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

       The following is a discussion and analysis of our financial position and results of operations for each of the three years in the period ended December 31, 2005. This commentary should be read in conjunction with our consolidated financial statements and the notes thereto which appear beginning under “Item 8: Financial Statements and Supplementary Data.”

Executive Overview

What businesses are we in?

      Motorola reports financial results for the following four operating business segments:

What were our 2005 financial highlights?

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What drove the $2.4 billion increase in earnings from continuing operations?

      The key contributors to the substantial increase in earnings from continuing operations were:

What were the financial highlights for our four operating segments in 2005?

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What were our other major accomplishments in 2005?

      In 2005, we were focused first and foremost on increasing profitable sales and growing market share. We realigned our structure to better enable our vision of seamless mobility, now serving our customers through four business units: Mobile Devices, Government and Enterprise Mobility Solutions, Networks and Connected Home Solutions.

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      During 2005, Motorola was awarded the National Medal of Technology for its outstanding contributions to America’s technological innovation and competitiveness over its more than 75-year history. The National Medal of Technology, established in 1980 by an act of Congress, is the highest honor awarded by the President to America’s leading innovators. The award recognizes that since its founding in 1928, Motorola has stood on the cutting edge of innovation in areas such as two-way radios, cellular communication, paging, space flight communication, semiconductors and integrated, digital enhanced networks. As a result, the Company has helped establish entirely new industries and driven the phenomenal growth of mobile communications.

Looking Forward

      In 2006, we will build upon our 2005 achievements with our continued commitment to quality and our unrelenting focus on innovation. We will continue to pursue profitable market share growth across all our businesses.

      We are focused on our seamless mobility strategy. Seamless mobility recognizes that the boundaries between work, home, entertainment and leisure continue to dissolve. As we move between different environments, devices and networks, seamless mobility will deliver fluid experiences across the home, vehicle, office and beyond. Motorola is a thought leader on digital convergence.

      As we develop seamless mobility, we remain committed to delivering compelling products in all our businesses. We will continue to build on the success of the MOTORAZR with ultra thin products, including the introduction of the QWERTY design known as the Q, in 2006. We will continue to invest in next-generation, mission-critical data, video and security, and mesh technology to enable us to offer the most compelling products to public-safety agencies and other government customers. We will continue to build our enterprise business by offering products that enable the mobile enterprise. We will continue to develop and offer next-generation infrastructure networks that enable the mobile Internet and lead us to a seamless world.

      2006 will not be without challenges. We conduct our business in highly-competitive markets, facing new and established competitors. We also face technological and other industry challenges in developing seamless mobility products. Full digital convergence will require technological advancements and significant investment in research and development. The research and development of new, technologically advanced product is a complex process requiring high levels of innovations, as well as accurate anticipation of technological and market trends. During the year, we will continue to focus on improving the quality of our products and on enhancing our supply chain to ensure that we can meet customer demand and improve efficiency. However, we believe that despite these challenges, our seamless mobility strategy and our compelling products will result in a successful 2006.

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      Geographic market sales measured by the locale of the end customer as a percent of total net sales for 2005, 2004 and 2003 are as follows:

Geographic Market Sales by Locale of End Customer

      In June 2005, Moody’s upgraded the Company’s long-term debt rating to “Baa2” with a “stable” outlook from “Baa3” with a “positive” outlook. Moody’s also upgraded the Company’s short-term debt rating to “P-2” from “P-3”. In May 2005, S&P upgraded the Company’s long-term debt rating to “BBB+” with a “stable” outlook from “BBB” with a “positive” outlook. There was no change in the short-term rating of “A-2”. In January 2005, Fitch upgraded the Company’s long-term debt rating to “BBB+” with a “positive” outlook from “BBB” with a “positive” outlook. There was no change in the short-term rating of “F-2”.

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

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

      As further described under “Customer Financing Arrangements” below, for many years the Company has utilized a number of receivables programs to sell a broadly-diversified group of short-term receivables to third parties. Certain of the short-term receivables are sold to a multi-seller commercial paper conduit. This program provides for up to $300 million of short-term receivables to be outstanding with the conduit at any time. The obligations of the conduit to continue to purchase receivables under this short-term receivables program could be terminated if the Company’s long-term debt was rated lower than “BB+” by S&P or “Ba1” by Moody’s (which would be a decline of three levels from the current Moody’s rating). If this short-term receivables program were terminated, the Company would no longer be able to sell its short-term receivables to the conduit in this manner, but it would not have to repurchase previously-sold receivables.

Credit Facilities

      At December 31, 2005, the Company’s total domestic and non-U.S.  credit facilities totaled $2.9 billion, of which $95 million was considered utilized. These facilities are principally comprised of: (i) a $1.0 billion three-year revolving domestic credit facility maturing in May 2007 (the “3-Year Credit Facility”) which is not utilized, and (ii) $1.9 billion of non-U.S.  credit facilities (of which $95 million was considered utilized at December 31, 2005). Unused availability under the existing credit facilities, together with available cash, cash equivalents, Sigma Funds balances and other sources of liquidity, are generally available to support outstanding commercial paper, which was $300 million at December 31, 2005.

      In order to borrow funds under the 3-Year Credit Facility, the Company must be in compliance with various conditions, covenants and representations contained in the agreements. Important terms of the 3-Year Credit

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Facility include covenants relating to net interest coverage and total debt-to -book capitalization ratios. The Company was in compliance with the terms of the 3-Year Credit Facility at December 31, 2005. The Company has never borrowed under its domestic revolving credit facilities. Utilization of the non-U.S. credit facilities may also be dependent on the Company’s ability to meet certain conditions at the time a borrowing is requested.

Contractual Obligations, Guarantees, and Other Purchase Commitments

Contractual Obligations

      Summarized in the table below are the Company’s obligations and commitments to make future payments under debt obligations (assuming earliest possible exercise of put rights by holders), lease payment obligations, and purchase obligations as of December 31, 2005.

      Debt Obligations: At December 31, 2005, the Company’s long-term debt obligations, including current maturities and unamortized discount and issue costs, totaled $4.0 billion, as compared to $5.0 billion at December 31, 2004. A table of all outstanding long-term debt securities can be found in Note 4, “Debt and Credit Facilities,” to the Company’s consolidated financial statements. As previously discussed, the decrease in the long-term debt obligations as compared to December 31, 2004, was due to the redemptions and repurchases of $1.0 billion principal amount of outstanding securities during 2005. Also, as previously discussed, the remaining $118 million of 7.6% Notes due January 1, 2007 were reclassified to current maturities of long-term debt.

      Lease Obligations: The Company owns most of its major facilities, but does lease certain office, factory and warehouse space, land, and information technology and other equipment under principally non-cancelable operating leases. At December 31, 2005, future minimum lease obligations, net of minimum sublease rentals, totaled $1.2 billion. Rental expense, net of sublease income, was $254 million in 2005, $217 million in 2004 and $223 million in 2003.

      Purchase Obligations: The Company has entered into agreements for the purchase of inventory, license of software, promotional agreements, and research and development agreements which are firm commitments and are not cancelable. The longest of these agreements extends through 2015. Total payments expected to be made under these agreements total $992 million.

      Commitments Under Other Long-Term Agreements: The Company has entered into certain long-term agreements to purchase software, components, supplies and materials from suppliers. Most of the agreements extend for periods of one to three years (three to five years for software). However, generally these agreements do not obligate the Company to make any purchases, and many permit the Company to terminate the agreement with advance notice (usually ranging from 60 to 180 days). If the Company were to terminate these agreements, it generally would be liable for certain termination charges, typically based on work performed and supplier on-hand inventory and raw materials attributable to canceled orders. The Company’s liability would only arise in the event it terminates the agreements for reasons other than “cause.”

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

      As is customary in bidding for and completing network infrastructure projects and pursuant to a practice the Company has followed for many years, the Company has a number of performance/bid bonds and standby letters of credit outstanding, primarily relating to projects of Government and Enterprise Mobility Solutions segment and the Networks segment. These instruments normally have maturities of up to three years and are standard in the

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industry as a way to give customers a convenient mechanism to seek resolution if a contractor does not satisfy performance requirements under a contract. A customer can draw on the instrument only if the Company does not fulfill all terms of a project contract. If such an occasion occurred, the Company would be obligated to reimburse the financial institution that issued the bond or letter of credit for the amounts paid. The Company is not generally required to post any cash in connection with the issuance of these bonds or letters of credit. In its long history, it has been extraordinarily uncommon for the Company to have a performance/bid bond or standby letter of credit drawn upon. At December 31, 2005, outstanding performance/bid bonds and standby letters of credit totaled approximately $1.1 billion, compared to $1.0 billion at the end of 2004.

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

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

Customer Financing Commitments and Guarantees

      Outstanding Commitments: Certain purchasers of the Company’s infrastructure equipment continue to request that suppliers provide financing in connection with equipment purchases. Financing may include all or a portion of the purchase price of the equipment as well as working capital. Periodically, the Company makes commitments to provide financing to purchasers in connection with the sale of equipment. However, the Company’s obligation to provide financing is often conditioned on the issuance of a letter of credit in favor of the Company by a reputable bank to support the purchaser’s credit or a pre-existing commitment from a reputable bank to purchase the receivable from the Company. The Company had outstanding commitments to extend credit to third-parties totaling $689 million at December 31, 2005, compared to $294 million at December 31, 2004. Of these amounts, $594 million was supported by letters of credit or by bank commitments to purchase receivables at December 31, 2005, compared to $162 million at December 31, 2004.

      Guarantees of Third-Party Debt: In addition to providing direct financing to certain equipment customers, the Company also assists customers in obtaining financing directly from banks and other sources to fund equipment purchases. The Company had committed to provide financial guarantees relating to customer financing totaling $115 million and $78 million at December 31, 2005 and December 31, 2004, respectively (including $66 million and $70 million, respectively, relating to the sale of short-term receivables). Customer financing guarantees outstanding were $71 million and $29 million at December 31, 2005 and December 31, 2004, respectively (including $42 million and $25 million, respectively, relating to the sale of short-term receivables).

Customer Financing Arrangements

      Outstanding Finance Receivables: The Company had net finance receivables of $260 million at December 31, 2005, compared to $170 million at December 31, 2004 (net of allowances for losses of $12 million at December 31, 2005 and $2.0 billion at December 31, 2004). These finance receivables are generally interest bearing, with rates ranging from 3% to 10%. Interest income recognized on finance receivables for the years ended December 31, 2005, 2004 and 2003 was $7 million, $9 million and $18 million, respectively.

      Telsim Loan: On October 28, 2005, the Company announced that it settled the Company’s and its subsidiaries’ financial and legal claims against Telsim Mobil Telekomunikasyon Hizmetleri A.S. (“Telsim”). The Government of Turkey and the Turkish Savings and Deposit Insurance Fund (“TMSF”) are third-party beneficiaries of the settlement agreement. In settlement of its claims, the Company received $500 million in cash and the right to receive 20% of any proceeds in excess of $2.5 billion from any sale of Telsim. On December 13, 2005, Vodafone agreed to purchase Telsim for $4.55 billion, pursuant to a sales process organized by the TMSF. This purchase has not yet been completed. Accordingly, Motorola expects to receive an additional cash payment of $410 million upon the completion of the sale. Although there can be no assurances as to when or if the sale will close, the Company currently expects to receive the $410 million in the second quarter of 2006. The gross receivable outstanding from Telsim was zero at December 31, 2005. The Company is permitted to, and will continue to, enforce its U.S. court judgment against the Uzan family, except in Turkey and three other countries. As a result of

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difficulties in collecting the amounts due from Telsim, the Company had previously recorded charges reducing the net receivable from Telsim to zero. The net receivable from Telsim has been zero since 2002.

      Sales of Receivables and Loans: From time to time, the Company sells short-term receivables, long-term loans and lease receivables under sales-type leases (collectively, “finance receivables”) to third parties in transactions that qualify as “true-sales.” Certain of these finance receivables are sold to third parties on a one-time, non-recourse basis, while others are sold to third parties under committed facilities that involve contractual commitments from these parties to purchase qualifying receivables up to an outstanding monetary limit. Committed facilities may be revolving in nature. Certain sales may be made through separate legal entities that are also consolidated by the Company. The Company may or may not retain the obligation to service the sold finance receivables.

      In the aggregate, at December 31, 2005, these committed facilities provided for up to $1.1 billion to be outstanding with the third parties at any time, as compared to up to $724 million provided at December 31, 2004 and up to $598 million provided at December 31, 2003. As of December 31, 2005, $585 million of these committed facilities were utilized, compared to $305 million utilized at December 31, 2004 and $295 million utilized at December 31, 2003. Certain events could cause one of these facilities to terminate. In addition, before receivables can be sold under certain of the committed facilities they may need to meet contractual requirements, such as credit quality or insurability.

      Total finance receivables sold by the Company were $4.5 billion in 2005 (including $4.2 billion of short-term receivables), compared to $3.8 billion sold in 2004 (including $3.8 billion of short-term receivables) and $2.8 billion sold in 2003 (including $2.7 billion of short-term receivables). As of December 31, 2005, there were $1.0 billion of receivables outstanding under these programs for which the Company retained servicing obligations (including $838 million of short-term receivables), compared to $720 million outstanding at December 31, 2004 (including $589 of short-term receivables) and $557 million outstanding at December 31, 2003 (including $378 of short-term receivables).

      Under certain of the receivables programs, the value of the receivables sold is covered by credit insurance obtained from independent insurance companies, less deductibles or self-insurance requirements under the policies (with the Company retaining credit exposure for the remaining portion). The Company’s total credit exposure to outstanding short-term receivables that have been sold was $66 million at December 31, 2005 as compared to $25 million at December 31, 2004. Reserves of $4 million were recorded for potential losses on sold receivables at both December 31, 2005 and December 31, 2004.

Other Contingencies

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

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

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

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Segment Information

       The following commentary should be read in conjunction with the financial results of each reporting segment as detailed in Note 10, “Information by Segment and Geographic Region,” to the Company’s consolidated financial statements. Net sales and operating results for the Company’s four operating segments for 2005, 2004 and 2003 are presented below.

Mobile Devices Segment

      The Mobile Devices segment designs, manufactures, sells and services wireless handsets, with integrated software and accessory products. In 2005, Mobile Devices’ net sales represented 58% of the Company’s consolidated net sales, compared to 55% in 2004 and 49% in 2003.

Segment Results— 2005 Compared to 2004

      In 2005, the segment’s net sales increased 25% to $21.5 billion, compared to $17.1 billion in 2004. This 25% increase in net sales was driven by a 40% increase in unit shipments in 2005, reflecting strong consumer demand for GSM handsets and consumers’ desire for the segment’s compelling products that combine innovative style and leading technology. The segment had increased net sales in all regions as a result of an improved product portfolio, strong market growth in emerging markets and high replacement sales in more mature markets.

      The segment’s operating earnings increased to $2.2 billion in 2005, compared to operating earnings of $1.7 billion in 2004. The 27% increase in operating earnings was primarily related to an increase in gross margin, driven by the 25% increase in net sales. The improvements in operating results were partially offset by: (i) an increase in selling, general and administrative (“SG&A”) expenses, reflecting increased advertising and promotion expenditures to support higher sales and brand awareness, and (ii) an increase in total research and development (“R&D”) expenditures, as a result of increased investment in new product development. The segment’s industry typically experiences short life cycles for new products. Therefore, it is vital to the segment’s success that new, compelling products are constantly introduced. Accordingly, a strong commitment to R&D is required to fuel long-term growth.

      The segment’s backlog was $3.0 billion at December 31, 2005, compared to $1.5 billion at December 31, 2004. During the year, the segment had strong order growth and backlog increased due to: (i) high levels of customer demand for new products during the fourth quarter, certain of which were unable to be shipped in significant quantities due to supply constraints for select components, and (ii) the segment’s higher level of general order input in the fourth quarter of 2005 compared to the fourth quarter of 2004.

      Unit shipments increased by 40% to 146.0 million in 2005, compared to 104.5 million in 2004. The increase in unit shipments was attributed to a 17% increase in the size of the total worldwide handset market and a gain in the segment’s market share. The gain in market share was attributed to broad acceptance of the segment’s product offering, particularly a strong demand for GSM handsets. For the full year 2005, unit shipments by the segment increased in all regions.

      In 2005, average sales price (“ASP”) decreased approximately 10% compared to 2004. The overall decrease in ASP was driven primarily by a higher percentage of lower-tier, lower-priced handsets in the overall sales mix. By comparison, ASP increased approximately 15% in 2004 and declined 8% in 2003. ASP is impacted by numerous factors, including product mix, market conditions and competitive product offerings, and ASP trends often vary over time.

      A few customers represent a significant portion of the segment’s net sales. During 2005, purchases of iDEN ^® products by Sprint Nextel Corporation and its affiliates (“Sprint Nextel”) comprised approximately 11% of the segment’s net sales. On August 12, 2005, Sprint Corporation and Nextel Communications, Inc. completed their merger transaction (the “Sprint Nextel Merger”) that was announced in December 2004. The combined company, Sprint Nextel, is the segment’s largest customer and Motorola has been its sole supplier of iDEN handsets and core

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iDEN ^® network infrastructure equipment for over ten years. Sprint Nextel uses Motorola’s proprietary iDEN technology to support its nationwide wireless service business. Motorola is currently operating under supply agreements for iDEN handsets and infrastructure equipment that cover the period from January 1, 2005 through December 31, 2007. The segment did not experience any significant impact to its business in 2005 as a result of the Sprint Nextel Merger.

      The largest of the segment’s end customers (including sales through distributors) are Sprint Nextel, Cingular, China Mobile, América Móvil and T-Mobile. Besides selling directly to carriers and operators, Mobile Devices also sells products through a variety of third-party distributors and retailers, which account for approximately 36% of the segment’s net sales. The largest of these distributors, Brightstar Corporation, is our primary distributor in Latin America. The loss of any of the segment’s key customers could have a significant impact on the segment’s business.

      Although the U.S. market continued to be the segment’s largest individual market, many of our customers, and more than 60% of our segment’s total net sales, are outside the U.S. The largest of these international markets are China, the United Kingdom, Brazil, Germany and Mexico.

Segment Results—2004 Compared to 2003

      In 2004, the segment’s net sales increased 52% to $17.1 billion, compared to $11.2 billion in 2003. This 52% increase in net sales was driven by increases in both unit shipments and ASP compared to 2003, and reflected strong consumer demand for new products. The strong demand for these new handsets was reflected by increased net sales in all regions.

      The segment’s operating earnings increased to $1.7 billion in 2004, compared to operating earnings of $511 million in 2003. The 238% increase in operating earnings was primarily related to an increase in gross margin, which was driven by: (i) the 52% increase in net sales, and (ii) a decrease in reorganization of business charges, primarily due to: (a) charges recorded in 2003 for employee severance and exit costs, which were primarily related to the exit of certain manufacturing activities in Flensburg, Germany, and (b) reversals of accruals recorded in 2004 that were related to accruals for exit costs and employee severance which were no longer needed. These improvements to operating results were partially offset by: (i) an increase in SG&A expenditures, reflecting increased advertising, promotion and marketing expenditures to support higher sales and brand awareness, and (ii) an increase in R&D expenditures, primarily reflecting increased developmental engineering expenditures due to additional investment in new product development.

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

      Unit shipments increased by 39% to 104.5 million in 2004, compared to 75.3 million in 2003. The overall increase was driven by increased unit shipments in all regions. Correspondingly, the segment’s market share was estimated to have increased in 2004 compared to 2003.

      Also contributing to the increase in net sales in 2004 was an improvement in the segment’s ASP, which increased approximately 15% in 2004 compared to 2003. The overall increase in ASP was driven primarily by a shift in product mix during 2004 towards higher-tier handsets. By comparison, ASP declined approximately 8% in 2003 and 5% in 2002.

      The largest of the segment’s end customers (including sales through distributors) were Sprint Nextel, Cingular, China Mobile and Vodafone. During 2004, purchases of iDEN ^® products by Sprint Nextel comprised approximately 14% of the segment’s net sales. Besides selling directly to carriers and operators, the segment also sold products through a variety of third-party distributors and retailers, which accounted for approximately 30% of the segment’s net sales. The largest of these distributors, Brightstar Corporation, and was our primary distributor in Latin America.

      Although the U.S. market continued to be the segment’s largest market, sales into non-U.S.  markets represented approximately 60% of the segment’s total net sales in 2004, compared to 52% in 2003. The largest of these international markets in 2004 were China, the United Kingdom and Brazil. In North America, the industry saw consolidation of some major telecommunications carriers in 2004, involving some of the segment’s largest

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customers. However, the segment did not see any significant impact on their business in 2004 due to these consolidations.

Government and Enterprise Mobility Solutions Segment

      The Government and Enterprise Mobility Solutions segment designs, manufactures, sells, installs and services analog and digital two-way radio, voice and data communications products and systems to a wide range of public-safety, government, utility, transportation and other worldwide markets, and participates in the market for integrated information management, mobile and biometric applications and services. The segment also designs, manufactures and sells automotive electronics systems, as well as telematics systems that enable communication and advanced safety features for automobiles. In 2005, the segment net sales represented 18% of the Company’s consolidated net sales, compared to 20% in 2004 and 24% in 2003.

Segment Results—2005 Compared to 2004

      In 2005, the segment’s net sales increased 6% to $6.6 billion, compared to $6.2 billion in 2004. The increase in net sales reflects increased sales to the segment’s government and enterprise markets, partially offset by a decrease in sales to the automotive electronics market, driven primarily by weak automobile industry conditions. The increase in net sales in the government market was driven by increased customer spending on enhanced mission-critical communications and the continued focus on homeland security initiatives. The increase in net sales in the enterprise market reflects enterprise customers’ demand for business-critical communications. The overall increase in net sales was driven by net sales growth in the Americas and Asia.

      The segment’s operating earnings increased to $882 million in 2005, compared to operating earnings of $842 million in 2004. The 5% increase in operating earnings was primarily due to a 6% increase in net sales. This improvement in operating results was partially offset by: (i) an increase in SG&A expenditures, (ii) an increase in reorganization of business charges, primarily relating to employee severance, and (iii) an increase in R&D expenditures, driven by increased investment in next-generation technologies across the segment.

      Net sales in North America continue to comprise a significant portion of the segment’s business, accounting for 69% of the segment’s net sales in both 2005 and 2004. The principal Automotive customers are large automobile manufacturers, primarily in North America. Net sales to five such customers represented approximately 20% of the segment’s net sales in 2005. The segment’s backlog was $2.4 billion at both December 31, 2005 and December 31, 2004.

      Natural disasters and terrorist-related worldwide events in 2005 continued to place an emphasis on mission-critical communications systems. Spending by the segment’s government and public safety customers is affected by government budgets at the national, state and local levels. The segment will continue to work closely with all pertinent government departments and agencies to ensure that two-way radio and wireless communications is positioned as a critical need for public safety and homeland security. As a global leader in mission-critical communications, we expect to continue to grow as spending increases worldwide for mission-critical communications systems. The segment continues to be well-positioned to serve the increased worldwide demand for these systems in 2006 and beyond.

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

Segment Results—2004 Compared to 2003

      In 2004, the segment’s net sales increased 12% to $6.2 billion, compared to $5.6 billion in 2003. The increase in net sales reflected: (i) continued emphasis on spending by customers in the segment’s government market on

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enhanced mission-critical communications and the continued focus on homeland security initiatives, (ii) increased spending by the segment’s enterprise customers on business-critical communications needs, and (iii) an increase in automative-related sales. The overall increase in net sales reflected net sales growth in all regions.

      The segment’s operating earnings increased to $842 million in 2004, compared to operating earnings of $663 million in 2003. The 27% increase in operating earnings was primarily due to: (i) the 12% increase in net sales, (ii) cost savings from supply-chain efficiencies, and (iii) overall cost structure improvements. Also contributing to the increase in operating earnings was a decrease in reorganization of business charges, primarily due to a decrease in charges related to segment-wide employee severance. These improvements in operating results were partially offset by: (i) an increase in R&D expenditures driven by increased investment in new technologies, (ii) an increase in SG&A expenditures, primarily due to an increase in selling and sales support expenditures, resulting from the 12% increase in net sales, and (iii) $17 million of in-process research and development charges related to the acquisitions of MeshNetworks, Inc. (“MeshNetworks”) and CRISNET, Inc. (“CRISNET”)

      Net sales in North America continued to comprise a significant portion of the segment’s business, accounting for 67% of the segment’s net sales in both 2004 and 2003. The segment’s backlog was $2.4 billion at December 31, 2004, compared to $2.0 billion at December 31, 2003. The increase in backlog at the end of 2004 was driven by the awarding of large, multi-year projects in the segment’s government market during the latter half of 2004.

      In the fourth quarter of 2004, the Company completed the acquisitions of MeshNetworks and CRISNET. MeshNetworks is a leading developer of mobile mesh networking and position-location technologies. CRISNET has a suite of advanced software applications for law enforcement, justice and public safety agencies.

Networks Segment

      The Networks segment designs, manufactures, sells, installs and services: (i) cellular infrastructure systems, including hardware and software, (ii)  fiber-to -the-premise (“FTTP”) and fiber-to -the-node (“FTTN”) transmission systems supporting high-speed data, video and voice, and (iii) wireless broadband systems. In addition, the segment designs, manufactures, and sells embedded communications computing platforms. In 2005, the segment’s net sales represented 17% of the Company’s consolidated net sales compared to 19% in 2004 and 21% in 2003.

Segment Results— 2005 Compared to 2004

      In 2005, the segment’s net sales increased 5% to $6.3 billion, compared to $6.0 billion in 2004. The 5% increase in sales was driven by increased customer purchases of cellular infrastructure equipment, as well as increased sales of wireless broadband systems and embedded computing communications systems. On a geographic basis, net sales increased in the Europe, Middle East and Africa region (“EMEA”) and North America, which offset lower sales in Asia and Latin America. Sales into non-U.S.  markets represented approximately 58% of the segment’s total net sales in 2005, compared to approximately 66% in 2004. The segment’s backlog was $2.0 billion at both December 31, 2005, and December 31, 2004.

      The segment’s operating earnings increased to $990 million in 2005, compared to operating earnings of $718 million in 2004. The 38% increase in operating earnings was primarily related to an increase in gross margin, which was due to: (i) the 5% increase in net sales, and (ii) improvements in cost structure. These improvements in operating results were partially offset by an increase in SG&A expenditures, primarily due to increased selling and sales support expenditures, as a result of the 5% increase in net sales. R&D expenditures also increased compared to 2004, due to additional investment in the growth businesses of wireless broadband systems and passive optical networks.

      The cellular infrastructure industry experienced its second straight year of growth in 2005, with estimated worldwide industry growth of 10%. The segment’s 5% increase in net sales was reflective of the overall sales growth in the industry, yet resulted in a slight loss of market share for the segment in 2005.

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      The nature of the segment’s business is long-term contracts with major operators that require sizeable investments by its customers. In 2005, five customers— Sprint Nextel; KDDI; China Mobile; Verizon; and China Unicom— represented approximately 53% of the segment’s net sales. The loss of one of these major customers could have a significant impact on the segment’s business and, because contracts are long-term in nature, could impact revenue and earnings over several quarters.

      On August 12, 2005, Sprint Corporation and Nextel Communications, Inc. completed their merger transaction (the “Sprint Nextel Merger”) that was announced in December 2004. The combined company, Sprint Nextel, is the segment’s largest customer, representing 23% of the segment’s net sales in 2005. Motorola has been Sprint Nextel’s sole supplier of iDEN ^® handsets and core iDEN network infrastructure equipment for over ten years. Sprint Nextel uses Motorola’s proprietary iDEN technology to support its nationwide wireless service business. Motorola is currently operating under supply agreements for iDEN handsets and infrastructure equipment that cover the period from January 1, 2005 through December 31, 2007. The segment did not experience any significant impact to its business in 2005 as a result of the Sprint Nextel Merger.

      We also continue to build on our industry-leading position in push-to-talk over cellular (“PoC”) technology. We have executed agreements to launch our PoC product application on both GSM and CDMA2000 networks. The Networks business deployed PoC technology for 44 wireless carriers in 33 countries and territories in 2005. In addition, the Networks segment has begun executing on its seamless mobility strategy with major contract wins in PON and Wireless Broadband. In 2005, we announced an agreement with Verizon to supply FTTP access equipment and related services enabling their triple play offering (voice, data and video). We also signed a contract with Earthlink to deliver equipment and services enabling them to become a Metro WiFi broadband provider in Philadelphia, Anaheim and other cities.

Segment Results—2004 Compared to 2003

      In 2004, the segment’s net sales increased 24% to $6.0 billion, compared to $4.8 billion in 2003. The 24% increase in net sales in 2004 was driven by an increase in spending by the segment’s wireless service provider customers and reflects increased net sales in both the segment’s mature and emerging markets. Net sales growth occurred in all technologies and in all regions. Sales into non-U.S.  markets represented approximately 66% of the segment’s total net sales in 2004, compared to approximately 63% in 2003. The segment’s backlog was $2.0 billion at December 31, 2004, compared to $1.7 billion at December 31, 2003.

      The segment’s operating earnings increased to $718 million in 2004, compared to operating earnings of $148 million in 2003. The 385% increase in operating earnings was primarily related to an increase in gross margin, which was due to: (i) the 24% increase in net sales, and (ii) continued cost containment in the segment’s supply chain. These improvements in operating results were partially offset by: (i) an increase in SG&A expenditures, primarily due to increased selling and sales support expenditures, as a result of the 24% increase in net sales, and (ii) an increase in R&D expenditures in 2004 compared to 2003.

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

      In 2004, five customers—China Mobile; China Unicom; KDDI; Sprint Nextel; and Verizon—represented approximately 54% of the segment’s net sales. Sprint Nextel was the segment’s largest customer in 2004, representing 20% of the segment’s net sales.

      In May 2004, the Company completed the acquisition of Quantum Bridge, a leading provider of fiber-to-the-premise (“FTTP”) solutions. The acquisition complements Motorola’s existing multiservice technology, enabling the Company to offer a full-service access platform that broadband network operators can deploy to deliver the next generation of advanced services. The Quantum Bridge business became a part of the Networks segment in 2005 as part of the realignment of the segments that was effective January 1, 2005.

Connected Home Solutions Segment

      The Connected Home Solutions segment designs, manufactures and sells a wide variety of broadband products, including: (i) digital systems and set-top boxes for cable television, Internet Protocol (“IP”) video and broadcast networks, (ii) high speed data products, including cable modems and cable modem termination systems (“CMTS”) and IP-based telephony products, (iii) hybrid fiber coaxial network transmission systems used by cable television

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Segment Results— 2005 Compared to 2004

      In 2005, the segment’s net sales increased 25% to $2.8 billion, compared to $2.2 billion in 2004. The increase in overall net sales was driven by increases in both ASP and unit shipments of digital set-top boxes. Net sales increased in North America, Latin America and Asia, partially offset by a slight decrease in net sales in EMEA. Net sales in North America continue to comprise a significant portion of the segment’s business, accounting for 84% of the segment’s total net sales in 2005, compared to 83% in 2004. The segment’s backlog was $424 million at December 31, 2005, compared to $305 million at December 31, 2004.

      The segment generated operating earnings of $185 million in 2005, compared to $146 million in 2004. The improvement in operating results was primarily due to the 25% increase in net sales, partially offset by increased product costs due to increased sales of higher-end products, mainly HD/DVR set-top boxes. Although HD/ DVR set-top boxes carry a higher ASP, the higher costs on the HD/DVR set-top box line caused gross margin as a percentage of sales to decrease in 2005, compared to 2004. R&D and SG&A expenditures increased in total, but decreased as a percentage of net sales, primarily due to the increase in net sales.

      In 2005, net sales of digital set-top boxes increased 34%, due to increases in both ASP and unit shipments. The increase in ASP was driven by a product-mix shift towards higher-end products, particularly HD/ DVR set-top boxes. The increase in unit shipments was primarily due to the increased spending by cable operators. The segment continued to be the worldwide leader in market share for digital cable set-top boxes.

      In 2005, net sales of cable modems increased 9%. The increase in net sales was due to an increase in cable modem unit shipments, which was partially offset by the decline in ASP for cable modems. The decrease in ASP was primarily due to increased competition. The segment retained its leading worldwide market share in cable modems.

      Demand for the segment’s products depends primarily on the level of capital spending by broadband operators for constructing, rebuilding or upgrading their communications systems and services. After a number of years of decreased capital spending, in 2004 and 2005 our cable operator customers increased their purchases of the segment’s products and services, primarily due to increased demand for advanced digital set-top boxes to provide HD/ DVR functionality.

      The segment is dependent upon a small number of customers for a significant portion of its sales. Because of continuing consolidation within the cable industry, a small number of large cable television multiple system operators (“MSOs”) own a large portion of the cable systems and account for a significant portion of the total capital spending. In 2005, net sales to the segment’s top five customers represented 53% of the segment’s total net sales. Net sales to the segment’s largest customer, Comcast, accounted for 31% of the total net sales of the segment. The loss of business from any major MSO could have a significant impact on the segment’s business.

      During the first quarter of 2005, Motorola and Comcast entered into a broader strategic relationship that includes an agreement for a multi-year set-top box commitment. This agreement extended Comcast and Motorola’s agreement for Comcast to purchase set-top boxes and network equipment, including HD/ DVR and standard-definition entry-level set-top box models. As part of this strategic relationship, Motorola and Comcast also formed two joint ventures that will focus on developing and licensing the next generation of conditional access technologies.

      On February 24, 2006, the segment completed the acquisition of Kreatel Communications AB (“Kreatel”), a leading developer of innovative IP based digital set-top boxes. IPTV, or the video component of the triple play, is expected to be the primary focus for telecommunication companies around the world as it offers a significant competitive tool versus cable operators. The segment plans to integrate Kreatel’s set-top boxes into its current suite

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of digital systems and set-top boxes for cable television, IP video and broadcast networks, enabling the segment to offer a full range of connected home solutions which enable customers to be seamlessly connected, informed and entertained.

Segment Results— 2004 Compared to 2003

      In 2004, the segment’s net sales increased 27% to $2.2 billion, compared to $1.7 billion in 2003. The increase in overall net sales was primarily due to: (i) increased purchases of digital cable set-top boxes by cable operators, (ii) an increase in ASP due to a mix shift in digital set-top boxes towards higher-end products, and (iii) an increase in retail sales. The increase in net sales reflects net sales growth in all regions, primarily in North America. Net sales in North America continued to comprise a significant portion of the segment’s business, accounting for 83% of the segment’s total net sales in 2004, compared to 85% in 2003. The segment’s backlog was $305 million at December 31, 2004, compared to $288 million at December 31, 2003.

      The segment generated operating earnings of $146 million in 2004, compared to operating earnings of $48 million in 2003. The improvement in operating results was due to: (i) an increase in gross margin, which was driven by the 27% increase in net sales, (ii) a $73 million charge for impairment of goodwill related to the infrastructure business that occurred in 2003, and (iii) a decrease in SG&A expenditures. The decrease in SG&A expenditures was primarily due to: (i) a decrease in intangible amortization, and (ii) a decrease in administrative expenses due to benefits from prior cost-reduction actions. Although gross margin increased, the segment’s gross margin as a percentage of net sales decreased, primarily due to sales of new higher-tier products carrying lower initial margins, which is typical in the early phases of the segment’s product life cycles.

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

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

      The segment was dependent upon a small number of customers for a significant portion of its sales in 2004. Because of continuing consolidation within the cable industry, a small number of MSOs own a large portion of the cable systems and account for a significant portion of the total capital spending. In 2004, net sales to the segment’s top five customers represented 47% of the segment’s total net sales. Net sales to the segment’s largest customer, Comcast, accounted for 30% of the total net sales of the segment in 2004.

Significant Accounting Policies

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

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

   — Revenue recognition

   — Allowance for losses on finance receivables

   — Inventory valuation reserves

   — Deferred tax asset valuation

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   — Valuation of investments and long-lived assets

   — Restructuring activities

   — Retirement-related benefits

Revenue Recognition

      The Company’s arrangements with customers may differ in nature and complexity and may contain multiple deliverables including products, equipment, services and software that may be essential to the functionality of the other deliverables, which requires the Company to make judgments and estimates in recognizing revenues.

      Product and equipment sales may contain discounts, price protection, return provisions and other customer incentives. The Company’s recorded revenues are reduced by allowances for these items at the time the sales are recorded. The allowances are based on management’s best estimate of the amount of allowances that the customer will ultimately earn and is based on historical experience taking into account the type of products sold, the type of customer and the type of transaction specific to each arrangement.

      The Company’s long-term contracts involve the design, engineering, manufacturing and installation of wireless networks and two-way radio voice and data systems. These systems are designed to meet specific customer requirements and specifications and generally require extended periods to complete. If the Company can reliably estimate revenues and contract costs and the technology is considered proven, revenue is recognized under the percentage of completion method as work progresses towards completion. Estimates of contract revenues, contract costs and progress towards completion are based on estimates that consider historical experience and other factors believed to be relevant under the circumstances. Management regularly reviews these estimates and considers the impact of recurring business risks and uncertainties inherent in the contracts, such as system performance and implementation delays due to factors within or outside the control of management.

      Generally, multiple element arrangements are separated into specific accounting units when delivered elements have value to the customer on a stand-alone basis, objective and reliable evidence of fair value exists for the undelivered element(s), and delivery of the undelivered element(s) is probable and substantially within the control of the Company. Total arrangement consideration is allocated to the separate accounting units based on their relative fair values (if the fair value of each accounting unit is known) or using the residual method (if the fair value of the undelivered element(s) is known). Revenue is recognized for a separate accounting unit when the revenue recognition criteria are met for that unit. In certain situations, judgment is required in determining both the number of accounting units and fair value of the elements, although generally the fair value of an element can be objectively determined if the Company sells the element on a stand alone basis.

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

Allowance for Losses on Finance Receivables

      The Company has historically provided financing to certain customers in connection with purchases of the Company’s infrastructure equipment where the contractual terms of the note agreements are greater than one year. Financing provided has included all or a portion of the equipment purchase price, as well as working capital for certain purchasers.

      Gross financing receivables were $272 million at December 31, 2005 and $2.1 billion at December 31, 2004, with an allowance for losses on these receivables of $12 million and $2.0 billion, respectively. Of the receivables at December 31, 2005, $10 million (zero net of allowances for losses of $10 million) were considered impaired based on management’s determination that the Company will be unable to collect all amounts in accordance with the contractual terms of the relevant agreement. By comparison, impaired receivables at December 31, 2004 were $2.0 billion ($7 million, net of allowance for losses of $2.0 billion).

      Management periodically reviews customer account activity in order to assess the adequacy of the allowances provided for potential losses. Factors considered include economic conditions, collateral values and each customer’s payment history and credit worthiness. Adjustments, if any, are made to reserve balances following the completion

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of these reviews to reflect management’s best estimate of potential losses. The resulting net finance receivable balance is intended to represent the estimated realizable value as determined based on: (i) the fair value of the underlying collateral, if the receivable is collateralized, or (ii) the present value of expected future cash flows discounted at the effective interest rate implicit in the underlying receivable.

Inventory Valuation Reserves

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

      Inventories consisted of the following:

      The Company balances the need to maintain strategic inventory levels to ensure competitive delivery performance to its customers against the risk of inventory obsolescence due to rapidly changing technology and customer requirements. As indicated above, the Company’s inventory reserves represented 18% of the gross inventory balance at December 31, 2005 and 2004. These reserve levels are maintained by the Company to provide for unique circumstances facing our businesses. The Company has inventory reserves for pending cancellations of product lines due to technology changes, long-life cycle products, lifetime buys at the end of supplier production runs, business exits, and a shift of production to outsourcing.

      If actual future demand or market conditions are less favorable than those projected by management, additional inventory writedowns may be required. Likewise, as with other reserves based on management’s judgment, if the reserve is no longer needed, amounts are reversed into income. There were no significant reversals into income of this type in 2005 or 2004.

Deferred Tax Asset Valuation

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

      At December 31, 2005 and 2004, the Company’s deferred tax assets related to tax carryforwards were $2.1 billion and $2.2 billion, respectively. The tax carryforwards are comprised of net operating loss carryforwards, foreign tax credit and other tax credit carryovers for both U.S. and non-U.S. subsidiaries. A majority of the net operating losses and other tax credits can be carried forward for 20 years. The carryforward period for foreign tax credits was extended to ten years, from five years, during 2004 with the enactment of the American Jobs Creation Act of 2004.

      The Company has recorded valuation allowances totaling $896 million and $892 million as of December 31, 2005 and 2004, respectively, for certain state credits and state tax loss carryforwards with carryforward periods of seven years or less, tax loss carryforwards of acquired entities that are subject to limitations and tax loss

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carryforwards and other deferred tax assets of certain non-U.S.  subsidiaries. The Company believes that the deferred tax assets for the remaining tax carryforwards are considered more likely than not to be realizable based on estimates of future taxable income and the implementation of tax planning strategies.

Valuation of Investments and Long-Lived Assets

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

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

      At December 31, 2005 and 2004, the net book values of these assets were as follows (in millions):

      The Company recorded fixed asset impairment charges of $15 million in 2005, compared to no charges in 2004 and charges of $10 million in 2003. The 2003 charges primarily related to certain information technology equipment that was deemed to be impaired.

      The Company recorded impairment charges related to its investment portfolio of $25 million, $36 million and $96 million in 2005, 2004 and 2003, respectively, representing other-than-temporary declines in the value of the Company’s investment portfolio. The impairment charges in 2005 and 2004 are primarily related to cost-based investment write-downs. The $96 million impairment charge in 2003 was primarily comprised of a $29 million charge to write down to zero the Company’s debt security holding in a European cable operator and other cost-based investment writedowns. Additionally, the available-for-sale securities portfolio reflected a net pre-tax unrealized gain position of $157 million and $2.3 billion at December 31, 2005 and 2004, respectively.

      The Company performs a goodwill impairment test at the reporting unit level at least annually as of October, or more often should triggering events occur. In determining the fair value of the reporting unit, the Company utilizes independent appraisal firms who employ a combination of present value techniques and quoted market prices of comparable businesses. No impairment charges were required in 2005. During 2004, the Company determined that goodwill related to a sensor business, which was subsequently divested in 2005, was impaired by $125 million. During 2003, the Company determined that the goodwill at the infrastructure reporting unit of the Connected Home Solutions segment was impaired by $73 million.

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

Restructuring Activities

      The Company maintains a formal Involuntary Severance Plan (the “Severance Plan”) which permits the Company to offer eligible employees severance benefits based on years of service and employment grade level in the event that employment is involuntarily terminated as a result of a reduction-in -force or restructuring. Each separate reduction-in -force has qualified for severance benefits under the Severance Plan and, therefore, such

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benefits are accounted for in accordance with Statement No. 112, “Accounting for Postemployment Benefits” (“SFAS 112”). Under the provisions of SFAS 112, the Company recognizes termination benefits based on formulas per the Severance Plan at the point in time that future settlement is probable and can be reasonably estimated based on estimates prepared at the time a restructuring plan is approved by management. Exit costs primarily consist of future minimum lease payments on vacated facilities.

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

Retirement-Related Benefits

      The Company’s noncontributory pension plan (the “Regular Pension Plan”) covers U.S. employees who became eligible after one year of service. The benefit formula is dependent upon employee earnings and years of service. Effective January 1, 2005, newly-hired employees were not eligible to participate in the Regular Pension Plan. The Company also provides defined benefit plans to some of its foreign entities (the “Non-U.S.  Plans”).

      The Company also has a noncontributory supplemental retirement benefit plan (the “Officers’ Plan”) for its elected officers. The Officers’ Plan contains provisions for funding the participants’ expected retirement benefits when the participants meet the minimum age and years of service requirements. Elected officers who were not yet vested in the Officers’ Plan as of December 31, 1999 had the option to remain in the Officers’ Plan or elect to have their benefit bought out in restricted stock units. Effective December 31, 1999, no new elected officers were eligible to participate in the Officers’ Plan. Effective June 30, 2005, salaries were frozen for this plan.

      The Company has an additional noncontributory supplemental retirement benefit plan, the Motorola Supplemental Pension Plan (“MSPP”), which provides supplemental benefits in excess of the limitations imposed by the Internal Revenue Code on the Regular Pension Plan. All newly-elected officers are participants in MSPP. Elected officers covered under the Officers’ Plan or who participated in the restricted stock buy-out are not eligible to participate in MSPP.

      Certain healthcare benefits are available to eligible domestic employees meeting certain age and service requirements upon termination of employment (the “Postretirement Healthcare Benefits Plan”). For eligible employees hired prior to January 1, 2002, the Company offsets a portion of the postretirement medical costs to the retired participant. As of January 1, 2005, the Postretirement Healthcare Benefits Plan has been closed to new participants.

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

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

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

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Company’s investment return assumption for the Regular Pension Plan and Postretirement Health Care Benefits Plan was 8.50% in both 2005 and 2004. The investment return assumption for the Officers’ Plan was 6.00% in both 2005 and 2004. At December 31, 2005, the Regular Pension Plan investment portfolio was predominantly equity investments and the Officers’ Plan investment portfolio was predominantly fixed-income securities.

      A second key assumption is the discount rate. The discount rate assumptions used for pension benefits and postretirement health care benefits accounting reflects, at December 31 of each year, the prevailing market rates for high-quality, fixed-income debt instruments that, if the obligation was settled at the measurement date, would provide the necessary future cash flows to pay the benefit obligation when due. The Company’s discount rate for measuring the pension obligations was 6.00% both at December 31, 2005 and December 31, 2004. The Company’s discount rate for measuring the retirement healthcare obligation was 5.75% at December 31, 2005, compared to 6.00% at December 31, 2004.

      A final set of assumptions involves the cost drivers of the underlying benefits. The rate of compensation increase is a key assumption used in the actuarial model for pension accounting and is determined by the Company based upon its long-term plans for such increases. In both 2005 and 2004, the Company’s rate for future compensation increase was 4.00% for non-officer employees. The Company’s 2005 rate for future compensation increase for the Officers’ Plan was 0% as salaries have been frozen for this plan. The Company’s 2004 rate for future compensation increase for the Officers’ Plan was 3.00%. For retiree medical plan accounting, the Company reviews external data and its own historical trends for health care costs to determine the health care cost trend rates. Based on this review, the health care cost trend rate used to determine the December 31, 2005 accumulated postretirement benefit obligation was 10% for 2006 with a declining trend rate of 1% each year until it reaches 5% by 2011, with a flat 5% rate for 2011 and beyond.

      Negative financial market returns during 2000 through 2002 resulted in a decline in the fair-market value of plan assets. This, when combined with declining discount rate assumptions in the last several years, has resulted in a decline in the funded status of the Company’s domestic and certain non-U.S.  plans. Consequently, the Company’s accumulated benefit obligation for various plans exceeded the fair-market value of the plan assets for these plans at December 31, 2005. The Company recorded a non-cash, after-tax, net charge of $208 million to equity relating to the Regular Pension Plan, the Officers’ Plan, and certain non-U.S.  subsidiaries retirement programs in the fourth quarter of 2005. This charge was included in Non-owner changes to equity in the consolidated balance sheets, and did not impact the Company’s pension expense, earnings or cash contribution requirements in 2005.

      For the Regular Pension Plan, the Company currently estimates 2006 expenses for continuing operations will be approximately $230 million. The 2005 and 2004 actual expenses, which include discontinued operations, were $177 million and $167 million, respectively. Cash contributions of $275 million were made to the Regular Pension Plan in 2005. The Company expects to make cash contributions of $270 million to this plan during 2006. In addition, the Company expects to make cash contributions of $5 million to its Officers’ and MSPP plans, collectively, and $44 million to its Non-U.S. Plans in 2006.

      For the Postretirement Health Care Benefits Plan, the Company currently estimates 2006 expenses for continuing operations will be approximately $31 million. The 2005 and 2004 actual expenses, which include discontinued operations, were $27 million and $39 million, respectively. The Company has partially funded its accumulated benefit obligation of $496 million with plan assets valued at $212 million at December 31, 2005. Motorola is obligated to transfer to Freescale Semiconductor $68 million in cash or plan assets, as permitted by law without adverse tax consequences to Motorola, with such transfer expected to occur in 2006, plus investment returns earned on this amount, which was approximately $7 million as of December 31, 2005. Cash contributions of $43 million were made to this plan in 2005. No cash contributions were required in 2004. The Company expects to make a cash contribution of approximately $45 million to the Postretirement Health Care Benefits Plan in 2006.

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

Recent Accounting Pronouncements

      In October 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statement”. SFAS 154 retained accounting guidance related to

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changes in estimates, changes in a reporting entity and error corrections; however, changes in accounting principles must be accounted for retrospectively by modifying the financial statements of prior periods. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not believe adoption of SFAS 154 will have a material impact on our financial condition, results of operations, or cash flows.

      In December 2004, the FASB issued Statement No. 123R (“SFAS 123R”), a revision to Statement No. 123, “Accounting for Stock-Based Compensation.” This standard requires the Company to measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards. The cost will be recognized as compensation expense over the vesting period of the awards. The standard provides for a prospective application. Under this method, the Company will begin recognizing compensation cost for equity based compensation for all new or modified grants after the date of adoption. In addition, the Company will recognize the unvested portion of the grant date fair value of awards issued prior to adoption based on the fair values previously calculated for disclosure purposes. At December 31, 2005, the aggregate value of unvested options, as determined using a Black-Scholes option valuation model, was $467 million. Upon adoption of SFAS 123R, a majority of this amount will be recognized over the remaining vesting period of these options. The Company will adopt SFAS 123R as of January 1, 2006. The Company believes that the adoption of this standard will result in a reduction of earnings per share by $0.06 to $0.08 in 2006. This estimate is based on many assumptions including the level of stock option grants expected in 2006, the Company’s stock price, and significant assumptions in the option valuation model including volatility and the expected life of options. Actual expenses could differ from the estimate.

      In November 2004, the FASB issued Statement No. 151, “Inventory Costs” (“SFAS 151”). SFAS 151 requires that abnormal amounts of idle facility expense, freight, handling costs, and spoilage, be charged to expense in the period they are incurred rather than capitalized as a component of inventory costs. In addition, SFAS 151 requires the allocation of fixed production overheads to the costs of conversions based on the normal capacity of the production facilities. The Company is required to adopt provisions of SFAS 151, on a prospective basis, as of January 1, 2006. The Company does not believe the adoption of SFAS 151 will have a material impact on the future results of operations.

Realignment of Segments Effective January 1, 2005

      The Company announced its decision, effective January 1, 2005, to realign its businesses into four operating business groups: (i) Mobile Devices, (ii) Government and Enterprise Mobility Solutions, (iii) Networks, and (iv) Connected Home Solutions. The historical segment financial information presented in the filing has been reclassified to reflect the realigned segments. The realignment had no impact on the Company’s previously-reported historical consolidated net sales, operating earnings(loss), earnings(loss) from continuing operations, net earnings(loss) or earnings(loss) per share.

Reclassification of Incentive Compensation Costs

      The consolidated statements of operations include reclassified incentive compensation costs, which were previously reported as a component of Selling, general and administrative (“SG&A”) expenditures, to Cost of sales and Research and development (“R&D”) expenditures based upon the function in which the related employees operate. The impact of this reclassification was: (i) a reduction in Gross margin of $89 million, $143 million and $64 million in 2005, 2004 and 2003, respectively, (ii) a decrease in SG&A expenditures of $334 million, $495 million and $244 million in 2005, 2004 and 2003, respectively, and (iii) an increase in R&D expenditures of $245 million, $352 million and $180 million in 2005, 2004 and 2003, respectively. The reclassification has also been reflected within the quarterly financial information provided in Note 15. The reclassifications did not affect Net sales, Operating earnings, Earnings from continuing operations, Net earnings or Earnings per share.

Forward-Looking Statements

      Except for historical matters, the matters discussed in this Form  10-K are forward-looking statements that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements under the following headings: (1) “Mobile Devices Segment,” about industry growth, including in emerging markets and for replacement sales, the impact from the loss of key customers, the allocation and regulation of frequencies the availability of materials, energy supplies and labor, the seasonality of the business, and the firmness of the segment’s backlog; (2) “Government and Enterprise Mobility Solutions Segment,” about spending for mission-critical wireless

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products and the Company’s ability to meet demand, impact from the loss of key customers, competition from system integrators, the impact of regulatory matters, allocation and regulation of frequencies, the availability of materials, energy supplies and labor, the seasonality of the business and the firmness of the segment’s backlog; (3) “Networks Segment,” about the impact from the loss of key customers, the impact of the segment’s strategy, the allocation and regulation of frequencies, the availability of materials, energy supplies and labor and the firmness of the segment’s backlog; (4) “Connected Home Solutions Segment,” about future sales of digital products, the impact of the segment’s strategy, the impact from the loss of key customers, sales to telephone carriers, the impact of demand and competitive changes, the impact of regulatory matters, the availability of materials, energy supplies and labor, the seasonality of the business and the firmness of the segment’s backlog; (5) “Other Information,” about the impact from the loss of key customers, the firmness of the aggregate backlog position, the competitiveness through research and development and utilization of technology; (6) “Properties,” about the consequences of a disruption in manufacturing; (7) “Legal Proceedings,” about the ultimate disposition of pending legal matters; (8) “Management’s Discussion and Analysis,” about: (a) the success of our business strategy, (b) future payments, charges, use of accruals and expected cost-saving benefits associated with our reorganization of business programs, (c) the Company’s ability and cost to repatriate funds, (d) the impact of the timing and level of sales and the geographic location of such sales, (e) future cash contributions to pension plans or retiree health benefit plans, (f) outstanding commercial paper balances, (g) the Company’s ability and cost to access the capital markets, (h) the Company’s ability to retire outstanding debt, (i) adequacy of resources to fund expected working capital and capital expenditure measurements, (j) expected payments pursuant to commitments under long-term agreements, (k) the outcome of ongoing and future legal proceedings (l) the impact of recent accounting pronouncements on the Company, and (m) the impact of the loss of key customers; and (9) “Quantitative and Qualitative Disclosures about Market Risk,” about: (a) the impact of foreign currency exchange risks, (b) future hedging activity and expectations of the Company, and (c) the ability of counterparties to financial instruments to perform their obligations.

      Some of the risk factors that affect the Company’s business and financial results are discussed in “Item 1A: Risk Factors.” We wish to caution the reader that the risk factors discussed in “Item 1A: Risk Factors”, and those described elsewhere in this report or our other Securities and Exchange Commission filings, could cause our actual results to differ materially from those stated in the forward-looking statements.

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