Edgar Filing: MOTOROLA INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q


(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended October 2, 2010
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number: 1-7221

MOTOROLA, INC.
(Exact name of registrant as specified in its charter)


DELAWARE (State of Incorporation)		36-1115800 (I.R.S. Employer Identification No.)
1303 E. Algonquin Road, Schaumburg, Illinois (Address of principal executive offices)		60196 (Zip Code)
Registrant's telephone number, including area code: (847) 576-5000

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ý		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

The number of shares outstanding of each of the issuer's classes of common stock as of the close of business on October 2, 2010:

Class		Number of Shares

Common Stock; $.01 Par Value		2,349,381,030

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		Page

PART I FINANCIAL INFORMATION		1
Item 1 Financial Statements
	Condensed Consolidated Statements of Operations (Unaudited) for the Three Months and Nine Months Ended October 2, 2010 and October 3, 2009	1
	Condensed Consolidated Balance Sheets (Unaudited) as of October 2, 2010 and December 31, 2009	2
	Condensed Consolidated Statement of Stockholders' Equity (Unaudited) for the Nine Months Ended October 2, 2010	3
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended October 2, 2010 and October 3, 2009	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations		31
Item 3 Quantitative and Qualitative Disclosures About Market Risk		54
Item 4 Controls and Procedures		56
PART II OTHER INFORMATION		57
Item 1 Legal Proceedings		57
Item 1A Risk Factors		58
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		63
Item 3 Defaults Upon Senior Securities		63
Item 4 (Removed and Reserved)		63
Item 5 Other Information		63
Item 6 Exhibits		64

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Part I—Financial Information

Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)


				Three Months Ended						Nine Months Ended

(In millions, except per share amounts)				October 2, 2010			October 3, 2009			October 2, 2010			October 3, 2009

Net sales			$	4,890		$	4,336		$	13,619		$	13,361
Costs of sales				3,110			2,897			8,754			9,348

Gross margin				1,780			1,439			4,865			4,013

Selling, general and administrative expenses				810			718			2,423			2,250
Research and development expenditures				637			621			1,889			1,950
Other charges				108			111			142			393

Operating earnings (loss)				225			(11	)		411			(580	)

Other income (expense):
	Interest expense, net			(29	)		(49	)		(100	)		(113	)
	Gain on sales of investments and businesses, net			4			21			44			21
	Other			5			(66	)		(26	)		49

Total other income (expense)				(20	)		(94	)		(82	)		(43	)

Earnings (loss) from continuing operations before income taxes				205			(105	)		329			(623	)
Income tax expense (benefit)				196			(25	)		278			(229	)

Earnings (loss) from continuing operations				9			(80	)		51			(394	)
Earnings from discontinued operations, net of tax				102			102			293			225

Net earnings (loss)				111			22			344			(169	)

Less: Earnings attributable to noncontrolling interests				2			10			4			24

Net earnings (loss) attributable to Motorola, Inc.			$	109		$	12		$	340		$	(193	)

Amounts attributable to Motorola, Inc. common shareholders:
Earnings (loss) from continuing operations, net of tax			$	7		$	(90	)	$	47		$	(418	)
Earnings from discontinued operations, net of tax				102			102			293			225

	Net earnings (loss)		$	109		$	12		$	340		$	(193	)

Earnings (loss) per common share:
	Basic:
		Continuing operations	$	0.00		$	(0.04	)	$	0.02		$	(0.18	)
		Discontinued operations		0.05			0.05			0.13			0.10

			$	0.05		$	0.01		$	0.15		$	(0.08	)

	Diluted:
		Continuing operations	$	0.00		$	(0.04	)	$	0.02		$	(0.18	)
		Discontinued operations		0.05			0.05			0.12			0.10

			$	0.05		$	0.01		$	0.14		$	(0.08	)

Weighted average common shares outstanding:
	Basic			2,339.0			2,299.6			2,327.6			2,290.8
	Diluted			2,374.4			2,299.6			2,360.0			2,290.8
Dividends paid per common share of Motorola, Inc.			$	—		$	—		$	—		$	0.05

See accompanying notes to condensed consolidated financial statements (unaudited).

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Motorola, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets
(Unaudited)


(In millions, except par value amounts)			October 2, 2010			December 31, 2009

ASSETS
Cash and cash equivalents		$	3,848		$	2,869
Sigma Fund and short-term investments			5,046			5,094
Accounts receivable, net			3,236			2,845
Inventories, net			1,354			1,097
Deferred income taxes			1,230			1,082
Other current assets			1,442			1,389
Current assets held for sale			1,217			1,656

	Total current assets		17,373			16,032

Property, plant and equipment, net			1,768			1,819
Sigma Fund			105			66
Investments			304			456
Deferred income taxes			1,762			2,283
Goodwill			2,752			2,714
Other assets			1,447			1,680
Non-current assets held for sale			414			553

	Total assets	$	25,925		$	25,603

LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable and current portion of long-term debt		$	532		$	536
Accounts payable			2,379			1,998
Accrued liabilities			4,517			4,141
Current liabilities held for sale			1,281			1,586

	Total current liabilities		8,709			8,261

Long-term debt			2,864			3,365
Other liabilities			3,639			3,987
Non-current liabilities held for sale			167			107
Stockholders' Equity
Preferred stock, $100 par value			—			—
Common stock, $.01 par value:			24			23
	Authorized shares: 4,200.0
	Issued shares: 10/02/10—2,355.9; 12/31/09—2,314.2
	Outstanding shares: 10/02/10—2,349.4; 12/31/09—2,312.1
Additional paid-in capital			8,565			8,211
Retained earnings			4,167			3,827
Accumulated other comprehensive loss			(2,315	)		(2,286	)

	Total Motorola, Inc. stockholders' equity		10,441			9,775
Non-controlling interests			105			108

	Total stockholders' equity		10,546			9,883

	Total liabilities and stockholders' equity	$	25,925		$	25,603

See accompanying notes to condensed consolidated financial statements (unaudited).

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Motorola, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)


	Motorola, Inc. Shareholders
						Accumulated Other Comprehensive Income (Loss)
(In millions)	Shares		Common Stock and Additional Paid-in Capital			Fair Value Adjustment to Available for Sale Securities, Net of Tax			Foreign Currency Translation Adjustments, Net of Tax			Retirement Benefits Adjustments, Net of Tax			Other Items, Net of Tax			Retained Earnings		Non-controlling Interests			Comprehensive Earnings (Loss)

Balances at December 31, 2009	2,314.2	$	8,234		$	70		$	(63	)	$	(2,295	)	$	2		$	3,827	$	108

Net earnings																		340		4		$	344
Net unrealized loss on securities, net of tax of $(35)						(59	)																(59	)
Foreign currency translation adjustments, net of tax of $25									(43	)													(43	)
Amortization of retirement benefit adjustments, net of tax of $43												84											84
Plan amendment, net of tax of $0												22											22
Remeasurement of retirement benefits, net of tax of $(13)												(28	)										(28	)
Issuance of common stock and stock options exercised	41.7		121
Tax shortfalls from stock-based compensation			(18	)
Share-based compensation expense			228
Net loss on derivative instruments, net of tax of $(5)															(5	)							(5	)
Dividends paid to noncontrolling interest on subsidiary common stock																				(7	)
Reclassification of share-based awards from liability to equity			24

Balances at October 2, 2010	2,355.9	$	8,589		$	11		$	(106	)	$	(2,217	)	$	(3	)	$	4,167	$	105		$	315

See accompanying notes to condensed consolidated financial statements (unaudited).

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Motorola, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows
(Unaudited)

		Nine Months Ended

(In millions)		October 2, 2010			October 3, 2009

Operating
Net earnings (loss) attributable to Motorola, Inc.		$	340		$	(193	)
Earnings attributable to noncontrolling interests			4			24

Net earnings (loss)			344			(169	)
Earnings from discontinued operations			293			225

Earnings (loss) from continuing operations			51			(394	)
Adjustments to reconcile earnings (loss) from continuing operations to net cash provided by (used for) operating activities:
Depreciation and amortization			426			487
Non-cash other income			(36	)		(2	)
Share-based compensation expense			200			199
Gain on sales of investments and businesses, net			(44	)		(21	)
Loss (gain) from the extinguishment of long-term debt			12			(67	)
Deferred income taxes			323			(114	)
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
	Accounts receivable		(305	)		124
	Inventories		(257	)		1,055
	Other current assets		(59	)		556
	Accounts payable and accrued liabilities		740			(2,505	)
	Other assets and liabilities		(136	)		(95	)

	Net cash provided by (used for) operating activities from continuing operations		915			(777	)

Investing
Acquisitions and investments, net			(72	)		(30	)
Proceeds from sales of investments and businesses, net			249			306
Capital expenditures			(180	)		(144	)
Proceeds from sales of property, plant and equipment			29			8
Proceeds from sales of Sigma Fund investments, net			30			98
Proceeds from sales (purchases) of short-term investments, net			(6	)		188

	Net cash provided by investing activities from continuing operations		50			426

Financing
Repayment of short-term borrowings, net			(4	)		(71	)
Repayment of debt			(484	)		(130	)
Issuance of common stock			152			110
Payment of dividends			—			(114	)
Distribution from discontinued operations			398			543
Other, net			—			6

	Net cash provided by financing activities from continuing operations		62			344

Discontinued Operations
Net cash provided by operating activities from discontinued operations			399			529
Net cash used for investing activities from discontinued operations			(37	)		(31	)
Net cash used for financing activities from discontinued operations			(398	)		(543	)
Effect of exchange rate changes on cash and cash equivalents from discontinued operations			36			45

	Net cash provided by (used for) discontinued operations		—			—

Effect of exchange rate changes on cash and cash equivalents from continuing operations			(48	)		(7	)

Net increase (decrease) in cash and cash equivalents			979			(14	)
Cash and cash equivalents, beginning of period			2,869			3,064

Cash and cash equivalents, end of period		$	3,848		$	3,050

Cash Flow Information

Cash paid during the period for:
Interest, net		$	142		$	216
Income taxes, net of refunds			95			109

See accompanying notes to condensed consolidated financial statements (unaudited).

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Motorola, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements
(Dollars in millions, except as noted)
(Unaudited)

1. Basis of Presentation

The condensed consolidated financial statements as of October 2, 2010 and for the three and nine months ended October 2, 2010 and October 3, 2009, include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly Motorola, Inc.'s (the "Company's") consolidated financial position, results of operations and cash flows for all periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2009. The results of operations for the three and nine months ended October 2, 2010 are not necessarily indicative of the operating results to be expected for the full year. Certain amounts in prior period financial statements and related notes have been reclassified to conform to the 2010 presentation.

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Change in Segment Presentation

On July 1, 2010, an initial registration statement on Form 10 was filed with the U.S. Securities and Exchange Commission in connection with the Company's planned separation into two independent, publicly traded companies. Amendments to the initial registration statement were filed on August 31, 2010 and October 8, 2010. The Mobile Devices and Home businesses are planned to be separated from Motorola, Inc. and operate as Motorola Mobility.

On July 19, 2010, the Company announced an agreement to sell certain assets and liabilities of its Networks business to Nokia Siemens Networks B.V. for $1.2 billion in cash (the "Transaction"). The Transaction is expected to close by early 2011. Based on the terms and conditions of the sale agreement, certain assets including $150 million of accounts receivable, the Company's iDEN infrastructure business and substantially all the patents related to the Company's wireless network infrastructure business, are excluded from the transaction.

Prior to the first quarter of 2010, certain costs, including some elements of share-based compensation, intangible assets amortization expense, business-related asset impairments and other Corporate expenses, were recorded at Corporate and included in Other and Eliminations. As of the first quarter of 2010, the Company now allocates these costs to the business segments which are part of continuing operations.

Beginning in the third quarter of 2010, the results of operations of the portions of the Networks business included in the Transaction are reported as discontinued operations. Certain Corporate and general costs which have historically been allocated to the Networks business will remain with the Company after the sale of the Networks business.

The operating results of the Company's iDEN infrastructure business and certain licensing activity generally related to the Networks business are also now being reported as part of the Enterprise Mobility Solutions segment. The Corporate and general costs which have historically been allocated to the Networks business are allocated to the Enterprise Mobility Solutions segment. Additionally, the results of operations of previously disposed businesses, which were deemed to be immaterial at the time of their disposition, have been reclassified from the Enterprise Mobility Solutions segment to discontinued operations. These businesses include: (i) an Israel-based wireless network operator, (ii) the biometrics business, and (iii) Good Technology. The assets and liabilities of the Networks business, as well as the assets and liabilities of the previously disposed businesses recorded by the Company prior to the closing of the underlying transactions, are reported as assets and liabilities held for sale. All previously reported financial information has been revised to conform to the current presentation.

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Motorola, Inc. reports financial results for the following operating business segments:

•: Mobile Devices: This segment designs, manufactures, sells and services wireless mobile devices, including smartphones, with integrated software and accessory products, and licenses intellectual property.
•: Home: This segment designs, manufactures, sells, installs and services set-top boxes for digital video, Internet Protocol video, satellite and terrestrial broadcast networks, end-to-end digital video and Internet protocol television distribution systems, broadband access network infrastructure platforms, and associated data and voice customer premises equipment and associated software solutions to cable television and telecommunication service providers.
•: Enterprise Mobility Solutions: This segment designs, manufactures, sells, installs and services analog and digital two-way radios, wireless LAN and security products, voice and data communications products and systems primarily for private networks, wireless broadband systems and end-to-end enterprise mobility solutions.

Recently Adopted New Accounting Guidance

Revenue Recognition

In October 2009, the Financial Accounting Standards Board ("FASB") issued new guidance which amended the accounting standards for revenue arrangements with multiple deliverables. The new guidance changes the criteria required to separate deliverables into separate units of accounting when they are sold in a bundled arrangement and requires an entity to allocate an arrangement's consideration using estimated selling prices ("ESP") of deliverables if a vendor does not have vendor-specific objective evidence of selling price ("VSOE") or third-party evidence of selling price ("TPE"). The new guidance also eliminates the use of the residual method to allocate an arrangement's consideration.

In October 2009, the FASB also issued new guidance to remove from the scope of software revenue recognition guidance tangible products containing software components and non-software components that function together to deliver the tangible product's essential functionality.

The new accounting guidance is effective for revenue arrangements entered into or materially modified after June 15, 2010. The standards permit prospective or retrospective adoption as well as early adoption. The Company elected to adopt this guidance early, at the beginning of its first quarter of fiscal 2010 on a prospective basis for applicable arrangements that were entered into or materially modified after January 1, 2010.

The Company's material revenue streams are the result of a wide range of activities, from the delivery of stand-alone equipment to custom design and installation over a period of time to bundled sales of devices, equipment, software and services. The Company enters into revenue arrangements that may consist of multiple deliverables of its product and service offerings due to the needs of its customers. Additionally, many of the Company's products have both software and non-software components that function together to deliver the product's essential functionality. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility of the sales price is reasonably assured. In addition to these general revenue recognition criteria, the following specific revenue recognition policies are followed:

Products and Equipment —For product and equipment sales, revenue recognition generally occurs when products or equipment have been shipped, risk of loss has transferred to the customer, objective evidence exists that customer acceptance provisions have been met, no significant obligations remain and allowances for discounts, price protection, returns and customer incentives can be reliably estimated. Recorded revenues are reduced by these allowances. The Company bases its estimates of these allowances on historical experience taking into consideration the type of products sold, the type of customer, and the specific type of transaction in each arrangement. Where customer incentives cannot be reliably estimated, the Company recognizes revenue at the time the product sells through the distribution channel to the end customer.

Long-Term Contracts —For long-term contracts that involve customization of the Company's equipment or software, the Company generally recognizes revenue using the percentage of completion method based on the percentage of costs incurred to date compared to the total estimated costs to complete the contract. In certain instances, when revenues or costs associated with long-term contracts cannot be reliably estimated or the contract contains other inherent uncertainties, revenues and costs are deferred until the project is complete and customer

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acceptance is obtained. When current estimates of total contract revenue and contract costs indicate a contract loss, the loss is recognized in the period it becomes evident.

Services —Revenue for services is generally recognized ratably over the contract term as services are performed.

Software and Licenses —Revenue from pre-paid perpetual licenses is recognized at the inception of the arrangement, presuming all other relevant revenue recognition criteria are met. Revenue from non-perpetual licenses or term licenses is recognized ratably over the period that the licensee uses the license. Revenue from software maintenance, technical support and unspecified upgrades is generally recognized over the period that these services are delivered.

Multiple-Element Arrangements —Arrangements with customers may include multiple deliverables, including any combination of products, equipment, services and software. These multiple element arrangements could also include an element accounted for as a long-term contract coupled with other products, equipment, services and software. For the Company's multiple-element arrangements where at least one of the deliverables is not subject to existing software revenue recognition guidance, deliverables are separated into more than one unit of accounting when (i) the delivered element(s) have value to the customer on a stand-alone basis, and (ii) delivery of the undelivered element(s) is probable and substantially in the control of the Company. Based on the new accounting guidance adopted January 1, 2010, revenue is then allocated to each unit of accounting based on the relative selling price of each unit of accounting based first on VSOE if it exists, based next on TPE if VSOE does not exist, and, finally, if both VSOE and TPE do not exist, based on ESP.

•: VSOE—In many instances, products are sold separately in stand-alone arrangements as customers may support the products themselves or purchase support on a time and materials basis. Additionally, advanced services such as general consulting, network management or advisory projects are often sold in stand-alone engagements. Technical support services are also often sold separately through renewals of annual contracts. The Company determines VSOE based on its normal pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range, generally evidenced by the pricing rates of approximately 80% of such historical stand-alone transactions falling within plus or minus 15% of the median rate. In addition, the Company considers the geographies in which the products or services are sold, major product and service groups, customer classification, and other environmental or marketing variables in determining VSOE.
•: TPE—VSOE generally exists only when the Company sells the deliverable separately. When VSOE does not exist, the Company attempts to determine TPE based on competitor prices for similar deliverables when sold separately. Generally, the Company's go-to-market strategy for many of its products differs from that of its peers and its offerings contain a significant level of customization and differentiation such that the comparable pricing of products with similar functionality sold by other companies cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products' selling prices are on a stand-alone basis. Therefore, the Company is typically not able to determine TPE.
•: ESP—The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. When both VSOE and TPE do not exist, the Company determines ESP for the arrangement element by first collecting all reasonably available data points including sales, cost and margin analysis of the product, and other inputs based on the Company's normal pricing practices. Second, the Company makes any reasonably required adjustments to the data based on market and Company-specific factors. Third, the Company stratifies the data points, when appropriate, based on customer, magnitude of the transaction and sales volume.

Once elements of an arrangement are separated into more than one unit of accounting, revenue is recognized for each separate unit of accounting based on the nature of the revenue as described above.

The Company's arrangements with multiple deliverables may also contain a stand-alone software deliverable that is subject to the existing software revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software deliverable and the non-software deliverable(s) based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the new revenue accounting guidance. In circumstances where the Company cannot determine VSOE or TPE of the selling price for all of the deliverables in the arrangement, including the software deliverable, ESP is used for the purpose of allocating the arrangement consideration.

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The Company's arrangements with multiple deliverables may be comprised entirely of deliverables that are all still subject to the existing software revenue recognition guidance. For these arrangements, revenue is allocated to the deliverables based on VSOE. Should VSOE not exist for the undelivered software element, revenue is deferred until either the undelivered element is delivered or VSOE is established for the element, whichever occurs first. When the fair value of a delivered element has not been established, but fair value exists for the undelivered elements, the Company uses the residual method to recognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement consideration is allocated to the delivered elements and is recognized as revenue.

Net sales as reported and pro forma net sales that would have been reported during the three and nine months ended October 2, 2010, if the transactions entered into or materially modified after January 1, 2010, were still subject to the previous accounting guidance are shown in the following table:


	Three Months Ended				Nine Months Ended
October 2, 2010		As Reported		Pro Forma Basis		As Reported		Pro Forma Basis

Net sales	$	4,890	$	3,689	$	13,619	$	11,565

For the three and nine months ended October 2, 2010, the difference between the amount of revenue recorded under the new accounting guidance for revenue recognition as compared to the pro forma amount that would have been recorded under the prior accounting guidance, relates primarily to sales of smartphones by the Company's Mobile Devices segment. The individual impact to the Company's other businesses was not material. The pro forma basis revenue reflects the recognition of revenue related to smartphones that contain a service element and unspecified software upgrade rights under a subscription-based model under which revenue is recognized ratably over the estimated expected life of the smartphone as the Company is unable to determine VSOE for the undelivered element in the transaction. To the extent that the smartphone arrangement contains a specified software upgrade right, the subscription model is deferred until the specified software upgrade is delivered as the Company was unable to determine VSOE for the specified software upgrade right. Once the specified software upgrade is delivered, revenue is then recognized under the subscription-based model over the remainder of the estimated expected life of the smartphone. The as reported revenue reflects the allocation of revenue related to smartphones shipped under arrangements executed during the three and nine months ended October 2, 2010 using ESP for the device, the service, specified software upgrade rights, when applicable, and the unspecified software upgrade rights, resulting in a lower deferral of revenue than under prior accounting guidance. Both the as reported revenue and the pro forma basis revenue contain the revenue recognized under the subscription-based revenue recognition model related to smartphones that contain a service element and unspecified software that shipped under arrangements executed during the year ended December 31, 2009.

Based on the Company's current sales strategies, the newly adopted accounting guidance for revenue recognition is not expected to have a significant effect on the timing and pattern of revenue recognition for sales in periods after the initial adoption when applied to multiple-element arrangements, except for the continued impact on smartphone revenue recognition.

2. Discontinued Operations

During the three months ended October 2, 2010, the Company announced an agreement to sell certain assets and liabilities of its Networks business to Nokia Siemens Networks B.V. The total assets and total liabilities included in the transaction, which are preliminary estimates subject to change, are $1.6 billion and $1.4 billion, respectively, based on balances as of October 2, 2010. The transaction is expected to close by early 2011.

During the three months ended July 3, 2010, the Company completed the sale of its Israel-based wireless network operator business formerly included as part of the Enterprise Mobility Solutions segment. The Company received $170 million in net cash and recorded a gain on sale of the business of $20 million before income taxes, which is included in Earnings from discontinued operations, net of tax, in the Company's condensed consolidated statements of operations.

During the three months ended April 4, 2009, the Company completed the sale of: (i) Good Technology, and (ii) the biometrics business, which includes its Printrak trademark. Collectively, the Company received $163 million in net cash and recorded a net gain on sale of the businesses of $175 million before income taxes, which is included in Earnings from discontinued operations, net of tax, in the Company's condensed consolidated statements of operations.

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Beginning in the third quarter of 2010, the results of operations of the portions of the Networks business included in the transaction with Nokia Siemens Networks B.V., as well as the results of operations of the previously disposed businesses discussed above, which were deemed to be immaterial for presentation as discontinued operations at the time of their disposition, are reported as discontinued operations. All previously reported financial information has been revised to conform to the current presentation.

The following table displays summarized activity in the Company's condensed consolidated statements of operations for discontinued operations during the three months and nine months ended October 2, 2010, and October 3, 2009.


	Three Months Ended				Nine Months Ended
		October 2, 2010		October 3, 2009		October 2, 2010		October 3, 2009

Net sales	$	871	$	1,117	$	2,603	$	2,960
Operating earnings		177		139		430		269
Earnings before income taxes		168		141		453		419
Income tax expense		66		39		160		194
Earnings from discontinued operations, net of tax		102		102		293		225

The assets and liabilities of the Networks business, as well as the assets and liabilities of the previously disposed businesses recorded by the Company prior to the closing of the underlying transactions, are reported as assets and liabilities held for sale in the applicable periods presented.

The following table displays a summary of the assets and liabilities held for sale as of October 2, 2010 and December 31, 2009.


			October 2, 2010		December 31, 2009

Assets
	Accounts receivable, net	$	487	$	651
	Inventories, net		186		211
	Other current assets		544		794
	Property, plant and equipment, net		179		336
	Investments		3		3
	Goodwill		108		109
	Other assets		124		105

		$	1,631	$	2,209

Liabilities
	Accounts payable	$	296	$	442
	Accrued liabilities		985		1,144
	Other liabilities		167		107

		$	1,448		1,693

Table of Contents

In June 2010, the Company announced that it had entered into a settlement and license agreement with another company, which resolves all outstanding litigation between the two companies. The agreement includes provisions for an upfront payment of $175 million from the other company to Motorola, future royalties to be paid by the other company to Motorola for the license of certain intellectual property, and the transfer of certain patents between the companies. As a result of this agreement and the valuation of the patents exchanged, the Company recorded a pre-tax gain of $228 million during the nine months ended October 2, 2010, related to the settlement of the outstanding litigation between the parties.

Interest expense, net, and Other, both included in Other income (expense), consist of the following:

The computation of basic and diluted earnings (loss) per common share attributable to Motorola, Inc. common shareholders is as follows:

In the computation of diluted earnings per common share from both continuing operations and on a net earnings basis for the three months ended October 2, 2010, 77.3 million out-of-the-money stock options and the assumed vesting of 9.3 million restricted stock units were excluded because their inclusion would have been antidilutive. In the computation of diluted earnings per common share from both continuing operations and on a net earnings basis for the nine months ended October 2, 2010, the assumed exercise of 114.0 million stock options and the assumed vesting of 6.4 million restricted stock units were excluded because their inclusion would have been antidilutive.

For the three months ended October 3, 2009, the Company was in a net loss position on a continuing operations basis and, accordingly, the assumed exercise of 179.7 million stock options and the assumed vesting of 57.5 million restricted stock units were excluded from diluted weighted average shares outstanding because their inclusion would have been antidilutive. For the nine months ended October 3, 2009, the Company was in a net loss position on a continuing operations basis and, accordingly, the assumed exercise of 200.7 million stock options and the assumed vesting of 49.5 million restricted stock units were excluded from diluted weighted average shares outstanding because their inclusion would have been antidilutive.

The Company's cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) were $3.8 billion and $2.9 billion at October 2, 2010 and December 31, 2009, respectively. Of these amounts, $224 million and $206 million, respectively, were restricted.

The fair market value of investments in the Sigma Fund was $5.1 billion and $5.2 billion at October 2, 2010 and December 31, 2009, respectively.

During the three and nine months ended October 2, 2010, the Company recorded a gain on Sigma Fund investments of $3 million and a gain of $15 million, respectively, in Other income (expense) in the condensed consolidated statement of operations. During the three and nine months ended October 3, 2009, the Company recorded a loss on Sigma Fund investments of $8 million and a gain of $67 million, respectively, in Other income (expense) in the condensed consolidated statement of operations.

During the three and nine months ended October 2, 2010, the Company recorded investment impairment charges of $1 million and $20 million, respectively, representing other-than-temporary declines in the value of the Company's investment portfolio, primarily related to common stock and equivalents and other securities recorded at cost. During the three and nine months ended October 3, 2009, the Company recorded investment impairment charges of $31 million and $64 million, respectively, representing other-than-temporary declines in the value of the Company's investment portfolio, primarily related to other securities recorded at cost. Investment impairment charges are included in Other within Other income (expense) in the Company's condensed consolidated statements of operations.

Depreciation expense for the three months ended October 2, 2010 and October 3, 2009 was $76 million and $93 million, respectively. Depreciation expense for the nine months ended October 2, 2010 and October 3, 2009 was $231 million and $279 million, respectively.

During the nine months ended October 2, 2010, the Company paid no cash dividends to holders of its common stock. During the nine months ended October 3, 2009, the Company paid $114 million in cash dividends to holders of its common stock, all of which was paid during the three months ended April 4, 2009, related to the payment of a dividend declared in November 2008. In February 2009, the Company announced that its Board of Directors suspended the declaration of quarterly dividends on the Company's common stock.

During the nine months ended October 2, 2010, the Company repurchased $500 million of its outstanding long-term debt for a purchase price of $477 million, excluding approximately $5 million of accrued interest, all of which occurred during the three months ended July 3, 2010. The $500 million of long-term debt repurchased included principal amounts of: (i) $65 million of the $379 million then outstanding of the 6.50% Debentures due 2025, (ii) $75 million of the $286 million then outstanding of the 6.50% Debentures due 2028, (iii) $222 million of the $446 million then outstanding of the 6.625% Senior Notes due 2037, and (iv) $138 million of the $252 million then outstanding of the 5.22% Debentures due 2097. After accelerating the amortization of debt issuance costs and debt discounts, the Company recognized a loss of approximately $12 million related to this debt tender in Other within Other income (expense) in the condensed consolidated statements of operations.

During the nine months ended October 3, 2009, the Company repurchased $199 million of its outstanding long-term debt for a purchase price of $129 million, excluding approximately $4 million of accrued interest, all of which occurred during the three months ended April 4, 2009. The $199 million of long-term debt repurchased included principal amounts of: (i) $11 million of the $358 million then outstanding of the 7.50% Debentures due

2025, (ii) $20 million of the $399 million then outstanding of the 6.50% Debentures due 2025, (iii) $14 million of the $299 million then outstanding of the 6.50% Debentures due 2028, and (iv) $154 million of the $600 million then outstanding of the 6.625% Senior Notes due 2037. The Company recognized a gain of approximately $67 million related to these open market purchases in Other within Other income (expense) in the condensed consolidated statements of operations.

The Company uses financial instruments to reduce its overall exposure to the effects of currency fluctuations on cash flows. The Company's policy prohibits speculation in financial instruments for profit on exchange rate price fluctuations, trading in currencies for which there are no underlying exposures, or entering into transactions for any currency to intentionally increase the underlying exposure. Instruments that are designated as part of a hedging relationship must be effective at reducing the risk associated with the exposure being hedged and are designated as part of a hedging relationship at the inception of the contract. Accordingly, changes in the market values of hedge instruments must be highly correlated with changes in market values of the underlying hedged items both at the inception of the hedge and over the life of the hedge contract.

The Company's strategy related to foreign exchange exposure management is to offset the gains or losses on the financial instruments against losses or gains on the underlying operational cash flows or investments based on the operating business units' assessment of risk. The Company enters into derivative contracts for some of the Company's non-functional currency receivables and payables, which are primarily denominated in major currencies that can be traded on open markets. The Company typically uses forward contracts and options to hedge these currency exposures. In addition, the Company enters into derivative contracts for some forecasted transactions, which are designated as part of a hedging relationship if it is determined that the transaction qualifies for hedge accounting under the provisions of the authoritative accounting guidance for derivative instruments and hedging activities. A portion of the Company's exposure is from currencies that are not traded in liquid markets and these are addressed, to the extent reasonably possible, by managing net asset positions, product pricing and component sourcing.

At October 2, 2010 and December 31, 2009, the Company had outstanding foreign exchange contracts, including held for sale amounts, with notional values totaling $1.3 billion and $1.7 billion, respectively. Management believes that these financial instruments should not subject the Company to undue risk due to foreign exchange movements because gains and losses on these contracts should generally offset losses and gains on the underlying assets, liabilities and transactions, except for the ineffective portion of the instruments, which are charged to Other within Other income (expense) in the Company's condensed consolidated statements of operations.

The following table shows the five largest net notional amounts of the positions to buy or sell foreign currency as of October 2, 2010 and the corresponding positions as of December 31, 2009:

At October 2, 2010, the Company's short-term debt consisted primarily of $5 million of short-term variable rate foreign debt. At October 2, 2010, the Company has $3.4 billion of long-term debt, including the current portion of long-term debt, which is primarily priced at long-term, fixed interest rates.

As part of its liability management program, one of the Company's European subsidiaries has an outstanding interest rate agreement ("Interest Agreement") relating to a Euro-denominated loan. The interest on the Euro-denominated loan is variable. The Interest Agreement changes the characteristics of interest rate payments from variable to maximum fixed-rate payments. The Interest Agreement is not accounted for as a part of a hedging relationship and, accordingly, the changes in the fair value of the Interest Agreement is included in Other income (expense) in the Company's condensed consolidated statements of operations. At October 2, 2010 and December 31, 2009, the fair value of the Interest Agreement put the Company in a liability position of $5 million and $4 million, respectively.

The use of derivative financial instruments exposes the Company to counterparty credit risk in the event of nonperformance by counterparties. However, the Company's risk is limited to the fair value of the instruments when the derivative is in an asset position. The Company actively monitors its exposure to credit risk. At present time, all of the counterparties have investment grade credit ratings. The Company is not exposed to material credit risk with any single counterparty. As of October 2, 2010, the Company was exposed to an aggregate credit risk of $2 million with all counterparties.

The following tables summarize the fair values and location in the condensed consolidated balance sheets of all derivative financial instruments held by the Company, including immaterial amounts related to held for sale businesses, at October 2, 2010 and December 31, 2009:

The following table summarizes the effect of derivative instruments in our condensed consolidated statements of operations, including immaterial amounts related to discontinued operations, for the three and nine months ended October 2, 2010 and October 3, 2009:

The following table summarizes the gains and losses recognized in the condensed consolidated financial statements, including immaterial amounts related to discontinued operations, for the three and nine months ended October 2, 2010 and October 3, 2009:

The Company's financial instruments include cash equivalents, Sigma Fund investments, short-term investments, accounts receivable, long-term receivables, accounts payable, accrued liabilities, derivative financial instruments and other financing commitments. The Company's Sigma Fund, available-for-sale investment portfolios and derivative financial instruments are recorded in the Company's condensed consolidated balance sheets at fair value. All other financial instruments, with the exception of long-term debt, are carried at cost, which is not materially different than the instruments' fair values.

Using quoted market prices and market interest rates, the Company determined that the fair value of long-term debt at October 2, 2010 was $3.5 billion, compared to a face value of $3.3 billion. Since considerable judgment is required in interpreting market information, the fair value of the long-term debt is not necessarily indicative of the amount which could be realized in a current market exchange.

At October 2, 2010 and December 31, 2009, the Company had valuation allowances of $2.8 billion and $2.9 billion, respectively, including $357 million and $422 million, respectively, relating to deferred tax assets for non-U.S. subsidiaries. During the nine months ended October 2, 2010, there was no adjustment to the U.S. valuation allowance. The valuation allowance relating to deferred tax assets of non-U.S. subsidiaries was primarily adjusted for exchange rate variances and current year activity.

In March 2008, the Company announced a strategy to separate into two publicly-traded companies. In February 2010, the Company announced that it is targeting the first quarter of 2011 for the completion of this separation. When evaluating the Company's valuation allowances, the Company is precluded from taking into consideration events dependent on future market conditions, such as the announced separation transaction. The Company will reassess its valuation allowance needs based on two separate publicly traded companies in the period the separation transaction occurs. The valuation allowances determined for two separate publicly traded companies may differ from the Company's current valuation allowance balances.

In the first quarter of 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law, which eliminated the favorable income tax treatment of Medicare Part D Subsidy receipts effective for tax years starting in 2013. As a result of the tax law change, during the three months ended April 3, 2010 the Company recorded an $18 million non-cash tax charge to reduce its deferred tax asset associated with Medicare Part D subsidies currently estimated to be received after 2012.

The Company evaluates its permanent reinvestment assertions with respect to foreign earnings at each reporting period and, except for certain earnings that the Company intends to reinvest indefinitely, accrues for the U.S. federal income taxes applicable to the earnings. As the Company realigns its capital structure to meet its current and future needs, the Company concluded that certain foreign earnings are no longer considered to be permanently reinvested and recorded $82 million of deferred tax expense in the second quarter of 2010. In the third quarter of 2010, the Company recognized an additional $136 million of deferred tax expense reflecting management's intent to reduce the invested capital of certain of its foreign subsidiaries. The capital reduction is part of the Company's plan to realign its global capital structure and is pending approval by certain governmental

agencies. As of October 2, 2010, the Company continues to maintain permanent reinvestment assertions with respect to certain foreign earnings which are restricted from repatriation due to the capital requirements of the foreign subsidiaries or due to local country restrictions.

The Company had unrecognized tax benefits of $247 million and $466 million, at October 2, 2010 and December 31, 2009, respectively, of which approximately $30 million and $100 million, respectively, if recognized, would affect the effective tax rate, net of resulting changes to valuation allowances. During the nine months ended October 2, 2010, the Company recorded $119 million of tax benefits related to a reduction in unrecognized tax benefits relating to facts that now indicate the extent to which certain tax positions are more-likely-than-not of being sustained. Additionally, the Company reduced its unrecognized tax benefits by $141 million for settlements with tax authorities.

Based on the potential outcome of the Company's global tax examinations, the expiration of the statute of limitations for specific jurisdictions, or the continued ability to satisfy tax incentive obligations, it is reasonably possible that the unrecognized tax benefits will change within the next 12 months. The associated net tax impact on the effective tax rate, exclusive of valuation allowance changes, is estimated to be in the range of a $50 million tax charge to a $100 million tax benefit, with cash payments in the range of $0 to $100 million.

During the first half of 2010, the Internal Revenue Service concluded its audit of Symbol Technologies, Inc.'s 2004 through January 9, 2007 pre-acquisition tax years and Motorola, Inc.'s 2004 through 2007 tax years. The Company has audits pending in several tax jurisdictions. Although the final resolution of the Company's global tax disputes is uncertain, based on current information, in the opinion of the Company's management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations. However, an unfavorable resolution of the Company's global tax disputes could have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved.

The net periodic pension costs for the Regular Pension Plan, Officers' Plan, the Motorola Supplemental Pension Plan ("MSPP") and Non-U.S. plans were as follows:

During the three months ended October 2, 2010, contributions of $50 million and $9 million were made to the Company's Regular Pension Plan and Non-U.S. plans, respectively. During the nine months ended October 2, 2010, contributions of $100 million and $34 million were made to the Company's Regular Pension Plan and Non-U.S. plans, respectively.

During the three months ended October 2, 2010, the Company created separate Non-U.S. plans in certain locations, pursuant to the Company's planned separation into two independent, publicly traded companies. The portion of existing pension assets and benefit obligations relating to employees covered by the newly-created plans were transferred to those plans. Prior to this transfer the pension assets and benefit obligations were remeasured resulting in an adjustment to Accumulated other comprehensive income of $28 million, net of tax.

During the nine months ended October 2, 2010, the Company recorded the impact of a plan amendment in one of its Non-U.S. plans resulting in a reduction of the amounts recognized in Accumulated Other Comprehensive Income of $22 million, net of tax. No gain or loss was recognized in the Company's condensed consolidated statement of operations as a result of the plan amendment.

The Company made no contributions to its postretirement healthcare fund during the three and nine months ended October 2, 2010.

Compensation expense for the Company's employee stock options, stock appreciation rights, employee stock purchase plans, restricted stock and restricted stock units ("RSUs") was as follows:

For the nine months ended October 2, 2010, the Company granted 31.3 million RSUs, net of forfeitures, and 10.6 million stock options. The total compensation expense related to the RSUs was $186 million, net of estimated forfeitures. The total compensation expense related to stock options was $28 million, net of estimated

forfeitures. The expense for both RSUs and stock options will be recognized over a weighted average vesting period of 3 years.

The Company holds certain fixed income securities, equity securities and derivatives, which must be measured using the fair value hierarchy and related valuation methodologies. The guidance specifies a hierarchy of valuation techniques based on whether the inputs to each measurement are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's assumptions about current market conditions. The prescribed fair value hierarchy and related valuation methodologies are as follows:

Level 2 —Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.

Level 3 —Valuations derived from valuation techniques, in which one or more significant inputs are unobservable.

The fair values of the Company's financial assets and liabilities by level in the fair value hierarchy as of October 2, 2010 and December 31, 2009 were as follows:

Level 1 —Quoted market prices in active markets are available for investments in common and preferred stock and common stock equivalents. As such, these investments are classified within Level 1.

Level 2 —The securities classified as Level 2 are comprised primarily of corporate, government, agency and government-sponsored enterprise bonds. The Company primarily relies on valuation pricing models, recent bid prices, and broker quotes to determine the fair value of these securities. The valuation models for Level 2 assets are developed and maintained by third party pricing services and use a number of standard inputs to the valuation model including benchmark yields, reported trades, broker/dealer quotes where the party is standing ready and able to transact, issuer spreads, benchmark securities, bids, offers and other reference data. The valuation model may prioritize these inputs differently at each balance sheet date for any given security, based on the market conditions. Not all of the standard inputs listed will be used each time in the valuation models. For each asset class, quantifiable inputs related to perceived market movements and sector news may be considered in addition to the standard inputs.

In determining the fair value of the Company's foreign currency derivatives, the Company uses forward contract and option valuation models employing market observable inputs, such as spot currency rates, time value and option volatilities. Since the Company primarily uses observable inputs in its valuation of its derivative assets and liabilities, they are classified as Level 2 assets.

Level 3 —Fixed income securities are debt securities that do not have actively traded quotes as of the financial statement date. Determining the fair value of these securities requires the use of unobservable inputs, such as indicative quotes from dealers, extrapolated data, proprietary models and qualitative input from investment advisors. As such, these securities are classified within Level 3.

At October 2, 2010, the Company has $580 million of investments in money market mutual funds classified as Cash and cash equivalents in its condensed consolidated balance sheet. The money market funds have quoted market prices that are generally equivalent to par.

The Company has no non-financial assets and liabilities that are required to be measured at fair value on a recurring basis at October 2, 2010.

Long-term receivables consist of trade receivables with payment terms greater than twelve months, long-term loans and lease receivables under sales-type leases. Long-term receivables consist of the following:

The current portion of long-term receivables is included in Accounts receivable and the non-current portion of long-term receivables is included in Other assets in the Company's condensed consolidated balance sheets.

Certain purchasers of the Company's infrastructure equipment may request that the Company provide long-term financing (defined as financing with a term of greater than one year) in connection with the sale of equipment. These requests may include all or a portion of the purchase price of the equipment. The Company's obligation to provide long-term financing may be conditioned on the issuance of a letter of credit in favor of the Company by a reputable bank to support the purchaser's credit or a pre-existing commitment from a reputable bank to purchase the long-term receivables from the Company. The Company had outstanding commitments to provide long-term financing to third parties totaling $297 million and $444 million at October 2, 2010 and December 31, 2009, respectively. Of these amounts, $45 million and $13 million were supported by letters of credit or by bank commitments to purchase long-term receivables at October 2, 2010 and December 31, 2009, respectively. The majority of the outstanding commitments at October 2, 2010 are to a small number of network operators in the Middle East region. In response to the recent tightening in the credit markets, certain customers of the Company have requested financing in connection with equipment purchases, and these types of requests have increased in volume and scope.

In addition to providing direct financing to certain equipment customers, the Company also assists customers in obtaining financing directly from banks and other sources to fund equipment purchases. The Company had committed to provide financial guarantees relating to customer financing totaling $31 million at both October 2, 2010 and December 31, 2009 (including $28 million and $27 million at October 2, 2010 and December 31, 2009, respectively, relating to the sale of short-term receivables). Customer financing guarantees outstanding were $4 million at both October 2, 2010 and December 31, 2009 (including $2 million at both October 2, 2010 and December 31, 2009, relating to the sale of short-term receivables).

From time to time, the Company sells accounts receivable and long-term receivables in transactions that qualify as "true-sales." Certain of these accounts receivable and long-term receivables are sold to third parties on a one-time, non-recourse basis, while others are sold to third parties under committed facilities that involve contractual commitments from these parties to purchase qualifying receivables up to an outstanding monetary limit. Committed facilities may be revolving in nature and, typically, must be renewed annually. The Company may or may not retain the obligation to service the sold accounts receivable and long-term receivables.

As of October 2, 2010 and December 31, 2009, the Company had a $200 million revolving facility for the sale of accounts receivable due from U.S. customers of our Enterprise Mobility Solutions segment, of which $0 million and $60 million, respectively, were utilized.

Under the terms of the facility, which was amended in the fourth quarter of 2009, the Company is required to sell its entire portfolio of outstanding accounts receivable from its U.S. customers of the direct and indirect channel government and public safety business. The initial cash proceeds received by the Company for the sale of these receivables is capped at the lower of eligible receivables less reserves or $200 million. The Company may also elect, at its option, to receive initial cash proceeds less than the cap. The remaining proceeds due to the Company for the receivables sold in excess of the initial cash proceeds are deferred until the receivables are collected.

Total sales of accounts receivable and long-term receivables were $490 million and $383 million during the three month periods ended October 2, 2010 and October 3, 2009, respectively, and $1.5 billion and $1.0 billion for the nine month periods ended October 2, 2010 and October 3, 2009, respectively. During the three month period ended October 2, 2010, cash proceeds related to accounts receivable sold during the period were $212 million, and cash proceeds related to accounts receivable sold in the prior period were $319 million. During the three month period ended October 2, 2009, cash proceeds related to accounts receivable sold were $383 million. During the nine month periods ended October 2, 2010 and October 3, 2009, cash proceeds related to accounts receivable sold were $1.2 billion and $1.0 billion, respectively. As of October 2, 2010, the Company is due $278 million under the deferred payment provisions of the committed facility discussed above. As of October 2, 2010, the Company retained servicing obligations for $355 million of sold accounts receivables and $261 million of sold long-term receivables. As of December 31, 2009, the Company retained servicing obligation for $195 million of sold accounts receivables and $297 million of sold long-term receivables at December 31, 2009.

Under certain arrangements, the value of accounts receivable sold is covered by credit insurance purchased from third-party insurance companies, less deductibles or self-insurance requirements under the insurance policies. The Company's total credit exposure, less insurance coverage, to outstanding accounts receivables that have been sold was $27 million at both October 2, 2010 and December 31, 2009.

The Company is a defendant in various suits, claims and investigations that arise in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved.

The Company is also a party to a variety of agreements pursuant to which it is obligated to indemnify the other party with respect to certain matters. Some of these obligations arise as a result of divestitures of the Company's assets or businesses and require the Company to hold the other party harmless against losses arising from the settlement of these pending obligations. The total amount of indemnification under these types of provisions is $143 million, of which the Company accrued $12 million at October 2, 2010 for potential claims under these provisions.

In addition, the Company may provide indemnifications for losses that result from the breach of general warranties contained in certain commercial and intellectual property agreements. Historically, the Company has not made significant payments under these agreements. However, there is an increasing risk in relation to patent indemnities given the current legal climate.

In indemnification cases, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party's claims. Further, the Company's obligations under agreements for indemnification based on breach of representations and warranties are generally limited in terms of duration, and for amounts not in excess of the contract value, and, in some instances, the Company may have recourse against third parties for certain payments made by the Company.

The Company reports financial results for the following operating business segments:

The following table summarizes the Net sales and Operating earnings (loss) by operating business segment:

The Operating earnings (loss) in Other and Eliminations consists of the following:

Corporate expenses are primarily comprised of: (i) general corporate-related expenses, and (ii) the Company's wholly-owned finance subsidiary.

The Company maintains a formal Involuntary Severance Plan (the "Severance Plan"), which permits the Company to offer eligible employees severance benefits based on years of service and employment grade level in the event that employment is involuntarily terminated as a result of a reduction-in-force or restructuring. Effective August 1, 2009, the Company amended and restated the Severance Plan. Under the Amended Severance Plan, severance benefits will be paid in bi-weekly installments rather than in lump sum payments. The Company recognizes termination benefits based on formulas per the Severance Plan at the point in time that future settlement is probable and can be reasonably estimated based on estimates prepared at the time a restructuring plan is approved by management. Exit costs consist of future minimum lease payments on vacated facilities and other contractual terminations. At each reporting date, the Company evaluates its accruals for employee separation and exit costs to ensure the accruals are still appropriate. In certain circumstances, accruals are no longer needed 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. In these cases, the Company reverses accruals through the consolidated statements of operations where the original charges were recorded when it is determined they are no longer needed.

During the nine months ended October 2, 2010, the Company continued to implement various productivity improvement plans aimed at achieving long-term, sustainable profitability by driving efficiencies and reducing operating costs. All three of the Company's business segments were impacted by these plans. The employees affected were located in all geographic regions.

During the three months ended October 2, 2010, the Company recorded net reorganization of business charges of $46 million, including $10 million of charges in Costs of sales and $36 million of charges under Other charges in the Company's condensed consolidated statements of operations. Included in the aggregate $46 million are charges of $39 million for employee separation costs and $15 million for exit costs, partially offset by $8 million of reversals for accruals no longer needed.

During the nine months ended October 2, 2010, the Company recorded net reorganization of business charges of $91 million, including $22 million of charges in Costs of sales and $69 million of charges under Other charges in the Company's condensed consolidated statements of operations. Included in the aggregate $91 million are charges of $100 million for employee separation costs and $15 million for exit costs, partially offset by $24 million of reversals for accruals no longer needed.

The following table displays a rollforward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2010 to October 2, 2010:

At January 1, 2010, the Company had an accrual of $57 million for exit costs attributable to lease terminations. The additional 2010 charges were $15 million. The adjustments of $5 million primarily reflect reversals of accruals no longer needed. The $27 million used in 2010 reflects cash payments. The remaining accrual of $40 million, which is included in Accrued liabilities in the Company's condensed consolidated balance sheets at October 2, 2010, primarily represents future cash payments for lease termination obligations that are expected to be paid over a number of years.

At January 1, 2010, the Company had an accrual of $65 million for employee separation costs, representing the severance costs for: (i) severed employees who began receiving payments in 2009, and (ii) approximately 1,200 employees who began receiving payments in 2010. The 2010 additional charges of $100 million represent severance costs for approximately an additional 2,200 employees, of which 700 were direct employees and 1,500 were indirect employees.

The adjustments of $20 million reflect: (i) $19 million of reversals of accruals no longer needed, and (ii) $1 million of translation adjustments.

During the first nine months of 2010, approximately 1,400 employees, of which 400 were direct employees and 1,000 were indirect employees, were separated from the Company. The $82 million used in 2010 reflects cash payments to separated employees. The remaining accrual of $63 million, which is included in Accrued liabilities in the Company's condensed consolidated balance sheets at October 2, 2010, is expected to be paid, generally, within one year to: (i) severed employees who have already begun to receive payments, and (ii) approximately 1,700 employees to be separated in 2010.

During the nine months ended October 3, 2009, the Company committed to implement various productivity improvement plans aimed at achieving long-term, sustainable profitability by driving efficiencies and reducing operating costs. All three of the Company's business segments, as well as corporate functions, were impacted by these plans, with the majority of the impact in the Mobile Devices segment. The employees affected were located in all regions.

Included in the aggregate $2 million are charges of $19 million for employee separation costs and $8 million for exit costs, partially offset by $25 million of reversals for accruals no longer needed.

During the nine months ended October 3, 2009, the Company recorded net reorganization of business charges of $245 million, including $48 million of charges in Costs of sales and $197 million of charges under Other charges in the Company's condensed consolidated statements of operations. Included in the aggregate $245 million are charges of $259 million for employee separation costs, $30 million for exit costs and $18 million for fixed asset impairment charges, partially offset by $62 million of reversals for accruals no longer needed.

The following table displays a rollforward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2009 to October 3, 2009:

At January 1, 2009, the Company had an accrual of $78 million for exit costs attributable to lease terminations. The additional 2009 charges of $30 million are primarily related to the exit of leased facilities and contractual termination costs, both within the Mobile Devices segment. The adjustments of $8 million reflected: (i) $7 million of reversals of accruals no longer needed, and (ii) $1 million of translation adjustments. The $41 million used in 2009 reflected cash payments. The remaining accrual of $59 million, which was included in Accrued liabilities in the Company's condensed consolidated balance sheets at October 3, 2009, represented future cash payments primarily for lease termination obligations and was expected to be paid over a number of years.

At January 1, 2009, the Company had an accrual of $153 million for employee separation costs, representing the severance costs for approximately 2,000 employees. The 2009 additional charges of $259 million represented severance costs for approximately an additional 6,700 employees, of which 2,100 were direct employees and 4,600 were indirect employees.

The adjustments of $48 million reflect $55 million of reversals of accruals no longer needed, partially offset by $7 million of translation adjustments.

During the nine months ended October 3, 2009, approximately 7,400 employees, of which 2,800 were direct employees and 4,600 were indirect employees, were separated from the Company. The $304 million used in 2009 reflected cash payments to these separated employees. The remaining accrual of $60 million, which was included in Accrued liabilities in the Company's condensed consolidated balance sheets at October 3, 2009, was expected to be paid to approximately 1,000 separated employees.

Amortization expense on intangible assets was $65 million and $69 million for the three months ended October 2, 2010 and October 3, 2009, respectively. Amortization expense on intangible assets was $193 million and $209 million for the nine months ended October 2, 2010 and October 3, 2009, respectively. As of October 2, 2010, annual amortization expense is estimated to be $259 million in 2010, $236 million in 2011, $75 million in 2012, $39 million in 2013 and $17 million in 2014.

The following table displays a rollforward of the carrying amount of goodwill by reportable segment from January 1, 2010 to October 2, 2010:

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This commentary should be read in conjunction with Motorola, Inc.'s (the "Company's") condensed consolidated financial statements for the three and nine months ended October 2, 2010 and October 3, 2009, as well as the Company's consolidated financial statements and related notes thereto and management's discussion and analysis of financial condition and results of operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2009.

On July 19, 2010, the Company announced an agreement to sell certain assets and liabilities of its Networks business to Nokia Siemens Networks B.V. for $1.2 billion in cash (the "Transaction"). The Transaction is expected to close by early 2011. Based on the terms and conditions of the sale agreement, certain assets, including $150 million of accounts receivables, the Company's iDEN infrastructure business and substantially all the patents related to the Company's wireless network infrastructure business, are excluded from the transaction.

The Company reports financial results for the following operating business segments:

October 8, 2010. The Mobile Devices and Home businesses are planned to be separated from Motorola, Inc. and operate as Motorola Mobility. The Company intends to effect the separation through a tax-free stock dividend of shares of Motorola Mobility to Motorola, Inc. shareholders (the "Distribution"). The Distribution is planned for the first quarter of 2011. Completion of the Distribution is subject to a number of conditions, including, among others, confirmation of the tax-free nature of the transaction, as well as effectiveness of the Form 10 registration statement.

On July 19, 2010, the Company announced that Nokia Siemens Networks B.V. would acquire the majority of our Networks infrastructure assets for $1.2 billion in cash. This includes our GSM, CDMA, WiMAX and LTE businesses. We will retain our iDEN infrastructure business, substantially all the patents related to the Networks business, and various other assets, including: (i) $150 million of accounts receivable, (ii) cash and (iii) certain customer financing notes. We expect the transaction to close by early 2011, subject to customary closing conditions, including regulatory approvals. On September 30, 2010, the Company filed a Form 8-K to present previously reported selected GAAP financial information of the Company for fiscal years 2007, 2008 and 2009 and for the first half of 2010 in a reclassified format to reflect: (i) the presentation of certain portions of the Company's Networks business as discontinued operations as a result of the Company's announcement of an agreement to sell a majority of the assets and liabilities of its Networks business to Nokia Siemens Networks, (ii) the reclassification of the operating results of previously disposed businesses, which were deemed to be immaterial at the time of their disposition, from the Enterprise Mobility Solutions segment to discontinued operations, and (iii) the resulting revised presentation of the Company's operating business segments.

After the completion of the Networks asset sale to Nokia Siemens Networks and the separation, Motorola, Inc. will change its name to Motorola Solutions and be comprised of the Company's Enterprise Mobility Solutions business, which will include the iDEN infrastructure business.

In our Mobile Devices business, while we expect the overall global mobile device market to remain intensely competitive, we expect annual growth in total industry mobile device demand over the next several years, particularly in smartphones. Our strategy is focused on developing and marketing a comprehensive smartphone portfolio and strengthening our position in priority markets. Our smartphone portfolio focus will be on the following: (i) differentiating our products using MOTOBLUR™, our proprietary applications and services suite, (ii) enhancing the ecosystem using our Motorola developer network ("MotoDEV") application development program, and (iii) providing a smartphone portfolio across multiple price points for a broad array of carrier, distributor and retail customers. Our market priorities continue to be primarily North America, China, and Latin America, followed by Western Europe and other strategic markets. Our mid- to high-tier feature phone portfolio will continue to be more limited than in prior years given the declining opportunity in this segment of the handset market. For lower-priced, voice-centric mobile devices, we are partnering with third-party original design manufacturers, primarily in Asia, to deliver a handset portfolio to meet certain customer requirements and extend our brand. With growth in the mobile device market, particularly in smartphones, and by accelerating our speed to market, providing rich consumer experiences and building our brand, we expect to continue to improve our financial performance.

In our Home business, demand for set-top boxes has contracted in 2010 compared to 2009 due primarily to adverse market conditions, particularly in the U.S. Growth in market demand may require improved market conditions and may be driven by increased consumer demand for high definition TV, whole-home network solutions, 3D-TV, advanced interactive services and converged experiences. Analog to digital transitions are still underway, particularly outside North America, and consumer demand is expected to drive infrastructure needs for more bandwidth, optimized networks and storage, and services. We will continue to leverage our position in set-top boxes and video delivery systems and prioritize our product portfolio and research and development efforts to ensure that we are well positioned for emerging opportunities in this marketplace.

We believe the combination of the Mobile Devices and Home businesses will allow us to address opportunities resulting from the convergence of mobility, media, computing and the Internet. This includes demand for innovative smartphone devices, uniform, multi-screen experiences and interactive personalized user driven services in the home and on mobile devices. The Mobile Devices and Home businesses have core strengths in intellectual property, end-to-end solutions, design, operator relationships and a global brand which uniquely positions the combined entity to capitalize on these opportunities.

In our Enterprise Mobility Solutions business, we have market leading positions in both mission critical and business critical communications solutions for customers around the world. While many government customers

continue to face challenging economic environments, demand levels have remained resilient. We believe that these customers will continue to place a high priority on mission critical communications and homeland security products and solutions. Conditions in our commercial enterprise market have improved compared to 2009. This has resulted in a more stable environment and increased demand trends as many of our customers upgrade their technology to improve supply chain efficiencies, increase productivity of associates and improve end-customer buying experiences. We believe that our prioritized investments in next generation products and solutions, our comprehensive portfolio and market leadership make our Enterprise Mobility Solutions business well positioned for profitable growth.

Due to increased demand for products, many electronic manufactures are experiencing shortages for certain components. We continue to work closely with our suppliers to secure adequate supply. If demand for our products increases from our current expectations, we may experience periodic supply shortages.

We conduct our business in highly competitive markets, facing both new and established competitors. The markets for many of our products are characterized by rapidly changing technologies, frequent new product introductions, changing consumer trends, short product life cycles and evolving industry standards. Market disruptions caused by new technologies, the entry of new competitors, consolidations among our customers and competitors, and changes in regulatory requirements, among other matters, can introduce volatility into our businesses. We face challenging, but relatively stable, global economic conditions with more limited visibility than historical norms. Meeting all of these challenges requires consistent operational planning and execution and investment in technology, resulting in innovative products that meet the needs of our customers around the world. As we execute on meeting these objectives, we remain focused on taking the necessary action to design and deliver differentiated and innovative products and services that will advance the way the world connects by simplifying and personalizing communications and enhancing mobility.

Results of Operations—Three months ended October 2, 2010 compared to three months ended October 3, 2009

Net sales were $4.9 billion in the third quarter of 2010, up 13% compared to net sales of $4.3 billion in the third quarter of 2009. The increase in net sales reflects: (i) a $342 million, or 20%, increase in net sales in the Mobile Devices segment, (ii) a $153 million, or 9%, increase in net sales in the Enterprise Mobility Solutions segment, and (iii) a $46 million, or 5%, increase in net sales in the Home segment. The 20% increase in net sales in the Mobile Devices segment was primarily driven by a 78% increase in average selling price ("ASP"), partially offset by a 33% decrease in unit shipments. The 9% increase in net sales in the Enterprise Mobility Solutions segment reflects a 21% increase in net sales to the commercial enterprise market and a 1% increase in net sales to the government and public safety market. The 5% increase in net sales in the Home segment reflects higher net sales of video and access infrastructure while net sales of set-top boxes remained consistent with the year-ago quarter.

Gross margin was $1.8 billion, or 36.4% of net sales, in the third quarter of 2010, compared to $1.4 billion, or 33.2% of net sales, in the third quarter of 2009. Gross margins have increased in all segments.

The increase in gross margin as a percentage of net sales in the third quarter of 2010 compared to the third quarter of 2009 reflects an increase in gross margin percentage in the Mobile Devices and Home segments and a slight decrease in the Enterprise Mobility Solutions segment. The Company's overall gross margin as a percentage of net sales is impacted by the proportion of overall net sales generated by its various businesses.

Selling, general and administrative ("SG&A") expenses increased 13% to $810 million, or 16.6% of net sales, in the third quarter of 2010, compared to $718 million, or 16.6% of net sales, in the third quarter of 2009. The increase in SG&A expenses reflects higher SG&A expenses in the Mobile Devices and Enterprise Mobility Solutions segments. The increase in the Mobile Devices and Enterprise Mobility Solutions segments were primarily due to increased selling and marketing expenses related to the increase in net sales. SG&A expenses as a percentage of net sales increased in the Mobile Devices and Enterprise Mobility Solutions segments and decreased slightly in the Home segment.

Research and development ("R&D") expenditures increased 3% to $637 million, or 13.0% of net sales, in the third quarter of 2010, compared to $621 million, or 14.3% of net sales, in the third quarter of 2009. The increase in R&D expenditures reflects higher R&D expenditures in the Enterprise Mobility Solutions and Mobile Devices segments, partially offset by lower R&D expenditures in the Home segment. The increases in R&D expenditures in the Enterprise Mobility Solutions and Mobile Devices segments were primarily due to developmental engineering expenditures for new product development and investment in next-generation technologies. The decrease in R&D expenditures in the Home segment is primarily due to savings from cost-reduction initiatives.

R&D expenditures as a percentage of net sales decreased in the Mobile Devices and Home segments and remained flat in the Enterprise Mobility Solutions segment. The Company participates in very competitive industries with constant changes in technology and, accordingly, the Company continues to believe that a strong commitment to R&D is required to drive long-term growth.

The Company recorded net charges of $108 million in Other charges (income) in the third quarter of 2010, compared to net charges of $111 million in the third quarter of 2009. The net charges in the third quarter of 2010 included: (i) $65 million of charges relating to the amortization of intangibles, (ii) $44 million of separation-related transaction costs, and (iii) $36 million of net reorganization of business charges included in Other charges (income), partially offset by a $37 million gain related to intellectual property reserve adjustments. The charges in the third quarter of 2009 included: (i) $69 million of charges relating to the amortization of intangibles, (ii) a $23 million charge related to an environmental reserve, and (iii) $19 million of separation-

related transaction costs. The net reorganization of business charges are discussed in further detail in the "Reorganization of Businesses" section.

Net interest expense was $29 million in the third quarter of 2010, compared to net interest expense of $49 million in the third quarter of 2009. Net interest expense in the third quarter of 2010 included interest expense of $48 million, partially offset by interest income of $19 million. Net interest expense in the third quarter of 2009 includes interest expense of $62 million, partially offset by interest income of $13 million. The decrease in net interest expense in 2010 is primarily attributable to a decline in interest expense due to lower average debt outstanding during the third quarter of 2010 compared to the third quarter of 2009.

Gains on sales of investments and businesses were $4 million in the third quarter of 2010, compared to gains on sales of investments and businesses of $21 million in the third quarter of 2009. In the third quarter of 2010 and 2009, the net gains were primarily comprised of gains related to sales of certain of the Company's equity investments.

Net Other income was $5 million in the third quarter of 2010, compared to net Other expense of $66 million in the third quarter of 2009. The net charges in the third quarter of 2009 were primarily comprised of: (i) $31 million of investment impairments, (ii) a $22 million foreign currency loss, and (iii) an $8 million loss from the Sigma Fund investments.

The Company recorded $196 million of net tax expense in the third quarter of 2010, resulting in an effective tax rate on continuing operations of 96%, compared to $25 million of net tax benefits in the third quarter of 2009, resulting in an effective tax rate of 24%. The Company's effective tax rate in the third quarter of 2010 was higher than the U.S. statutory tax rate of 35% primarily due to: (i) an increase in the U.S. federal income tax accrual for repatriation of undistributed foreign earnings related to the realignment of the Company's capital structure, and (ii) certain separation-related transaction costs incurred for which the Company recorded no tax benefit.

The Company's effective tax rate will change from period to period based on non-recurring events, such as the settlement of income tax audits, changes in valuation allowances and the tax impact of significant unusual or extraordinary items, as well as recurring factors including changes in the geographic mix of income before taxes and effects of various global income tax strategies.

The Company had net earnings from continuing operations before income taxes of $205 million in the third quarter of 2010, compared with a net loss from continuing operations before income taxes of $105 million in the third quarter of 2009. After taxes, and excluding Earnings (loss) attributable to noncontrolling interests, the Company had net earnings from continuing operations of $7 million, or $0.00 per diluted share, in the third quarter of 2010, compared to a net loss from continuing operations of $90 million, or $0.04 per diluted share, in the third quarter of 2009.

The improvement in the earnings from continuing operations before income taxes in the third quarter of 2010 compared to the third quarter of 2009 was primarily attributable to a $341 million increase in gross margin. The increase in gross margin was partially offset by: (i) a $92 million increase in SG&A expenses, (ii) a $71 million decrease in Other income, as presented in Other income (expense), (iii) a $17 million decrease in gains on the sale of investments and businesses, and (iv) a $16 million increase in R&D expenditures.

During the third quarter of 2010, the Company announced that Nokia Siemens Networks B.V. would acquire the majority of our Networks infrastructure assets. After taxes, the Company had earnings from discontinued operations of $102 million, or $0.05 per diluted share, in the third quarter of 2010, compared to earnings from discontinued operations of $102 million, or $0.05 per diluted share, in the third quarter of 2009.

Results of Operations—Nine months ended October 2, 2010 compared to nine months ended October 3, 2009

Net sales were $13.6 billion in the first nine months of 2010, a 2% increase compared to net sales of $13.4 billion in the first nine months of 2009. The increase in net sales reflects: (i) a $425 million, or 8%, increase in net sales in the Enterprise Mobility Solutions segment, and (ii) a $77 million, or 1%, increase in net sales in the Mobile Devices segment, partially offset by a $268 million, or 9%, decrease in net sales in the Home segment. The 8% increase in net sales in the Enterprise Mobility Solutions segment reflects a 17% increase in net sales to the commercial enterprise market and a 3% increase in net sales to the government and public safety market. The 1% increase in net sales in the Mobile Devices segment was primarily driven by a 67% increase in average selling price ("ASP"), partially offset by a 40% decrease in unit shipments. The 9% decrease in net sales in the Home segment reflects a 20% decrease in net sales of set-top boxes, partially offset by higher net sales of video and access infrastructure equipment.

Gross margin was $4.9 billion, or 35.7% of net sales, in the first nine months of 2010, compared to $4.0 billion, or 30.0% of net sales, in the first nine months of 2009. The increase in gross margin reflects: (i) a significant increase in the Mobile Devices segment, and (ii) increases in the Enterprise Mobility Solutions and Home segments.

The increase in gross margin in the Mobile Devices segment was primarily driven by: (i) a favorable product mix, specifically due to increased volume of smartphone devices, (ii) lower excess inventory and other related charges in 2010 than in 2009, and (iii) the 1% increase in net sales. The increase in gross margin in the Enterprise Mobility Solutions segment was primarily driven by the 8% increase in net sales and a favorable product mix. The increase in gross margin in the Home segment was due to a favorable product margin mix across all product lines.

The increase in gross margin as a percentage of net sales in the first nine months of 2010 compared to the first nine months of 2009 reflects an increase in gross margin percentage in all segments. The Company's overall gross margin as a percentage of net sales is impacted by the proportion of overall net sales generated by its various businesses.

Selling, general and administrative ("SG&A") expenses increased 8% to $2.4 billion, or 17.8% of net sales, in the first nine months of 2010, compared to $2.3 billion, or 16.8% of net sales, in the first nine months of 2009. The increase in SG&A expenses reflects higher SG&A expenses in all segments. The increase in the Enterprise Mobility Solutions segment was primarily due to increased selling and marketing expenses related to the increase in net sales. The increase in the Mobile Devices segment was primarily driven by an increase in marketing expenses. The slight increase in the Home segment were primarily due to increased expenditures on information technology upgrades. SG&A expenses as a percentage of net sales increased in all segments.

Research and development ("R&D") expenditures decreased 3% to $1.9 billion, or 13.9% of net sales, in the first nine months of 2010, compared to $2.0 billion, or 14.6% of net sales, in the first nine months of 2009. The decrease in R&D expenditures reflects lower R&D expenditures in the Mobile Devices and Home segments, partially offset by increased R&D expenditures in the Enterprise Mobility Solutions segment. The decreases in R&D expenditures in the Mobile Devices and Home segments are primarily due to savings from cost-reduction initiatives. The increase in R&D expenditures in the Enterprise Mobility Solutions segment was primarily due to developmental engineering expenditures for new product development and investment in next-generation technologies.

R&D expenditures as a percentage of net sales decreased in all segments. The Company participates in very competitive industries with constant changes in technology and, accordingly, the Company continues to believe that a strong commitment to R&D is required to drive long-term growth.

The Company recorded net charges of $142 million in Other charges in the first nine months of 2010, compared to net charges of $393 million in the first nine months of 2009. The charges in the first nine months of

2010 included: (i) $193 million of charges relating to the amortization of intangibles, (ii) $174 million of separation-related transaction costs, and (iii) $69 million of net reorganization of business charges included in Other charges, partially offset by: (i) $294 million of gains related to legal settlements and intellectual property reserve adjustments. The charges in the first nine months of 2009 included: (i) $209 million of charges relating to the amortization of intangibles, (ii) $197 million of net reorganization of business charges included in Other charges, (iii) $23 million of charges related to an environmental reserve, and (iv) $19 million of separation-related transaction costs, partially offset by income of $55 million related to collections received on a legal settlement.

Net interest expense was $100 million in the first nine months of 2010, compared to net interest expense of $113 million in the first nine months of 2009. Net interest expense in the first nine months of 2010 included interest expense of $167 million, partially offset by interest income of $67 million. Net interest expense in the first nine months of 2009 includes interest expense of $171 million, partially offset by interest income of $58 million. The decrease in net interest expense in 2010 is primarily attributable to a decline in interest expense due to lower average debt outstanding during the first nine months of 2010 and the absence of a reversal of approximately $8 million of interest expense accruals that were no longer needed as a result of the settlement of certain tax audits during 2009.

Gains on sales of investments and businesses were $44 million in the first nine months of 2010, compared to a gain on sales of investments and businesses of $21 million in the first nine months of 2009. In the first nine months of 2010, the net gain was primarily comprised of a $31 million gain on the sale of a single investment. In the first nine months of 2009, the net gain primarily relates to sales of certain of the Company's equity investments.

Net Other expense was $26 million in the first nine months of 2010, compared to net Other income of $49 million in the first nine months of 2009. The net Other expense in the first nine months of 2010 was primarily comprised of: (i) $20 million of investment impairments, (ii) a $19 million foreign currency loss, and (iii) a $12 million loss from the extinguishment of debt, partially offset by a $15 million gain from Sigma Fund investments. The net income in the first nine months of 2009 was primarily comprised of: (i) a $67 million gain related to the extinguishment of a portion of the Company's outstanding long-term debt, and (ii) $67 million of gains from Sigma Fund investments, partially offset by: (i) $64 million of other-than-temporary investment impairment charges, and (ii) a $27 million foreign currency loss.

The Company recorded $278 million of net tax expense in the first nine months of 2010, resulting in an effective tax rate on continuing operations of 84%, compared to $229 million of net tax benefits in the first nine months of 2009, resulting in an effective tax rate of 37%. The Company's effective tax rate in the first nine months of 2010 was higher than the U.S. statutory tax rate of 35% primarily due to: (i) an increase in the U.S. federal income tax accrual for repatriation of undistributed foreign earnings related to the realignment of the Company's capital structure (ii) a non-cash tax charge related to the Medicare Part D subsidy tax law change, and (iii) certain separation-related transaction costs incurred for which the Company recorded no tax benefit, partially offset by reductions in unrecognized tax benefits for facts that now indicate the extent to which certain tax positions are more-likely-than-not of being sustained.

The Company had net earnings from continuing operations before income taxes of $329 million in the first nine months of 2010, compared with a net loss from continuing operations before income taxes of $623 million in the first nine months of 2009. After taxes, and excluding Earnings (loss) attributable to noncontrolling interests, the Company had net earnings from continuing operations of $47 million, or $0.02 per diluted share, in the first nine months of 2010, compared to a net loss from continuing operations of $418 million, or $0.18 per diluted share, in the first nine months of 2009.

The improvement in the earnings (loss) from continuing operations before income taxes in the first nine months of 2010 compared to the first nine months of 2009 was primarily attributable to: (i) a $852 million increase in gross margin, (ii) a $251 million decrease in Other charges, (iii) a $61 million decrease in R&D expenditures, (iv) a $23 million increase in gains on the sale of investments and businesses, and (v) a $13 million decrease in net interest expense. These improvements were partially offset by: (i) an $173 million increase in SG&A expenses, and (ii) a $75 million decrease in net Other income, as presented in Other income (expense).

During the third quarter of 2010, the Company announced that Nokia Siemens Networks B.V. would acquire the majority of our Networks infrastructure assets. During the second quarter of 2010, the Company completed the sale of our Israel-based wireless network operator. During the first quarter of 2009, the Company completed the sales of: (i) Good Technology, and (ii) the Company's former biometrics business unit, which included its Printrak trademark.

After taxes, the Company had earnings from discontinued operations of $293 million, or $0.12 per diluted share, in the first nine months of 2010, compared to earnings from discontinued operations of $225 million, or $0.10 per diluted share, in the first nine months of 2009.

The Company maintains a formal Involuntary Severance Plan (the "Severance Plan"), which permits the Company to offer eligible employees severance benefits based on years of service and employment grade level in the event that employment is involuntarily terminated as a result of a reduction-in-force or restructuring. The Company recognizes termination benefits based on formulas per the Severance Plan at the point in time that future settlement is probable and can be reasonably estimated based on estimates prepared at the time a restructuring plan is approved by management. Exit costs consist of future minimum lease payments on vacated facilities and other contractual terminations. At each reporting date, the Company evaluates its accruals for employee separation and exit costs to ensure the accruals are still appropriate. In certain circumstances, accruals are no longer needed 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. In these cases, the Company reverses accruals through the consolidated statements of operations where the original charges were recorded when it is determined they are no longer needed.

The Company expects to realize cost-saving benefits of approximately $43 million during the remaining three months of 2010 from the plans that were initiated during the first nine months of 2010, representing: (i) $18 million of savings in R&D expenditures, (ii) $14 million of savings in SG&A expenses, and (iii) $11 million of savings in Costs of sales. Beyond 2010, the Company expects the reorganization plans initiated during the first nine months of 2010 to provide annualized cost savings of approximately $183 million, representing: (i) $80 million of savings in R&D expenditures, (ii) $55 million of savings in SG&A expenses, and (iii) $48 million of savings in Cost of sales.

The following table displays a rollforward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2010 to October 2, 2010:

The adjustments of $20 million reflect: (i) $19 million of reversals of accruals no longer needed, and (ii) $1 million of translation adjustments.

During the three months ended October 3, 2009, the Company recorded net reorganization of business charges of $2 million in Costs of sales in the Company's condensed consolidated statements of operations. Included in the aggregate $2 million are charges of $19 million for employee separation costs and $8 million for exit costs, partially offset by $25 million of reversals for accruals no longer needed.

The following table displays a rollforward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2009 to October 3, 2009:


		October 2, 2010			December 31, 2009

Work-in-process and production materials	$	1,040		$	887
Finished goods		861			883

		1,901			1,770
Less inventory reserves		(547	)		(673	)

	$	1,354		$	1,097


		October 2, 2010		December 31, 2009

Costs and earnings in excess of billings	$	280	$	258
Contract-related deferred costs		335		287
Contractor receivables		308		329
Value-added tax refunds receivable		98		94
Other		421		421

	$	1,442	$	1,389


		October 2, 2010			December 31, 2009

Land	$	115		$	115
Building		1,579			1,479
Machinery and equipment		3,470			3,496

		5,164			5,090
Less accumulated depreciation		(3,396	)		(3,271	)

	$	1,768		$	1,819


		October 2, 2010		December 31, 2009

Intangible assets, net of accumulated amortization of $1,495 and $1,312	$	466	$	591
Contract-related deferred costs		207		286
Royalty license arrangements		239		255
Value-added tax refunds receivable		70		127
Long-term receivables, net of allowances of $3 and $9		209		117
Other		256		304

	$	1,447	$	1,680


		October 2, 2010		December 31, 2009

Deferred revenue	$	1,061	$	836
Compensation		572		542
Customer reserves		344		321
Billings in excess of costs and earnings		239		253
Warranty reserves		224		209
Contractor payables		257		235
Tax liabilities		340		246
Customer downpayments		81		159
Other		1,399		1,340

	$	4,517	$	4,141


	Amounts attributable to Motorola, Inc. common shareholders
	Continuing Operations					Net Earnings
Three Months Ended		*October 2, 2010*		October 3, 2009			*October 2, 2010*		October 3, 2009

Basic earnings (loss) per common share:
Earnings (loss)	$	7	$	(90	)	$	109	$	12
Weighted average common shares outstanding		2,339.0		2,299.6			2,339.0		2,299.6

Per share amount	$	0.00	$	(0.04	)	$	0.05	$	0.01

Diluted earnings (loss) per common share:
Earnings (loss)	$	7	$	(90	)	$	109	$	12

Weighted average common shares outstanding		2,339.0		2,299.6			2,339.0		2,299.6
Add effect of dilutive securities:
Share-based awards and other		35.4		—			35.4		—

Diluted weighted average common shares outstanding		2,374.4		2,299.6			2,374.4		2,299.6

Per share amount	$	0.00	$	(0.04	)	$	0.05	$	0.01


	Amounts attributable to Motorola, Inc. common shareholders
	Continuing Operations					Net Earnings (Loss)
Nine Months Ended		*October 2, 2010*		October 3, 2009			*October 2, 2010*		October 3, 2009

Basic earnings (loss) per common share:
Earnings (loss)	$	47	$	(418	)	$	340	$	(193	)
Weighted average common shares outstanding		2,327.6		2,290.8			2,327.6		2,290.8

Per share amount	$	0.02	$	(0.18	)	$	0.15	$	(0.08	)

Diluted earnings (loss) per common share:
Earnings (loss)	$	47	$	(418	)	$	340	$	(193	)

Weighted average common shares outstanding		2,327.6		2,290.8			2,327.6		2,290.8
Add effect of dilutive securities:
Share-based awards and other		32.4		—			32.4		—

Diluted weighted average common shares outstanding		2,360.0		2,290.8			2,360.0		2,290.8

Per share amount	$	0.02	$	(0.18	)	$	0.14	$	(0.08	)


		October 2, 2010				December 31, 2009
Fair Value			Current		Non-current		Current		Non-Current

Cash		$	—	$	—	$	202	$	—
Securities:
	U.S. government, agency and government-sponsored enterprise obligations		5,032		—		4,408		—
	Corporate bonds		—		67		367		63
	Asset-backed securities		—		2		66		—
	Mortgage-backed securities		6		36		49		3

		$	5,038	$	105	$	5,092	$	66


		Recorded Value				Less
October 2, 2010			Short-term Investments		Investments		Unrealized Gains		Unrealized Losses		Cost Basis

Certificates of deposit		$	6	$	—	$	—	$	—	$	6
Available-for-sale securities:
	U.S. government, agency and government-sponsored enterprise obligations		—		19		1		—		18
	Corporate bonds		2		10		1		—		11
	Mortgage-backed securities		—		3		—		—		3
	Common stock and equivalents		—		35		17		—		18

			8		67		19		—		56
Other securities, at cost			—		183		—		—		183
Equity method investments			—		54		—		—		54

		$	8	$	304	$	19	$	—	$	293


		October 2, 2010		December 31, 2009

Defined benefit plans, including split dollar life insurance policies	$	2,348	$	2,450
Deferred revenue		504		601
Postretirement health care benefit plan		293		287
Unrecognized tax benefits		80		196
Other		414		453

	$	3,639	$	3,987


	Notional Amount
Net Buy (Sell) by Currency		October 2, 2010			December 31, 2009

Euro	$	(357	)	$	(377	)
Brazilian Real		(333	)		(342	)
Chinese Renminbi		(319	)		(297	)
Japanese Yen		(43	)		(236	)
British Pound		119			143


			Fair Values of Derivative Instruments
			Assets			Liabilities
October 2, 2010				Fair Value	Balance Sheet Location		Fair Value	Balance Sheet Location

Derivatives designated as hedging instruments:
	Foreign exchange contracts		$	3	Other assets	$	5	Other liabilities
Derivatives not designated as hedging instruments:
	Foreign exchange contracts			15	Other assets		45	Other liabilities
	Interest agreement contracts			—	Other assets		5	Other liabilities

Total derivatives not designated as hedging instruments				15			50

		Total derivatives	$	18		$	55


			October 2, 2010
Gain (Loss) on Derivative Instruments				Three Months Ended			Nine Months Ended		Statement of Operations Location

Derivatives not designated as hedging instruments:
	Interest rate contracts			(5	)		(13	)	Other income (expense)
	Foreign exchange contracts			(54	)		(23	)	Other income (expense)

		Total derivatives not designated as hedging instruments	$	(59	)	$	(36	)


	October 2, 2010
Foreign Exchange Contracts		Three Months Ended			Nine Months Ended		Financial Statement Location

Derivatives in cash flow hedging relationships:
Loss recognized in Accumulated other comprehensive loss (effective portion)	$	(5	)	$	(9	)	Accumulated other comprehensive loss
Gain reclassified from Accumulated other comprehensive loss into Net earnings (loss) (effective portion)		(4	)		(1	)	Cost of sales/Sales
Gain (loss) recognized in Net earnings (loss) on derivative (ineffective portion and amount excluded from effectiveness testing)		—			—		Other income (expense)


October 2, 2010				Level 1		Level 2		Level 3		Total

Assets:
	Sigma Fund securities:
		U.S. government, agency and government-sponsored enterprise obligations	$	—	$	5,032	$	—	$	5,032
		Corporate bonds		—		46		21		67
		Asset-backed securities		—		2		—		2
		Mortgage-backed securities		—		42		—		42
	Available-for-sale securities:
		U.S. government, agency and government-sponsored enterprise obligations		—		19		—		19
		Corporate bonds		—		10		—		10
		Mortgage-backed securities		—		3		—		3
		Common stock and equivalents		26		9		—		35
	Foreign exchange derivative contracts*			—		18		—		18
Liabilities:
	Foreign exchange derivative contracts*			—		50		—		50
	Interest agreement derivative contracts			—		5		—		5

* Includes immaterial amounts related to held for sale businesses.


December 31, 2009				Level 1		Level 2		Level 3		Total

Assets:
	Sigma Fund securities:
		U.S. government, agency and government-sponsored enterprise obligations	$	—	$	4,408	$	—	$	4,408
		Corporate bonds		—		411		19		430
		Asset-backed securities		—		66		—		66
		Mortgage-backed securities		—		52		—		52
	Available-for-sale securities:
		U.S. government, agency and government-sponsored enterprise obligations		—		23		—		23
		Corporate bonds		—		10		—		10
		Mortgage-backed securities		—		3		—		3
		Common stock and equivalents		136		11		—		147
	Foreign exchange derivative contracts*			—		15		—		15
Liabilities:
	Foreign exchange derivative contracts*			—		17		—		17
	Interest agreement derivative contracts			—		4		—		4

* Includes immaterial amounts related to held for sale businesses.


		October 2, 2010			December 31, 2009

Long-term receivables	$	236		$	154
Less allowance for losses		(3	)		(9	)

		233			145
Less current portion		(24	)		(28	)

Non-current long-term receivables, net	$	209		$	117


	Net Sales						Operating Earnings (Loss)
Three Months Ended		October 2, 2010			October 3, 2009			October 2, 2010			October 3, 2009

Mobile Devices	$	2,034		$	1,692		$	(43	)	$	(216	)
Home		912			866			49			20
Enterprise Mobility Solutions		1,946			1,793			253			223

		4,892			4,351			259			27
Other and Eliminations		(2	)		(15	)		(34	)		(38	)

	$	4,890		$	4,336

Operating earnings (loss)								225			(11	)
Total other income (expense)								(20	)		(94	)

Earnings (loss) from continuing operations before income taxes							$	205		$	(105	)


		Accruals at January 1, 2010		Additional Charges		Adjustments			Amount Used			Accruals at October 2, 2010

Exit costs	$	57	$	15	$	(5	)	$	(27	)	$	40
Employee separation costs		65		100		(20	)		(82	)		63

	$	122	$	115	$	(25	)	$	(109	)	$	103


		Accruals at January 1, 2009		Additional Charges		Adjustments			Amount Used			Accruals at October 3, 2009

Exit costs	$	78	$	30	$	(8	)	$	(41	)	$	59
Employee separation costs		153		259		(48	)		(304	)		60

	$	231	$	289	$	(56	)	$	(345	)	$	119


	*October 2, 2010*				December 31, 2009
		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization

Completed technology	$	1,145	$	910	$	1,133	$	785
Patents		341		209		288		166
Customer-related		198		120		209		110
Licensed technology		130		122		130		122
Other intangibles		147		134		143		129

	$	1,961	$	1,495	$	1,903	$	1,312


		Mobile Devices			Home			Enterprise Mobility Solutions			Total Motorola

Balances as of January 1, 2010:
Aggregate goodwill acquired	$	55		$	1,358		$	2,993		$	4,406
Accumulated impairment losses		(55	)		(73	)		(1,564	)		(1,692	)

Goodwill, net of impairment losses		—			1,285			1,429			2,714

Goodwill acquired		30			8			—			38

Balances as of October 2, 2010:
Aggregate goodwill acquired		85			1,366		$	2,993			4,444
Accumulated impairment losses		(55	)		(73	)		(1,564	)		(1,692	)

Goodwill, net of impairment losses	$	30		$	1,293		$	1,429		$	2,752


		Three Months Ended										Nine months Ended
(Dollars in millions, except per share amounts)			October 2, 2010		% of Sales			October 3, 2009		% of Sales			October 2, 2010		% of Sales			October 3, 2009		% of Sales

Net sales		$	4,890				$	4,336				$	13,619				$	13,361
Costs of sales			3,110		63.6	%		2,897		66.8	%		8,754		64.3	%		9,348		70.0	%

Gross margin			1,780		36.4	%		1,439		33.2	%		4,865		35.7	%		4,013		30.0	%

Selling, general and administrative expenses			810		16.6	%		718		16.6	%		2,423		17.8	%		2,250		16.8	%
Research and development expenditures			637		13.0	%		621		14.3	%		1,889		13.9	%		1,950		14.6	%
Other charges (income)			108		2.2	%		111		2.6	%		142		1.0	%		393		2.9	%

Operating earnings (loss)			225		4.6	%		(11	)	(0.3	)%		411		3.0	%		(580	)	(4.3	)%

Other income (expense):
Interest expense, net			(29	)	(0.6	)%		(49	)	(1.1	)%		(100	)	(0.7	)%		(113	)	(0.9	)%
Gains on sales of investments and businesses, net			4		0.1	%		21		0.5	%		44		0.3	%		21		0.2	%
Other			5		0.1	%		(66	)	(1.5	)%		(26	)	(0.2	)%		49		0.3	%

Total other income (expense)			(20	)	(0.4	)%		(94	)	(2.1	)%		(82	)	(0.6	)%		(43	)	(0.4	)%

Earnings (loss) from continuing operations before income taxes			205		4.2	%		(105	)	(2.4	)%		329		2.4	%		(623	)	(4.7	)%
Income tax expense (benefit)			196		4.1	%		(25	)	(0.6	)%		278		2.1	%		(229	)	(1.8	)%

			9		0.1	%		(80	)	(1.8	)%		51		0.3	%		(394	)	(2.9	)%
Less: Earnings attributable to non-controlling interests			2		0.0	%		10		0.3	%		4		0.0	%		24		0.2	%

Amounts attributable to Motorola, Inc. common shareholders:
Earnings (loss) from continuing operations			7		0.1	%		(90	)	(2.1	)%		47		0.3	%		(418	)	(3.1	)%
Earnings from discontinued operations, net of tax			102		2.1	%		102		2.4	%		293		2.2	%		225		1.7	%

Net earnings (loss)		$	109		2.2	%	$	12		0.3	%	$	340		2.5	%	$	(193	)	(1.4	)%

Earnings (loss) per diluted common share:
	Continuing operations	$	0.00				$	(0.04	)			$	0.02				$	(0.18	)
	Discontinued operations		0.05					0.05					0.12					0.10

		$	0.05				$	0.01				$	0.14				$	(0.08	)


		Accruals at January 1, 2010		Additional Charges		Adjustments			Amount Used			Accruals at October 2, 2010

Exit costs	$	57	$	15	$	(5	)	$	(27	)	$	40
Employee separation costs		65		100		(20	)		(82	)		63

	$	122	$	115	$	(25	)	$	(109	)	$	103


		Accruals at January 1, 2009		Additional Charges		Adjustments			Amount Used			Accruals at October 3, 2009

Exit costs	$	78	$	30	$	(8	)	$	(41	)	$	59
Employee separation costs		153