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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

or

For the transition period from              to             

Commission File number 1-7221

MOTOROLA, INC.

(Exact name of registrant as specified in its charter)

1303 East Algonquin Road, Schaumburg, Illinois 60196

(Address of principal executive offices)

(847) 576-5000

(Registrant’s telephone number)

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

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

None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 27, 2003 was approximately $21.8 billion (based on closing sale price of $9.38 per share as reported for the New York Stock Exchange-Composite Transactions).

The number of shares of the registrant’s Common Stock, $3 par value per share, outstanding as of January 31, 2004 was 2,340,651,138.

DOCUMENTS INCORPORATED BY REFERENCE

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Throughout this 10-K report we “incorporate by reference” certain information in parts of other documents filed with the Securities and Exchange Commission (the “SEC”). The SEC allows us to disclose important information by referring to it in that manner. Please refer to such information.

We are making forward-looking statements in this report. Beginning on page 76 we discuss some of the business risks and factors that could cause actual results to differ materially from those stated in the forward-looking statements.

“Motorola” (which may be referred to as the “Company”, “we”, “us” or “our”) means Motorola, Inc. or Motorola, Inc. and its subsidiaries, or one of our segments, as the context requires. “Motorola” is a registered trademark of Motorola, Inc.

Item 1: Business

General

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

Handsets: We are one of the world’s leading providers of wireless handsets, which transmit and receive voice, text, images and other forms of information and communication.

Wireless Networks: We also develop, manufacture and market public and enterprise wireless infrastructure communications systems, including hardware and software.

Mission-Critical Information Systems: In addition, we are a leading provider of customized, mission-critical radio communications and information systems.

We are a global leader in developing and deploying end-to-end digital broadband entertainment, communication and information systems for the home and for the office. Motorola broadband technology enables network operators and retailers to deliver products and services that connect consumers to what they want, when they want it.

We are the world’s market leader in embedded telematics systems that enable automated roadside assistance, navigation and advanced safety features for automobiles. Motorola also provides integrated electronics for the powertrain, chassis, sensors and interior controls.

We also are a leading producer of embedded processing and connectivity products for the automotive, networking and wireless communications industries.

Motorola is a corporation organized under the laws of the State of Delaware as the successor to an Illinois corporation organized in 1928. Motorola’s principal executive offices are located at 1303 East Algonquin Road, Schaumburg, Illinois 60196.

Business Segments

Motorola reports seven segments as described below.

Personal Communications Segment

The Personal Communications segment (“PCS” or the “segment”) designs, manufactures, sells and services wireless subscriber equipment. In 2003, PCS net sales represented 41% of the Company’s consolidated net sales.

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Principal Products and Services

Our wireless subscriber products include wireless handsets and personal 2-way radios, with related software and accessory products. We market our products worldwide to carriers and consumers through direct sales, distributors, dealers, retailers, and, in certain markets, through licensees.

Our Industry

We believe that total industry shipments of wireless handsets increased in 2003 by approximately 20% compared to 2002. Demand from new subscribers was strong in emerging markets, including India, China, Latin America and Eastern Europe. Replacement sales in highly penetrated markets were also strong due to generally improved economic conditions and compelling new phone designs and attractive features, such as cameras, large color displays, expanded software applications, messaging functionality, advanced gaming features, and an increased opportunity for personalization.

Despite these market improvements, we believe our estimated market share declined, primarily due to increased competition in Asia and delays in shipments of certain new products, which was primarily caused by supply constraints for a key component. However, we did begin shipping many of our new products in the second half of 2003, including a CDMA push-to-talk handset and 3G UMTS handsets. The industry forecasters predict that the wireless handset industry will continue to grow over the next several years as the transition to next-generation data-rich services, such as point-to-point video and higher speed data, continues.

Our Strategy

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

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

During 2003, we continued to build on our technology leadership with the introduction of a CDMA push-to-talk handset and the delivery of 3G UMTS handsets. In addition, in 2003 we introduced our first handset with Windows Mobile^™ operating systems from Microsoft. These advanced handsets feature Microsoft Pocket Outlook, Pocket Internet Explorer, Windows Media Player and other software applications familiar to users of Microsoft’s traditional computer software. We have also introduced products that use Bluetooth^® technology to support advanced wireless functions, including wireless headsets. For handsets using iDEN technology, we introduced products directed towards the prepaid market and high-end, Limited Edition products.

As part of our efforts to improve our brand, we are developing youth-driven brand partnerships that will support a consumer-centric design philosophy and further reinforce the brand strength generated by our MOTO marketing activities. Additionally, PCS has played a key role in reinvigorating the Motorola brand among consumers worldwide, which we expect will help fuel demand for new products and experiences during 2004 and beyond.

The success of our strategy is evidenced by our continued market leadership in North America and China. In Latin America, net sales increased very significantly for the full year 2003 compared to the full year 2002 and the segment is the overall market leader in Latin America. In the Europe, Middle East and Africa (EMEA) region, customer acceptance of our recently-launched products resulted in increased customer demand in the fourth quarter of 2003.

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Customers

The PCS “customer partnership” strategy continues to focus on strengthening relationships with our top customers. PCS has several customers, worldwide, the loss of which could have a negative impact on our results. In 2003, purchases of iDEN products by Nextel Communications, Inc. and its affiliates (collectively, “Nextel”) comprised approximately 18% of our segment’s net sales. In China, we sell our products to many distributors and retailers. These distributors and retailers in turn primarily sell our products for use on mobile systems operated by China Mobile and China Unicom, the two largest wireless operators in China. In 2003, approximately 9% of our wireless handsets sales were to the China market and were primarily used on these systems. The largest of our other customers (inclusive of related affiliates) are AT&T Wireless, Cingular, South Korea Telecom, Telcel Mexico, T-Mobile, Verizon and Vodafone. Many of our customers, and more than half of our net sales, are outside the United States.

Nextel is our largest customer and we have been their exclusive supplier of iDEN handsets and core network infrastructure equipment for over ten years. Nextel uses Motorola’s proprietary iDEN technology to support its nationwide wireless service business. Our agreements with Nextel have been non-exclusive. We are currently negotiating new agreements with Nextel for our products. Nextel is currently purchasing products from us under interim agreements, purchase orders and special development contracts. We cannot be assured at this time of the terms of new agreements with Nextel or Nextel’s continued exclusive long-term use of iDEN technology in its wireless business as it considers next-generation technology options.

Motorola has a contract with Nextel for the development of infrastructure software and wireless handsets that use a new 6:1 vocoder. The use of this new vocoder solution is expected to allow Nextel to increase capacity on its current system. Motorola has delivered 6:1 infrastructure software and initial subscriber units to Nextel. Nextel has announced that the performance and functionality of the 6:1 handsets has met or exceeded Nextel’s expectations in many respects. However, they have also indicated that in some operating conditions the voice quality while operating in 6:1 mode has not met their expectations. The Company continues to work closely with Nextel to optimize the 6:1 solution.

Competition

Although we believe our market share declined in 2003, we also believe we retained the second-largest worldwide market share of wireless handsets. The segment experiences intense competition in worldwide markets from numerous global competitors, including some of the world’s largest companies. The segment’s primary competitors are European and Asian manufacturers. Currently, its strongest competitors include Nokia, Samsung, Siemens, Sony-Ericsson and LG.

In Asia, particularly in China, we face intense competition from new and existing handset manufacturers. In 2003, as a result of this competition, our product portfolio and supply constraints, we believe the segment’s market share declined in China. However, we believe we maintained the top market position in China. To address the challenging market environment in China, we have continued to introduce several compelling new products with many attractive features that cover a wide range of tiers and market segments.

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

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

Payment Terms

The segment offers industry standard payment terms and generally does not grant extended payment terms.

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Regulatory Matters

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

Recent policy changes in the U.S. may encourage deregulation of frequency allocation, allowing new wireless communications technologies to be developed. Such policy changes may spread to other countries, and the reduced barriers to entry for the development of new technologies may introduce new competition for both Motorola and our customers.

Backlog

The segment’s backlog was $2.2 billion at December 31, 2003 and $1.1 billion at December 31, 2002. The 2003 backlog is believed to be generally firm and 100% of that amount is expected to be recognized as revenue in 2004. The forward-looking estimates of the firmness of such orders is subject to future events which may cause the amount recognized to change. Backlog increased primarily as a result of demand for new products that were introduced in the second half of 2003, including handsets with integrated cameras. Backlog was also impacted by the component supply constraints which resulted in the segment’s inability to meet the demand for certain new products in the fourth quarter.

Intellectual Property Matters

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

Inventory, Raw Materials, Right of Return and Seasonality

PCS’s practice is to carry reasonable amounts of inventory in distribution centers in order to meet customer delivery requirements in a manner consistent with industry standards. At the end of 2003, the segment had a higher inventory balance than at the end of 2002. We increased inventory in part because we anticipated higher first quarter 2004 sales compared to the first quarter of 2003. We also made certain strategic purchases of critical components. In addition, due to supply constraints of a key component in the fourth quarter of 2003, impacted products could not be produced and shipped contributing to a higher work-in-process inventory balance at the end of 2003.

Where economically and technically feasible, materials used in the segment’s operations are generally second-sourced to ensure a continuity of supply. Occasionally, shortages or extended delivery periods occur for various component parts, the effects of which are generally short in duration. In the fourth quarter of 2003, the segment experienced supply shortages impacting certain products. These shortages are improving in the first quarter of 2004.

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

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

The segment typically experiences increased sales in the fourth calendar quarter and lower sales in the first calendar quarter of each year. Sales of wireless handsets, two-way radios and related products increase during the

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year-end holiday season. During the fourth quarter of 2003, the segment did not experience its usual seasonal increase in sales as it was unable to meet demand for shipments of certain products, due to supply constraints for a key component. Correspondingly, for the first quarter of 2004, the segment expects higher sales than typical in a first quarter due to fulfillment of year-end 2003 backlog and strong demand for new products.

Our Facilities/Manufacturing

Our headquarters are located in Libertyville, Illinois. Our major facilities are located in Libertyville, Illinois; Plantation, Florida; Flensburg, Germany; Tianjin, China; Singapore; Chihuahua, Mexico; and Jaguariuna, Brazil. We also maintain interests in two Korean cellular handset design and manufacturing firms; and joint ventures in Hangzhou and Shanghai, China. Additional engineering, software development and administration offices are located in San Diego, California; South Plainfield, New Jersey; Champaign, Illinois; Ft. Worth, Texas; Boynton Beach, Florida; Basingstoke, England; Tokyo, Japan; Toulouse, France; Beijing, China; and Seoul, Korea. We also share a facility in Penang, Malaysia with the Commercial, Government and Industrial Solutions Segment. During 2003, we sold our Chihuahua, Mexico manufacturing facility to Foxconn International Holdings Group, and we are contracting with Foxconn for the manufacture of certain products. In addition, certain manufacturing will be ceased in Flensburg, Germany during the first quarter of 2004 and as part of a segment-wide research and development engineering optimization effort, our Boynton Beach, Florida facility is planned to be vacated by the end of 2004.

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

In 2003, nearly three-fourths of our handsets were manufactured in Asia, including products manufactured for us by third parties. We expect this trend to continue in 2004. Our largest manufacturing facilities are located in China, Singapore, Brazil, Germany, Malaysia and Korea. Each of these facilities serves multiple countries and regions of the world. In 2003, approximately 20% of our handsets were manufactured by third parties, who primarily manufacture in Asia. In 2004, this percentage is expected to increase to approximately 30%.

Semiconductor Products Segment

The Semiconductor Products segment (“SPS” or the “segment”) provides embedded processing and connectivity products to large, high-growth markets. It focuses on designing, producing and selling products to the automotive, networking and wireless communications industries. In 2003, SPS net sales represented 18% of the Company’s consolidated net sales.

Principal Products and Services

The segment designs, develops, manufactures and markets a broad range of semiconductor products that are based on its core capabilities in embedded processing. Embedded processors, in their simplest forms, provide the basic intelligence for electronic devices. Examples of the segment’s embedded processors include microcontrollers, digital signal processors and communications processors. In addition, the segment offers a broad portfolio of devices that complement its families of embedded processors, including sensors, radio frequency semiconductors, power management and other analog and mixed-signal integrated circuits. Through its embedded processors and complementary products it is also able to offer customers complex combinations of semiconductors and software, which are referred to as “platform-level products.”

The segment uses these products to serve each of its main businesses. In the networking market, the segment provides products for use in wireless infrastructure, enterprise switching and routing, network access and aggregation and pervasive computing applications. In the wireless market, wireless and mobile products focus on wireless handsets, personal digital assistants, global positioning systems, mobile gaming devices and machine-to- machine communication applications. In the automotive and standard products markets, SPS products include MCUs (microcontrollers), DSPs (digital signal processors), embedded MPUs (microprocessors), sensors and analog integrated circuits for use in automotive, consumer, and industrial applications.

The segment markets its products to original equipment manufacturers, to original design manufacturers and to contract manufacturers through a global network of sales offices and operations. The sales teams are augmented by a network of distributors, who extend the reach of products and services around the world.

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Our Industry

The semiconductor industry comprises a broad range of markets and products. Cumulatively, the markets within the overall semiconductor industry in which the segment participates grew at a slower rate, in 2003, than the overall industry. The market where the segment has the highest percentage of its sales is the automotive market, which traditionally has lower, but steadier, growth than the semiconductor industry as a whole. In 2003, the automotive market had single digit growth and the segment followed this trend for its automotive business. The networking market continued to have low growth rates as the market slowly recovered from the 2001 downturn, with continued lower capital spending levels by customers. The wireless communications market grew at a faster rate than the overall semiconductor industry in 2003; however, the segment’s largest customer in this market, Motorola’s Personal Communications segment, experienced delays in shipments of several new products.

The strength of the semiconductor industry during 2003 was reflected in a general increase in average selling price (ASP) for 2003, although the rate of increase slowed in the fourth quarter. During 2003, the segment’s increase in ASP followed the industry pattern.

Our Strategy

While the segment intends to continue to focus on delivering products based on its core competencies in embedded processing and connectivity across its three target industries, the segment also plans to expand its presence in related large and high-growth markets where it can apply the broad technology and embedded processing capabilities that it has developed for its target industries. For example, it is applying its networking capabilities into areas such as passive optical networking and wireless local area network (WLAN). It is also applying its wireless expertise into handheld gaming, toys and machine-to-machine communications networks. However, even with these new applications, the segment has not been as successful as it hoped at attracting new customers in the wireless handset industry. The segment is also extending its automotive expertise in embedded control, power management and sensors into underrepresented markets such as appliances, robotics, computer peripherals and toys.

The segment continues to follow the business strategy it introduced in 2000 in response to the semiconductor industry downturn and the changes in the industry. The strategy is aimed at improving the financial results of the segment and is based on three activities/goals: (1) improving asset efficiency, by reducing the segment’s internal manufacturing capacity to focus on leading-edge specialty process technologies and reduce future capital requirements, while establishing relationships to strategically outsource the manufacturing of the segment’s products utilizing standard process technologies, (2) engaging in partnering and licensing activities to offset a portion of research and development spending and to facilitate a return on the segment’s extensive collection of intellectual property, and (3) focusing on timely delivery of higher-value proprietary products.

In October of 2003, the Company announced that it intends to move its semiconductor operations into a separate, publicly-traded company. In December of 2003, a registration statement was filed with the U.S. Securities and Exchange Commission (“SEC”) relating to a proposed initial public offering (“IPO”) of stock of Freescale Semiconductor, Inc., the name given to the new entity that would be comprised of Motorola’s Semiconductor operations. The registration statement is currently being reviewed by the SEC, and accordingly, there is no way to know when, or if, such an IPO may occur.

Customers

The segment sells its products worldwide to Original Equipment Manufacturers (OEMs) and a network of industrial distributors through its own sales force, agents and distributors. The segment generally targets as customers the leaders in the market segments in which its products are used, as well as the companies that we believe will be future leaders in these segments. As these customers represent a significant share of the market opportunity, we believe that this approach provides us with the ability to best leverage our investments in research and development and to continually develop products that address market needs.

Products manufactured by the segment and supplied to other operating units of Motorola collectively constitute the segment’s largest end customer at 23% of 2003 revenue (2002, 26%; 2001, 23%). The segment’s largest customer within Motorola is the wireless handset business, PCS. No other customer accounted for 10% or more of the segment’s revenue in 2003. The segment’s top ten external end customers in 2003 were: Apple, Bosch, BMW,

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Continental Teves, Daimler Chrysler, Delphi, Hewlett Packard, Qualcomm, Siemens and Visteon. For products sold through the distribution channel, distributors Arrow, Avnet and Future accounted for more than 50% of our net sales to distributors. The volume of purchases by these end customers has affected, and could continue to affect, segment results.

Competition

The segment experiences intense competition from numerous competitors ranging from large companies offering a full range of products to small companies specializing in certain segments of the market, although few companies compete with the segment in all of its product areas. The competitive environment also is changing as a result of increased alliances between competitors, and it is expected that the environment will continue to evolve through alliances, strategic acquisitions or other agreements among our competitors. The top five competitors in the semiconductor industry comprised 36% of the total market in 2003, based on estimates published by the Semiconductor Industry Association and Gartner Dataquest. At 17%, Intel’s share was almost three times the size of its nearest competitor, due to its major penetration in the desktop PC market. Intel is also a competitor in the wireless market. The next four largest semiconductor suppliers had market shares ranging from 4% to 6%. In 2003, based on net sales, the segment had an estimated 2.8% share of the overall semiconductor market. However, the segment’s shares of its targeted sub-markets are much higher both in percentages and relative positions.

Important factors in competition include: price; technology offered; product features, quality, availability and warranty; the quality and availability of service; time-to-market; and company image. The ability to develop new products to meet customer requirements and to meet customer delivery schedules are also critical factors. New products represent the most important opportunity to overcome the pricing pressures inherent in the industry.

Payment Terms

Generally, the segment does not provide extended payment terms.

Backlog

The segment’s backlog was $1.2 billion at December 31, 2003 and $1.1 billion at December 31, 2002. Orders may be and are placed by customers for delivery up to as much as 12 months in the future, but for purposes of calculating backlog, only the next 13 weeks requirements are reported. An order is removed from the backlog only when the product is shipped, the order is cancelled or the order is rescheduled beyond the 13-week delivery window used for backlog reporting. In the semiconductor industry, backlog quantities and shipment schedules under outstanding purchase orders are frequently revised to reflect changes in customer needs. Therefore, the segment believes that most of its order backlog is cancelable. For these reasons, the amount of backlog as of any particular date may not be an accurate indicator of future results. However, the segment expects most of its backlog at December 31, 2003 to be recognized as revenue in 2004 because the history of the segment indicates that a relatively small amount of backlog is cancelled or rescheduled once it falls within the 13-week delivery period.

Intellectual Property Matters

Patent protection is very important to the segment’s operations and has become even more important under the segment’s new business model discussed above. We intend to continue to license more of our intellectual property to third parties. The segment has a broad portfolio of patents and licenses, covering manufacturing processes, packaging technology, software systems and electrical circuit design. The patent portfolio evolves over time as older patents expire and new patents are obtained. There are no patents the segment regards as critical to its business that expire in the next 12 months. In addition, Motorola is licensed to use certain patents owned by others and the segment benefits from those licenses. The protection of these licenses is also important to our operations.

Inventory, Raw Materials, Right of Return and Seasonality

A majority of the segment’s products are built-to-order for our customers. The segment can have sizeable amounts of inventory on hand from time to time. The level of inventory reflects the long manufacturing process that is a feature of the semiconductor industry.

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The primary raw materials used by the segment are raw silicon and piece parts, which are largely sourced from the U.S., Japan and Singapore. The segment is not currently experiencing any shortages in obtaining raw materials. We purchase a substantial portion of certain supplies from Taiwan and contract with companies to test and assemble certain products in Taiwan. With respect to these and other supplies, the segment is constantly evaluating additional sources of supply to minimize the risk of obtaining materials from only a few sources.

Electricity, oil and natural gas are used extensively in the segment’s operations. All of these energy sources are available in adequate quantities for current needs. Electricity and oil are the primary energy sources for the segment’s foreign operations, and, presently, there are no shortages of these sources. Labor is generally available in reasonable proximity to the segment’s manufacturing facilities. Difficulties in obtaining any of the aforementioned items could affect the segment’s results.

The segment previously permitted distribution customers to return products under an allowance program that limits the period for return and the quantity that can be returned. This program now provides the distributors a defined allowance for product obsolescence without the requirement to physically return the product. The cost of the new program is expected to be very comparable with the previous program, but with lower program administration costs. OEM and distribution customers can return products under warranty for a period of up to 3 years after purchase except unpackaged die and probed wafers, which have a warranty period of only 90 days.

The segment as a whole does not have seasonal patterns for sales. However, at a business group level within the segment, there are some seasonal patterns. Transportation and Standard Products Group sales are typically weak during the third quarter when automakers shut down to retool for new model-year vehicles, while strong consumer sales in the fourth quarter drive higher sales for the Wireless and Mobile Systems Group. In addition, the segment’s results are affected by the cyclical nature of the semiconductor industry.

Our Facilities/Manufacturing

The segment’s headquarters are located in Austin, Texas. The major manufacturing facilities are located in or around Austin, Texas; Phoenix, Arizona; Tianjin, China; Toulouse, France; East Kilbride, Scotland; Sendai, Japan and Kuala Lumpur, Malaysia. In addition to its manufacturing locations, the segment has research and development centers in several countries in Asia, Europe and the Americas, and a network of sales offices around the world. Certain facilities in Texas and Scotland closed in 2003 as previously announced. In addition, on January 16, 2004, the segment sold a wafer fabrication facility in Tianjin, China. The segment has wafer manufacturing evenly distributed across the United States, Europe and Asia, however the majority of its products are packaged in Asia, primarily in Malaysia, Taiwan and China. The segment outsourced approximately 15% of wafer manufacturing in 2003, primarily to one outsourcer located in Taiwan. Additionally, approximately 50% of product packaging was outsourced in 2003, primarily with one outsourcer that utilized its facilities in Taiwan and Korea.

Global Telecom Solutions Segment

The Global Telecom Solutions segment (“GTSS” or the “segment”) designs, manufactures, sells, installs and services wireless infrastructure communication systems, including hardware and software. In 2003, GTSS net sales represented 16% of the Company’s consolidated net sales.

Principal Products and Services

GTSS provides end-to-end wireless networks, including radio base stations, base site controllers, associated software and services, mobility soft switching, application platforms and third-party switching for CDMA, GSM, iDEN^® and UMTS technologies. The 2003 acquisition of Winphoria Networks, Inc. now enables GTSS to provide a Motorola-branded soft switch product. The addition of soft switch technology will enable the segment to provide less expensive, yet more versatile, switching alternatives to operators. GTSS products are marketed to wireless service providers worldwide through a direct sales force, licensees and agents.

Our Industry

Overall, wireless infrastructure industry sales were down in 2003 compared to 2002. Operators spent less on new equipment because of the difficult economic environment, pressure to reduce costs, and declines in average revenue per user (ARPU). In addition, technology enhancements have greatly improved network capacity without necessitating corresponding increases in spending by the operators.

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The industry’s migration to 3G systems, which are high-capacity wireless networks designed to provide enhanced data services, improved Internet access and increased voice capacity, is currently focused primarily on two technologies—CDMA2000 1X and UMTS. GTSS is a supplier for both of these technologies. While CDMA2000 1X has been extensively commercialized, service providers only began to commercialize their 3G UMTS investments in 2003. We expect service providers to continue to use GPRS (General Packet Radio Service), which is a 2.5G technology, to grow their data subscriber base and to build their business case for these next-generation systems. The industry continues to expect broader implementation of 3G UMTS over the next several years as operators transition to next-generation systems to expand voice capacity and to support new data services. In North America and other global markets, operators are now also giving serious consideration to the deployment of EDGE technology, which is a GSM derivative. EDGE provides data bandwidths higher than GPRS in the existing GSM spectrum assignments. In addition, some CDMA markets have begun to deploy CDMA2000 1X-DO technology. CDMA2000 1X-DO also provides increased data bandwidth compared to CDMA2000 1X. GTSS has added products that utilize both EDGE and CDMA2000 1X-DO technologies to its product portfolio.

Our Strategy

We are executing on a strategy to enhance our position as an end-to-end supplier in wireless infrastructure. GTSS continues to invest in key radio access technologies: CDMA2000 1X, CDMA2000 1X-DO, iDEN, GSM, GPRS, EDGE and UMTS. In 2003, Motorola purchased Winphoria Networks, Inc., a leading soft switch vendor, which positions GTSS as a leader in the evolution to next-generation IP networks. We began our first commercial deployments of the Motorola Soft Switch (MSS) in 2003. The market for wireless soft switch is still developing but network operators in emerging markets, as well as some service providers in mature markets, are considering the use of this new technology. As with all new technologies, there are risks, including performance and market acceptance. GTSS has also introduced a Global Applications Management Architecture (GAMA) platform, which enables operators to rapidly deploy new revenue-generating features using software applications.

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

We also continue to build on our industry-leading position in push-to-talk over cellular (PoC) technology. We have executed agreements to launch our PoC product application on both GPRS and CDMA1X networks. We have executed an agreement with Nextel Communications, Inc. to upgrade Nextel’s existing iDEN network to WiDEN^™ technology. WiDEN will enable Nextel to deliver cost-effective, high-speed wireless data service to its customers, similar to GPRS and CDMA2000 1X. The additions of these offerings are an important step in our ongoing strategy to further enhance our product portfolio.

Customers

Due to the nature of the segment’s business, the agreements it enters into are primarily long-term contracts with major operators that require sizeable investments by its customers. In 2003, five customers represented approximately 55% of the segment’s net sales (China Mobile; China Unicom; KDDI, a service provider in Japan; Nextel Communications, Inc. and its affiliates; and Verizon). The loss of any of the segment’s large customers, in particular these customers, could have a material adverse effect on the segment’s business. Further, because contracts are long-term, the loss of a major customer would impact revenue over several quarters.

Nextel is our largest customer and we have been their exclusive supplier of iDEN core network infrastructure equipment for over ten years. Nextel uses Motorola’s proprietary iDEN technology to support its nationwide wireless service business. GTSS’s contracts with Nextel have been non-exclusive. At the end of December 2003, the terms of our primary supply agreement with Nextel expired. We are currently negotiating new supply agreements with Nextel relating to products, software licensing and software support. Nextel is currently purchasing products from us under interim agreements, purchase orders and special development contracts, substantially on the same terms as contained in the expired agreement. On an interim basis, we have continued to provide software support in 2004, but we do not intend to recognize revenue for this software support until we have a contract with Nextel. We cannot be assured at this time of the terms of a supply contract renewal or Nextel’s continued exclusive long-term use of iDEN technology in its wireless business as it considers next-generation technology options.

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Motorola has a contract with Nextel for the development of infrastructure software and wireless handsets that use a new 6:1 vocoder. The use of this new vocoder solution is expected to allow Nextel to increase capacity on its current system. Motorola has delivered 6:1 infrastructure software and initial subscriber units to Nextel. Nextel has announced that the performance and functionality of the 6:1 handsets has met or exceeded Nextel’s expectations in many respects. However, they have also indicated that in some operating conditions the voice quality while operating in 6:1 mode has not met their expectations. The Company continues to work closely with Nextel to optimize the 6:1 solution.

Competition

We experience intense competition in worldwide markets from numerous competitors, ranging in size from some of the world’s largest companies to small, specialized firms. Major competitors include Ericsson, Nokia, Siemens, Lucent, Nortel, Alcatel, NEC, and Samsung. Ericsson has maintained its market leadership position and Nokia has solidified a number two market share position. Four other vendors, including GTSS, vie for number three in total market share.

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

Competitive factors in the market for the segment’s products include: technology offered; price; payment terms; availability of vendor financing; product and system performance, product features, quality, delivery, availability and warranty; the quality and availability of service; company image; relationship with key customers; and time-to-market. Price is a major area of competition and often impacts margins for initial system bids, particularly in emerging markets. Time-to-market has also been an important competitive factor, especially for new systems and technologies.

Payment Terms

GTSS contracts for large system installations typically have implementation milestones, such as delivery, installation and system acceptance. Generally, these milestones can take anywhere from 30 days to 180 days to complete. Customer payments are typically tied to the completion of these milestones. Once a milestone is reached, payment terms are generally 30 days to 60 days. As required for competitive reasons, we may provide or arrange for extended payment terms or long-term financing in connection with equipment purchases. In limited situations, financing may include providing additional working capital. We directly provided long-term financing of approximately: $16 million to two customers in 2003; $47 million to four customers in 2002; and $156 million to seven customers in 2001.

Regulatory Matters

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

Recent policy changes in the U.S. may encourage deregulation of frequency allocation, allowing new wireless communications technologies to be developed. Such policy changes may spread to other countries, and the reduced barriers to entry for the development of new technologies may introduce new competition for both Motorola and our customers.

Backlog

The segment’s backlog was $1.6 billion at December 31, 2003 and $1.2 billion at December 31, 2002. The 2003 order backlog is believed to be generally firm and 100% of that amount is expected to be recognized as revenue during 2004. The forward-looking estimates of the firmness of such orders is subject to future events that may cause the amount recognized to change.

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Intellectual Property Matters

Patent protection is extremely important to the segment’s operations. The segment has an extensive portfolio of patents relating to its products, systems, technologies, and manufacturing processes. Motorola is also licensed to use certain patents owned by others. The protection of these licenses is also important to the segment’s operations. Reference is made to the material under the heading “Other Information” for information relating to patents and trademarks and research and development activities with respect to this segment.

Inventory, Raw Materials, Right of Return and Seasonality

The segment’s practice is to carry sufficient inventory to respond to customers’ needs. In 2003, the segment reduced its inventory by 16% compared to 2002 levels. The reduction in inventory is in part due to reduced sales volume and continued improvement in our inventory management processes.

Materials used in the segment’s operations are second-sourced where feasible to ensure a continuity of supply. Occasional shortages in purchased components do occur; however, these shortages have not had a large impact on our business.

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

Generally, our contracts do not include a right of return other than for standard warranty provisions. For new product introductions, we may enter into milestone contracts wherein if we do not achieve the milestones, the product could be returned. Our business does not have seasonal patterns for sales.

Our Facilities/Manufacturing

Our headquarters are located in Arlington Heights, Illinois. Major design centers include Arlington Heights and Schaumburg, Illinois; Chandler, Arizona; Fort Worth, Texas; Cork, Ireland, and Swindon, U.K. We operate manufacturing facilities in Schaumburg, Illinois; Fort Worth, Texas; Hangzhou and Tianjin, China; Swindon, U.K., and Jaguariuna, Brazil. A majority of our manufacturing is conducted in China either in facilities we operate or in facilities operated by firms to which we outsource our manufacturing.

Commercial, Government and Industrial Solutions Segment

The Commercial, Government and Industrial Solutions segment (“CGISS” or the “segment”) provides customized, mission-critical integrated communications and information systems. In 2003, CGISS net sales represented 15% of the Company’s consolidated net sales.

Principal Products and Services

We design, manufacture, sell, install and service analog and digital two-way radio, voice and data communications products and systems to a wide range of public-safety, government, utility, transportation and other worldwide markets. In addition, the segment participates in the expanding market for integrated information management, mobile and biometric applications and services. These applications and services provide our customers with tools such as computer-aided dispatch, field based reporting, records management and fingerprint matching capabilities.

Our products are sold directly through our own distribution force or through independent authorized distributors and dealers, commercial mobile radio service operators and independent commission sales representatives. Our distribution organization provides system engineering and installation and other technical and systems management services to meet the customer’s particular needs. The customer may choose to install and maintain the equipment with its own employees, or may obtain installation, service and parts from a network of our authorized service stations (most of whom are also authorized dealers) or from other non-Motorola service stations.

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Our Industry

Significant events since 2001 have heightened the need for safety and security products and systems worldwide. Public-safety, government and enterprise organizations are seeking a wide range of detection and prevention capabilities; interoperable communications and information sharing across many users; and integrated voice, data and video capabilities. We have been a leader in providing mission-critical communications and information products and systems for more than 65 years, and our business is well positioned to continue to benefit from increased spending for safety and security products and systems.

Government budget deficits at the national, state and local levels continue to be a spending factor for public-safety agencies. In 2004, we expect continued prioritization of limited government funds towards funding of safety and security. However, recent U.S. federal government budget proposals have indicated potential funding reductions to state and local agencies in areas where our products and systems are purchased. We do not expect these reductions to have a material impact on our business in 2004.

The scope and size of systems requested by some of our customers are increasing. Some customers want large systems, including countrywide and statewide systems. These larger systems, or “mega-systems”, are more complex and include a wide range of capabilities. Mega-system projects will impact how contracts are bid, which companies compete for bids and how companies partner on projects. During the last two years, we have been awarded several mega-system projects, including state-wide projects in Illinois and Arkansas, as well as projects in Hong Kong and the United Kingdom. The scope of these and related projects vary, however, they are: (i) generally longer term arrangements, up to 10 years, (ii) cover a wider geography and larger user group, and (iii) include the sale of infrastructure, systems integration, subscriber products and/or managed services. In 2004, we expect the trend towards larger systems to continue.

Our Strategy

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

Customers

The principal customers for two-way radio products and systems include public-safety agencies, such as police, fire, emergency management services and military; petroleum companies; gas, electric and water utilities; courier companies; telephone companies; diverse industrial companies; transportation companies, such as railroads, airlines, taxicab operations and trucking firms; institutions, such as schools and hospitals; and companies in construction, manufacturing and service businesses. Our products are also sold and leased to various local, state, provincial, and national agencies for many uses, including homeland security. Net sales to customers in North America accounted for 66% of the segment’s net sales in 2003.

We have a large number of customers worldwide. The combined net sales from our top 10 customers worldwide represent about 16% of 2003 segment net sales. A loss or reduction in purchasing levels by a single customer or a few customers could, but is not likely to, have a material adverse effect on our results.

Competition

We are a leading worldwide supplier of two-way radio communications products, services and systems. We are the only provider delivering communications and information systems compliant with both existing industry digital standards, TETRA and Project 25. We experience widespread, intense competition from numerous competitors

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

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

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

Payment Terms

Payment terms vary worldwide. Generally, contract payment terms range from net 30 to 60 days. As required for competitive reasons, we may provide or arrange for long-term financing in connection with equipment purchases. Financing may cover all or a portion of the purchase price. We provide limited leasing of equipment, with lease terms from 1 to 10 years.

Regulatory Matters

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

Recent policy changes in the U.S. may encourage deregulation of frequency allocation, allowing new wireless communications technologies to be developed. Such policy changes may spread to other countries, and the reduced barriers to entry for the development of new technologies may introduce new competition for both Motorola and our customers.

Backlog

The segment’s backlog was $1.7 billion at both December 31, 2003 and December 31, 2002. The 2003 backlog amount is believed to be generally firm, and approximately 80% of that amount is expected to be recognized as revenue during 2004. This forward-looking estimate of the firmness of such orders is subject to future events that may cause the amount recognized to change.

Intellectual Property Matters

Patent protection is very important to the segment’s business. We actively participate in the development of open standards for interoperable, mission critical digital two-way radio systems. We have published our technology and licensed patents to signatories of the industry’s two primary memorandum of understanding defined by the Telecommunications Industry Association (TIA) Project 25 and European Telecommunications Standards Institute (ETSI), Terrestrial Trunked Radio (TETRA). Royalties associated with these licenses are not expected to be material to the segment’s financial results. Reference is made to the material under the heading “Other Information” for information relating to patents and trademarks, and research and development activities with respect to this segment.

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Inventory, Raw Materials, Right of Return and Seasonality

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

Availability of the materials and components required by the segment is relatively dependable, but normal fluctuations in market demand and supply could cause temporary, selective shortages and affect results. Direct sourcing of materials and components from foreign suppliers is becoming more extensive. We operate certain offshore subassembly plants, the loss of one or more of which could constrain our production capabilities and affect results.

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

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

Our Facilities/Manufacturing

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

Integrated Electronic Systems Segment

The Integrated Electronic Systems segment (“IESS” or the “segment”) designs, manufactures and sells: (i) automotive and industrial electronics systems, (ii) telematics systems that enable automated roadside assistance, navigation and advanced safety features for automobiles, (iii) portable energy storage products and systems, and (iv) embedded computing systems. In 2003, IESS net sales represented 8% of the Company’s consolidated net sales.

Principal Products and Services

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

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

The Motorola Computer Group (“MCG”) specializes in standards-based embedded computing systems that are integrated by OEMs into a wide variety of products in the telecommunications, industrial automation, defense and aerospace industries.

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

Our Industry

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

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In 2003, both net sales and orders were up for ACES due to new launches of electronic controls and telematics products. ESG experienced a substantial decrease in both net sales and orders, primarily due to reductions in the price of batteries for wireless handsets. MCG net sales and orders increased due to increased demand for commercial, off-the-shelf embedded computing systems.

Our Strategy

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

We expect MCG to grow by leading the move to higher utilization of standards-based embedded computing systems. These products enable OEMs in telecommunications, industrial automation, defense and aerospace industries to acquire commercial off-the-shelf computing systems instead of creating these systems with in-house engineering resources. This change enables OEMs to provide more cost-effective computing systems and to focus their own research and development on applications that add value to and differentiate the computing system.

ESG is expected to grow as the volume of portable devices in the mobile computing and portable communications market increases.

Customers

In 2003, 63% of the segment’s net sales were to four customers: 18% to Motorola, 17% to General Motors, 15% to Ford and 13% to Daimler Chrysler. Our largest customer within Motorola is the wireless handset business, PCS. The loss of a significant portion of any of these customers’ business could have a material adverse effect upon the segment.

Competition

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

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

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

Payment Terms

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

Backlog

The segment’s backlog was $347 million at December 31, 2003 and $308 million at December 31, 2002. For purposes of calculating backlog, the next 8 weeks’ requirements are reported, representing primarily the segment’s ACES business. The 2003 backlog is believed to be generally firm and approximately 100% of that amount is expected to be recognized as revenue during 2004. This forward-looking estimate of the firmness of such orders is subject to future events that may cause the amount recognized to change.

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Intellectual Property Matters

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

Inventory, Raw Materials, Right of Return and Seasonality

The segment does not carry significant amounts of inventory.

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

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

Our Facilities/Manufacturing

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

Broadband Communications Segment

The Broadband Communications segment (“BCS” or the “segment”) designs, manufactures and sells: a wide variety of broadband products for the cable television industry; high speed data products; hybrid fiber coaxial network transmission systems used by cable television operators; and digital satellite television systems for programmers. In 2003, BCS net sales represented 6% of the Company’s consolidated net sales.

Principal Products and Services

The segment is a leading provider of end-to-end networks used in the cable television industry for the delivery of video, voice and data services over hybrid fiber coaxial networks. These broadband networks include products to transport programming by broadcasters, products used at the cable operator’s headend (central office) and products used at its outside transmission plant. We also sell a suite of interactive digital set-top terminals for the customer’s home that enable advanced interactive entertainment and informational services, including video-on-demand, digital video recording (DVR), Internet access, e-mail, e-commerce, chat rooms, impulse pay-per view, decoding and processing of high definition television (HDTV) to be transmitted over networks using our technology and other IP services. Our interactive digital set-top terminals also deliver advanced interactive services focused on the digital video broadcast-compliant (DVB-compliant) markets around the world. We also provide digital system control equipment, encoders, access control equipment and a wide range of digital satellite receivers. Our digital business accounted for approximately 65% of our revenue in 2003 and is expected to account for a substantial portion of our revenues for the foreseeable future.

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

To complete the end-to-end broadband network system, we design and manufacture a diverse family of broadband infrastructure access applications for broadband services including video, voice, and data

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communications. These products include cable modem termination systems, headend products, amplifiers, taps, passives and optoelectronics.

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

Our Industry

Demand for our products depends primarily on: (i) capital spending by providers of cable services for constructing, rebuilding or upgrading their communications systems, and (ii) the marketing of advanced communications services by those providers. The amount of spending by these providers, and therefore a majority of our sales and profitability, are affected by a variety of factors, including: (i) general economic conditions; (ii) the continuing trend of consolidation within the cable industry; (iii) the financial condition of cable television system operators and alternative communications providers, including their access to financing; (iv) the rate of digital penetration; (v) technological developments; (vi) standardization efforts that impact the deployment of new equipment; and (vii) new legislation and regulations affecting the equipment sold by the segment. In 2003, our customers significantly reduced their capital spending for the second consecutive year, primarily due to difficult economic conditions and in an effort to improve their cash flows. Additionally, the debt ratings of several of the largest cable operators have also been downgraded, in part due to significant debt levels. These conditions have impacted, and may continue to impact, our customer’s ability to make new capital expenditures or raise additional capital in the near term to fund capital expenditures.

Our Strategy

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

We also are focused on enhancing and expanding our infrastructure offerings, including next-generation products in the CMTS and fiber optic network markets. Sales of our CMTS products increased in 2003 and are expected to continue to increase in 2004 as cable operators build out their networks to accommodate enhanced data and voice applications. We also will continue to expand our portfolio of data products beyond the traditional cable modem business. We are focused on providing home networking products, including wireless networking devices with high-speed Internet access for a complete home, small office or small-to-medium enterprise communications system.

Customers

We are dependent upon a small number of customers for a significant amount of our sales. The vast majority of our sales are in the U.S.—where a small number of large cable television multiple system operators (MSOs) own a large portion of the cable systems and account for a significant portion of the total capital spending in the industry. Comcast Corporation accounted for approximately 40% of the segment’s net sales in 2003. The loss of business in the future from Comcast or any of the other major MSOs could have a material adverse effect on the segment’s business.

Competition

The businesses in which we operate are highly competitive. We compete worldwide in the market for digital set-top terminals for cable and satellite networks. Based on 2003 annual sales, we believe we are the leading

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provider of digital cable set-top terminals in North America. Our digital cable set-top terminals compete with products from a number of different companies, including: (i) those that develop and sell substitute products that are distributed by direct broadcast satellite (DBS) service providers through retail channels, (ii) those that develop, manufacture and sell products of their own design, and (iii) those that license technology from us or other competitors. In North America, our largest competitor is Scientific Atlanta. Other competitors in North America include C-COR, Harmonic, Arris and Cisco. Outside of North America, where we have a smaller market position, we compete with many equipment suppliers, including several consumer electronics companies.

The traditional competitive environment in the North American cable market continues to change for several reasons. First, based on our customers’ requirements, we have begun and will continue to license certain of our technology to certain competitors. In 2004, we expect to license our technology to more licensees, which may result in increased competition for digital set-top terminals in our markets. Second, per OpenCable specifications, we anticipate that digital televisions will be available in 2004 that will not require a digital set-top box for one-way broadcast digital services.

Historically, reception of digital television programming from the cable broadband network required a set-top terminal with certain security technology compatible with the network. This security technology has limited the availability of set-top terminals to those manufactured by a few cable network manufacturers, including Motorola. The FCC has enacted regulations requiring separation of security functionality from set-top terminals by January 1, 2006. To meet this requirement, we have developed security modules for sale to cable operators for use with our own and third party set-top terminals. As a step towards this implementation, in 2002, the cable industry and consumer electronic manufacturers agreed upon a uni-directional security interface which allows third-party devices to access broadcast programming (not pay-per view or video on demand) with a security device. The first such devices became available in the fourth quarter of 2003. A full two-way security interface specification is expected to be completed by the end of 2004, and compliant devices are likely in 2006. These changes are expected to increase competition and encourage the sale of set-top terminals to consumers in the retail market. Traditionally, cable service providers have leased the set-top terminal to their customers.

The FCC also has mandated that digital tuners be incorporated into television sets by 2006. As a result of these actions, television manufacturers may integrate technology that is available in our set-top terminals into their products in the future and bypass the need for a set-top terminal for certain applications.

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

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

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

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

Payment Terms

Extended payment terms are provided to customers from time to time on a case-by-case basis. Such extended terms are isolated in nature and historically have not related to a significant portion of our revenues.

Regulatory Matters

Many of our products are subject to regulation by the FCC or other communications regulatory agencies. In addition, our customers and their networks, into which our products are incorporated, are subject to government

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regulation. Government regulatory policies affecting either the willingness or the ability of cable operators to offer certain services, or the terms on which the companies offer the services and conduct their business, may affect the segment’s results. Regulatory actions also have impacted competition, as discussed above.

Backlog

The segment’s backlog was $288 million at December 31, 2003 and $324 million at December 31, 2002. The reduction in backlog and related orders primarily reflects a shorter cycle time required for customer fulfillment. The 2003 order backlog is believed to be generally firm and 100% of that amount is expected to be recognized as revenue in 2004. The forward-looking estimates of the firmness of such orders is subject to future events, which may cause the amount recognized to change.

Intellectual Property Matters

We seek to build upon our core enabling technologies such as digital compression, encryption and conditional access systems, in order to lead the worldwide growth in the market for broadband communications networks. Our policy is to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications to protect technology and improvements that we consider important to the development of our business.We also rely on our proprietary knowledge and ongoing technological innovation to develop and maintain our competitive position, and will periodically seek to include our proprietary technologies in certain patent pools that support the implementation of standards. We are a founder of MPEG LA, the patent licensing authority established to foster broad deployment of MPEG-2 compliant systems. We have also licensed our digital conditional access technology, DigiCipher^® II, to other equipment suppliers. We also enter into other license agreements, both as licensor and licensee, covering certain products and processes with various companies. These license agreements require the payment of certain royalties that are not expected to be material to the segment’s financial results.

Inventory, Raw Materials, Right of Return and Seasonality

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

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

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

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

Our Facilities/Manufacturing

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

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Other Products Segment

The Other Products segment includes: (i) Next Level Communications, Inc., which became a wholly-owned subsidiary of Motorola in April 2003, (ii) various corporate programs representing developmental businesses and research and development projects, which are not included in any major segment, (iii) Motorola Credit Corporation (MCC), Motorola’s wholly-owned finance subsidiary, and (iv) Motorola’s holdings in cellular operating companies outside the U.S.

Other Information

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

Customers.    Motorola sells approximately 10.3% of its products and services to Nextel Communications, Inc. and its affiliates. In addition to Nextel, Motorola has several other large customers, the loss of one or more of these customers would have a material adverse effect on Motorola. Based on 2003 annual sales, in addition to Nextel, other large Motorola customers include Verizon, China Mobile and China Unicom.

Approximately 2.2% of Motorola’s net sales in 2003 were to various branches and agencies, including the armed services, of the U.S. Government. All contracts with the U.S. Government are subject to cancellation at the convenience of the Government.

Government contractors, including Motorola, are routinely subjected to numerous audits and investigations, which may be either civil or criminal in nature. The consequences of these audits and investigations may include administrative action to suspend business dealings with the contractor and to exclude it from receiving new business. In addition, Motorola, like other contractors, reviews aspects of its government contracting operations, and, where appropriate, takes corrective actions and makes voluntary disclosures to the U.S. Government. These audits and investigations could adversely affect Motorola’s ability to obtain new business from the U.S. Government.

Backlog.    Motorola’s aggregate backlog position, including the backlog relating to other Motorola segments, as of the end of the last two fiscal years was approximately as follows:

Except as previously discussed in this Item 1, the orders supporting the 2003 backlog amounts shown in the foregoing table are believed to be generally firm, and approximately 96% of orders on hand at December 31, 2003 are expected to be shipped or earned, with respect to contracts accounted for under percentage-of-completion of accounting, during 2004. However, this is a forward-looking estimate of the amount expected to be shipped, and future events may cause the percentage actually shipped to change.

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

Research and Development.    Motorola’s business segments participate in very competitive industries with constant changes in technology. Throughout its history, Motorola has relied, and continues to rely, primarily on its

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research and development programs for the development of new products, and on its production engineering capabilities for the improvement of existing products. Technical data and product application ideas are exchanged among Motorola’s business segments on a regular basis. Management believes, looking forward, that Motorola’s commitment to research and development programs, both to improve existing products and services and to develop new products and services, together with its utilization of state-of-the-art technology, should allow each of its segments to remain competitive.

Research and development (R&D) expenditures relating to new product development or product improvement, other than customer-sponsored contracts, were approximately $3.8 billion in 2003, $3.7 billion in 2002 and $4.3 billion in 2001. R&D expenditures increased 1% in 2003 as compared to 2002, after declining 13% in 2002 as compared to 2001. In addition, research funded under customer-sponsored contracts amounted to approximately $290 million in 2003, $263 million in 2002 and $269 million in 2001. Motorola continues to believe that a strong commitment to research and development is required to drive long-term growth. Approximately 23,500 professional employees were engaged in such research activities (including customer sponsored contracts) during 2003.

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

As of December 31, 2003, Motorola owned approximately 12,287 utility and design patents in the U.S. and 14,868 patents in foreign countries. These foreign patents are mostly counterparts of Motorola’s U.S. patents, but a number result from research conducted outside the U.S. and are originally filed in the country of origin. During 2003, Motorola was granted 735 U.S. utility and design patents. Many of the patents owned by Motorola are used in its operations or licensed for use by others, and Motorola is licensed to use certain patents owned by others. Royalty and licensing fees income recorded by Motorola was $635 million, $600 million and $613 million for the years ended December 31, 2003, 2002 and 2001, respectively.

Environmental Quality.    Motorola’s operations are from time to time the subject of investigations, conferences, discussions and negotiations with various federal, state and local environmental agencies with respect to the discharge or cleanup of hazardous waste and compliance by those operations with environmental laws and regulations. The remainder of the response to this section of Item 1 incorporates by reference the information contained under the captions “Environmental” and “Other” in Note 9, “Commitments and Contingencies” of Part II, Item 8: Financial Statements and Supplementary Data of this document.

Employees.    At December 31, 2003, there were approximately 88,000 employees of Motorola and its subsidiaries, as compared to approximately 97,000 employees at December 31, 2002, a 9.3% decline.

Financial Information About Foreign and Domestic Operations and Export Sales.    Domestic export sales to third parties were $2.0 billion, $1.4 billion and $2.2 billion for the years ended December 31, 2003, 2002 and 2001, respectively. Domestic export sales to affiliates and subsidiaries, which are eliminated in consolidation, were $5.3 billion, $4.7 billion and $4.9 billion for the years ended December 31, 2003, 2002 and 2001, respectively.

The remainder of the response to this section of Item 1 incorporates by reference Note 9, “Commitments and Contingencies” of Part II, Item 8: Financial Statements and Supplementary Data of this document and the “Results of Operations—2003 Compared to 2002” and “Results of Operations—2002 Compared to 2001” sections of Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations of this document.

Available Information

We make available free of charge through our website, www.motorola.com/investor, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, Exchange Act reports and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Also available free of charge on our website are the following corporate governance documents:

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All of our reports and corporate governance documents may also be obtained without charge by contacting Investor Relations, Motorola, Inc., Corporate Offices, 1303 East Algonquin Road, Schaumburg, Illinois 60196, E-mail: investors@motorola.com, phone: 1-800-262-8509. Our Internet website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.

Item 2: Properties

Motorola’s principal executive offices are located at 1303 East Algonquin Road, Schaumburg, Illinois 60196. Motorola also operates manufacturing facilities and sales offices in the U.S. and many other countries. (See “Item 1: Business” for information regarding the location of the principal manufacturing facilities for each of Motorola’s business segments.) Motorola owns 69 facilities (manufacturing, sales, service and office), 40 of which are located in North America and 29 of which are located in other countries. Motorola leases 333 facilities, 135 of which are located in North America and 198 of which are located in other countries.

As part of Motorola’s overall strategy to reduce operating costs and improve the financial performance of the corporation, a number of businesses and facilities have either been sold or are currently for sale. During 2003, facilities in Sendai, Japan; Penang, Malaysia; Irvine, California; Lawrenceville, Georgia and Chihuahua, Mexico were sold. In January of 2004, facilities in Tianjin, China and South Queensferry, Scotland were sold. Facilities (or portions thereof) in Mesa, Arizona; Tempe, Arizona; Harvard, Illinois; Northbrook, Illinois; Austin, Texas; Swindon, U.K., and Sendai, Japan are currently up for sale.

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

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

Item 3: Legal Proceedings

Personal Injury Cases

Cases relating to Wireless Telephone Usage

Motorola has been a defendant in several cases arising out of its manufacture and sale of wireless telephones. Jerald P. Busse, et al. v. Motorola, Inc. et al., filed October 26, 1995 in the Circuit Court of Cook County, Illinois, Chancery Division, is a class action alleging that defendants have failed to adequately warn consumers of the alleged dangers of cellular telephones and challenging ongoing safety studies as invasions of privacy. On October 9, 2002, the Circuit Court entered summary judgment in defendants’ favor. Plaintiffs have appealed the judgment. Kane, et al., v. Motorola, Inc., et al., filed December 13, 1993 in the Circuit Court of Cook County, Illinois, alleges that plaintiffs’ brain cancer was caused or aggravated by a prototype communication device. On May 11, 2000, the Court entered summary judgment in Motorola’s favor holding that there was no evidence to support plaintiffs’ theory of causation. On September 26, 2002, the Illinois Appellate Court affirmed the entry of summary judgment for Motorola and denied plaintiffs’ appeal. Plaintiffs have sought leave to appeal the decision to the Illinois Supreme Court. On June 6, 2003, the Illinois Supreme court denied the petition for leave to appeal. All avenues of appeal have now been exhausted. Medica et al., v. Motorola, Inc., et al., filed September 7, 1999 in the District Court of Clark County, Nevada, alleges that use of a cellular phone caused a malignant brain tumor. Newman et al., v. Motorola, Inc., et al., filed August 1, 2000, in the Circuit Court for Baltimore City, Maryland and subsequently removed to the U.S. District Court, alleges that use of a cellular phone caused a malignant brain tumor. On September 30, 2002, the district court in Newman ruled that plaintiffs’ expert testimony did not meet the standards

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of admissibility in the federal courts. With no admissible expert evidence to establish causation, the court subsequently entered summary judgment for defendants. Plaintiffs appealed the judgment. On October 22, 2003, the U.S. Court of Appeals for the Fourth Circuit affirmed the lower court’s decision.

During 2001, the Judicial Panel on Multidistrict Litigation ruled that five cases, Naquin, et al., v. Nokia Mobile Phones, et al., Pinney and Colonell v. Nokia, Inc., et al., Gillian et al., v. Nokia, Inc., et al., Farina v. Nokia, Inc., et al., and Gimpelson v. Nokia Inc, et. al., which allege that the failure to incorporate a remote headset into cellular phones rendered the phones defective and that cellular phones cause undisclosed injury to cells and other health risks, be transferred to the United States District Court for the District of Maryland for coordinated or consolidated pretrial proceedings in the matter called In re Wireless Telephone Radio Frequency Emissions Products Liability Litigation (the “MDL Proceeding”). On March 5, 2003, the MDL Court dismissed with prejudice the five cases consolidated during 2001. In doing so, the Court stated that the subject matter is preempted and not appropriate for litigation, but is entrusted by Congress to federal agencies. On April 2, 2003, plaintiffs appealed the dismissal as well as the court’s jurisdictional ruling. During 2002, the MDL panel transferred and consolidated seven additional cases, Horn v. Motorola, Inc., et. al., Murray v. Motorola, Inc., et al., Agro et. al., v. Motorola, Inc., et al., Cochran et. al., v. Audiovox Corporation, et al., Schofield et. al., v. Matsushita Electric Corporation of America, et al., each of which alleges that use of a cellular phone caused a malignant brain tumor, Dahlgren v. Motorola, Inc., et. al., which alleges that defendants manufactured and sold cell phones that increase the risk of adverse cellular reaction and or cellular dysfunction and failed to disclose biological effects, and Brower v. Motorola, Inc., et al., which contains allegations similar to Horn and Dahlgren, with the MDL Proceeding. On November 18, 2003, the MDL Court entered an order dismissing Horn without prejudice.

Cases relating to Two-Way Radio Usage

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

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

On March 10, 2004, the court, to which all September 11 litigation has been assigned, granted Motorola’s and the other defendants’ motion to dismiss the complaint on the grounds that all of the Virgilio plaintiffs have filed claims with the September 11^th Victims’ Compensation Fund, that Congress intended the Fund to be their remedy, and they have therefore waived their right to bring the lawsuit.

Iridium-Related Cases

Class Action Securities Lawsuits

Motorola has been named as one of several defendants in putative class action securities lawsuits pending in the District of Columbia arising out of alleged misrepresentations or omissions regarding the Iridium satellite communications business. The plaintiffs seek an unspecified amount of damages. On March 15, 2001, the federal court judge consolidated the various securities cases under Freeland v. Iridium World Communications, Inc., et, al., originally filed on April 22, 1999. Motorola moved to dismiss the plaintiffs’ complaint on July 15, 2002, and that motion has not yet been decided.

Bankrupcy Court Lawsuit

Motorola has been sued by the Official Committee of the Unsecured Creditors of Iridium in the Bankruptcy Court for the Southern District of New York on July 19, 2001. In re Iridium Operating LLC, et, al. v. Motorola

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asserts claims for breach of contract, warranty, fiduciary duty, and fraudulent transfer and preferences, and seeks in excess of $4 billion in damages.

Iridium India Lawsuits

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

In September 2002, Iridium India also filed a civil suit in the Bombay High Court against Motorola and Iridium. The suit alleges fraud, intentional misrepresentation and negligent misrepresentation by Motorola and Iridium in inducing Iridium India to purchase gateway equipment from Motorola, acquire Iridium stock, and invest in developing a market for Iridium services in India. Iridium India claims in excess of $200 million in damages and interest. In conjunction with the filing of the civil suit, Iridium India moved for interim relief and obtained, without notice to Motorola, an order prohibiting Motorola from removing assets from India. In August 2003, Motorola obtained dismissal of Iridium India’s motions for interim relief in the civil suit, but Iridium India appealed that dismissal to the appellate division of the Bombay High Court. An order prohibiting removal of certain assets from India remains in effect pending disposition of that appeal.

Shareholder Derivative Case

M&C Partners III v. Galvin, et al., filed January 10, 2002, in the Circuit Court of Cook County, Illinois, is a shareholder derivative suit filed derivatively on behalf of Motorola against fifteen current and former members of the Motorola Board of Directors and Motorola as a nominal defendant. The lawsuit alleges that the Motorola directors breached their fiduciary duty to the Company and/or committed gross mismanagement of Motorola’s business and assets by allowing Motorola to engage in improper practices with respect to Iridium. The suit seeks an unspecified amount of damages. In October 2003, the court dismissed plaintiff’s amended complaint in its entirety without prejudice.

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

Telsim-Related Cases

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

U.S. Case

On January 28, 2002, Motorola Credit Corporation (“MCC”), a wholly-owned subsidiary of Motorola, initiated a civil action with Nokia Corporation (“Nokia”), Motorola Credit Corporation and Nokia Corporation v. Kemal Uzan, et al., against several members of the Uzan family, as well as one of their employees and controlled companies, alleging that the defendants engaged in a pattern of racketeering activity and violated various state and federal laws. The suit alleged 13 separate counts of wrongdoing, including (i) three counts alleging violations of

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Illinois fraud and conspiracy laws; (ii) three federal statutory counts alleging computer hacking; (iii) one count alleging violations of the Illinois Trade Secrets Act; (iv) one count seeking imposition of an equitable lien and constructive trust; (v) one count seeking declaratory relief; and (vi) four counts of criminal activity in violation of the Racketeer Influenced and Corrupt Organizations Act, commonly known as “RICO”. The suit was filed in the United States District Court for the Southern District of New York (the “U.S. District Court”). The U.S. District Court issued its final ruling on July 31, 2003 as described below.

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

The U.S. District Court tried the case without a jury to conclusion on February 19, 2003. Subsequent to the trial of the case, and before a final ruling had been issued, the U.S. Court of Appeals for the Second Circuit (“the Appellate Court”) issued an opinion on March 7, 2003 regarding a series of appeals filed by the Uzans from the U.S. District Court’s earlier rulings. In its opinion, the Appellate Court remanded the case back to the U.S. District Court on the grounds that the RICO claims were premature and not yet ripe for adjudication, but concluded that the claims might become timely at some future point. The Appellate Court directed that the RICO claims be dismissed without prejudice to their being later reinstated. The Appellate Court, however, upheld the May 2002 Preliminary Injunction, finding that it was sufficiently supported by the fraud claims under Illinois law, and did not rule on the merits of the Uzans’ claim that this matter may only be resolved through arbitration in Switzerland. A discussion of the arbitration in Switzerland can be found in the section below entitled “Foreign Proceedings.”

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

On July 31, 2003, the U.S. District Court entered a judgment in favor of MCC for $4.26 billion. The U.S. District Court declined to reinstate the RICO claims, but held that the court had jurisdiction to decide the merits of the Illinois fraud claims. MCC’s fraud claims under Illinois common law fraud and civil conspiracy were sufficient to support a full judgment on behalf of MCC in the amount of $2.13 billion in compensatory damages. The U.S. District Court also awarded $2.13 billion in punitive damages. In addition, the preliminary injunction was converted into a permanent injunction, essentially unaltered in scope, and the U.S. District Court also ordered the Uzans arrested and imprisoned if they are found within 100 miles of the court’s jurisdiction for being in contempt of court.

On August 8, 2003, the U.S. District Court denied the Uzans’ request for a stay of execution of the judgment pending appeal. To stay execution, the Uzans were required to post a bond of $1 billion by August 15, 2003. The Uzans did not post the bond and instead appealed the U.S. District Court decision to the Appellate Court. On August 18, 2003, the Appellate Court assigned the appeal to a three-judge panel and ruled that the statutory stay (which was to expire on August 18) would remain in place until the panel ruled.

On August 18, 2003, Motorola and Nokia requested that the Appellate Court dismiss the Uzans’ appeal, based on the Uzans’ repeated failures to comply with court orders and their fugitive status. This motion was assigned to the same panel hearing the Uzans’ stay application.

On September 27, 2003, the Appellate Court granted MCC’s and Nokia’s motion, in part, dismissed the individual Uzans’ appeals and denied any stay of execution on the judgment against the individual Uzans. In addition, the Appellate Court vacated the judgment against the three corporate defendants and remanded certain questions to the U.S. District Court to decide in connection with the proceedings against the corporate defendants. The stay of execution was kept in place as against the corporate defendants.

On October 3, 2003, the Uzans filed a motion seeking rehearing by the motions panel and/or the entire Appellate Court and sought another stay of execution as against all of the defendants pending that determination. On February 6, 2004, the motions panel of the Appellate Court denied the Individual Defendants’ motion for reconsideration and stay of execution and issued a mandate. On February 18, 2004, the Individual Defendants filed with the Appellate Court a “Petition for Rehearing En Banc to Review the Panel’s Order Directing that the Mandate Issue ‘Forthwith.’ ” The motions panel of the Appellate Court, on February 19, 2004, on its own motion, sent a letter to the U.S. District Court purporting to withdraw the mandate it had issued on February 6, 2004.

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The Company continues its recovery efforts and following the denial of the Uzans’ motion for a stay by the Appellate Court, MCC has begun liquidating Uzan assets in the United States, the United Kingdom and France. However, the Company continues to believe that the litigation, collection and/or settlement processes will be very lengthy in light of the Uzans’ decision to violate various courts’ orders, including orders holding them in contempt of court. In addition, the Turkish government has asserted control over Telsim and certain other interests of the Uzans and this may make Motorola’s collection efforts more difficult.

Foreign Proceedings

In 2002, the United Kingdom’s High Court of Justice, Queen’s Bench Division (the “UK Court”), on motion of MCC, entered a worldwide freezing injunction against Cem Uzan, Hakan Uzan, Kemal Uzan and Aysegul Akay, freezing each of their assets up to a value of $200 million. The Uzans were ultimately held in contempt of court and ordered to be incarcerated for failing to make a full disclosure concerning their worldwide assets. On June 12, 2003, the UK Court of Appeal affirmed the lower court’s decision against Cem Uzan and Aysegul Akay, but concluded that MCC was not able to enforce the freezing order against Hakan Uzan and Kemal Uzan because they had no assets in England and Wales. Consequently, the lower court’s rulings as to Hakan Uzan and Kemal Uzan were reversed. MCC has appealed this aspect of the Court of Appeal’s decision. The Court of Appeal agreed to stay its Orders in relation to Hakan Uzan and Kemal Uzan, so that the Worldwide Freezing Orders remain effective against them and their worldwide assets, pending MCC’s appeal to the House of Lords. As a result of the Court of Appeal’s decision, the UK assets of Cem Uzan and Aysegul Akay, which total approximately $12.7 million, remain frozen and MCC has commenced the execution process in satisfaction of the New York judgment. In December 2003, the House of Lords issued a final judgment, declining to hear an appeal from the Court of Appeal’s decision, thus keeping the Court of Appeals’ decision in place.

Motorola has also filed attachment proceedings in several other foreign jurisdictions resulting in the preliminary seizure of assets owned by the Uzans and various entities within their control.

On February 5, 2002, Telsim initiated arbitration against MCC in Switzerland at the Zurich Chamber of Commerce. In Telsim’s request for arbitration, Telsim acknowledged its debt, but has alleged that the disruption in the Turkish economy during 2001 should excuse Telsim’s failure to make payments on the MCC loans as required under the agreements between the parties. Telsim seeks a ruling excusing its failure to adhere to the original payment schedule and establishing a new schedule for repayment of Telsim’s debt to MCC. Telsim has failed to comply with its proposed new schedule, missing the first three payments totaling approximately $85 million. In August 2003, MCC moved the arbitration panel for a partial award, seeking a judgment for the $85 million. Telsim opposed the motion. On January 26, 2004, the arbitral tribunal granted MCC’s request and entered a Partial Final Award in favor of MCC and against Telsim in the amount of $85 million. MCC will seek to enforce this award against Telsim in Turkey. MCC has requested a second partial award of $40 million from the arbitration panel to account for a loan payment that would have been due at year-end 2003 even under Telsim’s proposed loan repayment schedule. The arbitration panel has not yet ruled on this request. On June 7, 2002, Rumeli Telfon (“Rumeli”) initiated arbitration against MCC in the Zurich Chamber of Commerce seeking a ruling requiring that MCC consent to Rumeli’s request to place the Diluted Stock into an escrow account in Switzerland. Both of these arbitrations are proceeding.

On June 19, 2002, Telsim initiated arbitration against Motorola, Ltd. and Motorola Komünikasyon Ticaret ve Servis Ltd. Sti., both wholly-owned subsidiaries of Motorola, before the International Chamber of Commerce in Zurich, Switzerland, initially seeking approximately 179 million pounds (approximately US$281 million) as damages for the defendants’ alleged sale of defective products to Telsim. Telsim increased the amount of its claim to approximately 300 million pounds (approximately US$479 million). Motorola has denied the claims and has filed a counterclaim. Hearings were held in January 2004 and further hearings are scheduled for mid-March 2004 and June 2004.

Class Action Securities Lawsuits

A purported class action lawsuit, Barry Family LP v. Carl F. Koenemann, was filed against the former chief financial officer of Motorola, Inc. on December 24, 2002 in the United States District Court for the Southern District of New York, alleging breach of fiduciary duty and violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Thereafter, 18 additional putative class action complaints were filed in various federal courts against the Company, its former chief financial officer and various other individuals. The above complaints were all essentially identical and alleged that the price of Motorola’s stock was artificially inflated by a failure to disclose vendor financing to Telsim Mobil Telekomunikasyon Hizmetleri A.S. (Telsim), in connection with the sale of telecommunications equipment by Motorola. In each of the complaints, plaintiffs proposed a class period of February 3, 2000 through May 14, 2001, and sought an unspecified amount of damages.

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All of the above identified cases have been consolidated before the United States District Court for the Northern District of Illinois (the “Illinois District Court”). A lead plaintiff has been selected by the Illinois District Court and on October 10, 2003, the plaintiffs filed an amended consolidated complaint. Motorola filed its motion to dismiss the consolidated complaint on November 5, 2003. The court has scheduled a status conference with all of the parties on March 24, 2004, at which time the court may rule on the motion to dismiss or otherwise indicate when a ruling may be forthcoming.

In addition, a purported class action, Howell v. Motorola, Inc., et al., was filed against Motorola and various of its officers and employees in the Illinois District Court alleging breach of fiduciary duty and violations of the Employment Retirement Income Security Act (“ERISA”). The complaint alleged that the defendants had improperly permitted participants in Motorola’s 401(k) Profit Sharing Plan (the “Plan”) to purchase or hold shares of common stock of Motorola because the price of Motorola’s stock was artificially inflated by a failure to disclose vendor financing to Telsim in connection with the sale of telecommunications equipment by Motorola. The plaintiff sought to represent a class of participants in the Plan for whose individual accounts the Plan purchased or held shares of common stock of Motorola from May 16, 2000 to the present, and sought an unspecified amount of damages. On October 3, 2003, plaintiff filed an amended complaint asserting three claims for breach of fiduciary duties under ERISA against 24 defendants grouped into five categories. The amended complaint alleges the defendants violated ERISA by: (1) continuing to offer Motorola stock as an investment option under the Plan, even though it had become an imprudent investment due to Motorola’s dealings with Telsim and other third parties; (2) negligently making misrepresentations and negligently failing to disclose material information necessary for Participants to make informed decisions concerning their participation in the Plan; and (3) failing to appoint fiduciaries with the knowledge and expertise necessary to manage Plan assets, failing to monitor those fiduciaries properly, and failing to provide sufficient information to Participants and other Plan fiduciaries. On December 9, 2003, all but one of the defendants filed their motion to dismiss. No date has been set by the Court for a ruling on the motion to dismiss.

Charter Communications Class Action Securities Litigation

On August 5, 2002, Stoneridge Investment Partners LLC filed a purported class action in the United States District Court for the Eastern District of Missouri against Charter Communications, Inc. (“Charter”) and certain of its officers, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. This complaint did not name Motorola as a defendant, but asserted that Charter and the other named defendants had violated the securities laws in connection with, inter alia, a transaction with Motorola. In August 2003, the plaintiff amended its complaint to add Motorola, Inc. as a defendant. The amended complaint alleges that Motorola participated in a “scheme” with Charter in connection with this transaction to artificially inflate Charter’s earnings. On October 2, 2003, Motorola filed a motion to dismiss the amended complaint. No date has been set by the court for a ruling on the motion to dismiss.

In re Adelphia Communications Corp. Securities and Derivative Litigation

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

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

Also on December 22, 2003, Motorola was named as a defendant in Stocke v. John J. Rigas, et al. This case was originally filed in Pennsylvania and was subsequently transferred to the Southern District of New York as

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related to the Adelphia MDL. Several other individual and corporate defendants are also named in the amended complaint along with Motorola. As to Motorola, the complaint alleges a federal law claim arising under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and a state law claim of aiding and abetting fraud relating to Adelphia securities. The complaint seeks return of the consideration paid by plaintiff for Adelphia securities, punitive damages, pre-judgment and post-judgment interest, costs and expenses of litigation and other relief. Motorola has recently received this complaint, and fact discovery has not yet begun. Motorola plans to file a motion to dismiss this complaint and Motorola is vigorously defending the litigation.

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

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

Not applicable.

Executive Officers of the Registrant

Following are the persons who were the executive officers of Motorola as of February 29, 2004, their ages as of January 1, 2004, their current titles and positions they have held during the last five years:

Edward J. Zander; age 56; Chairman and Chief Executive Officer since January 2004. Prior to joining Motorola, Mr. Zander was a managing director of Silver Lake Partners from July 2003 to December 2003. Prior to holding that position, Mr. Zander was President and COO of Sun Microsystems, Inc. from January 1998 until June 2002.

Scott A. Anderson; age 50; Executive Vice President, President and Chief Executive Officer, Semiconductor Products Sector (“SPS”) since July 2003; Senior Vice President and General Manager, Transportation Systems Group, SPS from November 2000 to July 2003; Corporate Vice President and General Manager, Transportation Systems Group, SPS from February 1999 to November 2000; Corporate Vice President and Director, SPS Transition Management Organization from September 1998 to February 1999.

Robert L. Barnett; age 63; Executive Vice President since January 2003; Executive Vice President, President and Chief Executive Officer, Commercial, Government and Industrial Solutions Sector from July 1998 to January 2003.

Gregory Q. Brown; age 43; Executive Vice President, President and Chief Executive Officer, Commercial, Government and Industrial Solutions Sector since January 2003; Chairman of the Board and Chief Executive Officer of Micromuse, Inc. from February 1999 to December 2002; President, Ameritech Custom Business Services from September 1996 to February 1999.

Dennis J. Carey; age 57; Executive Vice President, President and Chief Executive Officer, Integrated Electronic Systems Sector since November 2002; Executive Vice President, Business Development, Strategy and Corporate Operations of The Home Depot, Inc. from May 2001 to March 2002; Executive Vice President and Chief Financial Officer of The Home Depot, Inc. from May 1998 to May 2001.

Eugene A. Delaney; age 47; Executive Vice President and President, Global Relations and Resources Organization since July 2002; Senior Vice President and President, Global Relations and Resources Organization from February 2002 to July 2002; Senior Vice President and General Manager, Global Customer Solutions Operations Asia/Pacific from October 2001 to February 2002; Senior Vice President and General Manager, Telecom Carrier Solutions Group, Global Telecom Solutions Sector from August 2000 to October 2001; Senior Vice President and General Manager, Global Telecom Solutions Group, Communications Enterprise from April 1999 to August 2000; Senior Vice President and General Manager, Network Solutions Sector from May 1998 to April 1999.

David W. Devonshire; age 58; Executive Vice President and Chief Financial Officer since April 2002; Executive Vice President and Chief Financial Officer of Ingersoll-Rand Company from January 2000 to January 2002; Senior Vice President and Chief Financial Officer of Ingersoll-Rand Company from January 1998 to January 2000.

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Glenn A. Gienko; age 51; Executive Vice President and Motorola Director of Human Resources since May 1996.

A. Peter Lawson; age 57; Executive Vice President, General Counsel and Secretary since May 1998.

Thomas J. Lynch; age 49; Executive Vice President, President and Chief Executive Officer, Personal Communications Sector (“PCS”) since August 2002; Executive Vice President and President, Integrated Electronic Systems Sector from January 2001 to August 2002; Senior Vice President and General Manager, Satellite & Broadcast Network Systems, Broadband Communications Sector from February 2000 to January 2001; Senior Vice President and General Manager, Satellite & Broadcast Network Systems, General Instrument Corporation from May 1998 to February 2000.

Daniel M. Moloney; age 44; Executive Vice President, President and Chief Executive Officer, Broadband Communications Sector (“BCS”) since June 2002; Senior Vice President and General Manager, IP Systems Group, BCS from February 2000 to June 2002; Senior Vice President and General Manager, Advanced Networks and Telecom Business Unit, General Instrument Corporation from July 1998 to January 2000.

Adrian R. Nemcek; age 56; Executive Vice President, President and Chief Executive Officer, Global Telecom Solutions Sector (“GTSS”) since August 2002; Senior Vice President and President, GTSS from September 2001 to August 2002; Senior Vice President and General Manager, Office of Strategy, GTSS from August 2000 to September 2001; Senior Vice President and General Manager, Customer Solutions Group, Network Solutions Sector from January 1999 to August 2000; Corporate Vice President and General Manager, EMEA Group, Cellular Infrastructure Group from March 1998 to January 1999.

Leif G. Soderberg; age 49; Senior Vice President and Director, Global Strategy and Corporate Development since November 2002; Senior Vice President and Director, Corporate Strategy from April 2002 to November 2002; Senior Vice President and General Manager, Strategy, Corporate Development and Industry Relations, Personal Communications Sector from September 2000 to April 2002; Senior Vice President and General Manager, Systems Solutions Group, Commercial, Government and Industrial Solutions Sector from December 1998 to September 2000.

Padmasree Warrior; age 43; Senior Vice President and Chief Technology Officer since January 2003; Corporate Vice President and General Manager, Energy Systems Group, Integrated Electronic Systems Sector from April 2002 to January 2003; Corporate Vice President and General Manager, Thoughtbeam, Inc., a wholly-owned subsidiary of Motorola, Inc., from October 2001 to April 2002; Corporate Vice President, Chief Technology Officer and Director, DigitalDNA Laboratories, Semiconductor Products Sector (“SPS”) from December 2000 to October 2001; Vice President, Chief Technology Officer and Director, DigitalDNA Laboratories, SPS from July 2000 to December 2000; Vice President and Assistant Director, DigitalDNA Laboratories, SPS from August 1999 to July 2000; Vice President and Director, HiPerMOS and RFLDMOS Device Center of Excellence, SPS from February 1999 to August 1999; Director, HiPerMOS and RFLDMOS Device Center of Excellence, SPS from June 1997 to February 1999.

Mike S. Zafirovski; age 50; President and Chief Operating Officer since July 2002; Executive Vice President and President, Personal Communications Sector from June 2000 to July 2002. Prior to joining Motorola, Mr. Zafirovski was at the General Electric Company for more than 24 years in several senior positions, including President and Chief Executive Officer of GE Lighting, General Electric Company from July 1999 to May 2000; President of GE Lighting, Europe, Middle East and Africa, General Electric Company from April 1996 to June 1999.

The above executive officers will serve as executive officers of Motorola until the regular meeting of the Board of Directors in May 2004 or until their respective successors shall have been elected. There is no family relationship between any of the executive officers listed above.

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PART II

Item 5: Market for Registrant’s Common Equity and Related Stockholder Matters

Motorola’s common stock is listed on the New York, Chicago and Tokyo Stock Exchanges. The number of stockholders of record of Motorola common stock on January 31, 2004 was 96,856.

The remainder of the response to this Item incorporates by reference Note 15, “Quarterly and Other Financial Data (unaudited)” of the Notes to Consolidated Financial Statements appearing on page 131 under “Item 8: Financial Statements and Supplementary Data”.

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Item 6: Selected Financial Data

Motorola, Inc. and Subsidiaries

Five Year Financial Summary

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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, 2003. This commentary should be read in conjunction with our consolidated financial statements and the notes thereto which appear beginning on page 89 under “Item 8: Financial Statements and Supplementary Data”.

Executive Overview

What businesses are we in?

Motorola reports seven segments as described below.

The Personal Communications segment (PCS) designs, manufactures, sells and services wireless subscriber equipment, including wireless handsets and personal two-way radios, with related software and accessory products. The segment’s net sales in 2003 were $11.0 billion, representing 41% of the Company’s consolidated net sales.

The Semiconductor Products segment (SPS) designs, develops, manufactures and sells a broad range of semiconductor products that are based on its core capabilities in embedded processing, including microcontrollers, digital signal processors and communications processors. In addition, the segment offers a broad portfolio of devices that complement its families of embedded processors, including sensors, radio frequency semiconductors, power management and other analog and mixed-signal integrated circuits. Through its embedded processors and complementary products, the segment is also able to offer customers complex combinations of semiconductors and software, which are referred to as “platform-level products”. The segment’s net sales in 2003 were $4.9 billion, representing 18% of the Company’s consolidated net sales. In October of 2003, the Company announced that it intends to move its semiconductor operations into a separate, publicly-traded company.

The Global Telecom Solutions segment (GTSS) designs, manufactures, sells, installs and services wireless infrastructure communication systems, including hardware and software. The segment provides end-to-end wireless networks, including radio base stations, base site controllers, associated software and services, mobility soft switching, application platforms and third-party switching for CDMA, GSM, iDEN^® and UMTS technologies. The segment’s net sales in 2003 were $4.4 billion, representing 16% of the Company’s consolidated net sales.

The Commercial, Government and Industrial Solutions segment (CGISS) designs, manufactures, sells, installs and services analog and digital two-way radio, voice and data communications products and systems to a wide range of public-safety, government, utility, transportation and other worldwide markets. In addition, the segment participates in the expanding market for integrated information management, mobile and biometric applications and services. The segment’s net sales in 2003 were $4.1 billion, representing 15% of the Company’s consolidated net sales.

The Integrated Electronic Systems segment (IESS) designs, manufactures and sells: (i) automotive and industrial electronics systems, (ii) telematics systems that enable automated roadside assistance, navigation and advanced safety features for automobiles, (iii) portable energy storage products and systems, and (iv) embedded computing systems. The segment’s net sales in 2003 were $2.3 billion, representing 8% of the Company’s consolidated net sales.

The Broadband Communications segment (BCS) designs, manufactures and sells a wide variety of broadband products, including: (i) digital systems and set-top terminals for cable television networks, (ii) high speed data products, including cable modems and cable modem termination systems (CMTS), as well as Internet Protocol (IP) based telephony products, (iii) hybrid fiber coaxial network transmission systems used by cable television operators, (iv) digital satellite television systems, (v) direct-to-home (DTH) satellite networks and private networks for business

Note: When discussing the net sales for each of our seven segments, we express the segment’s net sales as a percentage of the Company’s consolidated net sales. Because certain of our segments sell products to other Motorola businesses, $1.8 billion of intracompany sales were eliminated as part of the consolidation process in 2003. As a result, the percentages of consolidated net sales for each of our business segments sum to greater than 100% of the Company’s consolidated net sales.

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communications, and (vi) digital broadcast products for the cable and broadcast industries. The segment’s net sales in 2003 were $1.7 billion, representing 6% of the Company’s consolidated net sales.

The Other Products segment includes: (i) Next Level Communications, Inc., which became a wholly-owned subsidiary of the Company in April 2003, (ii) various corporate programs representing developmental businesses and research and development projects, which are not included in any major segment, (iii) Motorola Credit Corporation (MCC), the Company’s wholly-owned finance subsidiary, and (iv) the Company’s holdings in cellular operating companies outside the U.S. The segment’s net sales in 2003 were $435 million, representing 2% of the Company’s consolidated net sales.

What were our key 2003 financial results?

What we focused on in 2003?

During 2003, we focused on three key objectives.

First, we committed ourselves to continued earnings and balance sheet improvement. We significantly improved operating performance in 2003, with operating earnings of $1.1 billion, compared to an operating loss of $1.8 billion in 2002. We also continued to strengthen our balance sheet in 2003, as evidenced by our $2.8 billion in positive operating cash flow and $1.2 billion reduction in total debt. We also reduced our net debt to $41 million at the end of 2003. This is our lowest level of net debt in over 20 years.

We were also committed to a return to sales growth in 2003. Although net sales for the full year 2003 were less than full year 2002 net sales, we did achieve net sales growth of 4.4% in the second half of 2003 compared to the second half of 2002.

The final key objective was to accelerate our pace for addressing opportunities and fixing strategic issues. Some of the highlights in this area included: (i) product portfolio enhancements, primarily GTSS’s acquisition of Winphoria Networks, Inc., a company specializing in soft switch technology, and (ii) the decision to separate our semiconductor operations into a separate, publicly-traded company.

In addition, we implemented the following initiatives to bring renewed focus to operational efficiency.

First, we set an objective to reduce the cost of poor quality (COPQ) through objectives such as improving software quality, reducing warranty repair and reducing inventory excess and obsolescence and scrap.

We also focused on reducing the cost of purchased materials and services through an improved procurement process which includes: (i) aggressive cross-sector leverage, (ii) overall reductions in purchase and usage spending, (iii) utilizing low-cost sourcing centers, and (iv) integrating a fully digitalized negotiation and procurement process.

Finally, the Company is focused on improving the new product introduction process and engineering effectiveness throughout our business.

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What challenges and opportunities did our businesses face in 2003?

2003 was a critical year for our businesses and the industries in which we participate. We returned to profitability in 2003 after sustaining large losses in 2001 and 2002. After two very difficult years, growth returned to the telecommunications and semiconductor industries. Yet, despite the return to growth in these key industries, we did not meet all of the goals we established for ourselves. Below is a list of the most significant items impacting our 2003 performance in management’s view.

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Focusing on 2004

In looking ahead to 2004, first and foremost, we are focused on increasing profitable sales and growing market share. We remain cautiously optimistic about the economic recovery for information technology products, especially in the areas of communications and related industries. We are excited about the range of our new product offerings this year in our wireless handset, network infrastructure, broadband communications, semiconductor, automotive, and government and public safety businesses. Our unique advantage is providing compelling communication products for the mobile user, connecting the auto, the home and the enterprise, including the public safety market. Seamless mobility is our unique core competency and one which will continue to differentiate Motorola from our competitors over the next several years.

For 2004 we also are focused on the following specific programs:

We face challenges, including many of those that we faced in 2003. We are in extremely competitive businesses and face new and established competitors regularly. However, we believe our strategy, when properly executed, will result in future improvement of our operating results, including higher sales and earnings.

Results of Operations

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Geographic market sales measured by the locale of the end customer as a percent of total net sales for 2003, 2002 and 2001 are as follows:

Geographic Market Sales by Locale of End Customer

Results of Operations—2003 Compared to 2002

Net Sales

Net sales were $27.1 billion in 2003, down 1% from $27.3 billion in 2002. The overall decline in net sales was primarily related to: (i) a $342 million decrease in net sales by BCS, reflecting continuing reductions in capital spending by cable service providers, (ii) a $196 million decrease in net sales by PCS, primarily due to: (a) increased competition in Asia, (b) an estimated loss in market share resulting from delays in the introduction of new products, driven by supply constraints for a key component, and (c) the discontinued sale of paging products during 2002, (iii) a $194 million decrease in net sales by GTSS, reflecting continuing reductions in capital spending by cellular operators, specifically in mature markets, and (iv) a $136 million decrease in net sales by SPS, reflecting decreased sales by the segment in the networking and wireless markets, primarily driven by a reduction in sales to other Motorola businesses. These decreases were partially offset by: (i) a $382 million increase in net sales by CGISS, reflecting increased customer spending due to homeland security initiatives in the government market, as well as an increase in sales due to the conflict in the Middle East and the pending reconstruction of public safety systems in Iraq, and (ii) a $76 million increase in net sales by IESS, primarily due to the success of several new products in the automotive market and increased demand from industrial automation, medical and telecommunications customers.

Gross margin

Gross margin was $9.0 billion, or 33.1% of net sales, in 2003, compared to $9.0 billion, or 32.9% of net sales, in 2002. Four of the Company’s six major segments had a higher gross margin in 2003 and three of the six major segments had higher gross margin as a percentage of net sales. The improvement in gross margin as a percentage of net sales reflects: (i) an increase in SPS, primarily due to a reduction in labor costs, reflecting benefits from previous cost-reduction efforts, and a decline in depreciation costs resulting from the closures of manufacturing facilities, partially offset by the segment’s decrease in net sales, (ii) an increase in CGISS, primarily from the increase in net sales and a favorable product mix, as well as continued benefits from prior cost-reduction actions, and (iii) an increase in GTSS, primarily due to benefits from prior cost-reduction actions and a decline in reorganization of business charges reflected in costs of sales. These improvements in gross margin percentage were partially offset by declines in BCS and PCS, primarily due to the decline in net sales in these two segments.

The 2003 gross margin included reorganization of business charges of $38 million, which were included in Costs of Sales and primarily related to direct labor employee severance costs. The 2002 gross margin included reorganization of business charges of $56 million, which were included in Costs of Sales and primarily related to direct labor employee severance costs.

Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses declined 9% to $4.1 billion, or 15.1% of net sales, in 2003, compared to $4.5 billion, or 16.4% of net sales, in 2002. Four of the Company’s six major segments had lower SG&A expenses in 2003 than in 2002. The decrease in SG&A expenses was primarily driven by: (i) decreased general and administrative spending by PCS, reflecting benefits from prior and ongoing cost-reduction efforts, (ii) decreased selling and sales support costs by GTSS, reflecting benefits from prior cost-reduction efforts, partially

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offset by an increase in employee incentive program costs, and (iii) decreased general and administrative spending by IESS and BCS, reflecting benefits from prior cost-reduction actions. These benefits were partially offset by increased SG&A expenditures in: (i) SPS, primarily due to a reduction in grant income compared to 2002 levels, as well as an increase in employee incentive program costs, and (ii) CGISS, primarily due to an increase in employee incentive program costs.

Research and development expenditures

Research and development (R&D) expenditures increased slightly to $3.8 billion, or 13.9% of net sales, in 2003, compared to $3.7 billion, or 13.6% of net sales, in 2002. Four of the Company’s six major segments had increased R&D expenditures in 2003. The increase in R&D expenditures was primarily due to increased expenditures by: (i) PCS, reflecting an increase in developmental engineering expenditures due to the high volume of new product offerings, (ii) IESS, reflecting a reduction in customer funding of R&D, and (iii) SPS, reflecting a reduction in customer subsidized non-recurring engineering charges related to development of next generation wireless products. These increased expenditures were partially offset by a decrease in R&D expenditures by GTSS, reflecting benefits from prior restructuring actions. The Company believes that its decision to maintain R&D expenditures near the 2002 level is providing an immediate payback in terms of the sales growth and even stronger order growth it experienced in the second half of 2003.

Reorganization of businesses

Net reorganization of businesses charges in 2003 were $124 million, including $86 million reflected in the consolidated statements of operations under Reorganization of Businesses and $38 million included in Costs of Sales. The 2003 net charges of $124 million included reorganization of businesses charges of $353 million, offset by reversals of accruals no longer needed of $229 million. The $229 million of reversals constitute 18% of the Company’s $1.3 billion in earnings before income taxes in 2003. Net reorganization of businesses charges in 2002 were $1.8 billion, including $1.76 billion reflected under Reorganization of Businesses and $56 million included in Costs of Sales. The 2002 net charges of $1.8 billion included reorganization of business charges of $2.1 billion, offset by reversals of accruals no longer needed of $314 million. Reorganization of businesses charges include costs associated with workforce reductions, product line discontinuations, business exits, and consolidation of manufacturing and administrative operations. These charges are discussed in further detail in the “Reorganization of Businesses Programs” section below.

Other charges

The Company recorded net income of $57 million in Other Charges (Income) in 2003, compared to net charges of $833 million in 2002. The net income of $57 million in 2003 primarily consists of: (i) $69 million in income from the reversal of accruals no longer needed due to a settlement with the Company’s insurer on items related to previous environmental claims, (ii) $59 million in income due to the reassessment of remaining reserve requirements as a result of a litigation settlement agreement with The Chase Manhattan Bank regarding Iridium, a discontinued program to launch a low-orbit satellite communications system, and (iii) $41 million in income from the sale of Iridium-related assets that were previously written down. These items were partially offset by: (i) a $73 million impairment charge relating to goodwill associated with the infrastructure business of BCS, and (ii) $32 million of in-process research and development charges related to the acquisition of Winphoria Networks, Inc. by GTSS.

The net charge of $833 million in 2002 was primarily comprised of: (i) a $526 million charge for potentially uncollectible finance receivables to fully reserve a loan to Telsim, a wireless service provider in Turkey, who is currently in default on a $2.0 billion loan from the Company, (ii) a $325 million intangible asset impairment charge relating to an intellectual property license that enables the Company to provide national authorization services for digital set-top terminals, (iii) $80 million for potential repayments of incentives related to impaired facilities, and (iv) $12 million for acquired in-process research and development charges, primarily related to the acquisition of Synchronous, Inc. by BCS. These items were partially offset by: (i) $63 million of income from the reduction of accruals, primarily related to termination settlements relating to Iridium, and (ii) $24 million of income from the reduction of accruals no longer needed due to the settlement with the Company’s insurer on items related to previous environmental claims.

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Net interest expense

Net interest expense was $295 million in 2003, compared to $356 million in 2002. Net interest expense in 2003 included interest expense of $647 million, partially offset by interest income of $352 million. Net interest expense in 2002 included interest expense of $668 million, partially offset by interest income of $312 million. The decrease in net interest expense in 2003 compared to 2002 reflects: (i) a $1.2 billion reduction in overall debt levels during the year, (ii) benefits derived from fixed-to-floating interest rate swaps due to lower interest rates, (iii) lower rates of interest paid for commercial paper and other short-term borrowings due to the low general interest rate environment, and (iv) an increase in interest income due to higher average cash balances.

Gains on sales of investments and businesses

Gains on sales of investments and businesses were $643 million in 2003, compared to $96 million in 2002. The 2003 net gains primarily related to: (i) a $255 million gain on the sale of 25 million shares of common stock in Nextel Communications, Inc., (ii) a $97 million gain on the sale of the Company’s remaining interests in ON Semiconductor, (iii) an $80 million gain on the sale of the Company’s shares in Symbian Limited, (iv) a $65 million gain on the sale of the Company’s shares in UAB Omnitel of Lithuania, and (v) a $61 million gain on the sale of the Company’s shares in Nextel Partners, Inc.

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

Other

Charges classified as Other, as presented in Other Income (Expense), were $139 million in 2003, compared to $1.4 billion in 2002. These charges or income include: (i) foreign currency transaction gains (losses), (ii) equity in net earnings (losses) of affiliated companies, and (iii) investment impairment charges.

The $139 million of charges classified as Other in 2003 primarily related to: (i) $96 million of investment impairment charges, $29 million of which is related to the Company’s debt security holdings in Callahan Associates International L.L.C., a European cable operator, and (ii) $73 million of foreign currency losses, partially offset by $33 million of equity in earnings of affiliated companies.

The $1.4 billion of charges classified as Other in 2002 primarily related to $1.3 billion of investment impairment charges. These impairment charges were primarily comprised of: (i) a $464 million writedown in the value of the Company’s investment in Nextel Communications, Inc., (ii) a $321 million writedown of the Company’s debt security holdings and associated warrants in Callahan Associates International L.L.C, which was based on the results of an independent third-party valuation, (iii) a $95 million charge to write the value of the Company’s investment in an Argentine cellular operating company to zero, and (iv) a $73 million writedown of the Company’s investment in Telus Corporation. Other charges included: (i) $98 million of debt redemption charges paid in 2002 that related to the $825 million of Puttable Reset Securities (PURS) that were redeemed in February 2003, and (ii) $35 million of foreign currency losses.

Effective tax rate

The effective tax rate was 31% in 2003, representing a $400 million net tax expense, compared to a 28% effective tax rate, representing a $961 million net tax benefit, in 2002. The 2003 effective tax rate reflects a $61 million benefit from the reversal of previously-accrued income taxes. The tax reversal relates to a reassessment of the Company’s income tax requirements given the settlement of certain previously-pending income tax audits. The tax rate for 2003, excluding the tax reversal and a $32 million charge for in-process research and development charges related to the acquisition of Winphoria Networks, Inc., was 35%. This adjusted effective tax rate of 35% for 2003 is greater than the 2002 rate of 28% due to a change in the mix of earnings and losses in certain tax jurisdictions and the Company’s inability to recognize tax benefits on certain losses in 2002.

Earnings/(Loss)

The Company had earnings before income taxes of $1.3 billion in 2003, compared to a loss before income taxes of $3.4 billion in 2002. After taxes, the Company had earnings of $893 million, or $0.38 per diluted share, in 2003, compared to a net loss of $2.5 billion, or ($1.09) per share, in 2002.

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The $4.7 billion improvement in earnings before income taxes is primarily attributed to: (i) a $1.7 billion decrease in overall reorganization of business charges, including a $18 million decrease in reorganization of businesses costs recognized in Costs of Sales and a $1.68 billion decrease in costs recognized in Reorganization of Businesses, (ii) a $1.2 billion decrease in investment impairment charges, (iii) an $890 million decrease in Other Charges, primarily due to charges that occurred in 2002 that did not occur in 2003, which primarily consisted of a $526 million charge related to potentially uncollectible finance receivables from Telsim and a $325 million intangible asset impairment charge relating to a license to certain intellectual property, (iv) a $547 million increase in gains on sales of investments and businesses, primarily due to a $255 million gain from the sale of 25 million shares of common stock in Nextel Communications Inc. and gains from the sale of equity securities of other companies held for investment purposes, and (v) a $399 million decline in SG&A expenditures, primarily due to the benefits from prior restructuring actions. These items were partially offset by the 1% decline in net sales.

Results of Operations—2002 Compared to 2001

Net Sales

Net sales were $27.3 billion in 2002, down 11% from $30.5 billion in 2001. The overall decline in net sales was primarily related to reduced customer capital spending in the industries served by: (i) GTSS, where segment net sales decreased by $1.9 billion, (ii) BCS, where segment net sales decreased by $798 million, and (iii) CGISS, where segment net sales decreased by $573 million. All segments reported lower net sales in 2002 than 2001, except for PCS, which had a 4% increase.

In 2001, the Company sold its Integrated Information Systems Group, the Company’s defense and government electronics business, and the Multiservice Networks Division, a provider of end-to-end managed network systems. These businesses were previously included in CGISS and the Other Products segments, respectively. Businesses sold accounted for $553 million of net sales in 2001.

Gross margin

Gross margin increased to $9.0 billion, or 32.9% of net sales, in 2002, compared to $7.4 billion, or 24.2% of net sales, in 2001. The majority of the improvement was due to: (i) a decrease in reorganization of businesses charges included in costs of sales, (ii) reductions in fixed manufacturing costs, and (iii) lower material costs resulting from improved supply-chain efficiencies.

The 2002 gross margin included reorganization of businesses charges of $56 million, which were included in Costs of Sales and primarily related to direct labor employee severance costs. The 2001 gross margin included reorganization of businesses charges of $1.0 billion, which were included in Costs of Sales and primarily related to $520 million for product portfolio simplification write-offs and $443 million for direct labor employee severance costs. Additionally, businesses sold accounted for $166 million of gross margin in 2001.

Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses were $4.5 billion, or 16.4% of net sales, in 2002, compared to $4.9 billion, or 16.1% of net sales, in 2001. The decrease in SG&A expenses in 2002 was primarily related to benefits from the Company’s cost-reduction activities. Additionally, businesses sold accounted for $107 million of SG&A expenditures in 2001.

Research and development expenditures

Research and development (R&D) expenditures declined 13% to $3.7 billion, or 13.6% of net sales, in 2002, compared to $4.3 billion, or 14.0% of net sales, in 2001. The decrease in R&D expenses in 2002 was primarily related to a reduction in spending on low-priority programs as the Company continued to execute on its cost-reduction initiatives. Additionally, businesses sold accounted for $30 million of R&D expenditures in 2001.

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Reorganization of businesses

Total reorganization of businesses charges in 2002 were $1.8 billion, including $1.76 billion reflected in the consolidated statements of operations under Reorganization of Businesses and $56 million included in Costs of Sales. Total reorganization of businesses charges in 2001 were $2.9 billion, including $1.9 billion reflected under Reorganization of Businesses and $1.0 billion included in Costs of Sales. Reorganization of businesses charges include costs associated with workforce reductions, product line discontinuations, business exits, and consolidation of manufacturing and administrative operations. These charges are discussed in further detail in the “Reorganization of Businesses Programs” section below.

Other charges

Charges classified as Other Charges were $833 million in 2002, compared to $2.1 billion in 2001. The net charge of $833 million in 2002 was primarily comprised of: (i) a $526 million charge for potentially uncollectible finance receivables to fully reserve a loan to Telsim, (ii) a $325 million intangible asset impairment charge relating to an intellectual property license that enables the Company to provide national authorization services for digital set-top terminals, (iii) $80 million for potential repayments of incentives related to impaired facilities, and (iv) $12 million for acquired in-process research and development charges, primarily related to the acquisition of Synchronous, Inc. by BCS. These items were partially offset by: (i) $63 million of income from the reduction of accruals, primarily related to termination settlements relating to Iridium and (ii) $24 million of income from the reduction of accruals no longer needed due to the settlement with the Company’s insurer on items related to previous environmental claims.

The net charge of $2.1 billion in 2001 was primarily comprised of: (i) a $1.5 billion charge for potentially uncollectible finance receivables, of which $1.4 billion related to the $2.0 billion loan to Telsim, (ii) a $398 million charge related to litigation and arbitration settlements, of which $365 million related to the Company’s guarantee of a credit agreement for Iridium LLC, (iii) a $116 million charge for goodwill and intangible asset impairments, primarily related to the Internet Software and Content Group, a business included in the Other Products segment, (iv) a $45 million charge for contract terminations, and (v) $40 million for in-process research and development charges relating to the acquisitions of Blue Wave Systems, Inc., included in IESS, and RiverDelta Networks, Inc., included in BCS.

Net interest expense

Net interest expense was $356 million in 2002, compared to $413 million in 2001. Net interest expense in 2002 included interest expense of $668 million, partially offset by interest income of $312 million. Net interest expense in 2001 included interest expense of $786 million, partially offset by interest income of $373 million. The decrease in net interest expense in 2002 compared to 2001 reflects: (i) a $424 million reduction in overall debt levels during the year, (ii) benefits derived from fixed-to-floating interest rate swaps due to lower interest rates, and (iii) lower rates of interest paid for commercial paper and other short-term borrowings due to the low general interest rate environment, partially offset by: (i) higher interest rates on long-term debt issued in the fourth quarter of 2001, (ii) lower interest income on cash balances due to the low general interest rate environment, and (iii) a reduction in interest income earned due to a higher percentage of impaired long-term customer finance receivables.

Gains on sales of investments and businesses

Gains on sales of investments and businesses were $96 million in 2002, compared to $1.9 billion in 2001. The 2002 net gains primarily related to: (i) the sale of equity securities of other companies held for investment purposes, (ii) the sale of the CodeLink^™ bioarray business, and (iii) the reduction of accruals after the settlement of contingencies associated with the prior sales of certain businesses. The 2001 net gains primarily resulted from: (i) the sale of investments in several cellular operating companies outside the U.S., (ii) the sale of the Integrated Information Systems Group, and (iii) the sale of equity securities of other companies held for investment purposes.

Other

Charges classified as Other, as presented in Other Income (Expense), were $1.4 billion in 2002, compared to $1.2 billion in 2001. The $1.4 billion of charges classified as Other in 2002 primarily related to $1.3 billion of

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investment impairment charges. These impairment charges were primarily comprised of: (i) a $464 million writedown in the value of the Company’s investment in Nextel Communications, Inc., (ii) a $321 million writedown of the Company’s debt security holdings and associated warrants in Callahan Associates International L.L.C., which was based on the results of an independent third-party valuation, (iii) a $95 million charge to write the value of the Company’s investment in an Argentine cellular operating company to zero, and (iv) a $73 million writedown of the Company’s investment in Telus Corporation. Other charges included: (i) $98 million of debt redemption charges paid in 2002 that related to the $825 million of Puttable Reset Securities (PURS) that were redeemed in February 2003, and (ii) $35 million of foreign currency losses.

The $1.2 billion of charges classified as Other in 2001 primarily related to $1.2 billion of investment impairment charges. These impairment charges were primarily comprised of: (i) $640 million of impairments of the Company’s investments in United Pan-Europe Communications n.v., Open TV Corporation and other investments in cable operating companies and related cable software companies, (ii) a $111 million writedown of the Company’s investment in Telus Corporation, and (iii) a $100 million writedown of the Company’s investment in Teledesic Corporation.

Effective tax rate

The effective tax rate was 28% in 2002, representing a $961 million net tax benefit, compared to a 29% effective tax rate in 2001, representing a $1.6 billion net tax benefit. The 2002 effective tax rate is less than the U.S. statutory tax rate of 35% due primarily to: (i) the mix of earnings and losses by region and foreign tax rate differentials, and (ii) losses incurred in countries where, due to loss positions, the Company was unable to realize associated tax benefits.

Loss

The Company incurred a loss before income taxes of $3.4 billion in 2002, compared to a loss before income taxes of $5.5 billion in 2001. After taxes, the Company incurred a net loss of $2.5 billion, or ($1.09) per diluted share, in 2002, compared to a net loss of $3.9 billion, or ($1.78) per diluted share, in 2001.

The $2.1 billion decline in the loss before income taxes in 2002 was primarily attributed to: (i) a $1.6 billion improvement in gross margin, including a $1.0 billion decrease in reorganization of businesses charges included in Costs of Sales, despite a $3.2 billion decrease in net sales, (ii) a $1.3 billion decrease in Other Charges, (iii) a $559 million decline in R&D expenditures, and (iv) a $447 million decline in SG&A expenditures. These decreases were partially offset by a $1.8 billion decrease in gains on sales of investments and businesses. Also, businesses sold in 2001 accounted for $23 million of earnings before income taxes in 2001.

Reorganization of Business Programs

During 2003, the Company implemented cost-reduction plans by consolidating manufacturing and administrative operations and reducing its workforce. The Company realized cost-saving benefits associated with these cost-reduction plans of approximately $100 million in 2003, representing $20 million of savings in Costs of Sales, $50 million of savings in Research and Development Expenditures and $30 million of savings in Selling, General and Administrative Expenses. Beyond 2003, the Company expects these 2003 reorganization of businesses programs to provide annualized cost savings of approximately $300 million, representing $90 million of savings in Costs of Sales, $85 million of savings in Research and Development Expenditures and $125 million of savings in Selling, General and Administrative Expenses.

The Company records provisions for employee separation costs and exit costs when they are probable and estimable based on estimates prepared at the time the restructuring plans were approved by management. Employee separation costs consist primarily of ongoing termination benefits, principally severance payments. Exit costs primarily consist of future minimum lease payments on vacated facilities and facility closure costs. At each reporting date, the Company evaluates its accruals for exit costs and employee separation costs 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 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.

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For the Year Ended December 31, 2003

For the year ended December 31, 2003, the Company recorded net reorganization of businesses charges of $124 million, of which $38 million was included in Costs of Sales and $86 million was recorded under Reorganization of Businesses in the Company’s consolidated statements of operations. The net aggregate $124 million charge is comprised of the following:

Discontinuation of product lines

During 2003, the Semiconductor Products segment reversed $9 million of previously-established reserves which are no longer needed, primarily relating to anticipated facility decommissioning costs.

Business Exits

During 2003, the Other Products segment reversed exit cost accruals of $3 million.

Manufacturing and Administrative Consolidations

The Company’s actions to consolidate manufacturing operations and to implement strategic initiatives to streamline its global organization resulted in additional charges of $353 million ($136 million net of reversals) for the year ended December 31, 2003. These charges consisted primarily of: (i) $141 million in the Semiconductor Products segment, primarily for segment-wide employee separation costs, impairment of an Austin, Texas manufacturing site and impairment of equipment classified as held-for-sale, (ii) $85 million in the Personal Communications segment, primarily related to the planned exit of certain manufacturing activities in Flensburg, Germany and the planned closure of an engineering center in Boynton Beach, Florida, (iii) $50 million in the Commercial, Government and Industrial Solutions segment for segment-wide employee separation costs, and (iv) $39 million in General Corporate, primarily for the impairment of assets classified as held-for-sale and employee separation costs. The $353 million of charges were partially offset by reversals of $217 million of previous accruals no longer needed, consisting primarily of: (i) $144 million relating to unused accruals of previously-expected employee separation costs across all segments, (ii) $51 million for assets that were previously classified as held-for-sale that the Company now intends to use, as well as for reserves previously established to cover decommissioning costs which are no longer needed due to the sale of a facility by the Semiconductor Products segment, and (iii) $22 million for exit cost accruals no longer needed across all segments.

Reorganization of Businesses Charges—by Segment

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