared with $6,032,000 for 2000.

Income before income taxes decreased 14.1% to $96,139,000 from $111,911,000. As a percentage of net sales, income before income taxes declined to 21.4% from 23.2%.

Net income of $61,529,000, or $1.99 per diluted share, for 2001 was down 14.1% from $71,622,000, or $2.30 per diluted share, for 2000.

Management prepared the consolidated financial statements of Zebra Technologies Corporation in conformity with accounting principles generally accepted in the United States. Accordingly, the consolidated financial statements require certain estimates, judgments and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating the Company's reported financial results.

Management assesses the impairment of identifiable intangibles, long-lived assets and related goodwill and enterprise-level goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important to possibly trigger an impairment review consist of:

When it is determined that the carrying value of intangibles, long-lived assets and related goodwill and enterprise-level goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, management measures any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Net intangible assets, long-lived assets, and goodwill amounted to $97,473,000 as of December 31, 2002.

In 2002, SFAS No. 142, Goodwill and Other Intangible Assets, became effective. As a result, the Company ceased amortizing approximately $54,455,000 of goodwill, including existing intangible assets that were not considered identifiable under SFAS No. 142. The Company recorded approximately $3,835,000 of amortization on these amounts during 2001 and would have recorded approximately $3,835,000 of amortization during 2002. In lieu of amortization, the Company was required to perform an initial impairment review of its goodwill in 2002 and an annual impairment review thereafter.

The Company completed its initial impairment review during the second quarter of 2002. Considering the share price of the Company's stock among other measures of fair value, this impairment test indicated that the fair value of the Company's goodwill was significantly in excess of the carrying value. Consequently, no impairment charge was recorded.

Zebra recognizes revenue from product sales at the time of shipment and passage of title. Certain customers have the right to return products that do not function properly within a limited time after delivery. The Company regularly monitors and tracks product returns and records a provision for the estimated amount of such future returns, based on historical experience and any notification received of pending returns. While such returns have historically been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience return rates consistent with historical patterns. Any significant increase in product failure rates and the resulting credit returns could have a material adverse effect on operating results for the periods in which such returns materialize. A 10% increase (decrease) in returns above historical levels would decrease (increase) operating income by approximately 0.3%.

The Company has established standardized credit granting and review policies and procedures for all customer accounts receivable. These policies and procedures include credit reviews of all new customer accounts to establish credit limits and payment terms based on available credit information, which may include customer financial statements, bank and trade references, credit rating agency information and other credit related information that becomes available. Additionally, the Company performs ongoing credit evaluations of current customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined by a review of current credit information. The Company has established regional credit functions, reporting directly to the corporate financial officers, to manage the credit granting, review, and collections processes.

Over the last three years, quarter-end accounts receivable balances have ranged from 53.0 to 68.5 days sales outstanding. As of December 31, 2002, accounts receivable before provisions for uncollectible accounts were $72,535,000 or 53.0 days of sales. Similarly, past due accounts receivable are also at the low end of historical ranges as of December 31, 2002. The historically low balance, high quality, accounts receivable portfolio is the result of improvements to credit and collections policies, procedures, and staffing implemented during 2002.

The Company maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues. Over the last three years, accounts receivable reserves have been in the range of 1.7% to 2.9% of total accounts receivable. Accounts receivable reserves as of December 31, 2002 were $1,236,000, or 1.7% of the balance due. Management feels this reserve level is appropriate given the relatively low accounts receivable balances combined with the quality of the portfolio as of December 31, 2002. While credit losses have historically been within expectations and the provisions established, management cannot guarantee that the Company will continue to experience credit loss consistent with historical experience.

Zebra's accounts receivable portfolio is diversified among a large number of customers and geographic markets. No individual customer exceeds 9% of gross accounts receivable balances as of December 31, 2002, and only one customer exceeds 5% of gross accounts receivable as of December 31, 2002. Included in accounts receivable is an account with a $2,100,000 disputed balance. Although management believes this account is fully collectible, a $481,000 accrued liability has been recorded to cover the estimated cost of collection. If the actual collection, net of costs, is less than $1,619,000, operating income would be reduced.

The Company values its inventories at the lower of the actual cost to purchase or manufacture, or the current estimated market value. Management regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on estimated forecasts of product demand and production requirements for the subsequent twelve months. A significant increase in the demand for Zebra's products could result in a short-term increase in the cost of inventory purchases, while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. Additionally, the Company's estimates of future product demand may prove to be inaccurate, in which case the provision required for excess and obsolete inventory may be understated or overstated. In the future, if inventories are determined to be overvalued, the Company would be required to recognize such costs in cost of goods sold at the time of such determination. Likewise, if inventories are determined to be undervalued, the Company may have over-reported cost of goods sold in prior periods and would be required to recognize such additional operating income at the time of sale. The Company makes every effort to ensure the accuracy of its forecasts of future product demand; however any significant unanticipated changes in demand or technological developments could have a significant impact on the value of inventories and reported operating results.

Over the last three years, the Company's reserves for excess and obsolete inventory have ranged from 9.7% to 12.9% of gross inventory. As of December 31, 2002, reserves for excess and obsolete inventory were $5,075,000, or 11.5% of gross inventory.

The Company has recorded the estimated liability related to certain pending tax litigation and tax audits based on management's estimates of the probable range of loss. As additional information becomes available, management will assess the potential liability related to pending litigation and tax audits, and revise estimates. Such revisions in the estimates of potential future liabilities could materially affect the results of operations and financial position.

The Company is litigating a dispute over a 1998 tax assessment in the amount of approximately $2,000,000, including penalties and interest, with the Illinois Department of Revenue for the years 1993 through 1995. The case was filed by the Company in the District Court of Illinois and tried during November 2000. The decision from the court was unfavorable to the Company but has been appealed. The Company does not expect to know the result of the appeal until some time in the second half of 2003.

The Illinois Department of Revenue has also examined the Company's tax returns for the years 1996 and 1997, and issued an assessment for $3,200,000. The issues involved in this audit are identical to those involved in the 1993 to 1995 returns being litigated. The Company has paid this assessment under protest. Management believes that the ultimate outcome of this assessment will be consistent with the 1993 to 1995 litigation under appeal.

In addition, the Illinois Department of Revenue has not yet examined the Company's income tax returns for 1998 through 2001, but has a right to do so. Management believes that if such an audit occurred, the Illinois Department of Revenue would raise issues similar to those raised during the 1993 through 1997 audits.

The Company recorded tax reserves equal to management's estimate of the likely outcome of the Illinois Department of Revenue litigation for 1993 to 1995, the audit assessment for 1996 and 1997, and the unaudited 1998 through 2001 returns. If the Company loses all issues on appeal, the Company would record an additional one-time tax expense of $1,300,000. If the Company wins all issues on appeal, the Company would record a reduction to tax expense of $4,400,000. For additional information

respecting this matter, see Note 9 "Income Taxes" in the Notes to Consolidated Financial Statements annexed to this report.

Internally generated funds from operations are the primary source of liquidity for the Company, largely as a result of the Company's sales and profitability, control over working capital and relatively low requirements for purchases of property and equipment. As of December 31, 2002, the Company had $348,577,000 in cash and cash equivalents and investments and marketable securities, compared with $249,349,000 at the end of 2001. Capital expenditures totaled $8,481,000 in 2002, $9,613,000 in 2001, and $8,947,000 in 2000. Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements.

For 2002, net cash used in operating activities was $13,393,000, which included increases in investments and marketable securities of $108,498,000 and accounts receivable of $1,629,000, offset by a decline in inventories and other assets totaling $6,891,000 and an increase in accrued liabilities of $2,564,000. These changes are net of the effect of foreign exchange rates on cash. Depreciation and amortization totaled $12,259,000. Net cash used in investing activities was used exclusively for $8,481,000 in purchases of property and equipment, and $13,032,000 in net cash provided by financing activities was substantially generated by proceeds from the exercise of stock options. Cash and cash equivalents decreased by $7,910,000 for the year.

Net cash provided by operating activities totaled $14,076,000 in 2001,which included an increase in investments and marketable securities of $78,874,000 and relatively significant declines of $16,223,000, or 19.3%, in accounts receivable and of $17,284,000, or 30.4%, in inventories. Both declines exclude the effect of foreign exchange rates on cash. Depreciation and amortization totaled $15,691,000. Net cash used in investing activities was used exclusively for $9,613,000 in purchases of property and equipment, and $8,863,000 in net cash provided by financing activities was substantially generated by proceeds from the exercise of stock options.

Net cash provided by operating activities totaled $132,565,000 in 2000. During the year, the Company reduced its investments and marketable securities by $60,860,000 as partial funding for the Comtec acquisition. The Company also recorded increases of $7,106,000 in accounts receivable and $7,179,000 in inventories. Depreciation and amortization totaled $14,383,000. Investing activities used $97,423,000 in cash in 2000. In addition to the $8,947,000 used for purchases of property and equipment, the Company used $88,476,000 for the Comtec acquisition, net of cash acquired. For 2000, the Company used $48,675,000 for financing activities, including $55,505,000 for the purchase of treasury stock. Proceeds of $6,653,000 from the exercise of stock options had a positive effect on net cash used in financing activities. For 2000, cash and cash equivalents declined by $15,041,000.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and for the associated asset retirement costs. SFAS 143 must be applied starting with fiscal years beginning after June 15, 2002. Management does not believe the adoption of SFAS No. 143 will have a significant impact on the Company's consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 requires that gains and losses from extinguishment of debt be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30. Applying the provisions of Opinion No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual and infrequent and meet the criteria for classification as an extraordinary item. SFAS No. 145 is effective

beginning January 1, 2003. Management does not believe the adoption of SFAS No. 145 will have a significant impact on the Company's consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. This standard will be applied prospectively to exit or disposal activities initiated after December 31, 2002. Management does not believe the adoption of SFAS No. 146 will have a significant impact on the Company's consolidated financial statements.

Investors should carefully consider the risks, uncertainties and other factors described below, as well as other disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations, because they could have a material adverse effect on the Company's business, financial condition, operating results, and growth prospects.

The Company could encounter difficulties in any acquisition it undertakes, including unanticipated integration problems and business disruption. Acquisitions could also dilute stockholder value and adversely affect operating results. Proposed acquisitions that are not consummated may result in the write-off of certain acquisition costs.

The Company may acquire or make investments in other businesses, technologies, services or products. The process of integrating any acquired business, technology, service or product into operations may result in unforeseen operating difficulties and expenditures. Integration of an acquired company also may consume considerable management time and attention, which could otherwise be available for ongoing development of the business. The expected benefits of any acquisition may not be realized. Moreover, the Company may be unable to identify, negotiate or finance future acquisitions successfully. Future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or amortization expenses. To the extent that a proposed acquisition is not consummated, the Company may be required to write off certain costs associated with the acquisition, which could be significant.

The Company may not be able to continue to develop products to address user needs effectively in an industry characterized by rapid technological change.

To be successful, Zebra must adapt to rapidly changing technological and application needs by continually improving its products as well as introducing new products and services to address user demands.

Future success will depend on the Company's ability to adapt in this rapidly evolving environment. The Company could incur substantial costs if it has to modify its business to adapt to these changes, and may even be unable to adapt to these changes.

The Company competes in a highly competitive market, which is likely to become more competitive. Competitors may be able to respond more quickly to new or emerging technology and changes in customer requirements.

Zebra faces significant competition in developing and selling its systems. Principal competitors have substantial marketing, financial, development and personnel resources. To remain competitive, the Company believes it must continue to provide:

Zebra cannot assure it will be able to compete successfully against current or future competitors. Increased competition in printers or supplies may result in price reductions, lower gross profit margins and loss of market share, and could require increased spending on research and development, sales and marketing and customer support. Some competitors may make strategic acquisitions or establish cooperative relationships with suppliers or companies that produce complementary products. Any of these factors could reduce the Company's earnings.

The inability to protect intellectual property could harm the Company's reputation, and its competitive position may be materially damaged.

Zebra's intellectual property is valuable and provides the Company with certain competitive advantages. Copyrights, patents, trade secrets and contracts are used to protect these proprietary rights. Despite these precautions, it may be possible for third parties to copy aspects of the Company's products or, without authorization, to obtain and use information which Zebra regards as trade secrets.

Zebra sells a significant portion of its products internationally and purchases important components from foreign suppliers. These circumstances create a number of risks.

The Company sells a significant amount of its products to customers outside the United States. Shipments to international customers are expected to continue to account for a material portion of net sales. Risks associated with sales and purchases outside the United States include:

Economic factors, which are outside the Company's control, could lead to deterioration in the quality of the Company's accounts receivables.

The Company sells its products to customers in the United States and several other countries around the world. Sales are typically made on unsecured credit terms, which are generally consistent with the prevailing business practices in a given country. A deterioration of economic or political conditions in a country could impair Zebra's ability to collect on receivables in the affected country.

Infringement on the proprietary rights of others could put the company at a competitive disadvantage, and any related litigation could be time consuming and costly.

Third parties may claim that Zebra violated their intellectual property rights. To the extent of a violation of a third party's patent or other intellectual property right, the Company may be prevented from operating its business as planned, and may be required to pay damages, to obtain a license, if available, or to use a non-infringing method, if possible, to accomplish its objectives. Any of these claims, with or without merit, could result in costly litigation and divert the attention of key personnel.

The Company depends on the ongoing service of its senior management and ability to attract and retain other key personnel.

Future success of the Company is substantially dependent on the continued service and continuing contributions of senior management and other key personnel. The loss of the service of any of executive officer or other key employees could adversely affect business. The Company neither has long-term employment agreements with key personnel, nor maintains key man life insurance policies on any of its key employees.

The ability to attract, retain and motivate highly skilled employees is important to Zebra's long-term success. Competition for personnel in the Company's industry is intense, and the Company may be unable to retain key employees or attract, assimilate or retain other highly qualified employees in the future.

Continued terrorist attacks or war could lead to further economic instability and adversely affect the Company's stock price, operations, and profitability.

The terrorist attacks that occurred in the United States on September 11, 2001 caused periodic major instability in the U.S. and other financial markets. Possible further acts of terrorism and current and future war risks could have a similar impact. The United States continues to take military action against terrorism and has made strong overtures of going to war with Iraq. Terrorist attacks and potential war in the Middle East may lead to additional armed hostilities or to further acts of terrorism and civil disturbance in the United States or elsewhere, which may further contribute to economic instability. Any such attacks could, among other things, cause further instability in financial markets and could directly, or indirectly through reduced demand, negatively affect the Company's facilities and operations or those of its customers or suppliers.

Taxing authority challenges may lead to tax payments exceeding current reserves.

The Company operates in multiple tax jurisdictions in the United States and worldwide, and uses strategies to minimize its tax exposure. Local tax authorities may challenge these tax positions from time to time. Adverse outcomes in these situations may exceed the Company's reserves for tax payments and may increase the Company's effective tax rate.

The Company is exposed to the impact of changes in interest rates because of its large investment portfolio. As stated in the Company's written investment policy, the Company's investment portfolio is viewed as a strategic resource that will be managed to achieve above market rates of return in exchange for accepting a prudent amount of incremental risk, which includes the risk of interest rate movements. Risk tolerance is constrained by an overriding objective to preserve capital across each quarterly reporting cycle.

The Company mitigates interest rate risk with an investment policy that requires the use of outside professional investment managers, investment liquidity and broad diversification across investment strategies, and which limits the types of investments that may be made. Moreover, the policy requires due diligence of each investment manager both before employment and on an ongoing basis.

The following table sets forth the impact of a 1% movement in interest rates on the value of the Company's investment portfolio as of December 31, 2002.

Interest rate sensitive instruments			Effect on Pretax Income			Effect on Diluted EPS (after tax)
	+1% movement		$	(3,428,059	)	$	(0.07	)
	-1% movement		$	3,428,059		$	0.07

The Company conducts business in approximately 100 countries throughout the world and, therefore, is exposed to risk based on movements in foreign exchange rates. Currency exposures are related to the U.S. dollar/U.K. pound sterling, U.S. dollar/euro, and the U.K. pound sterling/euro exchange rates arising from invoicing European customers in pounds sterling and euros from the Company's U.K. office. The U.S. dollar/Japanese yen exchange rate arises from invoicing customers in Japanese yen. The yen foreign currency exposure averages approximately $125,000. There is no foreign exchange risk associated with the Company's investment portfolio.

The Company manages its foreign exchange exposure through a policy of selective hedging. This policy involves selling forward up to 120 days projected remittances in euros from the Company's U.K. subsidiary. Currency swaps that are net settled every month mitigate the U.S. dollar to U.K. pound sterling net exposure. This policy mitigates, but does not eliminate, the impact of exchange movements on the value of future cash flows. Thus, adverse movements in either the pound or the euro in relation to the dollar can directly affect the Company's financial results. The corporate treasury department executes all foreign exchange contracts with major financial institutions only. Under no circumstances does the Company enter into any type of foreign exchange contract for trading or speculative purposes.

The following table sets forth the impact of a 1% movement in the dollar/pound and dollar/euro rates measured as if the Company did not engage in the selective hedging practices described above. It is based on the dollar/euro and dollar/pound exchange rates and euro and pound denominated assets and liabilities as of December 31, 2002.

Foreign exchange			Effect on Pretax Income			Effect on Diluted EPS (after tax)
	Dollar/pound		$	96,582		$	0.00
	Dollar/euro		$	273,000		$	0.01

From time to time, the Company has taken direct equity positions in companies. These investments relate to potential acquisitions and other strategic business opportunities. To the extent that it has a direct investment in the equity securities of another company, the Company is exposed to the risks associated with such investments.

The Company currently employs three investment managers, two of which manage portfolios of investment funds (i.e. fund of funds). These investment funds use a variety of investment strategies, some of which involve the use of equity securities. Each investment manager's portfolio is designed to be market neutral, although an individual fund within a portfolio may be exposed to market risk. By policy, management limits the amount of the Company's investments in alternative investment strategies to a maximum of 20% of the total investment portfolio, with no single investment exceeding $10,000,000.

The Company utilizes a "Value-at-Risk" (VaR) model to determine the maximum potential one-day loss in the fair value of its interest rate, foreign exchange and equity price sensitive instruments.

The following table sets forth the impact of a 1% change in the value of all equity positions held by the Company's investment managers.

Equity price sensitive instruments			Effect on Pretax Income			Effect on Diluted EPS (after tax)
	+1% movement		$	183,112		$	0.00
	-1% movement		$	(183,112	)	$	(0.00	)

The financial statements and schedule of the Company are annexed to this Report as pages F-2 through F-23. An index to such materials appears on page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

The information in response to this item is incorporated by reference from the Proxy Statement sections entitled "Election of Directors" and "Executive Officers."

The information in response to this item is incorporated by reference from the Proxy Statement section entitled "Executive Compensation and Certain Transactions."

The information in response to this item is incorporated by reference from the Proxy Statement section entitled "Security Ownership of Management and Certain Beneficial Owners" and "Equity Compensation Plan Information."

The information in response to this item is incorporated by reference from the Proxy Statement section entitled "Executive Compensation and Certain Transactions."

The Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this Report, that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company's management, including the Chairman and Chief Executive Officer and the Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding required disclosure.

There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation.

Notwithstanding the foregoing, as part of the Company's on-going internal audit functions, the security policies and procedures of certain systems were reviewed. The review, which was completed within the 90 days prior to the date of the filing of this Report, identified areas for process improvement, particularly in the area of system access and control. In accordance with Company policy, management presented the issues raised by the review to the Audit Committee of the Board of Directors, and the Company is implementing plans to address those issues in an appropriate and timely manner

The financial statements and schedule filed as part of this report are listed in the accompanying Index to Financial Statements and Schedule. The exhibits filed as a part of this report are listed in the accompanying Index to Exhibits.

The Company filed no Current Report on Form 8-K during the fourth quarter of 2002.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 26th day of February 2003.

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Report has been signed below by the following persons in the capacities and on the dates indicated.

Signature	Title	Date

/s/ EDWARD L. KAPLAN Edward L. Kaplan	Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)	February 26, 2003
/s/ GERHARD CLESS Gerhard Cless	Executive Vice President, Secretary and Director	February 26, 2003
/s/ CHARLES R. WHITCHURCH Charles R. Whitchurch	Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)	February 26, 2003
/s/ JOHN W. PAXTON, SR. John W. Paxton, Sr.	President, Bar Code Business Unit, and Director	February 26, 2003
/s/ CHRISTOPHER G. KNOWLES Christopher G. Knowles	Director	February 26, 2003
/s/ DAVID P. RILEY David P. Riley	Director	February 26, 2003
/s/ MICHAEL A. SMITH Michael A. Smith	Director	February 26, 2003

1. I have reviewed this annual report on Form 10-K of Zebra Technologies Corporation (the "Company");

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

1. I have reviewed this annual report on Form 10-K of Zebra Technologies Corporation (the "Company");

All other financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

We have audited the accompanying consolidated balance sheets of Zebra Technologies Corporation and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of earnings, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule of valuation and qualifying accounts. These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zebra Technologies Corporation and Subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)

CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except per share data)

Zebra Technologies Corporation and its wholly-owned subsidiaries (the Company) design, manufacture, sell and support a broad line of bar code label and receipt printers and card printers, self-adhesive labeling materials, card supplies, thermal transfer ribbons and bar code label design software. These products are used principally in automatic identification (auto ID), data collection and personal identification applications and are distributed world-wide through a network of resellers, distributors and end users representing a wide cross-section of industrial, service and government organizations.

Principles of Consolidation. The accompanying financial statements have been prepared on a consolidated basis to include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts, transactions, and unrealized profit have been eliminated in consolidation.

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

Cash and Cash Equivalents. Cash consists primarily of deposits with banks. In addition, the Company considers highly liquid short-term investments with original maturities of less than seven days to be cash equivalents

Investments and Marketable Securities. Investments and marketable securities at December 31, 2002, consisted of U.S. government securities, state and municipal bonds, partnership interests and equity securities, which are held indirectly in diversified funds actively managed by investment professionals. The Company classifies its debt and marketable equity securities in one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities that the Company has the ability and intent to hold until maturity. All securities not included in trading or held-to-maturity are classified as available-for-sale.

Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of discounts or premiums. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized.

Inventories. Inventories are stated at the lower of cost or market, and cost is determined by the first-in, first-out (FIFO) method.

Property and Equipment. Property and equipment is stated at cost. Depreciation and amortization is computed primarily using the straight-line method over the estimated useful lives of the various classes of property and equipment, which are 30 years for buildings and range from 3 to 10 years for other property. Property and equipment held under capital leases is amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset.

Income Taxes. The Company accounts for income taxes under the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Intangible Assets. Goodwill represents the unamortized excess of the cost of acquiring a business over the fair values of the net assets received at the date of acquisition. Goodwill is no longer being amortized as required by SFAS No. 142, Goodwill and Other Intangible Assets.

Other intangible assets consist primarily of current technology. These assets are recorded at cost and amortized on a straight-line basis over 5 years. Accumulated amortization for these other intangible assets was $3,865,000 and $5,944,000 at December 31, 2002 and 2001, respectively.

Revenue Recognition. Revenue is recognized at the time of shipping and includes freight billed to customers.

Research and Development Costs. Research and development costs are expensed as incurred.

Advertising. Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2002, 2001 and 2000 totaled $3,965,000, $4,405,000 and $4,637,000, respectively.

Warranty. The Company provides warranty coverage of up to one year on printers against defects in material and workmanship. A provision for warranty expense is recorded at the time of shipment and adjusted quarterly based on historical warranty experience. The following is a summary of the Company's accrued warranty obligation during the year ended December 31, 2002.

	2002
Accrued warranty—beginning balance	$	1,021
Add: warranty expense		3,080
Deduct: warranty payments		2,426

Accrued warranty—ending balance	$	1,675

Financial instruments. The reported amounts of the Company's financial instruments, which include investments and marketable securities, trade accounts receivable, accounts payable, accrued liabilities, income taxes payable and short-term notes payable, approximate their fair values because of the contractual maturities and short-term nature of these instruments.

Stock-based Compensation. At December 31, 2002, the company has three stock-based compensation plans, which are described more fully in Note 16. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income

and earnings per share if the Company had applied the fair value recognition provisions of FASB No. 123, Accounting for Stock-based Compensation, to stock-based compensation.

		2002			2001			2000
Net income, as reported		$	71,595		$	61,529		$	71,622
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects			(5,102	)		(3,558	)		(4,009	)

Pro forma net income		$	66,493		$	57,971		$	67,613

Basic earnings per share:
	As reported	$	2.31		$	2.01		$	2.33
	Pro forma		2.15			1.89			2.20
Diluted earnings per share:
	As reported	$	2.29		$	1.99		$	2.30
	Pro forma		2.13			1.88			2.17

Deferred Compensation Plan. The Company has a deferred compensation plan that permits management and highly compensated employees to defer portions of their compensation and to select a method of investing these funds. The salaries that have been deferred since the plan's inception have been accrued and the only charges, other than additional deferred salaries, related to this plan are the unrealized gain/loss on the deferred amounts.

Foreign Currency Translation. The consolidated balance sheets of the Company's foreign subsidiaries are translated into U.S. dollars using the year-end exchange rate, and statement of earnings items are translated using the average exchange rate for the year. The resulting translation gains or losses are recorded in stockholders' equity as a cumulative translation adjustment, which is a component of accumulated other comprehensive loss.

Capitalized Software. The Company's investment in software development consists primarily of enhancements to its existing E-commerce web-based application, which will include the automation of current business activities. Specifically, the activities include the processing of customer orders; the acknowledgement of customer orders and delivery; and the financial invoicing for all of Zebra's products and will aid in enabling the Company to create new business efficiencies.

Costs associated with the planning and design phases of web-based development, including coding and testing activities necessary to establish technological feasibility of the functionality of the website, are charged to research and development as incurred. Once technological feasibility has been determined, costs incurred in the construction phase of software development including coding, testing, and product quality assurance are capitalized.

Funded Engineering Arrangement. The Company was part of an arrangement with a third party, whereby the Company was reimbursed for certain engineering services performed on behalf of the third party. The arrangement had a term of three years. The arrangement also provided that the Company would be the exclusive manufacturer of the products resulting from the engineering agreement. The products would be distributed under the third party's brand name. During 2000 and 2001, the Company incurred approximately $2,800,000 of reimbursable expenses under the agreement. As of December 31, 2002, the Company had an accounts receivable of approximately $2,100,000 related to this arrangement. A provision of $481,000 has been established to cover estimated collection costs, which is included in accrued liabilities. The arrangement was terminated in 2002.

Acquisition Costs. The Company periodically invests in potential acquisitions. Any external costs incurred are recorded as prepaid expenses until such time as the Company either completes the

transaction or abandons the transaction. If the transaction is completed, the costs are treated as part of the cost of the acquisition. If the transaction is abandoned, the costs are expensed during the period in which it is abandoned. During 2002, operating expenses include $3,300,000 of costs related to such an abandonment. As of December 31, 2002, the balance sheet includes $35,000 in prepaid expenses related to acquisitions.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposition of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Recently Issued Accounting Pronouncements. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and for the associated asset retirement costs. SFAS No. 143 must be applied starting with fiscal years beginning after June 15, 2002. Management is currently evaluating the impact that the adoption of SFAS No. 143 will have on the consolidated financial statements.

Comtec Information Systems, Inc. On April 3, 2000, the Company acquired Comtec Information Systems, Inc. (Comtec), by acquiring all of the outstanding capital stock of Comtec for approximately $88,476,000 in cash. Located in Warwick, Rhode Island, Comtec had been a privately held company. Comtec designs, manufactures and supports mobile printing systems. The acquisition was accounted for under the purchase method. At the time of the acquisition, the purchase price was allocated to identifiable tangible assets and intangible assets acquired and liabilities assumed based on their estimated fair values. Estimated amounts allocated to acquired in-process technology were expensed at the time of the acquisition. The consolidated statements of earnings reflect the results of operations of

Comtec since the effective date of the acquisition. At the time of acquisition, the purchase price allocation for Comtec was as follows:

	Amount (in thousands)
Net tangible assets	$	15,235
Acquired in-process technology		5,953
Intangible assets		31,786
Goodwill		35,502

Purchase price	$	88,476

The following summary presents information concerning the purchase price allocation for the Comtec acquisition after the Company's implementation of SFAS No. 142, Goodwill and Other Intangible Assets, during the first quarter of 2002:

	Amount (in thousands)
Net tangible assets	$	15,235
Acquired in-process technology		5,953
Current technology		6,494
Goodwill		60,794

Purchase price	$	88,476

Prior to the implementation of SFAS No. 142, goodwill was amortized on a straight-line basis over the expected period of 20 years and other intangible assets were amortized over periods up to 15 years. These amortization periods are reflective of the expense amounts recorded in the Company's 2001 and 2000 income statements. Subsequent to the implementation of SFAS No. 142, the amount allocated to current technology related to the Comtec acquisition is amortized over a period of five years and is included as a component of other intangible assets on the balance sheet as of December 31, 2002. See Note 10 for a further discussion of the Company's implementation of SFAS No. 142.

Acquisition Termination Costs and Sale of Investment. In the first quarter of 2002, the Company terminated the acquisition agreement and tender offer in which the Company would acquire all outstanding shares of common stock (including associated rights to purchase preferred stock) of Fargo Electronics, Inc. for $7.25 per share in cash. In connection with the termination, the Company recorded $3,300,000 in expenses for capitalized acquisition costs and other acquisition costs that would otherwise have been capitalized. Also during the quarter ended March 30, 2002, the Company sold its investment in common stock of Fargo and realized a pre-tax gain of $1,953,000, which is included in investment income.

For the years ended December 31, 2002, 2001, and 2000, earnings per share were computed as follows (in thousands, except per-share amounts):

		Years Ended December 31,
		2002		2001		2000
Basic earnings per share:
Net income		$	71,595	$	61,529	$	71,622
Weighted average common shares outstanding			30,983		30,645		30,790
	Per share amount	$	2.31	$	2.01	$	2.33
Diluted earnings per share:
Net income		$	71,595	$	61,529	$	71,622
Weighted average common shares outstanding			30,983		30,645		30,790
Add: Effect of dilutive securities — stock options			282		236		365

Diluted weighted average and equivalent shares outstanding			31,265		30,881		31,155
	Per share amount	$	2.29	$	1.99	$	2.30

The potentially dilutive securities, which were excluded from the earnings per share calculation, consisted of stock options for which the exercise price was greater than the average market price of the Class A Common Stock. For the years ended December 31, the shares amounted to 194,875 in 2002, 436,325 in 2001, and 267,500 in 2000.

The amortized cost, gross unrealized holding gains, gross unrealized holding losses and aggregate fair value of investment securities at December 31, 2002, were as follows (in thousands):

The amortized cost, gross unrealized holding gains, gross unrealized holding losses and aggregate fair value of investment securities at December 31, 2001, were as follows (in thousands):

The Company is a limited partner in two non-registered partnerships. The partnerships seek to provide returns to its partners by making strategic investments in a diversified portfolio of investment funds. Zebra's investment as a limited partner allows it to have liability protection limited to the amount of its investments in the funds.

The contractual maturities of debt securities at December 31, 2002, were as follows (in thousands):

	Fair Value
Due within one year	$	142,829
Due after one year through five years		138,508
Due after five years		30,019

	$	311,356

Using the specific identification method, the proceeds and realized gains on the sales of available-for-sale securities were as follows (in thousands):

		2002		2001		2000
Proceeds		$	3,499			—		—
Realized gains (losses)		$	1,760		($	2,242	)	—

The realized gain of $1,760,000 in 2002 includes a gain on the sale of an available-for-sale stock offset by an additional write-down of an available-for-sale security whose decline in value was determined to be other than temporary. The realized loss of $2,242,000 in 2001 is the result of a write-down of an available-for-sale security whose decline in value was determined to be other than temporary.

Unique Building Corporation (Unique), an entity controlled by certain officers and stockholders of the Company, leases a facility and equipment to the Company under a lease described in Note 12. Management believes that the lease payments are substantially consistent with amounts that could have been negotiated with third parties on an arm's-length basis and represent conditions at the time of the negotiations.

Lease payments related to the leases, and recorded as a component of all functional areas, were included in the consolidated financial statements as follows (in thousands):

	Unique Operating Lease Payments
2002	$	2,085
2001		2,085
2000		2,085

Future minimum lease payments related to this lease as of December 31, 2002, are as follows (in thousands):

	Operating Leases
2003	$	2,195
2004		2,284
2005		2,336
2006		2,336
2007		2,336
Thereafter		17,341

Total minimum lease payments	$	28,828

The components of inventories, net of allowances, are as follows (in thousands):

	December 31,
	2002		2001
Raw material	$	21,404	$	25,410
Work in process		1,104		1,360
Finished goods		15,558		13,153

Total inventories	$	38,066	$	39,923

Property and equipment, which includes assets under capital leases, is comprised of the following (in thousands):

	December 31,
	2002			2001
Buildings	$	11,499		$	12,029
Land		1,910			1,910
Machinery, equipment and tooling		38,941			35,507
Machinery and equipment under capital leases		2,757			1,670
Furniture and office equipment		6,164			5,681
Computers and software		33,899			28,951
Automobiles		153			183
Leasehold improvements		4,012			2,997
Projects in progress		1,274			2,705

		100,609			91,633
Less accumulated depreciation and amortization		(61,147	)		(50,891	)

Net property and equipment	$	39,462		$	40,742

Amortization of capitalized software was $2,042,000 in 2002, $1,834,000 in 2001, and $1,797,000 in 2000.

The geographical sources of earnings before income taxes were as follows (in thousands):

The Company does not provide for deferred income taxes on undistributed earnings of foreign subsidiaries, which totaled approximately $11,600,000 at December 31, 2002 and $8,700,000 at December 31, 2001. Management expects such earnings to be permanently reinvested in these companies. Should such earnings be remitted to the Company, foreign tax credits would be available to substantially offset the U.S. income taxes due upon repatriation.

The provision for income taxes differs from the amount computed by applying the U.S. statutory Federal income tax rate of 35%. The reconciliation of statutory and effective income taxes is presented below (in thousands):

Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Based on management's assessment, it is more likely than not that the deferred tax assets will be realized through future taxable earnings.

The Illinois Department of Revenue has also examined the Company's tax returns for the years 1996 and 1997 and issued an assessment for $3,200,000. The issues involved in this audit are identical to those involved in the 1993 through 1995 returns being litigated. The Company has paid this assessment under protest. The Company believes that the ultimate outcome of this assessment will be consistent with the 1993 to 1995 litigation under appeal.

Tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows (in thousands):

During the first quarter of 2002, Zebra implemented SFAS No. 142, Goodwill and Other Intangible Assets, which replaces the requirements to amortize intangible assets with indefinite lives and goodwill with a requirement for an annual impairment test. SFAS No. 142 also establishes requirements for identifiable intangible assets. As a result, during the first quarter Zebra reclassified $21,720,000 of intangible assets into goodwill, as such assets, which included assembled workforce and customer lists, did not meet the criteria for recognition as an asset apart from goodwill under SFAS No. 142.

Operating income for 2001 and 2000 includes $3,835,000 and $2,876,000 respectively, of amortization of goodwill and other intangible assets that are not included in 2002 results, because of the implementation of SFAS No. 142. If adjusted for the impact of the implementation of SFAS No. 142 (i.e., if goodwill had not been amortized), net income, basic earnings per share, and diluted earnings per share would have been as follows:

	Years ended December 31,
	2001		2000
Net income	$	63,983		$	73,463
Basic earnings per share	$	2.09		$	2.39
Diluted earnings per share	$	2.07		$	2.36

The Company has a Retirement Savings and Investment Plan (the 401(k) Plan), which is intended to qualify under Section 401(k) of the Internal Revenue Code. Qualified employees may participate in the Company's 401(k) Plan by contributing up to 15% of their gross earnings to the plan subject to certain Internal Revenue Service restrictions. The Company matches each participant's contribution of up to 6% of gross eligible earnings at the rate of 50%. The Company may contribute additional amounts to the 401(k) Plan at the discretion of the Board of Directors, subject to certain legal limits.

The Company has a discretionary profit-sharing plan for qualified employees, to which it contributed 1.9% of eligible earnings for 2002, 1.9% for 2001 and 3.1% for 2000. Participants are not permitted to make contributions under the profit-sharing plan.

Company contributions to these plans, which were charged to operations, approximated the following (in thousands):

	2002		2001		2000
401(k)	$	1,452	$	1,374	$	1,287
Profit sharing		1,146		1,178		877

Total	$	2,598	$	2,552	$	2,164

Leases. In September 1989, the Company entered into a lease agreement for its Vernon Hills facility and certain machinery, equipment, furniture and fixtures with Unique Building Corporation. The facility portion of the lease is the only remaining portion in existence as of December 31, 2002, and is treated as an operating lease. An amendment to the lease dated July 1997 added 59,150 square feet and extended the term of the existing lease through June 30, 2014. The lease agreement includes a modification to the base monthly rental, which goes into effect if the prescribed rent payment is less than the aggregate principal and interest payments required to be made by Unique under an Industrial Revenue Bond (IRB).

Minimum future obligations under noncancelable operating leases and future minimum capital lease payments as of December 31, 2002, are as follows (in thousands):

	Capital Lease			Operating Leases
2003	$	184		$	4,198
2004		169			3,839
2005		169			3,331
2006		228			3,096
2007		28			3,031
Thereafter		97			21,352

Total minimum lease payments	$	875		$	38,847

Less amount representing interest		(125	)

Present value of minimum payments		750
Less current portion of obligation under capital lease		(145	)

Long-term portion of obligation under capital lease	$	605

Rent expense for operating leases charged to operations for the years ended December 31, 2002, 2001, and 2000 was $5,699,000, $4,917,000, and $4,833,000, respectively.

Letter of credit. In connection with the lease agreements described above, the Company has guaranteed Unique's full and prompt payment under Unique's letter of credit agreement with a bank. The contingent liability of the Company under this guaranty as of December 31, 2002, is $700,000, which is the limit of the Company's guaranty throughout the term of the IRB.

Derivative Instruments. In the normal course of business, portions of the Company's operations are subject to fluctuations in currency values. The Company addresses these risks through a controlled program of risk management that includes the use of derivative financial instruments.

The Company enters into foreign exchange forward contracts to manage exposure to fluctuations in foreign exchange rates to the funding of its United Kingdom operations. The Company accounts for such contracts by recording any unrealized gains or losses in income each reporting period. The notional principal amounts of outstanding forward contracts were €26,000,000 and £3,293,000 at December 31, 2002, and £16,391,000 and £6,019,000 at December 31, 2001. The realized losses, included in other, net expense, were $1,432,000 in 2002 and $661,000 in 2001.

Legal proceedings. On January 31, 2003, a Writ of Summons was filed in the Nantes Commercial Court, Nantes, France, by Printherm, a French corporation, and several of its shareholders (collectively, "Printherm"), against Zebra Technologies France, a French corporation and wholly-owned subsidiary of the Company. Printherm seeks damages in the amount €15,004,000 and additional unspecified damages in connection with Zebra France's termination of negotiations in December 2000 with respect to the proposed acquisition by the Company of the capital stock of Printherm. The Company believes that Printherm's claims are without merit, and the Company will vigorously defend the action.

The Company operates in one industry segment. Information regarding the Company's operations by geographic area for the years ended December 31, 2002, 2001, and 2000 is contained in the following table. These amounts (in thousands) are reported in the geographic area where the final sale originates.

Holders of Class A Common Stock are entitled to one vote per share. Holders of Class B Common Stock are entitled to 10 votes per share. Holders of Class A and Class B Common Stock vote together as a single class on all actions submitted to a vote of stockholders, except in certain circumstances. If at any time the number of outstanding shares of Class B Common Stock represents less than 10% of the total number of outstanding shares of both classes of common stock, then at that time such outstanding shares of Class B Common Stock will automatically convert into an equal number of shares of Class A Common Stock.

Class A Common Stock has no conversion rights. A holder of Class B Common Stock may convert the Class B Common Stock into Class A Common Stock, in whole or in part, at any time and from time to time. Shares of Class B Common Stock convert into shares of Class A Common stock on a share-for-share basis.

Holders of Class A and Class B Common Stock are entitled to receive cash dividends equally on a per-share basis, if and when the Company's Board of Directors declares such dividends. In the case of any stock dividend paid, holders of Class A Common Stock are entitled to receive the same percentage dividend (payable in shares of Class A Common Stock) as the holders of Class B Common Stock receive (payable in shares of Class B Common Stock).

Holders of Class A and Class B Common Stock share with each other on a ratable basis as a single class in the net assets of the Company in the event of liquidation.

Beginning January 1, 2002, the Company offered a deferred compensation plan that permits management and highly compensated employees to defer portions of their compensation and to select a method of investing these funds. The salaries that have been deferred since the plan's inception have been accrued and the only expense, other than salaries, related to this plan is the unrealized gain/loss on the deferred amounts. Investment income includes an unrealized loss of $16,000 for 2002 related to this plan. The Company has included $1,008,000 in other long-term liabilities at December 31, 2002 to reflect its liability under this plan. To fund this plan, the Company purchases corporate-owned whole-life insurance contracts on the related employees, of which the Company is the beneficiary. Investments and marketable securities include the cash surrender value of these policies aggregating $914,000 as of December 31, 2002.

As of December 31, 2002, the Company had three active stock option and stock purchase plans, described below.

The Board of Directors adopted the 1997 Stock Option Plan, effective February 11, 1997, and 4,250,000 shares of Class A Common Stock were reserved for issuance under the plan. The 1997 Stock Option Plan is a flexible plan that provides the committee that administers the Plan broad discretion to fashion the terms of the awards to provide eligible participants with stock-based incentives, including: (i) nonqualified and incentive stock options for the purchase of the Company's Class A Common Stock and (ii) dividend equivalents. The persons eligible to participate in the 1997 Stock Option Plan are directors, officers, and employees of the Company or any subsidiary of the Company who, in the opinion of the committee administering the plan, are in a position to make contributions to the growth, management, protection and success of the Company or its subsidiaries. As of December 31, 2002, 1,377,587 shares were available under the plan.

The options granted under the 1997 Stock Option Plan have an exercise price equal to the closing market price of the Company's stock on the date of grant. The options generally vest over two- to five-year periods and have a legal life of ten years from the date of grant. The Board of Directors administers the plan.

The Company's Board of Directors adopted the 1997 Director Plan, effective February 11, 1997. The 1997 Director Plan provides for the issuance of options to purchase up to 77,000 shares of Class A Common Stock, which shares are reserved and available for purchase upon the exercise of options granted under the 1997 Director Plan. Only directors who are not employees or officers of the Company are eligible to participate in the 1997 Director Plan. Under the 1997 Director Plan, each non-employee director was granted, on the effective date of the plan, an option to purchase 15,000

shares of Class A Common Stock, and each non-employee director subsequently elected to the Board will be granted an option to purchase shares of Class A Common Stock on the date of his or her election. Options granted under the 1997 Director Plan provide for the purchase of Class A Common Stock at a price equal to the fair market value on the date of grant. If there are not sufficient shares remaining and available to all non-employee directors eligible for an automatic grant at the time at which an automatic grant would otherwise be made, then each eligible non-employee director shall receive an option to purchase a pro rata number of shares. Unless otherwise provided in an option agreement, options granted under the 1997 Director Plan shall become exercisable in five equal increments beginning on the date of the grant and on each of the first four anniversaries thereof. All options expire on the earlier of (a) ten years following the grant date or (b) the second anniversary of the termination of the non-employee director's directorship for any reason other than due to death or disability (as defined in the 1997 Director Plan). A total of 52,500 shares were issued under this plan, which was terminated February 1, 2002. At December 31, 2002, 9,000 options issued under the 1997 Director Plan remained outstanding and unexercised.

The Board of Directors and stockholders adopted the 2001 Stock Purchase Plan and reserved 500,000 shares of Class A Common Stock for issuance thereunder. Under this plan, employees who work a minimum of 20 hours per week may elect to withhold up to 10% of their cash compensation through regular payroll deductions to purchase shares of Class A Common Stock from the Company over a period not to exceed 12 months at a purchase price per share equal to the lesser of: (1) 85% of the fair market value of the shares as of the date of the grant, or (2) 85% of the fair market value of the shares as of the date of purchase. As of December 31, 2002, 68,905 shares have been purchased under the plan.

The Company's Board of Directors adopted the 2002 Director Plan, effective February 1, 2002. The 2002 Director Plan provides for the issuance of options to purchase up to 160,000 shares of Class A Common Stock, which shares are reserved and available for purchase upon the exercise of options granted under the 2002 Director Plan. Only directors who are not employees or officers of the Company are eligible to participate in the 2002 Director Plan. Under the 2002 Director Plan, each non-employee director was granted, on the effective date of the plan, an option to purchase 20,000 shares of Class A Common Stock, and each non-employee director subsequently elected to the Board will be granted an option to purchase shares of Class A Common Stock on the date of his or her election. Options granted under the 2002 Director Plan provide for the purchase of Class A Common Stock at a price equal to the fair market value on the date of grant. If there are not sufficient shares remaining and available to all non-employee directors eligible for an automatic grant at the time at which an automatic grant would otherwise be made, then each eligible non-employee director shall receive an option to purchase a pro rata number of shares. As of December 31, 2002, 100,000 shares were available under the plan. Unless otherwise provided in an option agreement, options granted under the 2002 Director Plan shall become exercisable in five equal increments beginning on the date of the grant and on each of the first four anniversaries thereof. All options expire on the earlier of (a) ten years following the grant date, (b) the first anniversary of the termination of the non-employee director's directorship for any reason other than those listed in clause (c) below, or (c) the termination of the non-employee director's directorship by the Company's stockholders for cause, or resignation for cause, in each case as defined in the option agreement.

For purposes of calculating the compensation cost consistent with SFAS No. 123, the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for stock option grants in 2002, 2001, and 2000, respectively: expected dividend yield of 0% for each period; expected volatility of 53%, 59%, and 58%; risk free interest rate of 4.55%, 4.38%, and 5.05%; and expected weighted-average life of six years, five years, and five years. The fair value of options granted was $35,234,000 in 2002, $11,930,000 in 2001 and $24,290,000 in 2000.

The fair value of the employees' purchase rights pursuant to the Stock Purchase Plan are estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for purchase rights granted in 2002, 2001, and 2000, respectively: fair market value of $51.14, $38.18, and $44.62; option price of $43.47, $32.45, and $37.92; expected dividend yield of 0% for each period; expected volatility of 40%, 54%, and 71%; risk-free interest rate of 1.32%, 2.17%, and 5.85%; and expected lives of three months to one year.

Stock option activity for the years ended December 31, 2002, 2001, and 2000 was as follows:

The following table summarizes information about fixed stock options outstanding at December 31, 2002:

		First Quarter			Second Quarter			Third Quarter			Fourth Quarter
2002		$	73		$	0		$	0		$	0
2001		$	832		$	532		$	305		$	169

Sales to ScanSource, Inc., accounted for 13.6% of net sales in 2002. No customer accounted for 10% or more of net sales in 2001 or 2000.

ZEBRA TECHNOLOGIES CORPORATION
Schedule II
Valuation and Qualifying Accounts
(Amounts in thousands)

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Delaware		36-2675536
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
333 Corporate Woods Parkway, Vernon Hills, IL 60061 (Address of principal executive offices) (Zip Code)

		Square Footage
Location		Manufacturing, Production & Warehousing	Administrative, Research & Sales	Total	Lease Expires
Vernon Hills, Illinois, USA		111,676	113,429	225,105	June 2014
Camarillo, California, USA		69,921	72,156	142,077	Owned
Warwick, Rhode Island, USA		50,872	48,968	98,727	April 2005
Greenville, Wisconsin, USA		26,917	2,284	30,000	March 2007
High Wycombe, UK		—	24,700	24,700	October 2018
Preston, UK		30,450	8,600	39,050	Owned
Varades, France		8,151	5,919	14,070	December 2006

	Total	297,987	276,056	573,729

2002	High		Low		2001	High		Low
First Quarter	$	58.99	$	47.27	First Quarter	$	57.00	$	35.50
Second Quarter		60.15		47.37	Second Quarter		52.06		34.13
Third Quarter		57.94		45.12	Third Quarter		49.95		35.15
Fourth Quarter		68.60		48.50	Fourth Quarter		56.50		36.00

Year Ended December 31,		2002			2001			2000			1999			1998
Net sales		$	475,611		$	450,008		$	481,569		$	402,213		$	339,678
Cost of sales			244,864			240,115			249,141			198,942			183,639

Gross profit			230,747			209,893			232,428			203,271			156,039
Total operating expenses			128,942	(1)(2)		117,434	(2)		123,758	(2)		99,487	(3)		94,174	(3)

Operating income			101,805	(1)(2)		92,459	(2)		108,670	(2)		103,784	(3)		61,865	(3)
Income before income taxes			110,883	(1)(2)		96,139	(2)		111,911	(2)		108,800	(3)		65,021	(3)
Net income			71,595	(1)(2)		61,529	(2)		71,622	(2)		69,632	(3)		40,069	(3)
Earnings per share
	Basic	$	2.31	(1)(2)	$	2.01	(2)	$	2.33	(2)	$	2.23	(3)	$	1.30	(3)
	Diluted	$	2.29	(1)(2)	$	1.99	(2)	$	2.30	(2)	$	2.21	(3)	$	1.29	(3)
Weighted average shares outstanding
	Basic		30,983			30,645			30,790			31,175			30,919
	Diluted		31,265			30,881			31,155			31,521			31,176

December 31,	2002		2001		2000		1999		1998
Cash and cash equivalents and investments and marketable securities	$	348,577	$	249,349	$	156,714	$	235,568	$	162,668
Working capital		427,676		330,510		256,799		302,804		229,688
Total assets		573,088		479,556		418,896		394,643		310,002
Long-term obligations		1,613		408		513		664		36
Stockholders' equity		534,155		445,007		371,288		349,307		270,884

		Years Ended
Product Category		December 31, 2002		December 31, 2001		Percent Change		(i) Percent of Total Sales—2002	(ii) Percent of Total Sales—2001
Hardware		$	360,185	$	339,895	6.0		75.7	75.6
Supplies			87,981		85,266	3.2		18.5	18.9
Service and software			23,301		19,336	20.5		4.9	4.3
Freight revenue			4,144		5,511	(24.8	)	0.9	1.2

	Total sales	$	475,611	$	450,008	5.7		100.0	100.0

		Years Ended
Geographic Region		December 31, 2002		December 31, 2001		Percent Change	(iii) Percent of Total Sales—2002	(iv) Percent of Total Sales—2001
International			205,323		180,053	14.0	43.2	40.0
North America			270,288		269,955	0.1	56.8	60.0

	Total sales	$	475,611	$	450,008	5.7	100.0	100.0

		Years Ended
Product Category		December 31, 2001		December 31, 2000		Percent Change		(v) Percent of Total Sales—2001	(vi) Percent of Total Sales—2000
Hardware		$	339,895	$	378,093	(10.1	)	75.6	78.5
Supplies			85,266		81,045	5.2		18.9	16.8
Service and software			19,336		16,659	16.1		4.3	3.5
Freight revenue			5,511		5,772	(4.5	)	1.2	1.2

	Total sales	$	450,008	$	481,569	(6.6	)	100.0	100.0

		ZEBRA TECHNOLOGIES CORPORATION
		By:	/s/ EDWARD L. KAPLAN Edward L. Kaplan Chairman and Chief Executive Officer

2.1	(1)	Stock Purchase Agreement dated March 21, 2000, by and among Registrant, Comtec Information Systems, Inc., Comtec Information Systems Acquisition Corporation and the stockholders of Comtec Information Systems, Inc., and Comtec Information Systems Acquisition Corporation.
3.1	(2)	Certificate of Incorporation of the Registrant.
3.2	(3)	Certificate of Amendment to Certificate of Incorporation of the Registrant.
3.3	(4)	Bylaws of the Registrant.
3.4	(5)	Amendment to Bylaws of the Registrant.
3.5	(3)	Amendment to Bylaws of the Registrant.
4.0	(4)	Specimen stock certificate representing Class A Common Stock.
4.1	(6)	Rights Agreement between the Registrant and Mellon Investor Services, as Rights Agent.
10.1	(7)	1997 Stock Option Plan. +
10.2	(8)	First Amendment to the 1997 Stock Option Plan. +
10.3	(8)	Second Amendment to the 1997 Stock Option Plan. +
10.4	(9)	Third Amendment to the 1997 Stock Option Plan. +
10.5	(10)	Amendment No. Four to the 1997 Stock Option Plan. +
10.6	(4)	Form of Indemnification Agreement between the Registrant and each of its directors.
10.7	(4)	Lease between the Registrant and Unique Building Corporation for the Registrant's facility in Vernon Hills, Illinois, as amended.
10.8	(4)	Guaranty by the Registrant of certain obligations.
10.9	(7)	Directors' 1997 Stock Option Plan.+
10.10	(5)	Employment Agreement between the Registrant and Charles R. Whitchurch. +
10.11	(11)	Amendment to the lease between the Registrant and Unique Building Corporation for the Registrant's facility in Vernon Hills, Illinois, dated April 1, 1993.
10.12	(12)	Amendment to the lease between the Registrant and Unique Building Corporation for the Registrant's facility in Vernon Hills, Illinois, dated December 1, 1994.
10.13	(13)	Amendment to the lease between the Registrant and Unique Building Corporation for the Registrant's facility in Vernon Hills, Illinois, dated June 1, 1996.
10.14	(13)	Amendment to the lease between the Registrant and Unique Building Corporation for the Registrant's facility in Vernon Hills, Illinois, dated June 2, 1996.
10.15	(14)	Employment Agreement between the Registrant, Eltron, and Donald K. Skinner. +
10.16	(15)	Amendment to the lease between the Registrant and Unique Building Corporation for the Registrant's facility in Vernon Hills, Illinois, dated as of July 1, 1999.
10.17	(16)	Lease between the Registrant and CRE Corporation for the Registrant's facility in Warwick, Rhode Island, dated as of June 30, 2000.
10.18	(6)	Employment Agreement between the Registrant and John Paxton. +
10.19	(3)	2002 Non-Employee Director Stock Option Plan. +
10.20	(3)	Amendment No. 1 to the 2002 Non-Employee Director Stock Option Plan. +
10.21	(3)	2002 Non-Employee Director Stock Option Plan Non-Qualified Stock Option Agreement. +
10.22		Executive Nonqualified Deferred Compensation Plan. +
21.0		Subsidiaries of the Registrant.
23.1		Consent of KPMG LLP, independent auditors.
99.1		Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2		Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


		(1)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Form 8-K filed April 18, 2000, and incorporated herein by reference.
		(2)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Registration Statement on Form S-3, File No. 333-33315, and incorporated herein by reference.
		(3)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Form 10-Q for the quarterly period ended June 29, 2002, and incorporated herein by reference.
		(4)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Registration Statement on Form S-1, as amended, File No. 33-41576, and incorporated herein by reference.
		(5)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference.
		(6)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Form 10-Q for the quarterly period ended March 30, 2002, and incorporated herein by reference.
		(7)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.
		(8)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Registration Statement on Form S-8, File No. 333-63009, and incorporated herein by reference.
		(9)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Registration Statement on Form S-8, File No. 333-84512, and incorporated herein by reference.
		(10)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Form 10-Q for the quarterly period ended September 28, 2002, and incorporated herein by reference.
		(11)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference.
		(12)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference.
		(13)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference.
		(14)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Registration Statement on Form S-4, as amended, File No. 333-60241, and incorporated herein by reference.
		(15)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Form 10-Q for the quarterly period ended April 1, 2000, and incorporated herein by reference.
		(16)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
		+		Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K.

		Page
Financial Statements
	Independent Auditors' Report	F-2
	Consolidated Balance Sheets as of December 31, 2002 and 2001	F-3
	Consolidated Statements of Earnings for the Years ended December 31, 2002, 2001, and 2000	F-4
	Consolidated Statements of Comprehensive Income for the Years ended December 31, 2002, 2001, and 2000	F-5
	Consolidated Statements of Stockholders' Equity for the Years ended December 31, 2002, 2001, and 2000	F-6
	Consolidated Statements of Cash Flows for the Years ended December 31, 2002, 2001, and 2000	F-7
	Notes to Consolidated Financial Statements	F-8
Financial Statement Schedule
	The following financial statement schedule is included herein:
	Schedule II—Valuation and Qualifying Accounts	F-25

				December 31, 2002			December 31, 2001
ASSETS
Current assets:
	Cash and cash equivalents			$	18,418		$	26,328
	Investments and marketable securities				330,159			223,021
	Accounts receivable, net of allowances of $1,236 in 2002 and $1,975 in 2001				71,299			67,160
	Inventories				38,066			39,923
	Deferred income taxes				4,107			4,295
	Prepaid expenses				2,531			3,611

		Total current assets			464,580			364,338

Property and equipment at cost, less accumulated depreciation and amortization					39,462			40,742
Deferred income taxes					1,722			902
Goodwill					54,455			32,735
Other intangibles					3,556			26,693
Other assets					9,313			14,146

			Total assets	$	573,088		$	479,556

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	15,447		$	14,414
	Accrued liabilities				17,661			14,993
	Short-term note payable				275			221
	Current portion of obligation under capital lease				145			79
	Income taxes payable				3,376			4,121

		Total current liabilities			36,904			33,828
Obligation under capital lease, less current portion					605			408
Deferred rent					416			313
Other long-term liability					1,008			—

			Total liabilities		38,933			34,549

Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized, none outstanding					—			—
Class A Common Stock, $.01 par value; 50,000,000 shares authorized, 27,660,466 and 26,018,743 shares issued, and 27,282,087 and 25,256,380 shares outstanding in 2002 and 2001, respectively					276			260
Class B Common Stock, $.01 par value; 28,358,189 shares authorized, 3,886,050 and 5,527,773 shares issued and outstanding in 2002 and 2001, respectively					39			55
Additional paid-in capital					56,478			59,012
Treasury stock, at cost (378,379 shares and 762,363 shares, respectively)					(16,760	)		(35,482	)
Retained earnings					494,150			422,555
Accumulated other comprehensive loss					(28	)		(1,393	)

			Total stockholders' equity		534,155			445,007

			Total liabilities and stockholders' equity	$	573,088		$	479,556

														Accumulated Other Comprehensive Income
	Class A Common Stock		Class B Common Stock			Additional Paid-in Capital			Retained Earnings		Treasury Stock			Unrealized Holding Gain (Loss) on Investments			Cumulative Translation Adjustment			Total
Balance at December 31, 1999	$	249	$	65		$	60,072		$	289,404	$	—		$	—		$	(483	)	$	349,307

Issuance of 128,827 shares of Class A Common Stock upon exercise of stock options		1		—			3,227			—		—			—			—			3,228
Conversion of 604,187 shares of Class B Common Stock to 604,187 shares of Class A Common Stock		6		(6	)		—			—		—			—			—			—
Repurchase of 1,170,500 shares of Class A Common Stock		—		—			—			—		(55,505	)		—			—			(55,505	)
Reissuance of 111,747 treasury shares upon exercise of stock options and purchases under stock purchase plan		—		—			(1,952	)		—		5,377			—			—			3,425
Tax benefit resulting from exercise of options		—		—			1,505			—		—			—			—			1,505
Gains on put options		—		—			639			—		—			—			—			639
Net income		—		—			—			71,622		—			—			—			71,622
Unrealized holding loss on investments (net of income taxes)		—		—			—			—		—			(1,425	)		—			(1,425	)
Foreign currency translation adjustment		—		—			—			—		—			—			(1,508	)		(1,508	)

Balance at December 31, 2000		256		59			63,491			361,026		(50,128	)		(1,425	)		(1,991	)		371,288

Conversion of 408,228 shares of Class B Common Stock to 408,228 shares of Class A Common Stock		4		(4	)		—			—		—			—			—			—
Reissuance of 296,390 treasury shares upon exercise of stock options and purchases under stock purchase plan		—		—			(5,751	)		—		14,646			—			—			8,895
Tax benefit resulting from exercise of options		—		—			1,273			—		—			—			—			1,273
Loss on put options		—		—			(1	)		—		—			—			—			(1	)
Net income		—		—			—			61,529		—			—			—			61,529
Unrealized holding gain on investments (net of income taxes)		—		—			—			—		—			3,000			—			3,000
Foreign currency translation adjustment		—		—			—			—		—			—			(977	)		(977	)

Balance at December 31, 2001		260		55			59,012			422,555		(35,482	)		1,575			(2,968	)		445,007

Conversion of 1,641,723 shares of Class B Common Stock to 1,641,723 shares of Class A Common Stock		16		(16	)		—			—		—			—			—			—
Reissuance of 383,984 treasury shares upon exercise of stock options and purchases under stock purchase plan		—		—			(5,616	)		—		18,722			—			—			13,106
Tax benefit resulting from exercise of options		—		—			3,082			—		—			—			—			3,082
Net income		—		—			—			71,595		—			—			—			71,595
Unrealized holding loss on investments (net of income taxes)		—		—			—			—		—			(1,603	)		—			(1,603	)
Foreign currency translation adjustment		—		—			—			—		—			—			2,968			2,968

Balance at December 31, 2002	$	276	$	39		$	56,478		$	494,150	$	(16,760	)	$	(28	)	$	—		$	534,155

		Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Available for sale (included in other assets):
	Equity securities	$	365	$	—	$	(42	)	$	323
Trading securities:
	U.S. government and agency securities		96,195		207		(152	)		96,250
	State and municipal bonds		174,508		275		(1,565	)		173,218
	Corporate bonds		34,316		149		(196	)		34,269
	Partnership interests		15,676		3,139		(12	)		18,803
	Other		7,607		28		(16	)		7,619

			328,302		3,798		(1,941	)		330,159

		$	328,667	$	3,798	$	(1,983	)	$	330,482

		Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Available for sale (included in other assets):
	Equity securities	$	1,804	$	2,462	$	—		$	4,266
Trading securities:
	U.S. government and agency securities		118,825		42		(53	)		118,814
	State and municipal bonds		76,576		286		(222	)		76,640
	Corporate bonds		5,077		89		—			5,166
	Partnership interests		17,326		3,104		(29	)		20,401
	Other		2,000		—		—			2,000

			219,804		3,521		(304	)		223,021

		$	221,608	$	5,983	$	(304	)	$	227,287

	2002		2001		2000
United States	$	101,454	$	90,272	$	101,532
Outside United States		9,429		5,867		10,379

Total	$	110,883	$	96,139	$	111,911

		2002			2001			2000
Current:
	Federal	$	30,660		$	25,998		$	35,362
	State		5,247			5,319			6,441
	Foreign		3,254			2,107			3,761
Deferred:
	Federal		296			1,132			(4,922	)
	State		40			152			(472	)
	Foreign		(209	)		(98	)		119

Total		$	39,288		$	34,610		$	40,289

	2002			2001			2000
Provision computed at statutory rate	$	38,809		$	33,649		$	39,169
State income tax (net of Federal tax benefit)		3,634			3,556			3,880
Tax-exempt interest and dividend income		(2,422	)		(1,524	)		(1,588	)
Tax benefit of exempt foreign trade income		(1,575	)		(1,438	)		(1,035	)
Other		842			367			(137	)

Provision for income taxes	$	39,288		$	34,610		$	40,289

		December 31,
		2002			2001
Deferred tax assets:
	Deferred rent-building	$	165		$	124
	Capital equipment lease		114			11
	Accrued vacation		647			576
	Inventory items		2,008			2,193
	Allowance for doubtful accounts		19			259
	Other accruals		3,424			3,102
	Acquisition related items		2,114			2,321
	Unrealized loss on securities		189			—

Total deferred tax assets			8,680			8,586
Deferred tax liabilities:
	Unrealized gain on securities		—			(1,717	)
	Depreciation		(2,851	)		(1,672	)

Total deferred tax liabilities			(2,851	)		(3,389	)

Net deferred tax asset		$	5,829		$	5,197

		As of December 31, 2002
		Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets
	Current technology	$	7,421	$	(3,865	)
Unamortized intangible assets
	Goodwill	$	54,455
Aggregate amortization expense
	For the year ended December 31, 2002	$	1,494
Estimated amortization expense
	For the year ended December 31, 2003		1,494
	For the year ended December 31, 2004		1,494
	For the year ended December 31, 2005		568

	United States		United Kingdom		Other		Total
2002
Net sales	$	341,941	$	133,670	$	—	$	475,611
Long-lived assets		90,873		5,707		893		97,473
2001
Net sales	$	325,003	$	111,577	$	13,428	$	450,008
Long-lived assets		93,345		5,755		1,070		100,170
2000
Net sales	$	357,412	$	100,988	$	23,169	$	481,569
Long-lived assets		97,637		6,526		1,234		105,397

	2002				2001				2000
Fixed Options	Shares		Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price
Outstanding at beginning of year	1,413,385		$	38.38	1,487,277		$	36.08	1,390,588		$	27.88
Granted	718,750			49.02	287,500			41.49	440,000			55.29
Exercised	(342,001	)		32.09	(247,838	)		28.38	(195,369	)		23.76
Canceled	(124,739	)		48.45	(113,554	)		38.02	(147,942	)		31.57

Outstanding at end of year	1,665,395			43.51	1,413,385			38.38	1,487,277			36.10
Options exercisable at end of year	385,201			34.87	477,385			31.22	417,570			27.82

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price		Number of Shares	Weighted-Average Exercise Price
$4.31	4,500	1.52 years	$	4.31	4,500	$	4.31
$17.38-$26.56	350,198	5.63 years	$	26.02	214,567	$	25.68
$29.25-$40.88	298,959	7.46 years	$	39.39	73,510	$	36.47
$43.13-$54.69	816,863	8.82 years	$	48.64	30,397	$	47.68
$60.63	194,875	7.13 years	$	60.63	62,227	$	60.63

	1,665,395				385,201

2002	First Quarter (1)(2)		Second Quarter		Third Quarter		Fourth Quarter
Net sales	$	110,185	$	115,951	$	123,151	$	126,324
Gross profit		52,012		55,749		60,422		62,564
Operating expenses		32,474		30,783		31,538		34,147
Operating income		19,538		24,966		28,884		28,417
Net income		14,940		16,460		19,867		20,328
Basic earnings per share	$	0.49	$	0.53	$	0.64	$	0.65
Diluted earnings per share	$	0.48	$	0.53	$	0.64	$	0.65

2001	First Quarter(2)		Second Quarter(2)		Third Quarter(2)		Fourth Quarter(2)
Net sales	$	115,144	$	112,935	$	110,318	$	111,611
Gross profit		54,022		52,334		52,037		51,500
Operating expenses		29,339		31,069		28,317		28,709
Operating income		24,683		21,265		23,720		22,791
Net income		16,930		14,471		14,882		15,246
Basic earnings per share	$	0.55	$	0.47	$	0.49	$	0.50
Diluted earnings per share	$	0.55	$	0.47	$	0.48	$	0.49

Description		Balance at Beginning of Period		Charged to Costs and Expenses			Deductions			Balance at End of Period
Valuation account for accounts receivable:
	Year ended December 31, 2002	$	1,975	$	909		$	1,648		$	1,236
	Year ended December 31, 2001	$	1,420	$	489		$	(66	)	$	1,975
	Year ended December 31, 2000	$	1,850	$	(47	)	$	383		$	1,420
Valuation account for inventories:
	Year ended December 31, 2002	$	5,916	$	1,664		$	2,505		$	5,075
	Year ended December 31, 2001	$	5,743	$	2,171		$	1,998		$	5,916
	Year ended December 31, 2000	$	4,556	$	3,692		$	2,505		$	5,743