Motorola, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except as noted)

1.     Basis of Presentation

        The condensed consolidated financial statements as of March 29, 2003 and for the three months ended March 29, 2003 and March 30, 2002, include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the financial position, results of operations and cash flows as of March 29, 2003 and for all periods presented.

        Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto incorporated by reference in the Company's Form 10-K for the year ended December 31, 2002. The results of operations for the three months ended March 29, 2003 are not necessarily indicative of the operating results to be expected for the full year. Certain amounts in prior periods' financial statements and related notes have been reclassified to conform to the 2003 presentation.

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

2.     Other Financial Data

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        In the computation of diluted earnings per common share for the three months ended March 29, 2003, the assumed conversions of the zero coupon notes due 2009, the equity security units and out-of-the-money stock options were excluded because their inclusion would have been antidilutive. In the computation of diluted earnings (loss) per common share for the three months ended March 30, 2002, the assumed conversions of the zero coupon notes due 2009 and 2013, all stock options, restricted stock and the equity security units were excluded because their inclusion would have been antidilutive.

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        For the three months ended March 29, 2003 and March 30, 2002, impairment charges were $62 million and $155 million, respectively, for certain buildings and equipment that were deemed to be impaired, primarily in connection with facility consolidations undertaken by the Semiconductor Products and Personal Communications segments. Depreciation expense for the three months ended March 29, 2003 and March 30, 2002 was $406 million and $525 million, respectively.

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        For the three months ended March 29, 2003, and March 30, 2002, the Company recorded impairment charges of $47 million and $188 million, respectively, representing other-than-temporary declines in the value of its investment portfolio. The $47 million charge was primarily comprised of a $29 million charge to write down to zero the Company's debt security holding in a European cable operator. The $188 million charge was primarily comprised of a $95 million charge to write down to zero the Company's investment in an Argentine cellular operating company and $63 million in charges related to the write down of investments in cable operating companies. Investment impairment charges are included in Other within Other Income (Expense) in the Company's condensed consolidated statements of operations.

        Gains on Sales of Investments and Businesses, net, consist of the following:

        For the three months ended March 29, 2003, the gains primarily resulted from a $255 million gain on the sale of 25 million shares in Nextel Communications, Inc. in March 2003. At that time, the Company also entered into three agreements to hedge up to 25 million of additional shares of Nextel common stock. Under these agreements, the Company received no initial proceeds, but has retained the right to receive, at any time during the contract periods, the present value of the aggregate contract "floor" price. The three agreements are to be settled over periods of three, four and five years, respectively. Pursuant to these agreements and exclusive of any present value discount, Motorola is entitled to receive aggregate proceeds of approximately $333 million. The precise number of shares of Nextel common stock that Motorola would deliver to satisfy the contracts is dependent upon the price of Nextel common stock on the various settlement dates. The maximum aggregate number of shares Motorola would be required to deliver under these agreements is 25 million and the minimum number of shares is 18.5 million. Alternatively, Motorola has the exclusive option to settle the contracts in cash. Motorola will retain all voting rights associated with the up to 25 million hedged Nextel shares, although, pursuant to customary market practice, the covered shares are pledged to secure the hedge contracts.

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3.     Stock Compensation Costs

        The Company measures compensation cost for stock options and restricted stock using the intrinsic value-based method. Compensation cost, if any, is recorded based on the excess of the quoted market price at grant date over the amount an employee must pay to acquire the stock. The Company has evaluated the pro forma effects of using the fair value-based method of accounting and as such, net

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earnings (loss), basic earnings (loss) per common share and diluted earnings (loss) per common share would have been as follows:

        On May 6, 2003, the Company granted approximately 72 million options to approximately 40,000 eligible employees. The options were granted at fair market value and, in general, vest and become exercisable in 25% increments, annually, over the four years after the grant date. The Compensation Committee of the Company's Board of Directors approved this grant on May 6, 2003 after the adoption of the Motorola Omnibus Incentive Plan of 2003 at the May 5, 2003 Annual Meeting of Shareholders.

4.     Debt and Credit Facilities

        In December 2002, the Company entered into an agreement with Goldman, Sachs & Co. ("Goldman") to repurchase all of the Company's $825 million of Puttable Reset Securities (PURS) ^sm due February 1, 2011 from Goldman. At that time, the Company paid Goldman $106 million to terminate Goldman's annual remarketing rights associated with the PURS. In February 2003, the Company purchased the $825 million of PURS from Goldman with cash on hand.

        In March 2002, the Company entered into interest rate swaps to change the characteristics of interest rate payments on its $1.4 billion 6.75% debentures due 2006 and its $300 million 7.60% notes due 2007 from fixed-rate payments to short-term LIBOR based variable rate payments to manage fixed and floating rates in its debt portfolio. In June 1999, the Company's finance subsidiary entered into interest rate swaps to change the characteristics of the interest rate payments on its $500 million 6.75% Guaranteed Bonds due 2004 from fixed-rate payments to short-term LIBOR based variable rate payments in order to match the funding with its underlying assets. The short-term LIBOR based variable payments on each of the above interest rate swaps was 2.6% for the three months ended March 29, 2003. The fair value of the interest rate swaps at March 29, 2003 was approximately $195 million. Except for these interest rate swaps, at March 29, 2003, the Company had no outstanding commodity derivatives, currency swaps or options relating to either its debt instruments or debt investments.

        The Company is exposed to credit loss in the event of nonperformance by the counterparties in swap contracts. The Company minimizes its credit risk on these transactions by only dealing with leading, credit-worthy financial institutions having long-term debt ratings of "A" or better and,

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therefore, does not anticipate nonperformance. In addition, the contracts are distributed among several financial institutions, thus minimizing credit risk concentration.

        In February 1999, Motorola Capital Trust I, a Delaware statutory business trust and wholly owned subsidiary of the Company (the "Trust"), sold Trust Originated Preferred Securities ^sm ("TOPrS") to the public at an aggregate offering price of $500 million. The Trust used the proceeds from this sale, together with the proceeds from its sale of common stock to the Company, to buy a series of 6.68% Deferrable Interest Junior Subordinated Debentures due March 31, 2039 ("Subordinated Debentures") from the Company with the same payment terms as the TOPrS. The sole assets of the Trust are the Subordinated Debentures. The TOPrS are shown as "Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely company-guaranteed debentures" in the Company's condensed consolidated balance sheets. The Company's obligations relating to the TOPrS include obligations to make payments on the Subordinated Debentures and obligations under the related Indenture, Trust Guarantee and Declaration of Trust. Taken together, these obligations represent a full and unconditional guarantee of amounts due under the TOPrS.

5.     Financing Arrangements

        Finance receivables consist of the following:

        Current finance receivables are included in Accounts Receivable and long-term finance receivables are included in Other Assets in the Company's condensed consolidated balance sheets. Interest income recognized on finance receivables for the three months ended March 29, 2003 and March 30, 2002 was $1 million and $5 million, respectively.

        An analysis of impaired finance receivables included in total finance receivables is as follows:

        At March 29, 2003 and December 31, 2002, the Company had $2.0 billion of gross receivables from one customer, Telsim, in Turkey (the "Telsim Loan"). As a result of difficulties in collecting the amounts due from Telsim, the Company has previously recorded charges reducing the net receivable from Telsim to zero. At March 29, 2003 and December 31, 2002, the net receivable from Telsim was zero. Although the Company continues to vigorously pursue its recovery efforts, it believes the litigation and collection process will be very lengthy in light of the Uzans' repeated decisions to violate court orders.

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        As of December 31, 2002, the Motorola Receivables Corporation ("MRC") short-term receivables program provided for up to $400 million of short-term receivables to be outstanding with third parties at any time. In February 2003, the MRC short-term receivables program was amended and the level of allowable outstanding short-term receivables was increased to $425 million. Total receivables sold through the MRC short-term program for the three months ended March 29, 2003 and March 30, 2002 were $179 million and $284 million, respectively. There were approximately $168 million and $240 million of short-term receivables outstanding under the MRC short-term receivables program at March 29, 2003 and December 31, 2002, respectively.

        In addition to the MRC short-term receivables program, the Company also sells other short-term receivables directly to third parties. Total short-term receivables sold by the Company (including those sold directly to third parties and those sold through the MRC short-term receivables program) during the three months ended March 29, 2003 and March 30, 2002 were $686 million and $735 million, respectively. There were approximately $776 million and $802 million of short-term receivables outstanding at March 29, 2003 and December 31, 2002, respectively. The Company's total credit exposure to outstanding short-term receivables was $23 million and $40 million at March 29, 2003 and December 31, 2002, respectively. The Company had reserves of $19 million recorded for potential losses pursuant to this credit exposure at March 29, 2003 and December 31, 2002.

        The Company has sold a limited number of long-term receivables to an independent third party through Motorola Funding Corporation ("MFC"). In connection with the sale of long-term receivables, the Company retains obligations for the servicing, administering and collection of receivables sold. No such receivables were sold under this program during 2002 or the first quarter of 2003. Total finance receivables outstanding under this program were $66 million and $71 million at March 29, 2003 and December 31, 2002, respectively. The Company has provided an allowance for first loss of $9 million and $14 million at March 29, 2003 and December 31, 2002, respectively.

        In May 2003, the Company voluntarily terminated the program for the sale of long-term receivables through MFC. In light of the significant decrease in long-term financing provided by the Company to customers in recent years, no long-term receivables have been sold through this program in 2002 or 2003 and the benefits from maintaining the program no longer exceed the costs. To effect this termination, the Company purchased all outstanding long-term receivables previously sold to, and held by, the independent third party and terminated the credit insurance related to these long-term receivables.

        Certain purchasers of the Company's infrastructure equipment continue to require suppliers to provide financing in connection with equipment purchases. Financing may include all or a portion of the purchase price of the equipment as well as working capital. The Company had outstanding commitments to extend credit to third-parties totaling $170 million and $175 million at March 29, 2003 and December 31, 2002, respectively.

        In addition to providing direct financing to certain equipment customers the Company also assists customers in obtaining financing directly from banks and other sources to fund equipment purchases. The amount of loans from third parties for which the Company has committed to provide financial guarantees totaled $51 million and $50 million at March 29, 2003 and December 31, 2002, respectively. For the three months ended March 29, 2003 no payments were made by the Company under the terms of these guarantees. These financial guarantees primarily related to two customers and are scheduled to expire in 2005. Customer outstanding borrowings under these third party loan arrangements were $51 million and $50 million at March 29, 2003 and December 31, 2002, respectively. Accrued liabilities of $26 million and $25 million at March 29, 2003 and December 31, 2002, respectively, have been recorded to reflect management's best estimate of probable losses of unrecoverable amounts, should these guarantees be called.

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6.    Goodwill and Other Intangible Assets

        Amortized intangible assets, excluding goodwill were comprised of the following:

        Amortization expense on intangible assets was $15 million and $14 million for the three months ended March 29, 2003 and March 30, 2002, respectively. Amortization expense is estimated to be $50 million for 2003, $47 million in 2004, $43 million in 2005, $33 million in 2006, and $24 million in 2007.

        The following table displays a rollforward of the carrying amount of goodwill from January 1, 2003 to March 29, 2003, by business segment:

Next Level Communications, Inc.

        In April 2003, Motorola announced that it had completed its cash tender offer of $1.18 per share for all remaining outstanding shares of common stock of Next Level Communications, Inc. (Next Level), a leading provider of high speed data, video and voice broadband solutions over existing phone lines. Motorola acquired the remaining ownership of Next Level through a short-form merger and Next Level is now a wholly-owned subsidiary of Motorola. The total purchase price to Motorola to acquire the approximately 26% of Next Level that it did not own at the initiation of the tender offer was approximately $47 million.

Iridium Program

        A committee of unsecured creditors (the "Creditors Committee") of Iridium LLC and its operating subsidiaries (collectively "Old Iridium"), was, over objections by Motorola, granted leave by the Bankruptcy Court to file a complaint on Old Iridium's behalf against Motorola. In March 2001, the Bankruptcy Court approved a settlement between the Creditors Committee and Old Iridium's secured creditors that provides for the creation of a litigation fund to be used in pursuit of the claims against Motorola. Motorola's appeal of this order is pending. On July 19, 2001, the Creditors Committee filed

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its complaint against Motorola in Bankruptcy Court on behalf of Old Iridium's debtors and estates, seeking in excess of $4 billion in damages. Discovery in this case is underway.

        The Iridium India gateway investors (IITL) have filed a suit against Motorola, and certain current and former Motorola officers, in an India court under the India Penal Code claiming cheating and conspiracy in connection with investments in Old Iridium and the purchase of gateway equipment. Under Indian law if IITL were successful in the suit, IITL could recover compensation of the alleged financial losses. In September 2002, IITL also filed a civil suit in India against Motorola and Old Iridium alleging fraud and misrepresentation in inducing IITL to invest in Old Iridium and to purchase and operate an Iridium gateway in India. IITL claims in excess of $200 million in damages, plus interest.

        The Chase Manhattan Bank, as agent for the lenders under Old Iridium's $800 million Senior Secured Credit Agreement, filed four lawsuits against Motorola. In March 2003, the Company reached a settlement agreement with Chase, pursuant to which all four of the cases, including Motorola's counterclaim, were dismissed with prejudice. Under the settlement agreement, Motorola released to Chase its claim to $371 million that was previously paid into an escrow account in April 2002 and made an additional payment of $12 million.

        The Company had reserves related to the Iridium program of $77 million and $152 million at March 29, 2003 and December 31, 2002, respectively. These reserves are included in Accrued Liabilities in the condensed consolidated balance sheets. The reduction in the reserve balance is comprised of $16 million in cash payments, of which $12 million relates to the Chase settlement agreement, and $59 million for the reduction of reserves after reassessment in light of the wind-down of the program and the settlement agreement reached with Chase. The remaining reserve balance of $77 million at March 29, 2003 relates primarily to termination claims and the settlement of remaining obligations. The remaining reserves are expected to require future cash payments, primarily in 2003.

        These reserves are believed by management to be sufficient to cover Motorola's current exposures related to the Iridium program. However, these reserves do not include additional charges that may arise as a result of litigation related to the Iridium program. While the still pending cases are in very preliminary stages and the outcomes are not predictable, an unfavorable outcome of one or more of these cases could have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations.

Other

        The Company is also a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements entered into by the Company or divestitures of Company assets, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants related to such matters as title to assets sold, certain IP rights, and certain income tax related matters. In each of these circumstances, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party's claims. Further the Company's obligations under these agreements may be limited in terms of duration typically not in excess of 24 months and or amounts not in excess of the contract value, and in some instances, the Company may have recourse against third parties for certain payments made by the Company.

        Historically, the Company has not made significant payments under these types of agreements. It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the unique facts and circumstances involved in each particular agreement. At March 29, 2003 and December 31, 2002, the Company had reserves of $65 million, recorded as

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liabilities in the Company's condensed consolidated balance sheets which have been provided to cover known indemnification obligations. The Company believes that if it were to incur additional losses with respect to any unknown matters at March 29, 2003, such losses should not have a material adverse effect on the Company's financial position, results of operations or cash flows.

8.    Segment Information

        Summarized below are the Company's segment sales and operating earnings (loss) for the three months ended March 29, 2003, and March 30, 2002:

9.    Reorganization of Businesses

        Beginning in 2000 and continuing into 2003, the Company implemented plans to reduce its workforce, discontinue product lines, exit businesses and consolidate manufacturing and administrative operations. The Company initiated these plans in an effort to reduce costs and simplify its product portfolio. Prior to January 1, 2003, the Company recorded provisions for employee separation costs and exit costs based on estimates prepared at the time the restructuring plans were approved by management. On January 1, 2003, the Company adopted FASB Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which generally requires employee separation and exit costs to be expensed as incurred. Exit costs primarily consist of future minimum lease payments on vacated facilities and facility closure costs. Employee separation costs consist primarily of severance. At

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each reporting date, the Company evaluates its accruals for exit costs and employee separation to ensure that 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 unexpectedly and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were initiated. The Company reverses accruals to income when it is determined they are no longer required.

Three months ended March 29, 2003

        For the three months ended March 29, 2003, the Company recorded net charges of $66 million, of which $3 million was included in Costs of Sales and $63 million was recorded under Reorganization of Businesses in the Company's condensed consolidated statements of operations. The aggregate $66 million charge is comprised of the following:

Manufacturing and Administrative Consolidations

        The Company's actions to consolidate manufacturing operations and to implement strategic initiatives to streamline its global organization resulted in charges of $117 million, $66 million net of reversals, for the three months ended March 29, 2003. The charge consisted primarily of: (i) $45 million in the Semiconductor Products segment primarily for fixed asset impairments related to a manufacturing facility in Texas; (ii) $26 million in General Corporate for the impairment of assets classified as held for sale; and (iii) $41 million primarily in the Commercial, Government and Industrial Solutions and Semiconductor Products segments related to employee separation costs. These charges were offset by reversals of $51 million primarily for unused accruals relating to previously-expected employee separation costs across all segments.

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        The 2003 net charges of $(3) million represent additional charges of $2 million and reversals into income of $5 million. The $16 million used in 2003 reflects cash payments of $13 million and non-cash utilization of $3 million. The remaining accrual of $198 million, which is included in Accrued Liabilities in the Company's condensed consolidated balance sheets, represents future cash payments, primarily for lease termination obligations, which will extend over several years.

        The following table displays a rollforward of the accruals established for employee separation costs from January 1, 2003 to March 29, 2003:

        At January 1, 2003, the Company had an accrual of $419 million for employee separation costs, representing the severance costs for approximately 7,200 employees. The 2003 net charges of $7 million represent additional charges of $41 million and reversals of $34 million. The additional charges for employee separation costs represent the severance costs for approximately an additional 1,200 employees.

        During the three months ended March 29, 2003, approximately 2,000 employees were separated from the Company. The $113 million used in 2003 reflects cash payments to these separated employees. The remaining accrual of $313 million, which is included in Accrued Liabilities in the Company's condensed consolidated balance sheets, is expected to be paid to approximately 6,400 separated employees in 2003.

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