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, 2006. 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 three operating business segments:

What were our 2006 financial highlights?

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What were the financial highlights for our three operating businesses in 2006?

What were our major accomplishments and challenges in 2006?

      In 2006, Motorola continued to focus on increasing profitable sales and growing market share by building on our vision of seamless mobility. We continued our expansion into developing markets, enhanced Motorola’s product portfolio with innovative and exciting new devices and solutions and built on the leadership position of our three business segments through strategic transactions. Although we did not meet our operating earnings target in our Mobile Devices business during the fourth quarter of 2006, we believe that Motorola remains well positioned in our markets.

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      Although our Networks and Enterprise and Connected Home Solutions businesses ended 2006 with strong momentum, our Mobile Devices business faced major challenges during the latter part of 2006, causing its fourth-quarter profitability to fall significantly short of our expectations. We intend to improve the profitability of this business and we are taking the necessary actions to make that happen. As we enter 2007, we remain confident in the strength of each of our core markets. With our continued dedication to quality and our unrelenting focus on innovation, we are committed to executing on our strategic plan and pursuing profitable sales growth across all of our businesses. We believe that a balanced focus on profitability and growth will drive shareholder value.

      Our vision of seamless mobility continues to drive everything we do. We are dedicated to building simple and seamless connections to people, information and entertainment. We will do this by continuing to revolutionize wireless networks and broadband communications — bringing cutting-edge technologies into everyday life and empowering the mobile consumer to go anywhere and do anything without sacrificing complete connectivity. We strive to design and deliver new “must have” products, “must do” experiences and powerful networks that enable mobility, along with a full complement of support services. We will continue executing on this vision by extending it around the world and unveiling new technology platforms and products that break down the boundaries of traditional communication and improve life.

      As we continue to expand the geographies that our products and services reach, it remains important that we embrace the unique needs and customs of our local markets. Vast segments of the world’s population, many of whom are yet to make a phone call or connect to the Internet, represent a tremendous opportunity for Motorola to extend our brand. As our world becomes increasingly interlinked, Motorola is focused on connecting “the next billion” mobile phone users. Globalization has made, and will continue to make, country-specific knowledge, talent and leadership indispensable. We have worked to develop specific expertise that allows us to understand the technology needs of each market, rather than a “one-size-fits-all” solution. We are building a strong and efficient footprint in the developing world, and we expect that this will generate financial benefits for Motorola and make a profound and lasting impact on those who were previously unable to “connect.”

      Going forward we are very focused on improving Motorola’s operating margin percentage. Much of this focus will center on our Mobile Devices business, which accounts for nearly two-thirds of our sales and generated much lower than expected operating margins in the fourth quarter of 2006. Over the last three years, the focus on market

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share growth in the Mobile Devices business has increased its share of the global handset market from approximately 12% to approximately 22%. Going forward, this business will rebalance its market share and profitability objectives, with greater emphasis on profitability. To do this, we will continue to refresh and revitalize our product portfolio, with greater emphasis on higher-tier multimedia experiences. At the same time, we are increasing our focus on our cost structure, with particular emphasis on reducing manufacturing and design costs. We will seek to reduce costs and accelerate our time to market by focusing on our silicon and software platform strategies. We will also continue to invest in the Motorola brand, with emphasis on effective marketing of 2007 product line introductions. Although the Mobile Devices business will place a greater emphasis on profitability, we recognize that near-to-medium term pricing pressures will provide challenges to improving margins and profitability.

      The transformation of our Networks and Enterprise business began in 2006, when we combined our cellular networks infrastructure business with our government and enterprise mobility business, and this transformation will continue in 2007. In early 2007, we completed the acquisition of Symbol Technologies, Inc., which now forms the cornerstone of our enterprise mobility business. Our goal is to continue to grow our Networks and Enterprise business consistently and profitably. We are investing to be the leading infrastructure provider of WiMAX, a next-generation wireless broadband technology, and we expect the WiMAX market to begin to materialize in 2008 as several WiMAX networks come on-line. Also, we will continue to develop next-generation products and solutions for our government and public safety customers, for whom homeland security and public safety needs continue to be front and center. As the Internet goes mobile and enterprise customers look to enhance productivity, we will leverage our acquisition of Symbol with our existing enterprise assets to capitalize on the enterprise mobility market.

      Our Connected Home Solutions business will continue to focus on expanding its leadership position in broadband connected home products and services in North America while capitalizing on new markets outside of North America. Our shipments outside North America have grown in each of the last three years and these markets continue to provide new growth opportunities. We believe we are well positioned to capitalize on the convergence of services and application across delivery platforms within the home and across mobile applications.

      We conduct our business in highly-competitive markets, facing both new and established competitors. The markets for many of our products are characterized by rapidly changing technologies, frequent new product introductions, short product life cycles and evolving industry standards. Market disruptions caused by new technologies, the entry of new (and often well-capitalized) competitors into markets we serve, and frequent consolidations among our customers and competitors, among other matters, introduce volatility into our operating performance and cash flow from operations. Meeting these disruptive challenges while working towards full digital convergence requires continual technological advancements and continued investment in innovative solutions. We must have compelling products that meet the expanding needs and evolving desires of our customers around the world. We are focused on meeting these challenges and improving our profitability.

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      Geographic market sales measured by the locale of the end customer as a percent of total net sales for 2006, 2005 and 2004 are as follows:

Geographic Market Sales by Locale of End Customer

      In October 2006, Moody’s upgraded the Company’s long-term debt rating to “Baa1” with a positive outlook from “Baa2” with a stable outlook. Moody’s also affirmed the Company’s “P-2” short-term debt rating. There were no other changes in the Company’s debt ratings during the fourth quarter of 2006.

      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 three 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. The Company has maintained commercial paper balances of between $300 million and $400 million for the past four years.

      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 $500 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 four 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, 2006, the Company’s total domestic and non-U.S.  credit facilities totaled $4.0 billion, of which $175 million was considered utilized. These facilities are principally comprised of: (i) a $2.0 billion five-year revolving domestic credit facility maturing in December 2011 (the “5-Year Credit Facility”) which is not utilized, and (ii) $2.0 billion of non-U.S.  credit facilities (of which $175 million was considered utilized at December 31, 2006). The 5-Year Credit Facility replaced the Company’s former $1.0 billion three-year revolving domestic credit facility, which was scheduled to mature in May 2007. 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, 2006.

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      In order to borrow funds under the 5-Year Credit Facility, the Company must be in compliance with various conditions, covenants and representations contained in the agreements. The Company was in compliance with the terms of the 5-Year Credit Facility at December 31, 2006. 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, 2006.

      Debt Obligations: At December 31, 2006, the Company’s long-term debt obligations, including current maturities and unamortized discount and issue costs, totaled $4.1 billion, as compared to $4.0 billion at December 31, 2005. 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.

      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, 2006, future minimum lease obligations, net of minimum sublease rentals, totaled $2.3 billion. Rental expense, net of sublease income, was $241 million in 2006, $250 million in 2005 and $205 million in 2004.

      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 $1.0 billion.

      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.”

      The Company also enters into a number of arrangements for the sourcing of supplies and materials with minimum purchase commitments and take-or-pay obligations. The majority of the minimum purchase obligations under these contracts are over the life of the contract as opposed to a year-by-year take-or-pay. If these agreements were terminated at December 31, 2006, the Company’s obligation would not have been significant. The Company does not anticipate the cancellation of any of these agreements in the future. Subsequent to the end of 2006, the Company entered into take-or-pay arrangements with suppliers through May 2009 with minimum purchase obligations of $2.2 billion during that period. The Company estimates purchases during that period that exceed the minimum obligations.

      The Company outsources certain corporate functions, such as benefit administration and information technology-related services. These contracts are expected to expire in 2013. The total remaining payments under these contracts are approximately $1.3 billion over the remaining seven years; however, these contracts can be

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terminated. Termination would result in a penalty substantially less than the remaining 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 the Networks and Enterprise segment. These instruments normally have maturities of up to three years and are standard in the industry as a way to give customers a convenient mechanism to seek resolution if a contractor does not satisfy performance requirements under a contract. A customer can draw on the instrument only if the Company does not fulfill all terms of a project contract. If such an occasion occurred, the Company would be obligated to reimburse the financial institution that issued the bond or letter of credit for the amounts paid. The Company is not generally required to post any cash in connection with the issuance of these bonds or letters of credit. In its long history, it has been extraordinarily uncommon for the Company to have a performance/bid bond or standby letter of credit drawn upon. At December 31, 2006, outstanding performance/bid bonds and standby letters of credit totaled approximately $1.5 billion, compared to $1.0 billion at the end of 2005.

      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, and access to the short-term and long-term debt markets.

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. These requests may include all or a portion of the purchase price of the equipment. 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 $398 million at December 31, 2006, compared to $689 million at December 31, 2005. Of these amounts, $262 million was supported by letters of credit or by bank commitments to purchase receivables at December 31, 2006, compared to $594 million at December 31, 2005.

      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 $122 million and $140 million at December 31, 2006 and December 31, 2005, respectively (including $19 million and $66 million, respectively, relating to the sale of short-term receivables). Customer financing guarantees outstanding were $47 million and $79 million at December 31, 2006 and December 31, 2005, respectively (including $2 million and $42 million, respectively, relating to the sale of short-term receivables).

Customer Financing Arrangements

      Outstanding Finance Receivables: The Company had net finance receivables of $269 million at December 31, 2006, compared to $260 million at December 31, 2005 (net of allowances for losses of $10 million at December 31, 2006 and $12 million at December 31, 2005). These finance receivables are generally interest bearing, with rates ranging from 2% to 11%. Interest income recognized on finance receivables for the years ended December 31, 2006, 2005 and 2004 was $9 million, $7 million and $9 million, respectively.

      Telsim Loan: On October 28, 2005, the Company entered into an agreement to resolve disputes regarding Telsim Mobil Telekomunikasyon Hizmetleri A.S. (“Telsim”) with Telsim and the government of Turkey. The

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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 $410 million in cash in 2006 and $500 million in 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.

      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, 2006, these committed facilities provided for up to $1.3 billion to be outstanding with the third parties at any time, as compared to up to $1.1 billion provided at December 31, 2005 and up to $724 million provided at December 31, 2004. As of December 31, 2006, $817 million of these committed facilities were utilized, compared to $585 million utilized at December 31, 2005 and $305 million utilized at December 31, 2004. 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 $6.4 billion in 2006 (including $6.2 billion of short-term receivables), compared to $4.5 billion sold in 2005 (including $4.2 billion of short-term receivables) and $3.8 billion sold in 2004 (including $3.8 billion of short-term receivables). As of December 31, 2006, there were $1.1 billion of receivables outstanding under these programs for which the Company retained servicing obligations (including $789 million of short-term receivables), compared to $1.0 billion outstanding at December 31, 2005 (including $838 million of short-term receivables) and $720 million outstanding at December 31, 2004 (including $589 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 $19 million at December 31, 2006 as compared to $66 million at December 31, 2005. A reserve of $4 million was recorded for potential losses on sold receivables at both December 31, 2006 and December 31, 2005.

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 various 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 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 11, “Information by Segment and Geographic Region,” to the Company’s consolidated financial statements. Net sales and operating results for the Company’s three operating segments for 2006, 2005 and 2004 are presented below.

Mobile Devices Segment

      The Mobile Devices segment designs, manufactures, sells and services wireless handsets with integrated software and accessory products, and licenses intellectual property. In 2006, the segment’s net sales represented 66% of the Company’s consolidated net sales, compared to 61% in 2005 and 58% in 2004.

Segment Results—2006 Compared to 2005

      In 2006, the segment’s net sales increased 32% to $28.4 billion, compared to $21.5 billion in 2005. The increase in net sales was driven by a 49% increase in unit shipments, primarily driven by strong demand for GSM and CDMA handsets and reflecting consumers’ desire for the segment’s compelling products that combine innovative style and leading technology, partially offset by an 11% decrease in average selling price (“ASP”). On a product technology basis, net sales of products for GSM and CDMA technologies increased and net sales of products for iDEN and UMTS technologies decreased. On a geographic basis, net sales increased in High Growth markets (defined as countries in the Middle East, Africa, Southeast Asia and India), North Asia, North America and Latin America, and decreased in Europe.

      The segment’s operating earnings increased to $2.7 billion in 2006, compared to operating earnings of $2.2 billion in 2005. The 23% increase in operating earnings was primarily due to an increase in gross margin, driven primarily by: (i) the 49% increase in unit shipments, (ii) savings from supply chain cost-reduction initiatives, and (iii) increased income from technology and platform licensing, partially offset by the 11% decline in ASP. The increase in gross margin was partially offset by: (i) an increase in selling, general and administrative (“SG&A”) expenses, primarily driven by an increase in marketing expenses to support higher net sales and promote brand awareness, and (ii) an increase in research and development (“R&D”) expenditures, as a result of an increase in developmental engineering for new product development and software, as well as ongoing investment in next-generation technologies. The segment’s industry typically experiences short life cycles for new products, so it is vital to the segment’s success that new, compelling products are constantly introduced. Therefore, a strong commitment to R&D is required to fuel long-term growth. As a percentage of net sales, SG&A expenses increased and R&D expenditures decreased as compared to 2005.

      The segment’s backlog was $1.4 billion at December 31, 2006, compared to $3.0 billion at December 31, 2005. This decrease in backlog is primarily due to an unusually high level of backlog at December 31, 2005 due to strong customer demand for new products during the fourth quarter of 2005, certain of which were unable to be shipped in significant quantities due to supply constraints for select components.

      Unit shipments increased 49% to 217.4 million units in 2006, compared to 146.0 million units in 2005. The overall increase was driven by increased unit shipments of products for GSM, CDMA and UMTS technologies, partially offset by decreased unit shipments of products for iDEN technology. For the full year 2006, unit shipments by the segment increased in all regions. Due to the segment’s increase in unit shipments outpacing overall growth in the worldwide handset market, which grew approximately 20% in 2006, the segment believes that it expanded its global handset market share to an estimated 22% in 2006.

      In 2006, ASP decreased approximately 11% compared to 2005. The overall decrease in ASP was driven primarily by an unfavorable geographic and product-tier mix. By comparison, ASP decreased approximately 10% in 2005 and increased approximately 15% in 2004. ASP is impacted by numerous factors, including product mix, market conditions and competitive product offerings, and ASP trends often vary over time.

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      The largest of the segment’s end customers (including sales through distributors) are China Mobile, Verizon, Sprint Nextel, Cingular, and T-Mobile. These five largest customers accounted for approximately 39% of the segment’s net sales in 2006. Besides selling directly to carriers and operators, the segment also sells products through a variety of third-party distributors and retailers, which account for approximately 38% of the segment’s net sales. The largest of these distributors is Brightstar Corporation. 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 65% of our segment’s 2006 net sales, were outside the U.S. The largest of these international markets are China, Brazil, the United Kingdom, Mexico, and Hong Kong.

      During 2006, the segment completed the acquisition of TTP Communications plc, a developer of intellectual property used in the design and manufacture of wireless communication terminals and a leading provider of protocol stack software that offers rapid customization of handsets through its AJAR applications framework. Subsequent to the end of 2006, the segment completed the acquisition of Good Technology, Inc., a leader in enterprise mobile computing software and service.

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. The increase in net sales was driven by a 40% increase in unit shipments in 2005, reflecting strong consumer demand for GSM handsets. 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 improvement in gross margin was partially offset by: (i) an increase in SG&A expenses, primarily driven by increased marketing expenses to support higher net sales and brand awareness, and (ii) an increase in R&D expenditures, as a result of increased investment in new product development. As a percentage of net sales, both R&D expenditures and SG&A expenses decreased in 2005 as compared to 2004.

      The segment’s backlog was $3.0 billion at December 31, 2005, compared to $1.5 billion at December 31, 2004. During 2005, the segment had strong order growth and backlog increased due to: (i) strong customer demand for new products during the fourth quarter of 2005, 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 40% to 146.0 million in 2005, compared to 104.5 million in 2004. The increase in unit shipments 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. Due to the segment’s increase in unit shipments outpacing overall growth in the worldwide handset market, which grew approximately 17% in 2005, the segment believes that it expanded its global market share to an estimated 18% in 2005.

      In 2005, 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 approximately 8% in 2003.

      The largest of the segment’s end customers (including sales through distributors) were Sprint Nextel, Cingular, China Mobile, América Móvil and T-Mobile. These five largest customers accounted for approximately 41% of the segment’s net sales in 2005. During 2005, purchases of iDEN ^® products by Sprint Nextel comprised approximately 13% of the segment’s net sales. Besides selling directly to carriers and operators, the segment also sells products through a variety of third-party distributors and retailers, which account for approximately 36% of the segment’s net sales. The largest of these distributors was Brightstar Corporation.

      Although the U.S. market continued to be the segment’s largest individual market, many of our customers, and more than 63% of our segment’s 2005 net sales, were outside the U.S. The largest of these international markets were China, the United Kingdom, Brazil, Germany and Mexico.

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Networks and Enterprise Segment

      The Networks and Enterprise segment designs, manufactures, sells, installs and services: (i) cellular infrastructure systems and wireless broadband systems to public carriers and other wireless service providers (referred to as the “public networks” market), and (ii) analog and digital two-way radio, voice and data communications products and systems, as well as wireless broadband systems, to a wide range of public safety, government, utility, transportation and other worldwide enterprise markets (referred to as the “private networks” market). In January 2007, the segment completed the acquisition of Symbol Technologies Inc. (“Symbol”), a leader in designing, developing, manufacturing and servicing products and systems used in end-to -end enterprise mobility solutions. Symbol will become the cornerstone of the segment’s enterprise mobility strategy. In 2006, the segment’s net sales represented 26% of the Company’s consolidated net sales, compared to 32% in 2005 and 35% in 2004.

Segment Results—2006 Compared to 2005

      The segment’s net sales were $11.2 billion in both 2006 and 2005. The slight increase in net sales was primarily driven by higher net sales in the Europe, Middle East and Africa region (“EMEA”) and Latin America, partially offset by lower net sales in North America and Asia. In the private networks market, net sales were up in all regions, driven by increased demand for enhanced mission-critical communications systems. Net sales to the public networks market decreased, primarily due to decreases in: (i) Asia, due in part to delays in the granting of 3G licenses in China that have led service providers to slow their near-term capital investment and competitive pricing, (ii) North America, primarily due to customer expenditures returning to historic trends compared to an exceptionally strong 2005, and (iii) Latin America, partially offset by a slight increase in net sales in EMEA.

      The segment’s operating earnings were $1.5 billion in 2006, compared to operating earnings of $1.9 billion in 2005. The 22% decrease in operating earnings was primarily due to: (i) a decrease in gross margin, due to an unfavorable product/regional mix and competitive pricing in the public networks market, and (ii) an increase in reorganization of business charges, primarily related to employee severance. As a percentage of net sales, both R&D expenditures and SG&A expenses were flat compared to 2005.

      Net sales into U.S. markets represented approximately 51% of the segment’s total net sales in 2006, compared to approximately 52% in 2005. Due to the nature of the segment’s business, many of the agreements we enter into are long-term contracts that require sizeable investments by our customers. Net sales to the segment’s top five commercial customers, plus the U.S. government and its public safety agencies, represented approximately 34% of the segment’s net sales in 2006. The loss of one of these major customers could have a significant impact on the segment’s business and, because many of these contracts are long-term in nature, could impact revenue and earnings over several quarters. The segment’s backlog was $4.4 billion at December 31, 2006, compared to $4.1 billion at December 31, 2005.

      In the private networks business, natural disasters and terrorist-related worldwide events in 2005 continued to place an emphasis on mission-critical communications systems. Spending by the segment’s private networks market customers is affected by government budgets at the national, state and local levels.

      In the public networks business, Sprint Nextel selected the segment to play a major role in the Sprint Nextel WiMAX infrastructure roll-out. The segment has been a long-standing proponent of WiMAX and is now participating in 22 WiMAX trials globally. The segment also maintained momentum in infrastructure development and services in 2006 by continuing to deliver outstanding technologies and services for wireless and wireline carriers. The segment has 55 commercial deployments of push-to-talk over cellular (“PoC”) technology with customers operating in 39 countries through 2006.

      Sprint Nextel is the segment’s largest customer and the segment has been Sprint Nextel’s sole supplier of iDEN network infrastructure equipment for more than ten years. Sprint Nextel uses Motorola’s proprietary iDEN technology to support its nationwide wireless service business. Motorola is currently operating under a supply agreement for iDEN infrastructure equipment that covers the period from January 1, 2005 through December 31,

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2007. The segment’s sales of iDEN network infrastructure equipment decreased from 2005 to 2006 and is expected to continue to decline in 2007.

      During 2006, the segment completed a number of significant acquisitions, including: (i) Orthogon Systems LLC, a leader in wireless Ethernet connectivity and orthogonal frequency division multiplexing (“OFDM”) technology for fixed wireless equipment, and (ii) NextNet Wireless, Inc., a former Clearwire Corporation subsidiary and a leading provider of OFDM-based non -line-of -sight (“NLOS”) wireless broadband infrastructure equipment.

      The acquisition of Symbol is an important step forward for our enterprise mobility strategy. Consistent with the segment’s focus on extending our seamless mobility leadership, the acquisition unites the adjacent assets, expertise, customer bases, supplier bases and industry-leading products to enhance the segment’s leading position in the enterprise mobility market.

Segment Results—2005 Compared to 2004

      In 2005, the segment’s net sales increased 7% to $11.2 billion, compared to $10.5 billion in 2004. The increase in net sales was primarily driven by higher net sales in North America and EMEA, partially offset by lower net sales in Asia and Latin America. In 2005 compared to 2004, net sales to the private networks market were up in all regions, driven by increased demand for enhanced mission-critical communications systems and the continued focus on homeland security initiatives. Net sales to the public networks market: (i) increased in EMEA and North America, primarily due to increased demand for cellular infrastructure equipment and related services, and (ii) decreased in Asia, due in part to delays in the granting of 3G licenses in China that have led service providers to slow their near-term capital investment, and in Latin America.

      The segment’s operating earnings increased to $1.9 billion in 2005, compared to operating earnings of $1.6 billion in 2004. The 25% increase in operating earnings was primarily due to: (i) an increase in gross margin, driven by the 7% increase in net sales, and (ii) improvements in cost structure for the public networks market. This improvement in operating results was partially offset by: (i) an increase in SG&A expenses, primarily due to increased selling and sales support expenses associated with the increase in net sales, and (ii) an increase in R&D expenditures, driven by increased investment in next-generation technologies across the segment. As a percentage of net sales in 2005 compared to 2004, R&D expenditures decreased and SG&A expenses increased.

      Net sales into U.S. markets represented approximately 52% of the segment’s total net sales in 2005, compared to approximately 50% in 2004. Net sales to the segment’s top five commercial customers, plus the U.S. government and its public safety agencies, represented approximately 37% of the segment’s net sales in 2005. The loss of one of these major customers could have a significant impact on the segment’s business and, because many of these contracts are long-term in nature, could impact revenue and earnings over several quarters. The segment’s backlog was $4.1 billion at December 31, 2005, compared to $4.2 billion at December 31, 2004.

      On August 12, 2005, Sprint Corporation and Nextel Communications, Inc. completed their merger transaction (the “Sprint Nextel Merger”) that was announced in December 2004. In 2005, the combined company, Sprint Nextel, was the segment’s largest customer, representing 14% of the segment’s net sales. The segment did not experience any significant impact to its business in 2005 as a result of the Sprint Nextel Merger.

      In 2005, the segment continued to build on its industry-leading position in push-to -talk over cellular (“PoC”) technology, executing agreements to launch our PoC product application on both GSM and CDMA2000 networks. The segment had 44 commercial deployments of PoC technology with customers operating in 33 countries and territories through 2005. In addition, the segment 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.

Connected Home Solutions Segment

      The Connected Home Solutions segment designs, manufactures, sells and services: (i) cable television, Internet Protocol (“IP”) video and broadcast network set-top boxes (“digital entertainment devices”), (ii)  end-to -end digital video system solutions, (iii) broadband access networks, and (iv)  IP-based data and voice products

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Segment Results—2006 Compared to 2005

      In 2006, the segment’s net sales increased 16% to $3.3 billion, compared to $2.9 billion in 2005. The increase in net sales was primarily driven by increased demand for digital entertainment devices, particularly advanced HD/DVR set-top boxes. Net sales increased in all regions. Net sales in North America continue to comprise a significant portion of the segment’s business, accounting for 83% of the segment’s total net sales in 2006, compared to 85% in 2005. The segment’s backlog was $792 million at December 31, 2006, compared to $430 million at December 31, 2005. The 84% increase in backlog is primarily due to strong orders for our digital and HD/DVR set-top boxes.

      The segment had operating earnings of $224 million in 2006, compared to operating earnings of $153 million in 2005. The 46% increase in operating earnings was primarily due to the increase in gross margin, driven by the 16% increase in net sales, partially offset by: (i) an increase in Other charges (income) from a legal reserve and an increase in net reorganization of business charges, primarily relating to employee severance, and (ii) an increase in R&D expenditures, primarily related to developmental engineering expenditures. SG&A expenses and R&D expenditures as a percentage of net sales both decreased as compared to 2005.

      In 2006, net sales of digital entertainment devices increased 24% compared to 2005. Unit shipments of digital entertainment devices increased to 10.1 million, a 57% increase from 2005, while ASPs decreased due to a product mix shift. The increase in unit shipments of digital entertainment devices was primarily due to increased demand for HD/DVR set-top boxes. The segment continued to be the worldwide leader in market share for digital entertainment devices.

      In 2006, net sales of cable modems increased 18% compared to 2005. The increase in net sales of cable modems was due to: (i) increased unit shipments of cable modems, and (ii) increased ASPs for cable modems, reflecting increased demand for advanced voice-enabled modems. 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 for offering advanced services. In 2006, our cable operator customers significantly increased their purchases of the segment’s products and services, primarily due to increased demand for digital entertainment devices, particularly HD/DVR set-top boxes.

      The segment is dependent upon a small number of customers for a significant portion of its sales. A small number of large cable television multiple system operators (“MSOs”) own a large portion of the cable systems and account for a significant portion of the total capital spending in the cable industry. In 2006, net sales to the segment’s top five customers represented 54% of the segment’s total net sales, and net sales to the segment’s largest customer, Comcast Corporation (“Comcast”), accounted for 29% of the segment’s total net sales. The loss of business from any major MSO could have a significant impact on the segment’s business.

      During 2006, the segment completed a number of significant acquisitions, including: (i) Kreatel Communications AB, a leading developer of innovative IP-based digital set-top boxes and software, (ii) Broadbus Technologies, Inc., a provider of technology solutions for television on demand, and (iii) Vertasent LLC, a software developer for managing technology elements for switched digital video networks. These acquisitions did not have a material impact on the segment results in 2006. In February 2007, the segment completed the acquisition of Netopia, Inc., a broadband equipment provider for DSL customers, which allows for phone, TV and fast Internet connections. The segment also announced its intention to acquire Tut Systems, Inc., a leading developer of edge routing and video encoders.

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Segment Results—2005 Compared to 2004

      In 2005, the segment’s net sales increased 23% to $2.9 billion, compared to $2.3 billion in 2004. The increase in overall net sales was driven by increases in both ASP and unit shipments of digital entertainment devices, particularly HD/DVR 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 accounted for 85% of the segment’s total net sales in 2005, compared to 83% in 2004. The segment’s backlog was $430 million at December 31, 2005, compared to $305 million at December 31, 2004.

      The segment generated operating earnings of $153 million in 2005, compared to $154 million in 2004. The slight decrease in operating earnings was primarily due to an increase in R&D expenditures, primarily related to developmental engineering expenditures, partially offset by an increase in gross margin, driven by the 23% increase in net sales. In 2005, compared to 2004, gross margin as a percentage of net sales decreased primarily due to increased product costs due to increased sales of digital entertainment devices, mainly HD/DVR set-top boxes, partially offset by higher ASPs on HD/DVR set-top boxes. As a percentage of net sales, for 2005 compared to 2004, SG&A expenses decreased and R&D expenditures increased.

      In 2005, net sales of digital entertainment devices 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 33%. 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 2005 and 2004 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.

      In 2005, net sales to the segment’s top five customers represented 53% of the segment’s total net sales and net sales to the segment’s largest customer, Comcast, accounted for 31% of the segment’s total net sales. The loss of business from any major MSO could have a significant impact on the segment’s business.

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

   — Taxes on income

   — Valuation of investments and long-lived assets

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   — 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 may 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; otherwise, the revenue is recognized under the completed contract method. 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.

      Gross financing receivables were $279 million and $272 million at December 31, 2006 and 2005, respectively with an allowance for losses on these receivables of $10 million and $12 million, respectively. Of the receivables at December 31, 2006, $1 million ($0, net of allowances for losses of $1 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, 2005 were $10 million ($0, net of allowance for losses of $10 million).

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

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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 un-marketability. 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 12% and 18% of the gross inventory balance at December 31, 2006 and 2005, respectively. 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 2006 or 2005.

Taxes on Income

      The Company’s effective tax rate is based on pre-tax income and the tax rates applicable to that income in the various jurisdictions in which the Company operates. An estimated effective tax rate for a year is applied to the Company’s quarterly operating results. In the event that there is a significant unusual or discrete item recognized, or expected to be recognized, in the Company’s quarterly operating results, the tax attributable to that item would be separately calculated and recorded at the same time as the unusual or discrete item. The Company considers the resolution of prior year tax matters to be such items. Significant judgment is required in determining the Company’s effective tax rate and in evaluating its tax positions. The Company establishes reserves when it is probable that the Company will not realize the full tax benefit of the position. The Company adjusts these reserves in light of changing facts and circumstances.

      Tax regulations may require items of income and expense to be included in the tax return in different periods than the items are reflected in the consolidated financial statements. As a result, the effective tax rate reflected in the consolidated financial statements may be different than the tax rate reported in the income tax return. Some of these differences are permanent, such as expenses that are not deductible on the tax return, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future years for which the Company has already recorded the tax benefit in the consolidated financial statements. The Company establishes valuation allowances for its deferred tax assets when it is more likely than not that the amount of expected future taxable income will not support the use of the deduction or credit. Deferred tax liabilities generally represent tax expense recognized in the consolidated financial statements for which payment has been deferred or expense for which the Company has already taken a deduction on the income tax return, but has not yet recognized as expense in the consolidated financial statements.

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Valuation of Investments and Long-Lived Assets

      The Company assesses the impairment of investments and long-lived assets, which includes identifiable intangible assets, goodwill and property, plant and equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important 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, 2006 and 2005, the net book values of these assets were as follows (in millions):

      The Company recorded fixed asset impairment charges of $15 million in both 2006 and 2005, compared to no charges in 2004.

      The Company recorded impairment charges related to its investment portfolio of $27 million, $25 million and $36 million in 2006, 2005 and 2004, respectively, representing other-than-temporary declines in the value of the Company’s investment portfolio, primarily related to cost-based investment write-downs. Additionally, the available-for-sale securities portfolio reflected a net pre-tax unrealized gain position of $60 million and $157 million at December 31, 2006 and 2005, respectively.

      The Company performs a goodwill impairment test at the reporting unit level at least annually on October 1, 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 2006 or 2005. During 2004, the Company determined that goodwill related to a sensor business, which was subsequently divested in 2005, was impaired by $125 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 benefits are accounted for in accordance with SFAS No. 112, “Accounting for Postemployment Benefits” (“SFAS 112”). Under the provisions of SFAS 112, the Company recognizes termination benefits based on formulas per the Severance Plan at the point in time that future settlement is probable and can be reasonably estimated based on estimates prepared at the time a restructuring plan is approved by management. Exit costs primarily consist of future minimum lease payments on vacated facilities. At each reporting date, the Company evaluates its accruals for exit costs and employee separation costs to ensure the accruals are still appropriate. In certain circumstances, accruals are no longer required because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company and did not receive severance or were

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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. On February 20, 2007, the Company passed an amendment to the Regular Pension Plan which changes the definition of average earnings. Under the current formula, benefits are calculated using the highest annual earnings in any five years within the last ten calendar years. Beginning in January 2008, the benefit will be based on the average of the five highest years of earnings within the last ten calendar years prior to December 31, 2007 averaged with future earnings. 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, the salaries to be utilized for calculation of benefits under this plan have been frozen.

      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. Elected officers covered under the Officers’ Plan or who participated in the restricted stock buy-out are not eligible to participate in MSPP. Effective January 1, 2005, newly-hired employees are not eligible to participate in the MSPP. Effective January 1, 2007, eligible compensation for calculation of benefits under MSPP has been capped at the IRS limit plus $175,000 or, for those in excess of this cap at January 1, 2007, their current compensation is frozen for calculation purposes.

      Certain healthcare benefits are available to eligible domestic employees meeting certain age and service requirements upon termination of employment (the “Postretirement Health Care 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 Health Care Benefits Plan has been closed to new participants.

      Accounting methodologies use an attribution approach that generally spreads individual events over the service lives of the employees in the plan. Examples of “events” are plan amendments and changes in actuarial assumptions such as discount rate, expected long-term rate of return on plan assets, and rate of compensation increases. The principle underlying the required attribution approach is that employees render service over their service lives on a relatively consistent basis and, therefore, the income statement effects of pension benefits or postretirement health care benefits are earned in, and should be expensed in, the same pattern.

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

      The Company uses long-term historical actual return experience with consideration of the expected investment mix of the plans’ assets, as well as future estimates of long-term investment returns to develop its expected rate of return assumption used in calculating the net periodic pension cost and the net retirement healthcare expense. The Company’s investment return assumption for the Regular Pension Plan and Postretirement Health Care Benefits Plan was 8.5% in 2006 and 2005. The investment return assumption for the Officers’ Plan was 6% in 2006 and 2005. At December 31, 2006, the Regular Pension Plan and the Postretirement Health Care Benefits Plan

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investment portfolio were predominantly equity investments and the Officers’ Plan investment portfolio was predominantly fixed-income securities.

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      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% at December 2006 and 2005. The Company’s discount rate for measuring the Postretirement Health Care Benefits Plan obligation was 5.75% at December 31, 2006 and 2005.

      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 2006 and 2005, the Company’s rate for future compensation increase was 4% for the Regular Pension Plan. The Company’s 2006 and 2005 rate for future compensation increase for the Officers’ Plan was 0% as the salaries to be utilized for calculation of benefits under this plan have been frozen. For Postretirement Health Care Benefits 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, 2006 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. Changes in the industry’s projected health care costs have caused the graded trend rate assumption to be reset to 10% for 2007, with the trend rate expected to grade down 1% per year until reaching 5% by 2012.

      The actuarial assumptions for all plans are set forth at the beginning of the fiscal year. Variations from these assumptions typically are amortized into expense over the average service period. Beginning in 2006, unamortized amounts are held as a separate, non-owner component of equity. The Company recorded a non-cash, after-tax, net charge of $308 million to equity relating to the unamortized amounts for the Regular Pension Plan, the Officers’ Plan, Non-U.S.  Plans, and the Postretirement Health Care Benefits Plan in the fourth quarter of 2006.

      For the Regular Pension Plan, the Company currently estimates 2007 expenses for continuing operations will be approximately $170 million. The 2006 and 2005 actual expenses were $240 million and $177 million, respectively. Cash contributions of $270 million were made to the Regular Pension Plan in 2006. The Company expects to make cash contributions of approximately $280 million to its U.S. pension plans and approximately $120 million to its non-U.S.  pension plans during 2007.

      For the Postretirement Health Care Benefits Plan, the Company currently estimates 2007 expenses for continuing operations will be approximately $21 million. The 2006 and 2005 actual expenses were $22 million and $27 million, respectively. Motorola is obligated to transfer to Freescale Semiconductor $68 million, plus investment returns earned on this amount, which was approximately $17 million as of December 31, 2006 in cash or plan assets, as permitted by law without adverse tax consequences to Motorola, with such transfer expected to occur in 2007. Cash contributions of $27 million were made to this plan in 2006. The Company expects to make cash contributions of approximately $24 million to the Postretirement Health Care Benefits Plan in 2007.

      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 February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS 159 on its consolidated financial statements.

      In September 2006, the FASB issued EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF  06-4”). EITF  06-4 requires that endorsement split dollar life insurance arrangements which provide a benefit to an employee beyond the postretirement period be recorded in accordance with SFAS No. 106, “Employer’s Accounting for Postretirement Benefits Other Than Pensions” or APB Opinion No. 12, “Omnibus Opinion — 1967” based on the substance of

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

the agreement with the employee. Under the provisions of these Statements, a liability should be accrued equal to the actuarial present value of the future death benefits over the service period. EITF  06-4 is effective for fiscal years beginning after December 15, 2007. The effects of applying EITF  06-4 may be reflected as either a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or through retrospective application to all prior periods. The Company is currently assessing the impact of EITF  06-4 on the Company’s consolidated financial statements.

      In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”). SFAS 158 requires employers to (i) recognize the funded status of their defined benefit pension and other postretirement plans on their consolidated balance sheet, (ii) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost, (iii) measure defined benefit plan assets and obligations as of the date of the employer’s statement of financial position, and (iv) disclose additional information in the notes to financial statements. The Company adopted the recognition and disclosure requirements of SFAS 158 as of December 31, 2006. The impact of adopting these provisions was an increase in net liabilities for pension and postretirement health care benefits of $783 million and a decrease in stockholders’ equity of $514 million, net of taxes. The SFAS 158 provision related to measurement date is effective for fiscal years ending after December 15, 2008. The Company is currently assessing the impact of the change in measurement date on the Company’s financial statements but does not believe the adoption of this provision of SFAS 158 will have a material impact on the Company’s consolidated financial statements.

      In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value as required by other accounting pronouncements and expands fair value measurement disclosures. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS 157 on the Company’s consolidated financial statements.

      In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements in Current Year Financial Statements.” SAB 108 expresses the SEC Staff’s views regarding the process of quantifying financial statement misstatements. SAB 108 addresses the diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet. The Company adopted the provisions of SAB 108 as of December 31, 2006. The adoption of SAB 108 did not have an effect on the Company’s consolidated results of operations, financial position, or cash flows.

      In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective beginning January 1, 2007. The adoption of FIN 48 is not expected to have a material effect on the Company’s consolidated results of operations or cash flows. The Company estimates that the adoption of FIN 48 will cause an increase in noncurrent liabilities and an equal offsetting increase in noncurrent deferred tax assets in the range of $900 million to $1.0 billion. The amount of cash ultimately payable with regard to the uncertain tax positions is not affected by the balance sheet reclassification estimated upon the adoption of FIN 48 and will be a function of Motorola’s overall tax situation when the underlying tax issues are resolved, taking into account the availability of deferred tax assets that may reduce tax otherwise due.

      In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets — An Amendment of SFAS No. 140” (“SFAS 156”). Among other requirements, SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract when there is either: (i) a transfer of the servicer’s financial assets that meets the requirements for sale accounting, (ii) a transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities”, or (iii) an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates. SFAS 156 is effective for fiscal years beginning after September 15, 2006. The Company does not believe the adoption of

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SFAS 156 will have a material effect on the Company’s consolidated results of operations, financial position or cash flows.

Realignment of Segments

      Effective as of the second quarter of 2006, the Company realigned its businesses into three operating business segments: (i) Mobile Devices, (ii) Networks and Enterprise, and (iii) Connected Home Solutions. In addition, during the second quarter of 2006, the Company executed an agreement to sell its automotive electronics business. Reclassifications have been made to prior years’ financial statements and related notes to conform to the 2006 presentation and present the automotive electronics business as a discontinued operation.

Reclassifications

      Effective as of the fourth quarter 2006, the Company reflects costs associated with the amortization of intangible assets and in-process research and development at the corporate level rather than at the business segment level. Accordingly, these costs have been reclassified in prior period financial statements from the corresponding business segment to Other and Eliminations to conform to the current period presentation. In addition, certain costs associated with amortization of intangible assets, information technology development and new product introduction costs have been reclassified between statement lines in the consolidated statements of operations in the prior period financial statements to conform to the current period presentation.

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) “Item 1: Business” about the impact of the Symbol Technologies, Inc. (“Symbol”) acquisition; (2) “Mobile Device Segment,” about industry growth, including in emerging markets and for replacement sales, the impact of the segment’s strategy, the impact from the loss of key customers, the allocation and regulation of frequencies, the impact of regulatory matters, the availability of materials, energy supplies and labor, the seasonality of the business, the firmness of the segment’s backlog and the manufacturing location; (3) “Networks and Enterprise Segment,” about the impact of the Symbol acquisition, the potential of the portfolio, 3G licenses and market development, homeland security industry growth, sales and utilization, enterprise mobility market growth, the impact of the segment’s strategy, the impact from the loss of key customers, competition from system integrators and telecommunications carriers, consolidation among providers, iDEN trends, 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; (4) “Connected Home Solutions Segment,” about the impact of the segment’s strategy, the impact of acquisitions, the impact from the loss of key customers, the competitive position, 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 impact of property sales and 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 impact of acquisitions, (b) the success of our business strategy, (c) future payments, charges, use of accruals and expected cost-saving benefits associated with our reorganization of business programs, (d) the Company’s ability and cost to repatriate funds, (e) the impact of the timing and level of sales and the geographic location of such sales, (f) future cash contributions to pension plans or retiree health benefit plans, (g) outstanding commercial paper balances, (h) the Company’s ability and cost to access the capital markets, (i) the Company’s ability to retire outstanding debt, (j) adequacy of resources to fund expected working capital and capital expenditure measurements, (k) expected payments pursuant to commitments under long-term agreements, (l) the outcome of ongoing and future legal proceedings (m) the impact of recent accounting pronouncements on the Company, and (n) 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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