Contents

1 Financial Highlights2 To Our Stockholders and Friends3 Communications Sector6 Semiconductor Products Sector9 I nformation Systems G rou p

10 General Systems Group12 Government Electronics Group14 Automotive and Industrial

Electronics Group16 Financial Review18 Financial Statements21 Notes to Consolidated

Financial Statements27 Five Year Financial Summary30 Directors and Officers32 Quality and Productivity33 Major Facilities and Products

The Company

Motorola, Inc. is one of the world's lead-ing manufacturers of electronic equip-ment, systems and componentsproduced for both United States andinternational markets. Motorola prod-ucts include two-way radios, pagers,cellular radiotelephones and otherforms of electronic communicationssystems, semiconductors, defense andaerospace electronics, automotive andindustrial electronic equipment, datacommunications and information proc-essing and handling equipment. Moto-rola is one of the few end-equipmentmanufacturers that can draw on exper-tise in both semiconductor technologyand government electronics.

Financial HighlightsMotorola, Inc. and Consolidated Subsidiaries, Years ended December 31

(In millions of dollars, except per share data)

Net sales

Earnings before income taxes

% to sales

Net earnings excluding DISC tax cancellation

% to sales

Net earnings

% to sales

Net earnings per share excluding DISC tax cancellation

Net earnings per share

Research and development expenditures

Fixed asset expenditures

Working capital

Current ratio

Return on average invested capital (stockholders' equity plus long- andshort-term debt, net of short-term investments) excluding DISC tax cancellation

% of total debt less short-term investments to total debt lessshort-term investments plus equity

Book value per common share

Yearend employment (approximate)

1985

$5,443

45

0.8%

72

1.3%

72

1.3%

.61

.61464

641

924

1.78

2.4%

26.9%19.14

90,200

1984

$5,534

466

8.4%

349

6.3%

387

7.0%

2.95

3.27

425

783

1,001

1.83

14.5%

18.0%

19.19

99,900

Annual Meeting of StockholdersThe annual meeting will be held on May5,1986. A notice of the meeting, togetherwith a form of proxy and a proxy state-ment, will be mailed to stockholders onor about March 20,1986, at which timeproxies will be solicited by the Boardof Directors.

Form 10-KAfter the close of each fiscal year,Motorola submits a report on Form 10-Kto the Securities and Exchange Commis-sion containing certain additional infor-mation concerning its business. A copyof this report may be obtained withoutcharge by addressing your request to theSecretary, Motorola, Inc., CorporateOffices, Motorola Center, 1303 E. Algon-quin Road, Schaumburg, III. 60196.

Transfer Agent and RegistrarHarris Trust and Savings Bank111 W.Monroe StreetChicago, III. 60603

AuditorsPeat, Marwick, Mitchell & Co.303 E. Wacker DriveChicago, III. 60601

To Our Stockholders and Friends

Robert W. Galvin William J. Weisz John F. Mitchell

While 1985 was a painful year for Motor-ola, we took measures that have made usmore competitive in markets with excel-lent growth potential. Our semiconductorand computer-related businesses suf-fered through a severe industry down-turn that more than offset the record salesand operating profits in the Communica-tions Sector.

Sales in 1985 declined 2 percent to$5.44 billion from $5.53 billion in 1984.Earnings were $72 million, or 61 cents pershare, compared with $349 million, or$2.95 per share, a year earlier. The 1984earnings exclude a nonrecurring DISCtax benefit of $38 million.

The 1985 results include special one-time costs of approximately $60 millionassociated with staff reductions, organi-zational restructuring, discontinuation ofcertain product lines, and write-down ofobsolete inventory and equipment in theSemiconductor Products Sector, Motor-ola Computer Systems, Inc., (formerlyFour-Phase Systems, Inc.) and TegalCorp. These costs are net of special one-time income items in these operations.

Operations OverviewCommunications Sector sales rose13 percent, operating profits improvedsharply and new orders were up 12 per-cent. Backlog was up 10 percent from theend of 1984. Results include the CellularGroup, which is now part of the GeneralSystems Group.

The Semiconductor Products Sector'ssales were 23 percent lower, while neworders and backlog each declined about45 percent. The sector had an operatingloss, compared with record operatingprofits in 1984.

The semiconductor industry sufferedfrom excess inventories, selling pricesthat were sharply lower than 1984, andweak business conditions in importantmarkets such as computers. During 1985we reduced our costs dramatically. Sell-ing prices stabilized and orders turnedupward during the last quarter of the year.

Information Systems Group sales rose14 percent, while new orders increased5 percent and backlog was down 7 per-cent. The group had an operating loss,compared with a small profit in 1984. Theresults include operations of MotorolaComputer Systems, Inc., which is nowpart of the new General Systems Group.

Government Electronics Group salesincreased 13 percent, new ordersadvanced 27 percent and backlog was32 percent higher. Operating profitsdeclined.

Sales in the Automotive and IndustrialElectronics Group were down 2 percent,orders were 3 percent lower, and back-log was approximately the same. Thegroup continued its long-term pattern ofprofitability, although operating profitswere lower than in 1984.

Sale of South African OperationWe sold our manufacturing facility inSouth Africa to Allied Technologies Ltd.,which continues to service and distributeMotorola products.

Board of Directors, OfficersWallace C. Doud, a former vice presidentof IBM, was elected to the Board of Direc-tors at the 1985 Annual Meeting. Severalofficers were promoted during 1985, andsome of our operations were restruc-tured. The list of elected officers onpages 30 and 31 indicates which of theofficers advanced in rank or assumed anew position since our last annual reportto stockholders.

John T. Hickey elected to retire asexecutive vice president and chief finan-cial officer after completing 37 years ofservice with the company, and John R.Welty elected to retire as executive vicepresident and chief corporate staff officerafter 27 years of service. Walter B. Scott,a director since 1955, is not standing forre-election to the board in line with ourpolicy on age and tenure of directors. Weacknowledge with appreciation theirmany contributions to Motorola.

OutlookThe problems faced by our semiconduc-tor and computer-related businessescontinue to dampen our short-termgrowth prospects, but we are seeingpositive developments that should ena-ble us to return to a more acceptablegrowth pattern later in 1986. All of ourbusinesses should benefit from thedecline in interest rates and the reducedvalue of the dollar, as well as the contin-ued emphasis on the resolution of tradeissues.

Our employees in 1985 acceptedshorter workweeks and reductions insalaries, along with delays in salaryincreases. We appreciate these sacri-fices, which helped our companythrough a difficult time.

As we continue to focus our efforts onserving our customers, we are makingkey strategic investments and develop-ing advanced electronic products for amore productive world. We face thefuture with the confidence that we willcontinue our leadership in excitinggrowth markets.

Yours very truly,

Robert W. GalvinChairman

William J. WeiszVice Chairman

John F. MitchellPresident

Communications Sector

GROUPS & DIVISIONS:Communications Distribution Group

Commercial Markets DivisionDistribution Service GroupNational Markets DivisionSpecial Markets DivisionState and Local Government Markets Division

Communications International GroupEuropean Division

Communications Manufacturing GroupComponents Division

Land Mobile Product GroupFixed Products DivisionLand Mobile Systems DivisionMobile Products DivisionPortable Products Division

Paging Products DivisionData Products Division

Communications Sector sales rose 13percent in 1985 to a record $2.31 billion.Operating profits improved sharply asdemand grew for advanced systems.New orders increased 12 percent whilebacklog was up 10 percent from the endof 1984.

These results include the CellularGroup, which became part of the newGeneral Systems Group during theyear. Cellular activities are discussed onpage 10.

Major domestic gains were led by thestate and local government and cellulartelephone markets. International neworders also increased.

Advanced Two-Way Radio SystemsDemand increased for state-of-the-arttwo-way land mobile systems. In 800MHz advanced trunking systems, forexample, the sector received a contractfrom the Arkansas State Police valued at$24.5 million over two years for a state-wide system. The award includes STX®20-channel trunked portable radios intro-duced in 1985. This new synthesizedradio is the world's first dual operationportable that can operate on conven-tional as well as trunked 800 MHz sys-tems. Trunked systems providecomputer-aided sharing of a small num-ber of channels by many users.

The City of Tulsa, Okla., awarded thesector $4.3 million for the second phase

of an advanced trunking system thatcombines the police and fire depart-ments into a single integrated system.Houston Lighting and Power signed acontract for an advanced trunking sys-tem and a data communications systemusing the KDT480® mobile data terminal.

Motorola introduced the Syntor X®9000 Series mobile radio, featuring an11-character alphanumeric display thatallows the user to scroll through namesand instructions. The company also intro-duced the Maxar® 50 mobile radio, itssmallest and lowest-priced conventionalradio, and a new 97-channel locomotiveradio that gives railroads expandedchannel and signaling capabilities.

In secure communications, the sectorannounced Securenet, a lower-cost digit-al voice protection system featuring sev-eral new products. These include theSecurenet version of the Syntor X® 9000mobile, the Securenet Expo® portableradio, combining secure communica-tions with Motorola's smallest two-wayportable radio, and the Secure Smartnetsystem for 800 MHz advanced trunkingsystems.

A new Automatic Vehicle Location sys-tem is designed to track the location ofradio-equipped vehicles automatically. Itcan be used in commercial, transit, utilityand public safety markets.

In microwave communications,Motorola acquired the Gemlink® productline from General Electric Co. Gemlink,which complements Motorola's existingproducts, operates in the 23 GHz band,providing data, voice and video commu-nication links for up to 10 miles. Produc-tion was transferred from GE's facility inOwensboro, Ky., to the sector's manufac-turing plant in Schaumburg, III.

PagingMotorola enhanced its leadership in pag-ing with several new models, includingthe Sensar® numeric display pager.About the size of a fountain pen andweighing less than two ounces, the Sen-sar is one-third the size of its nearest

Communications Sector (continued)

competition. It has a 12-digit display andcan store up to 120 numeric characters infive memories.

The new Optrx® Pager/Personal Mes-sage Center printer and charger com-bines the versatility of a pager with theconvenience of a charger. Used with analphanumeric Optrx display pager, thedesktop Personal Message Center auto-matically provides hard copy of mes-sages received while the pager is in theunit and simultaneously charges thepager's battery.

The New York Stock Exchange beganoperating a Metro-Page 200™ systemfeaturing the BPR 2000™ numeric dis-play pager. Brokers on the floor arepaged when they are needed to com-plete a transaction. The system handles50,000 pages per day for 1,050 bro-kers—the highest call traffic per sub-scriber for any known system.

Portable Radio Data SystemThe sector installed a shared radio datacommunications system in the Chicagoarea. It provides two-way communica-tions between 28-ounce portable com-puter terminals, mobile terminals and aremote host computer for customers whodon't have enough users to require a pri-vately owned system. Several field serv-ice and sales organizations are conduct-ing pilot tests on the Chicago system.Systems also are planned for other majormetropolitan areas.

The radio data communications sys-tem for IBM now covers more than 300cities. Other private mobile radio/datasystems began operating in San Fran-cisco and Concord, Calif., and the north-west suburbs of Chicago for public safetyagencies. A M Cooper Transportation, atrucking company in Dothan, Ala.,ordered a system for computer-aideddispatch. A major order was receivedfrom a manufacturer for KDT 800™portable data terminals to provideincreased speed and efficiency inwarehousing operations.

International ProgressThe sector introduced products aimed atstrengthening its position in specific geo-graphic markets. For example, the MCmicro™ mobile radio and base stationseries for Europe is offered in versionscapable of handling the many forms ofadvanced signaling necessary to meetthe diverse requirements of Europeanmarkets. It is also one of the smallestmobiles available in Europe.

In Japan, Motorola is now one of thelargest suppliers of pagers in the NipponTelegraph and Telephone Corp. (NTT)system as a result of an increased order.The RC-13 Pocket Bell pagers for NTThave been among the most reliable over-all in competition with the best electronicsmanufacturers in Japan. Motorola beganshipping the new, smaller RC-14 PocketBell pager, also with excellent results.

Motorola provided equipment for pag-ing systems in Singapore, Korea and Italyand was selected by the French govern-ment to participate in new citywide pag-ing services.Storno AcquisitionIn January 1986, Motorola signed anagreement in principle to acquire StornoA/S, a subsidiary of General ElectricCo. Storno manufactures land-mobilecommunications systems and cellularsubscriber equipment at plants inCopenhagen, Denmark, Flensburg,West Germany, and Camberley, England.Its sales in 1985 were approximately$95 million.ExpansionMotorola occupied a new 130,000-square-foot radio and microelectronicsmanufacturing facility in Singapore andacquired a smaller plant for manufactur-ing printed circuit boards.

During 1985, Motorola employees inMount Pleasant, Iowa, moved from aleased building to a newly constructedradio manufacturing facility. The sectoralso acquired and occupied a 76,000-square-foot building in Schaumburg, III.,

for use as a high-tech service and train-ing facility.

Construction began on a 65,000-square-foot Midwest Area Sales head-quarters building in Itasca, III., and a30,000-square-foot manufacturing facilityin Leon, Mexico.

(upper left) The MC micro'" mobile radio isdesigned to handle the diverse requirementsof most European markets.

(upper right) The Sensar* numeric displaypager weighs less than two ounces and canstore up to five messages.

(lower left) The Syntor X® 9000 mobile radioenables users to scroll through names andinstructions on the display. The Securenetversion provides for secure voicecommunication.

(lower center) In a shared radio data system,sales personnel can use 28-ounce portableterminals to communicate with a centralcomputer.

(lower right) The Optrx® Pager IPersonalMessage Center printer and charger provideshard copies of messages while charging thepager's battery.

5588ft

Semiconductor Products Sector

GROUPS & DIVISIONS:Discrete and Special Technologies Group

Low-frequency Power Transistor/ThyristorProducts DivisionRF and Optoelectronic Products DivisionSmall Signal and Sensor Products DivisionZenerlRectitier Products Division

Integrated Circuits Wafer Manufacturing GroupBipolar Wafer Processing DivisionMOS Wafer Processing Division

International Semiconductor GroupAsia Pacific Semiconductor Products DivisionEuropean Semiconductor GroupDiscrete and Analog Products Division(Toulouse)Logic, ASIC and Microsystems ProductsDivision (Munich)MOS Memory and Microprocessor Division(EastKilbride)

Microprocessor Products GroupStandard Logic and Analog IC Group

Bipolar Analog IC DivisionBipolar Logic and Memory IC DivisionMOS Logic and Analog IC Division

Application Specific Integrated Circuits DivisionAssembly Manufacturing and EquipmentEngineering DivisionMOS Memory Division

The Semiconductor Products Sector(SPS) operating results were significantlylower in 1985, although a stream ofadvanced new products helped to par-tially offset generally weak marketdemand.

Sales declined 23 percent to $1.73 bil-lion. New orders and backlog each wereabout 45 percent lower. An operatingloss was recorded for the year, due to thecombination of lower selling prices, varia-tions in overhead expenses caused byreduced production levels, and revalua-tion of inventories to reflect pricingdeclines. Also contributing to the losswere expenses associated with work-force reductions and elimination ofunprofitable product lines, along withcontinued investment in strategicprograms.

Reduced market demand that beganin mid-1984 continued and deepenedduring the year, because of the accumu-lation by many customers of large semi-conductor inventories and declining

end-equipment production. As cus-tomers reduced excess componentinventories, new orders graduallyimproved in the second half of the year.Most orders had short-term deliveryrequirements.

Demand was weaker in most majorU.S. market segments, with the excep-tion of automotive and federal/military.However, the fourth-quarter order rateimproved over the third quarter in thecomputer, communications and distribu-tion segments.

In key international regions, demandwas lower on a year-to-year basis,although the European market declinedless than the Asia Pacific and Japaneseregions. The order rate rose moderatelyin all regions during the final quarter ofthe year.

The sector implemented a series ofexpense-reduction measures, includingvoluntary and involuntary workforcereductions; temporary, graduated salaryreductions; a special voluntary early-retirement program; shorter workweeksin selected businesses and reducedoperating budgets. Further savings wereachieved by consolidating and curtailingsome operations and delaying the start-up of several new facilities. However, keyresearch, product and process develop-ment programs were maintained.

Advanced MicroprocessorsDemand was high for 32-bit micropro-cessors and 8-bit HCMOS (high-per-formance complementary metal-oxidesemiconductor) microcomputers. The32-bit MC68020 "mainframe computeron a chip" was joined by two key com-panion products, the MC68881 FloatingPoint Coprocessor and the MC68851Paged Memory Management Unit. Byyearend, 29 companies had introducedsystems based on the 68020 micropro-cessor, with many more scheduled forintroduction in 1986 as a result of morethan 500 design-ins. Sampling of a morepowerful 20 MHz version began inNovember.

For communications networking appli-cations, Motorola introduced and begansampling two HCMOS Serial ProcessorUnits that use a modular designapproach. The MC68824 Token BusController is the world's first single-chipdevice to implement standards specifiedfor the General Motors ManufacturingAutomation Protocol (MAP). Boards andMicroMAP™ software modules also wereintroduced. MAP is a communicationsstandard supported by a large number ofusers for networking all intelligent sys-tems in a factory.

The MC68605 X.25 Protocol Controlleris an HCMOS chip for use in long-dis-tance communication over phone lines orsatellite links, PBX systems and publicdata networks. Also introduced was anHCMOS version of the MC6800016-bitmicroprocessor that uses 90 percent lesspower than the original device.

Major design-ins were achieved foradvanced 8-bit HCMOS microcomput-ers, including the MC68HC04,05 and11 families. They range from low cost tovery high performance, and are used inautomotive, communications, consumerand industrial products. Many of themfeature on-chip capabilities such asEEPROM (electrically erasable pro-grammable read-only memory), whichallows a user to tailor the microcomputerto specific applications.

(upper left) New Motorola-designed probecard can simultaneously link 160 pads on anapplication specific integrated circuit toautomated test equipment.

(upper right) New MRF154 ultra high powertransistor enables designers to save spaceand reduce costs in medical electronics andradio transmitting equipment.

(lower left) "Smart cards" that contain theirown memory and logic will be used forelectronic payment, individual portable filesor access to data banks. Heart of the card is acustom MC6805 microcomputer.

(lower right) Technician at new advancedproduct research and developmentlaboratory in Austin, Texas.

Semiconductor Products Sector (continued)

Motorola's VME (VersaModule™Eurocard) board format became furtherestablished as a major industry standard.SPS introduced more than 30 VME prod-ucts during the year.

Memory DevicesMotorola expanded its family of HCMOSfast static RAMs (random access memo-ries) and phased down production ofdynamic RAMs. Volume productionbegan of the 4K by 4 fast static deviceand sampling began on very high per-formance 64K by 1 and 8K by 8 staticRAMs, part of a new memory portfoliodesigned to give the company a leadingposition in the static RAM market.

Motorola phased down its productionof 64K and 256K NMOS dynamic RAMsin the latter part of 1985 because ofsevere attrition in selling prices. Develop-ment continued on advanced high-performance memories, including a256K CMOS static RAM augmentingthe present 64K CMOS static RAMfamily. Higher density EPROMs alsowere being readied for introduction.

Discrete ExpansionMotorola expanded its discrete productlines and surface-mount packaging port-folio to extend its position as the world'slargest supplier of discrete semiconduc-tors. The power MOSFET (MOS fieldeffect transistor) family grew substantially.More than 100 device types were intro-duced for communications, industrialand military applications, including an RF(radio-frequency) power transistor withthe industry's highest power-handlingcapability, 600 watts at 100 MHz, forapplications such as single-sidebandradio transmitters, nuclear magneticresonator drives and wafer fabricationequipment.

IntheSMARTpower™ line, a technol-ogy that combines CMOS logic with apower transistor, several new standardproducts were introduced and newdesigns for automotive and motor controlapplications were sampled.

Logic and AnalogMotorola expanded its portfolio ofadvanced bipolar and CMOS logiccircuits, including FAST(FairchildAdvanced Schottky Transistor-logic),high-speed CMOS and MECL (MotorolaEmitter-Coupled Logic) 10KH. An olderlogic line, ALS (Advanced Low-powerSchottky) was discontinued, and addi-tional devices were offered in surface-mount packages.

Custom bipolar and MOS circuits wereintroduced for automotive applicationssuch as powertrain control, body elec-tronics, and instrumentation. For thetelecommunications segment, new dedi-cated integrated circuits included a highvoltage CMOS driver/receiver; threepulse/tone dialer devices and severalcustom CMOS circuits for major commu-nications equipment manufacturers.Application Specific ICsIn semicustom circuits, Motorolaannounced its first BiMOS MacrocellArray, a 6,000-gate logic device thatcombines the best features of bipolar andMOS technologies on a single chip.Under an agreement with NCR, Inc.,Motorola began sourcing a three-micronstandard cell library, NCR sourced Moto-rola's HCMOS Macrocell Arrays, and thecompanies began joint development of atwo-micron standard cell portfolio. Firstshipments of the three-micron standardcell family featuring logic, RAM, ROM,analog and microprocessor cells beganin the fourth quarter.

Production began on a line of two-micron HCMOS double-layer metalMacrocell Arrays, including a 4,800-gatedevice. Motorola's Macrocell Array librar-ies were implemented on engineeringworkstations offered by Daisy Systems,Mentor Graphics Corp. and PersonalCAD Systems Inc. MOS semicustomoperations moved to Chandler, Ariz., fromAustin, Texas.

International DevelopmentsIn Europe, a new bipolar process wasimplemented in the Toulouse, France,facility for production of advanced logicand analog devices. More than onemillion units of a custom 8-bit micro-computer, which was developed by theEuropean Design Center in Geneva,were shipped to Europe's leading pro-ducer of "smart cards." These devices,which resemble credit cards, have micro-processors embedded in them.

In Japan, the Aizu Wakamatsu facilitybegan producing several new types ofmicroprocessor, logic and memorydevices, and land adjacent to the facility-was purchased for future expansion.Nippon Motorola Ltd. bought a 45-acresite about 200 miles northeast of Tokyofor a future semiconductor facility. Prod-uct testing capability was expanded atthe Hong Kong facility to permit volumetesting of microprocessors andmicrocomputers.

New Manufacturing GroupSPS consolidated its U.S. integrated cir-cuit fabrication operations to form a neworganization, the Integrated CircuitsWafer Manufacturing Group. Several fab-rication areas were converted to HCMOScapability.

The sector also centralized manage-ment of its research functions, and anexpanded, advanced capability BipolarTechnology Center became operationalin the Mesa, Ariz., facility.

Information Systems Group

ORGANIZATIONS:CodexUniversal Data SystemsInternational

The Information Systems Group (ISG)provides its customers with products tohandle complex data communicationneeds. Despite an industry slowdownduring the year, the group marketed arecord number of new products.

Motorola Computer Systems, Inc., for-merly Four-Phase Systems, Inc., becamepart of the General Systems Group in1985, and its operations are discussedon the following page. The ComputerSystems financial results, however, areincluded with ISG in the followingparagraph.

ISG's overall sales rose 14 percentfrom 1984, while new orders increased 5percent and backlog was down 7 per-cent. ISG had an operating loss, com-pared with a small profit in 1984. The lossincludes special one-time costs associ-ated with a consolidation of Four-Phaseoperations.

CodexNew products from Codex include the2680, the first modem to offer almosttotally error-free transmission at 19,200bits per second (bps) using eight-dimen-sion trellis-coded modulation. The 2680includes integrated network manage-ment and control and an extensive arrayof diagnostics. Codex also introducedthe 2200 Series of Bell-compatible, error-correcting personal computer modemsand the 2300 Series of private-linemodems.

The new 4850/4860 network manage-ment and control systems, designed withthe cooperation of Delta Air Lines, moni-tor and control networks of up to 3,000modems. New local area networking(LAN) products include the 4210 SNAgateway, the 4810 LAN manager, the4010 PC entryway and the 4020 econom-ical asynchronous entryway.

Codex introduced the 6700 Series ofdistributed communications processors,designed to provide customers operating

medium- to large-scale, multi-vendornetworks of 200 to 2,000 terminals withboth statistical multiplexing and packetswitching in a single nodal processor.

The new 6760 is the most powerful ofthese processors in the industry. Each6760 node has a continuous throughputof 40,000 characters per second (cps)and can handle up to 256 channels andfour 64,000 bps links. The 6740 is a mid-range multiplexer with a continuousthroughput of 15,000 cps. It can statisti-cally multiplex up to 64 channels andsupport two 64,000 bps links. The pro-cessors can communicate with Codex's6000 Series of intelligent network proces-sors through the Muxport protocol.

Universal Data SystemsUniversal Data Systems (UDS) intro-duced 16 modems during the year,including two error-correcting modems:the EC201C/D, operating at 2,400 bps,and the EC212A/D, operating at 1,200bps. The new Sync-Up ™ 208 A/B trans-mits synchronous data at 4,800 bps. Withthe appropriate software, it is compatiblewith IBM mainframes. Among higher-speed modems, UDS introduced thepoint-to-point, trellis-coded 14,400 bpsmodem and 9,600 bps Fastpoll™modem.

ISG InternationalNew products from the International Divi-sion include the 650 and 660 intelligentX.25 processors. They enable smallernetwork users (100-500 terminals) to con-struct packet-switched data networksusing the internationally accepted X.25protocol. They also allow users to switchlow-end multiplexers that typically func-tion only point-to-point.

ISG International won major awardsfrom PTTs, the government agencies incharge of national telephone networks,and from overseas customers with exten-sive private data communications net-works. Contracts were signed with theNorwegian, Swedish and JapanesePTTs, as well as S.W.I.FT, an internationaltransactions network serving financialinstitutions in more than 50 countries.

The Codex 4860 centralized network con-trol system for Delta Air Lines handles theautomatic monitoring of more than 3,000locations connected by more than 400communication lines In the United Statesand Canada.

General Systems Group

ORGANIZATIONS:Cellular Group

Cellular Infrastructure DivisionCellular Subscriber Products Division

Motorola Computer Systems, Inc.

The General Systems Group, formed inOctober 1985, combines the CellularGroup and Motorola Computer Systems,Inc., formerly Four-Phase Systems, Inc.The 1985 financial results of the CellularGroup are included in the Communica-tions Sector, and the results of ComputerSystems are included in the InformationSystems Group.

Cellular GroupCellular telephone demand increasedsignificantly during 1985 as Motorolaremained the leader in the highly compet-itive industry. With more than 80 systemseither in service or scheduled for service,Motorola has received more contractsthan any other supplier of cellular sys-tems. Major 1985 contracts included amulti-city award from Metro Mobile CTSand individual city contracts for systemsin New York, Dallas, Philadelphia, Norfolk,Va., Greensboro, N.C., andWilmington, Del.

An award from Petrocom Communica-tions, Inc. calls for a wide-area cellularsystem to serve the petroleum industry inthe Gulf of Mexico. The system will be thefirst to employ satellite links between off-shore cellular sites and onshore switch-ing equipment.

System expansion contracts includeda $22 million award from Cellnet in theUnited Kingdom. Cellnet, the fastestgrowing system in the world, hasattracted more than 25,000 subscribersserved by 100 cell sites in less than oneyear of commercial service.

Motorola was selected to supply thePeople's Republic of China with its first800 MHz cellular system, to be installedin Beijing.

Motorola introduced several new sub-scriber products, including a lower-

priced 900 MHz DynaT-A-C® portabletelephone for use in both North Americaand Europe.

International demand for subscriberequipment also increased because ofnew systems in Hong Kong and Canadaand expansion in Scandinavia, Austria,Korea and Japan.

In November, the International TradeCommission affirmed an earlier U.S.Commerce Department determinationthat Japanese car telephones werebeing sold at less than fair value in theU.S. and ruled that the U.S. cellular indus-try had been materially damaged. Thefinding means that Japanese manufac-turers must post dumping duties rangingfrom 4.77 percent to 106 percent onproducts and subassemblies importedfrom Japan.

In Hong Kong, a Motorola joint venturethat allows the company to participate inongoing revenues as a cellular systemoperator entered commercial service. AMotorola Israel joint venture is expectedto begin service in 1986.

Motorola Computer SystemsFour-Phase Systems, Inc. changed itsname to Motorola Computer Systems,Inc., effective in April 1986, to moreclosely reflect the nature of the compa-ny's business and its working alliancewith Motorola.

While the Computer Systems businesssuffered from the overall slowdown in thecomputer industry, substantial effortswere made to improve operations. Thebusiness restructured itself to reducecosts and organize around product lines.It formed two new product-line businessunits, and introduced several new prod-ucts designed to improve user productiv-ity and open new markets in the officenetwork environment.

A key entry in this area is the BusinessAssistant™ family of office applicationsoftware programs for the Series 2000and 6000 microcomputers. This inte-grated software offering makes the UNIX

operating system much easier to use andmore accessible to the office worker.(UN IX is a trademark of AT&T.)

With the introduction of TransText™, asophisticated communications softwareprogram, Motorola Computer Systemstook a leading role in providing a connec-tion between departmental systems andDISOSS, the IBM distributed office sup-port system. With TransText, users haveaccess to the vast data available in othersystems linked to the DISOSS network.

New systems included the Model 290,an addition to the UNIX-based Series2000 family of microcomputers. TheModel 290 features a Motorola 68010microprocessor and supports up to 16workstations.

Working with the Information SystemsGroup, Computer Systems won a majorcontract to supply the State of California'sDepartment of Social Services with acomprehensive office automation net-work. It will consist of Series 2000 micro-computers, Business Assistant software,Codex local area networks and UniversalData Systems modems.

(left) Dyna T-A'C* portable cellular telephoneIn Hong Kong, where Motorola Is part of ajoint venture that operates the system.

(upper right) New laboratory managementsystem at Children's Memorial Hospital InChicago employs a Series 6000 system fromMotorola Computer Systems.

(lower right) New V.33 modem from UniversalData Systems operates at 14,400 bits per sec-ond and features trellls-coded modulation.UDS Is part of the Information SystemsGroup (page 9).

10

Government Electronics Group

ORGANIZATIONS:Communications DivisionTactical Electronics DivisionAerospace OperationsRadar Operations

Sales for the Government ElectronicsGroup (GEG) increased 13 percent from1984, while new orders advanced 27 per-cent. Backlog was 32 percent higherthan at the end of the prior year.

Operating profits declined from a yearearlier, primarily because of performanceshortfalls on some programs. In addition,the increased level of U.S. governmentaudits and systems reviews resulted inadditional costs, which contributed to thedecline in profits. New orders and salesincreased sharply during the latter part ofthe year.

GEG received several significant con-tracts during 1985. They include:• A $55.7 million follow-on production

contract from the U.S. Navy for targetdetecting devices for the Navy's Stan-dard Missile. This is the largest majorproduction program awarded to GEG'sTactical Electronics Division to date.These types of target detecting deviceshave been in production for 13 years,and represent the group's longest run-ning program. During the year, GEGshipped its 10,OOOth unit to the Navy.

• A $47 million full-scale productionaward from the Army to manufactureFMU-139/B electronic ordnancedevices, which are being produced inan automated facility built in 1985.

• A $27.3 million development awardfrom TRW to provide an engineeringmodel and prototype unit of a high-speed digital baseband processor forNASA's Advanced CommunicationsTechnology Satellite (ACTS), which isdue to be launched in late 1989.

• A $15.3 million development award fromthe National Security Agency for a low-cost secure voice/data telephone termi-nal and a secure cellular mobile radiosystem. Product development is a

Motorola team effort led by GEG, withstyling and user interface developed bythe Communications Sector, modemsdeveloped by UDS, and a custom largescale integration chip set developed byGEG. The product is being designed forhigh-volume production in AlEG'sSeguin, Texas, facility.

• A $12.2 million follow-on productionaward from the Navy to produce addi-tional UHF Demand Assigned MultipleAccess (DAMA) multiplexer systems,representing the definitization of a $28million contract awarded in 1984. Thegroup also received a $14.3 million pro-duction award, which represented exer-cise of an option on a previous contract.In addition, development work contin-ued on the MACS modem, or mini-DAMA, the next generation of DAMAequipment. The smaller version willeliminate the need for a separate radioand will increase the effectiveness ofsatellite capabilities for aircraft andsubmarines.

• An additional $10 million from the U.S.Army to provide modifications and addi-tional equipment for the Joint STARSground station. The award is a follow-onto a $33 million development contractreceived in 1984 for the airborne, radar-based joint service surveillance system.A communications transponder,

designed and built by GEG nearly eightyears ago sent back the first photos of amoving comet, the Giacobini-Zinner. Thetransponder continues to perform flaw-lessly aboard the International CometaryExplorer Satellite launched in 1979.

Equipment developed and producedby GEG provided the major link betweenVoyager 2 and Earth when the spacecraftmade its closest approach to Uranus.Motorola's radio frequency subsystem(RFS) transmitted engineering and scien-tific data as well as still pictures of Uranusobtained by Voyager's cameras. TheRFS also receives messages from Earthand forwards the signals to other on-board equipment.

The Voyager 1 and 2 spacecrafts,launched in 1977, transmitted picturesand data of Jupiter and Saturn in 1979,1980 and 1981 through the Motorolaequipment. Voyager 2 will continuetoward a rendezvous with Neptunein 1989.

(left) These target detecting devices are usedon the Navy's Standard Missile. GEG shippedIts 10,000th unit during 1985.

(upper right) This ground-station equipmentIs part of the Joint STARS airborne, radar-based joint service surveillance system.

(lower right) Motorola Is developing a low-cost secure telephone under a contract fromthe National Security Agency.

12

Automotive and Industrial Electronics Group

ORGANIZATIONS:Automotive ElectronicsDisplay and TerminalsElectronic Appliance ControlsInternational

Automotive and Industrial ElectronicsGroup (AIEG) results were slightly lowerthan a year ago, despite a turnaround ininternational operations. The overalldecline reflects softer market conditionsprimarily in AlEG's non-automotivebusinesses.

Sales were down 2 percent from a yearearlier while new orders declined 3 per-cent. Backlog was approximately thesame as at the end of 1984. The groupcontinued its long-term pattern of profita-bility, although operating profits wereIowerthanin1984.

AIEG continued to invest in high-growth product lines serving the auto-motive, computer/office equipmentand appliance control markets, andexpanded its worldwide customer sup-port and production capabilities. Thegroup opened a vehicular electronicsapplication/systems laboratory nearFrankfurt, West Germany, to serve theEuropean market and plans a similaroperation in Detroit to serve U.S. cus-tomers. A Taiwan manufacturing facilitywas completed with first shipmentsscheduled for the first quarter of 1986.

New Technologies and ProductsDemand in the passenger-car and light-truck market remained at a high levelwhile the use of electronics continued torise. Increased application of engine con-trol systems at Ford Motor Co. andbroader use of AlEG's sensor productson fuel-injected engines at Chrysler Corp.resulted in a high level of activity.

The instruments, engine and sensorsbusinesses received several develop-ment contracts from manufacturers in theautomotive and heavy-vehicle markets.AIEG began developing advanced

recording and monitoring systems fortrucks, and was awarded a significantinstrumentation contract from a farm-equipment manufacturer. The group alsobegan shipping a new line of brushlessalternators that offer up to 160 amps ofoutput, much higher than most other unitsin the marketplace.

Display Systems received initial ordersfor its new very-high-resolution mono-chrome monitor for use in the phototype-setting industry and for its Megapixel™family of ultra-high-resolution monitors.The Megapixel products offer screensizes up to 19 inches, with resolutiongreater than 100 pixels, or dots, per inch.

Terminal Systems received its firstorders from value-added resellers fornew color and monochrome IBM plug-compatible terminals, with productionscheduled for the first half of 1986. AIEGalso began shipping a full line of 3270system-compatible terminals.

The Electronic Appliance Controlsbusiness began volume production ofa new lower-cost midsize control for amajor appliance manufacturer andlaunched production of a microproces-sor-based control for dishwashers. Thebusiness began to shift a majority of itsproduction to the Taiwan manufacturingfacility. Production orders were receivedfor a complete line of microwave ovencontrols with enhanced features for 1986shipment and a new control for a laundryproduct for 1987 shipment.

International OperationsPerformance improved substantially inAngers, France, and Stotfold, England,with both facilities in full production ofautomotive electronics productslaunched during 1984. The group beganmanufacturing cellullar radiotelephoneequipment in Stotfold for the General Sys-tems Group and initiated plans to estab-lish an Asia-Pacific marketing and salespresence in 1986.

Advanced Processes and SystemsAIEG centralized its manufacturing, sup-ply management and computer-inte-grated manufacturing services toenhance its worldwide capabilities. Thereorganization was augmented by heavyinvestments in the group's quality, supplymanagement, material and manufactur-ing processes and systems.

(upper left) Chassis dynamometer at AlEG'svehicular electronics application/systemslaboratory near Frankfurt, West Germany.

(upper right) The Motorola M179 computerterminal, first In a new family of IBM 3270plug-compatible terminals.

(lower left) New microprocessor-basedappliance controls help create anew genera-tion of automatic dishwashers.

(lower right) Mapped ignition moduledesigned for European passenger carseliminates the distributor and breaker pointsrequired In conventional systems.

14

Financial Review

NET DEBT TO NET DEBT PLUS EQUITY*(As of Yearend)

•Total Debt Less Short-Term Investments 26.9Total Debt Less Short-Term Investmentsplus Stockholders'Equity

1981 1982 1983 1984 1985

CAPITAL EXPENDITURES(Millions of Dollars) 7 3 3

'Percent of Sales

1981 1982 1983 1984 1985

Financial Condition1985 was a particularly difficult year froman earnings perspective, thereby chal-lenging our longstanding policy of main-taining a strong balance sheet. Total debtof the company increased to $996 millionfrom $642 million at yearend 1984. Theincreased debt resulted primarily fromthe lower-than-normal earnings coupledwith continued high investment in stra-tegic fixed assets. Net of short-terminvestments, the debt to debt plus equityratio increased to 26.9 percent from 18.0percent at the end of 1984. This ratio is atthe high end of our preferred range andwe will strive to reduce it to a more con-servative level in the year ahead.

The current ratio was reduced from1.83 in 1984 to 1.78 in 1985. Working cap-ital decreased by $77 million to $924 mil-lion, principally due to the large reductionin inventories, as the increase in notespayable was offset by reductions in othercurrent liabilities.

Management believes the companycontinues to have sufficient capitalresources to meet the needs of itsbusinesses.

Debt and Its MakeupDuring 1985 the U.S. commercial papermarket was the principal source of short-term debt. The $491 million commercialpaper debt outstanding at yearend 1985was supported by U.S. backup creditfacilities totaling $729 million, including$345 million of revolving credit agree-ments and $384 million of other creditfacilities.

During the year additional steps weretaken to decrease the percentage of vari-able rate debt on the balance sheet,thereby reducing our exposure to possi-ble increases in short-term interest rates.In May, $100 million in Eurodollar deben-tures were sold, and in July, the equiva-lent of $44 million in notes denominated inEuropean Currency Units were sold atfixed interest rates. A variety of otherinstruments were used to fix the interestrate on an additional $53 million. Overall,while we have reduced the percent of

variable rate debt to total debt, webelieve the dollar amount continues to behigh and will seek ways to reduce it further.

Receivables and InventoriesDespite a variety of factors makingreceivable management difficult in 1985,yearend weeks of receivables were 7.1compared to 7.0 weeks at yearend 1984.The slight increase results primarily froma shift during the year to a greater mix ofcomplex product and systems orders,which tend to have slower customeracceptance and payment. Yearendreceivables totaled $813 million, or $4million less than 1984.

Improvements in inventory manage-ment during the year were more dra-matic, but the potential for additionalprogress remains. Inventory turnover,based on cost of goods sold, increasedto 2.7 turns from 2.3 turns in 1984. Year-end inventory totaled $801 million or $136million less than 1984.

Fixed Asset ExpendituresWhile the absolute level of investment innew fixed assets in 1985 declined from ayear earlier, 1985 still represented a yearof higher-than-average investment, asnew product development continuedunabated. Expenditures for the year were$641 million, or 11.8 percent of sales,compared with record expenditures of$783 million, or 14.2 percent of sales, in1984. As shown in the segment informa-tion on page 25 of this report, the Semi-conductor Products segment continuesto make the highest dollar investment,although slightly lower than a year ago asa percentage of total expenditures.

OperationsInformation on the company's sales,operating profits and assets by productand market segments is shown in Note 8on page 25 of this report. During 1985 asignificant shift occurred in the sales byproduct segment as the semiconductorindustry experienced a sharp downturn,resulting in reduced unit volume andlower selling prices. The Communica-tions Products segment continued to

16

grow and now represents 41 percent oftotal sales. The Information Systems andGovernment Electronics Products alsocontinued a pattern of growth and nowrepresent an increased percentage of thetotal business. Automotive and IndustrialElectronics Products, which is included inthe Other Products segment, maintainedapproximately the same sales volume asin 1984. The Semiconductor Productssegment is expected to resume its long-term growth pattern in 1986 and will con-tinue to be a major contributor to sales.

Operating and net profits of the com-pany were sharply reduced in 1985 pri-marily due to the downturn in thesemiconductor and computer-relatedindustries. Operating profit margins were3.7 percent in 1985 compared with 10.3percent in 1984 and net profits were 1.3percent compared with 6.3 percent in thesame periods. The reduced profit mar-gins resulted primarily from operatinglosses in memory products (part of Semi-conductor Products); Four-Phase Sys-tems (part of Information SystemsProducts); and Tegal Corp. (part of OtherProducts). Automotive and IndustrialElectronics Products continued to oper-ate profitably.

The domestic losses incurred in 1985were carried back to offset incomereported in prior years. The benefit of thiscarryback is reflected in the $27 milliontax credit in 1985.

Information on the impact of inflation onthe company's operations appears onpage 28 of this report.

As noted elsewhere in this report, wesee favorable signs for each of our busi-nesses that should enable us to return toa more acceptable pattern of profitablegrowth later in 1986.

Research and DevelopmentResearch and development expendi-tures, exclusive of government-fundedwork, reached $464 million, an increaseof 9 percent over expenditures in 1984.The increased expenditures, despitereduced sales volume, further empha-sizes our commitment to technological

1985 Net Sales byBusiness Segment(1984 percentages in parentheses)

Communications Products 41% (36)

Semiconductor Products 31% (39)

Information Systems Products 13% (11)

Government Electronics Products 9% (8)

Other Products 6% (6)

leadership. The new products funded bythis effort should be a critical factor inassuring future market success.

Key Financial Legislative IssuesLast year at this time we expressedapproval of the Administration'sannounced intention to seek simplifica-tion and equity in the U.S. tax laws. At thesame time, we expressed concern thatsome of the proposals would be counter-productive to capital formation andthereby reduce the ability of U.S. compa-nies to effectively compete on a globalbasis. The House of Representatives haspassed HR 3838, the Tax Reform Act of1985. While this bill does include certaindesirable provisions, on balance it will bedetrimental to our company and mayreduce its ability to compete in the high-technology markets on a global basis.Specifically, we are concerned about theproposed elimination of the investmenttax credit, lengthened depreciationschedules, and reduced credits forresearch and experimentation expendi-tures. A bill is now under consideration inthe Senate Finance Committee and it isour hope that its version of the tax billand the version formulated by the JointHouse-Senate Conference will includemore acceptable tax provisions for Amer-ican industries thereby enhancing theirability to compete in the world markets.

PROFIT MARGINSQ Operating ONet

1981 1982 1983 1984 1985

RESEARCH AND DEVELOPMENTEXPENDITURES"(Exclusive of Government Funded Work)(Millions of Dollars) 4 6 4

•Percentto Sales 4 2 5•*As defined by SEC

1981 1982 1983 1984 1985

17

Statements Of Consolidated EarningsMotorola, Inc. and Consolidated Subsidiaries, Years ended December 31

(In millions of dollars, except per share data)

Net Sales

Manufacturing and other costs of sales

Selling, general and administrative expense

Depreciation of plant, equipment, and leased equipment

Interest expense, net

Total costs and other expenses

Earnings before income taxes

Income taxes (benefit) provided on earnings

Cancellation of DISC taxes

Income taxes (benefit)

Net earnings

Net earnings per share

Average shares outstanding (in millions)

1985

$5,443

3,406

1,475

441

76

5,398

45

(27)

—

(27)

72

$ .61

119.0

1984

$5,534

3,206

1,475

353

34

5,068

466

117

(38)

79

387

$ 3.27

118.5

1983

$4,328

2,593

1,113

289

24

4,019

309

65

—

65

244

$ 2.09

117.1

See accompanying notes to consolidated financial statements.

Statements Of Consolidated Stockholders' EquityMotorola, Inc. and Consolidated Subsidiaries, Years ended December 31

(In millions of dollars, except per share data)

Common Stock andAdditional Paid-in Capital

1985 1984 1983

Retained Earnings

1985 1984 1983

Balances at January 1,

Stock split (3-for-1)

Net earnings

Stock option plans

Conversions of debentures

Contributions to Employee Stock Ownership Plan

Dividends declared ($.64 per share in 1985, $.61 pershare in 1984 and $.53 per share in 1983)

Balances at December 31,

$834

—

—

6

—

4

_

$844

$581

237

—

16

—

—

_

$834

$515

—

—

26

40

—

_

$581

$1,444

—

72

—

—

—

(76)

$1,440

$1,367

(237)

387

—

—

—

(73)

$1,444

$1,185

—

244

—

—

—

(62)

$1,367

See accompanying notes to consolidated financial statements.

18

Consolidated Balance SheetsMotorola, Inc. and Consolidated Subsidiaries, as of December 31

A s s e t s (In millions of dollars, except per share data)

Current assets

Cash

Short-term investments, at cost (approximating market)

Accounts receivable, less allowance for doubtful accounts (1985, $32; 1984, $29)

Inventories:Finished goods

Work in process and production materials

Future income tax benefits

Other current assets

Total current assets

Property, plant and equipment

Land

Buildings

Machinery

Accumulated depreciation

Property, plant and equipment, net

Equipment leased to others, net

Sundry assets

Total assets

Liabilities and Stockholders' Equity

Current liabilities

Notes payable and current portion of long-term debt

Accounts payable

Accrued liabilities

Income taxes payable

Total current liabilities

Long-term debt

Noncurrent deferred taxes

Other noncurrent liabilities

Stockholders' equity

Common stock, $3 par value.Authorized shares (in millions): 1985, 150.0; 1984, 150.0Outstanding shares (in millions): 1985, 119.3; 1984, 118.8

Preferred stock, $100 par value issuable in series.Authorized shares (in millions): 0.5 (none issued)

Additional paid-in capital

Retained earnings

Total stockholders' equity

Total liabilities and stockholders' equity

1985

$ 19

157

813

187

614

170

149

2,109

81

1,012

2,169

(1,281)

1,981

157

123

$4,370

$ 291

375

455

64

1,185

705

100

96

358

486

1,440

2,284

$4,370

1984

$ 25

143

817

161

776

148

133

2,203

59

872

1,867

(1,056)

1,742

150

99

$4,194

$ 111

436

540

115

1,202

531

102

81

356

478

1,444

2,278

$4,194

See accompanying notes to consolidated financial statements.

19

Statements Of Consolidated Changes In Financial PositionMotorola, Inc. and Consolidated Subsidiaries, Years ended December 31

(In millions of dollars)

Operations

Net earnings

Add (deduct) noncash items:Depreciation:

Fixed assets

Equipment leased to others

Change in deferred taxes

Funds provided by operations

Funds provided by (used for):

Cash

Accounts receivable, net

Inventories

Other current assets

Accounts payable and accrued liabilities

Income taxes payable

Sundry assets

Other noncurrent liabilities

Total funds provided by (used for):

Net funds provided by operations

Investments

Fixed asset expenditures

Disposals and other changes to plant andequipment, net

Net increase in equipment leased to others

Decrease (increase) in short-term investments

Net funds used for investments

Dividends Declared

Total funds provided (required)

Financing

Increase (decrease) in notes payable and current portionof long-term debt

Increase (decrease) in long-term debt

Issuance of common stock

Net funds provided by (used for) financing

1985

$ 72

36675

(24)

489

6

4

136

(16)

(146)

(51)

(24)

15

(76)

413

(641)

36

(82)

(14)

(701)

(76)

$(364)

180

174

10

$364

1984

$387

286

67

(51)

689

0

(162)

(258)

(47)

238

25

(22)

0)(227)

462

(783)

33

(66)

39

(777)

(73)

$(388)

103

269

16

$388

1983

$244

225

64

(28)

505

(4)

(102)

(26)

(8)

197

52

(22)

18

105

610

(406)

14

(60)

(54)

(506)

(62)

$ 42

0)(107)

66

$ (42)

See accompanying notes to consolidated financial statements.

20

Accountants' Report Notes To Consolidated Financial StatementsMotorola, Inc. and Consolidated Subsidiaries

PEATMARWICK

Certified Public Accountants

Peat Marwick Plaza303 East Wacker DriveChicago, Illinois 60601(312)938-1000

The Board of Directors and Stockholdersof Motorola, Inc.:

We have examined the consolidated balance sheetsof Motorola, Inc. and consolidated subsidiaries asof December 31,1985 and 1984, and the relatedstatements of consolidated earnings, stockholders'equity, and changes in financial position for each of theyears in the three-year period ended December 31,1985. Our examinations were made in accordance withgenerally accepted auditing standards and, accordingly,included such tests of the accounting records and suchother auditing procedures as we considered necessaryin the circumstances.

In our opinion, the aforementioned consolidatedfinancial statements present fairly the financial positionof Motorola, Inc. and consolidated subsidiaries atDecember 31,1985 and 1984, and the results of theiroperations and changes in their financial position foreach of the years in the three-year period endedDecember 31,1985, in conformity with generallyaccepted accounting principles applied on a consistentbasis.

January 23,1986

1. Accounting PoliciesA summary of significant accounting policies used in the preparation ofthese consolidated financial statements follows.

Consolidation: The consolidated financial statements include theaccounts of the Company and all majority-owned subsidiaries exceptfor financial subsidiaries, which are not significant and are accountedfor on the equity basis. All significant intercompany accounts andtransactions have been eliminated in consolidation.

Inventories: Inventories are valued at the lower of average cost(which approximates computation on a first-in, first-out basis) ormarket (i.e., net realizable value or replacement cost).

Investment Tax Credits: Investment tax credits are recorded underthe flow-through method.

Property, Plant and Equipment and Equipment Leased toOthers: Property, plant and equipment is stated at cost. Equipmentleased to others is stated at cost, net of accumulated depreciation. Thecost of buildings, machinery and equipment is depreciated generallyby the declining-balance method over the estimated useful lives ofsuch assets, as follows: buildings and building equipment, 5-50 years,machinery and equipment, 2-12 years.

Foreign Currency Translation: The Company uses the U.S. dollaras the functional currency for financial reporting. Gains and lossesfrom translation to U.S. dollars are included in the determination of netincome in the period in which they occur.

2. Income TaxesThe Company provides for income taxes based on earnings reportedfor financial statement purposes. Income tax expense differs fromincome taxes currently payable because of timing differences in therecognition of certain income and expense items for tax and financialstatement purposes.

The components of earnings before income taxes are as follows:

(In millions of dollars) 1985 1984 1983

U.S. and U.S. possessions

Other nations

Total

$(10)

55

$ 45

$327

139

$466

The components of income taxes (benefit) are as follows:

(In millions of dollars) 1985 1984

Taxes currently payable:

United States

Other nations

State income taxes (U.S.)

Total currently payable

Total change in deferred taxes

Income taxes (benefit)

$(42)

34

5

(3)

(24)

$(27)

$ 80

34

16

130

(51)

$ 79

$236

73

$309

1983

$ 68

12

13

93

(28)

$ 65

21

The Company carried back 1985 U.S. pretax operating losses toreduce taxes provided in prior years. For Federal income taxpurposes, investment tax credit carryforwards of $36 million areavailable to reduce future income taxes. If not used, these credits willexpire in 2000. For financial reporting purposes, all of the investmenttax credits were utilized in 1985.

The income taxes (benefit) are different than the amounts computedby applying the statutory Federal income tax rate of 46%. Thedifferences are summarized as follows:

An analysis of the changes in deferred taxes is as follows:

(In million of dollars)

U.S. Federal corporateincome tax expense @ 46%

Increase (decrease) in tax expenseresulting from:

Taxes on earnings in othernations and U.S. possessions

Investment tax credit

Research and experimentationtax credit

State income taxes

Other

Tax expense (benefit), excludingDISC tax cancellation

Cancellation of DISC taxes

Income taxes (benefit)

1985

$21

(10)

(36)

(13)

1

10

(27)

—

$(27)

1984

$214

(43)

(36)

(21)

9

(6)

117

(38)

$ 79

1983

$142

(37)

(24)

(16)

5

(5)

65

—

$ 65

The Tax Reform Act of 1984 cancelled any future obligations forpreviously deferred Federal taxes on certain earnings of DomesticInternational Sales Corporations (DISC). Prior to 1984 the Companyhad provided such deferred taxes, totaling approximately $38 million,on the earnings of its DISC which, accordingly, were reversed in 1984.

Income taxes have not been provided on the undistributed earningsof certain of the Company's foreign subsidiaries amounting to $299million, $285 million and $201 million at December 31,1985,1984and 1983, respectively. It is intended that these earnings will bepermanently invested in operations outside the U.S. Should theseearnings be distributed, foreign tax credits would reduce the additionalU.S. income tax which would be payable.

At December 31,1985, certain non-U.S. subsidiaries had losscarryforwards for financial reporting purposes of approximately$25 million.

The Internal Revenue Service has examined the Federal income taxreturns for Motorola, Inc. through 1981 and the returns have beensettled through 1975. In connection with the audits for the years 1976-1981, the IRS has proposed adjustments to the Company's incomefor those years which would result in substantial additional tax. TheCompany disagrees with most of the proposed adjustments and iscontesting them. In the opinion of the Company's management, thefinal disposition of these matters will not have a material adverse effecton the business or financial position of the Company.

(In millions of dollars)

Investment tax credit carryforward

Completed contract accounting

Cancellation of DISC tax

Depreciation

Deferred installment sales

Earnings of foreign subsidiariesanticipated to be repatriatedin the future

Income from long-term lease of equipment

Tax credits recognized as increases(reductions) in deferred taxes

Inventory valuations

Capitalization of expense items

Other, net

Total change in deferred taxes

1985

$(36)

37

—

2

(5)

4

(6)

19

(24)

(6)

(9)

$(24)

1984

$ —

20

(38)

16

—

7

(10)

(4)

(24)

—

(18)

$(51)

1983

$ -

—

—

5

—

(2)

(5)

(9)

(13)

—

(4)

$(28)

3. Long-Term Debt and Backup Credit FacilitiesLong-term debt at December 31, consisted of the following:

(In millions of dollars)

Floating Rate Debt:Commercial paper supported by revolving credit

commitments from banks

Variable rate redeemable pollution controlrevenue bonds supported by revolving creditcommitments from banks

Foreign notes payable (generally at prevailinglocal rates) due in installments to 1991

Fixed Rate Debt:121/4% eurodollar bonds due December 15,1994

12% eurodollar bonds due December 15,1994

111/2% eurodollar bonds due May 9,1997

8%% ECU bonds due July 16,1992

8% sinking fund debentures due October 1,2007(callable at 105.2% reducing to 100.0% of theprincipal amount)

7%% industrial revenue bonds due January 1,2014

4%% debentures due April 1,1986

Capitalized lease obligations

Other long-term debt

Less current maturities

Long-term debt

1985

$317

28

10

75

12

100

44

62

20

6

26

24

724

(19)

$705

1984

$317

28

20

75

—

—

—

62

20

6

2

7

537

(6)

$531

22

In 1985, the Company issued $100 million in 11 Vz% eurodollarbearer bonds and 50 million European Currency Units (ECU) in 8%%bearer bonds exclusively to foreign investors. During 1985, theCompany issued $12 million in 12% eurodollar bearer bonds uponexercise of warrants detached from the 12V*% eurodollar bearerbonds issued in 1984. Outstanding warrants allow the purchase of anadditional $63 million of 12% bearer bonds. For the amount of warrantsexercised the Company, at its option, can call a corresponding amountof the original 121/4% bonds to maintain a $75 million outstanding debt.

The Company had total backup credit facilities of $1,050 million atDecember 31,1985, including $345 million of revolving creditagreements and $635 million of annually renewable (but withdrawableat any time) lines of credit. Of the available lines of backup creditfacilities $300 million remained unused at December 31,1985. TheCompany pays commitment fees generally of 1/s% of unused lines ofcredit. Borrowings are generally at the market rate.

The aggregate maturities and sinking fund requirements for long-term debt during the next five years are as follows:

(In millions of dollars)

1986

19

1987

81

1988

166

1989

135

1990

4

Maturities and sinking fund requirements in the year 1987 andthereafter include commercial paper, notes payable and revenuebonds supported by revolving credit commitments.

4. LeasesThe Company owns most of its major facilities, but does lease

certain office, factory and warehouse space, land, data processingand other equipment.

Rental expense was $104 million in 1985, $100 million in 1984, and$87 million in 1983.

Minimum future lease revenues as well as the Company's minimumfuture lease obligations, net of minimal sublease rentals, both of whichwere based on noncancellable leases in effect at yearend, 1985 wereas follows:

(In millions of dollars)

Year ending December 31

1986

1987

1988

1989

1990

Later

Future LeaseRevenues

$125

66

26

5

4

—

Future LeaseObligations

$ 69

53

36

24

17

100

5. Employee Benefit and Incentive PlansManagement Incentive: The Company may provide up to 7% of its

annual consolidated pretax earnings, as defined in the MotorolaExecutive Incentive Plan, for the payment of cash incentive awards tokey employees. Insufficient pretax earnings, as defined in the Plan,were available in 1985 for incentive awards, and as such, none wereprovided for. However, some awards may be paid from prior accruals.Amounts of $23 million in 1984, and $13 million in 1983 were providedfor incentive awards.

Retirement Benefits: The Company and certain subsidiaries haveprofit-sharing plans, principally contributory, in which all eligibleemployees participate. The Company contributions to profit-sharingfunds in the United States and other nations, which are generallybased upon percentages of pretax earnings from those operations, asdefined, were $9 million in 1985, $76 million in 1984, and $42 million in1983. No Company contribution for 1985 was provided for the plancovering most domestic employees.

The Company has a noncontributory pension plan covering mostdomestic employees after one year of service. The Company's policyis to fund the accrued pension cost or the amount allowable based onthe full funding limitations of the Internal Revenue Service, if less. Dueto the significant excess of plan assets over accumulated benefits,assumption changes have been made in each of the last three yearswhich reduced the contribution and expense accrued. In 1985, theCompany began amortizing the excess funding of this plan against thenormal costs calculated using the aggregate cost valuation method,thereby reducing pension expense by $8 million in 1985. No pensionexpense was recognized in 1985 compared to $11 million in 1984, and$12 million in 1983.

During 1985, the Company increased the interest rate assumptionfrom 7% to 8% and increased the salary increase assumption from 5%to 5.5%. These changes in assumptions reduced 1985 pensionexpense by $8 million. The Company had reduced the salary increaseassumption to 5% from 6% in 1984. This assumption change reduced1984 pension expense by $3 million.

Actuarial valuation and plan asset data for this plan is set forth below.As of January 1

(In millions of dollars) 1985 1984

Net plan assets available to pay benefits

Actuarial present value of accumulatedplan benefits

Vested accumulated plan benefits

Interest rate assumed

$286

136

120

8%

$273

133

109

7%

During September, 1985 the Company offered an early retirementplan to certain employees. Benefits under this plan are payable fromthe pension plan assets and the present value of these benefits of $11million is included in the present value of the accumulated and vestedplan benefits detailed above.

Certain foreign subsidiaries have varying types of retirement plansproviding benefits for substantially all of their employees. Essentiallyall of the cost of these plans is borne by the subsidiaries. Amountscharged to earnings for the plans were $6 million in 1985, $8 million in1984, and $7 million in 1983.

23

In addition to providing pension benefits the Company providescertain health care benefits to its retired employees. The majority of itsdomestic employees may become eligible for these benefits if theyreach retirement age while working for the Company. The cost ofretiree health care benefits is recognized as expense when claimsare paid and totaled $2 million in 1985. There are no significantpost-retirement health care benefit plans in foreign countries.

Stock Options: Under the Company's employee share optionplans, shares of common stock have been made available for grant tokey employees. The exercise price of each option granted is 100% ofmarket value on the date of grant.

Shares subject to option under these plans during 1985 and 1984are as follows:

(In thousands of shares)

Options outstanding beginning of year

Additional options granted

Options exercised

Options terminated, cancelled or expired

Options outstanding at end of year

Shares reserved for possible future optionsgrants

Total shares reserved

Total options exercisable

1985

5,200

852

(555)

(191)

5,306

1,353

6,659

4,444

1984

4,732

1,207

(676)

(63)

5,200

2,033

7,233

3,662

Options exercised during 1985, including options previously grantedto employees of Four-Phase Systems, Inc. were at per share prices of$8.41 to $43.71. Options outstanding at December 31,1985 were atper share prices of $11.48 to $48.21.

6. Other Financial Data(In millions of dollars)

Interest expense

Interest income

Interest capitalized

Net interest expense

Research and developmentexpenditures

Foreign currency gains (losses)

Accrued liabilities:

Taxes (other than income taxes)

Contribution to employees' pensionand profit-sharing funds

Accrued compensation

Dividends payable

Other

Total accrued liabilities

1985

$100

(19)

(5)

$ 76

464

(7)

$ 65

8

135

19

228

$455

1984

$ 53

(15)

(4)

$ 34

425

2

$ 59

85

159

19

218

$540

1983

$ 39

(11)

(4)

$ 24

336

8

$ 46

52

115

16

169

$398

7. ContingenciesThe Company is a defendant in various suits and claims which arise

in the normal course of business and is obligated under repurchaseand other agreements principally in connection with the financing ofsales.

The Company's Government Electronics Group (GEG) has beensubpoenaed for records in connection with a federal criminalinvestigation. The investigation appears to involve whether theCompany improperly charged labor expenses under certaingovernment defense contracts. In addition, GEG is being audited bythe Department of Defense with respect to government contractpricing, cost allocation and charging matters.

The Company is unable to predict the outcome of the investigationor audits at this time or to estimate the kinds or amounts of claims orother actions that could be instituted against the Company, its officersor employees as a result of such proceedings.

Under government procurement regulations, an indictment couldresult in a government contractor being suspended from eligibility forawards of any new government contracts for one year and a convictionalso could result in debarment from government contracts for one yearor more.

In the opinion of management, the ultimate disposition of thesematters will not have a material adverse effect on the business orfinancial position of the Company.

24

8. Information by Industry Segment and Geographic RegionInformation about the Company's operations in different industry segments for the years ended December 31, is summarized below(In millions of dollars and percent of net sales):

NET SALES OPERATING PROFIT

Communications Products1

Semiconductor Products

Information Systems Products2

Government Electronic Products

Other Products

Adjustments and eliminations

Industry totals

General corporate expenses

Interest expense, net

Other, net

Earnings before income taxes

1985

$2,314

1,728

704

496

356

(155)

$5,443

1984

$2,055

2,240

618

441

370

(190)

$5,534

ASSETS

1983

$1,620

1,612

514

369

324

(111)

$4,328

1985

$243 10.5%

(38) (2.2)%

(17) (2.4)%

39 7.9%

(23) (6.5)%

(4) -

200 3.7%

(79)

(76)

—

$ 45 .8%

1984

$143 7.0%

373 16.7%

1 .2%

52 11.8%

15 4.1%

(13) -

571 10.3%

(71)

(34)

—

$466 8.4%

1983

$ 92 5.7%

205 12.7%

(5) (1.0)%

54 14.6%

35 10.8%

(4) -

377 8.7%

(47)

(24)

3

$309 7.1%

Communications Products1

Semiconductor Products

Information Systems Products2

Government Electronic Products

Other Products

Adjustments and eliminations

Industry totals

General corporate assets

Other, net

1985

$1,471

1,529

598

311

194

(32)

4,071

251

48

1984

$1,425

1,495

592

233

199

(32)

3,912

242

40

1983

$1,053

1,143

470

149

155

(16)

2,954

238

44

Consolidated totals

Communications Products1

Semiconductor Products

Information Systems Products2

Government Electronic Products

$4,370 $4,194 $3,236

FIXED ASSET EXPENDITURES

1985

$132

325

68

55

1984

$170

412

72

36

1983

$119

174

35

31

1985

$ 86

197

31

15

DEPRECIATION

1984

$ 68

150

26

13

1983

$ 57

116

22

11

Expenditures and depreciation for property, plant and equipment do not include amounts for equipment leased to others.11ncludes Cellular Groupincludes Four-Phase Systems

25

Information about the Company's operations in different geographic regions for the years ended December 31, is summarized below(In millions of dollars and percent of net sales):

United States

Other nations

Adjustments and eliminations

Geographic totals

General corporate expenses

Interest expense, net

Other, net

Earnings before income taxes

1985

$5,040

1,818

(1,415)

$5,443

NET SALES

1984

$5,260

1,870

(1,596)

$5,534

1983

$4,104

1,414

(1,190)

$4,328

1985

$113

76

11

200

(79)

(76)

—

$ 45

2.2%

4.2%

—

3.7%

.8%

OPERATING PROFIT

1984

$434

173

(36)

571

(71)

(34)

—

$466

8.3%

9.3%

—

10.3%

8.4%

1983

$290

91

(4)

377

(47)

(24)

3

$309

7.1%

6.4%

—

8.7%

7.1%

ASSETS

United States

Other nations

Adjustments and eliminations

Geographic totals

General corporate assets

Other, net

Consolidated totals

1985

$3,084

1,046

(59)

4,071

251

48

$4,370

1984

$3,031

950

(69)

3,912

242

40

$4,194

1983

$2,291

724

(61)

2,954

238

44

$3,236

Motorola operates predominantly in one industry, electronicequipment and components. Operations involve the design, manu-facture and sale of a diversified line of electronic products, whichincludes, but is not limited to: two-way radio and communicationssystems; semiconductors, including integrated circuits and micro-processor units; data communication and distributive data processingequipment and systems; electronic equipment and industrial electronicproducts. The Company operates manufacturing and distribution

facilities outside the U.S. No single country outside the U.S. accountsfor more than 10% of consolidated net sales or total assets.

Operating profit was computed as total revenues less operatingexpenses which exclude general corporate expenses, net interest andincome taxes. Identifiable assets are those assets of the Company thatare identified to classes of similar products or operations in eachgeographical area, excluding internal receivables. Corporate assetsare principally cash and marketable securities, the corporateadministrative headquarters, and future income tax benefits.Intersegment sales, principally semiconductor components,amounted to $113 million for 1985, $137 million for 1984, and $78million for 1983. Intersegment and intergeographic transfers areaccounted for on an arm's length pricing basis and are consistent withrules and regulations of domestic and foreign taxing authorities.

Sales to U.S. federal government agencies aggregated $780 millionfor 1985, and $696 million for 1984. No other single customer (or groupof customers under common control) accounted for 10% or more of theCompany's sales.

Equity in the net assets of non-U.S. subsidiaries amounted to $657million at December 31,1985 and $613 million at December 31,1984.

26

Five Year Financial SummaryMotorola, Inc. and Consolidated Subsidiaries, Years ended December 31

Operating Results (in millions of dollars)

Net sales

Manufacturing and other costs of sales

Selling, general and administrative expense

Depreciation of plant, equipment, and leased equipment

Net interest expense

Total costs and other expenses

Earnings before income taxes and extraordinary gain

Income taxes (benefit) provided on earnings

Cancellation of DISC taxes

Net earnings before extraordinary gain

Extraordinary gain

Net earnings

Net earnings excluding DISC tax cancellation

Net earnings excluding DISC tax cancellation as a percent of sales

Per Share Data3(in dollars)

Net earnings

Net earnings excluding DISC tax cancellation

Dividends declared

Balance Sheet (In millions of dollars)

Total assets

Working capital

Long-term debt

Total debt

Stockholders' equity

Other Data

Current ratio

Return on average invested capital

Return on average stockholders' equity

Yearend employment (approximate)

Average shares outstanding (in millions)3

$

$

$

$

$

$

$

1985

5,443

3,406

1,475

441

76

5,398

45

(27)

—

72

—

72

72

1.3%

.61

.61

.64

4,370

924

705

996

2,284

1.78

2.4%

3.2%

90,200

119.0

1984

$ 5,534

3,206

1,475

353

34

5,068

466

117

(38)

387

—

$ 387

$ 349

6.3%

$ 3.27

$ 2.95

.61

$ 4,194

1,001

531

642

$ 2,278

1.83

14.5%2

16.4%2

99,900

118.5

1983

$ 4,328

2,593

1,113

289

24

4,019

309

65

—

244

—

$ 244

$ 244

5.6%

$ 2.09

$ 2.09

.53

$ 3,236

894

262

270

$ 1,948

2.07

12.2%

13.5%

88,800

117.1

$

$

$

$

$

$

$

1982

3,786

2,269

1,013

244

48

3,574

212

42

—

170

8

178

178

4.5%

1.621

1.621

.53

2,833

924

369

378

1,700

2.57

9.1%

11.3%

78,800

109.5

1981

$ 3,570

2,086

985

205

35

3,311

259

77

—

182

—

$ 182

$ 182

5.1%

$ 1.70

$ 1.70

.53

$ 2,615

833

427

433

$ 1,409

2.32

11.2%

13.7%

80,800

107.1

NOTES

1. Includes the extraordinary gain.2. Excludes cancellation of DISC taxes.3. Years 1981 through 1983 reflect the 3-for-1 stock split in 1984.

27

Supplementary Information OnThe Effects Of Changing Prices

Statement Of Consolidated EarningsAdjusted For Changing Prices

The following tables present certain information adjusted for theeffects of specific price changes as adjusted for equivalent servicepotential of replacement assets (current cost). Inventories wereestimated based on quantities on hand at yearend 1985 adjusted toreflect current replacement cost. Cost of sales was estimated byadjusting the historical cost of sales to reflect LIFO (last in, first out)inventory valuation. The current cost of property, plant, and equipmentwas estimated by adjusting historical cost by externally generatedindustrial prices indices relevant to the plant and equipment ofMotorola. Depreciation expense was computed assuming straight-linedepreciation using the same indices used to develop the estimatedcurrent cost of property, plant, and equipment.

Motorola, like other companies, has experienced increases in thecost of its production resources. However, the electronic componentsand equipment industry (e.g., semiconductors and semiconductorbased equipment) has been able to accomplish significant productivitygains in its manufacturing processes, which have reduced the costof products sold beyond the increase in the costs of productionresources. Thereby, overtime, selling prices generally decrease.Productivity gains in Motorola's other business have reduced theeffects of increased production costs, resulting in price increases overtime at rates significantly less than general inflation.

This method of calculating current cost data ignores bothproductivity gains available from engineering and labor as well asinflationary pressures in selling, general, and administrative costs.

Year ended December 31,1985(In millions of dollars)

Net sales

Manufacturing and othercosts of sales

Selling, general andadministrative expense

Depreciation of plantand equipment

Interest expense, net

Income taxes (benefit)

Total costs and expenses

Net earnings

Gain from decline in purchasingpower of net payables

Decrease in specific prices (current cost)of inventories and property, plant, andequipment held during the year

Effect of increase in general price level

Excess of increase in general pricelevel over decrease in specific prices

HistoricalCost

$5,443

3,406

1,475

441

76

(27)

5,371

72

CurrentCost

$5,443

3,408

1,475

416

76

(27)

5,348

95

17

(70)

114

$184

At December 31,1985, the estimated current cost of inventorieswas $765 million and the estimated current cost of property, plant andequipment, net of accumulated depreciation was $2,969 million.

The Company uses accelerated methods of depreciation in itshistorical cost financial statements in part to conservatively valueearnings as a result of the increasing prices the Company will have topay to replace these assets. Had depreciation expense under thecurrent cost method been computed using accelerated methods, thedepreciation charged would have approximated $448 million for 1985.

STATEMENT OF CONSOLIDATED EARNINGS ADJUSTED FOR CHANGING PRICESYears ended December 31

(In millions of dollars)

Net sales

Net earnings before extraordinary gain

Gain from decline in purchasing power of net payables

Net assets

Net earnings per share

Cash dividends declared per common share

Market price per common share

Average consumer price index

1985

$5,443

95

17

3,114

.80

.64

38.88

321.9

1984

$5,728

454

10

3,153

3.83

.63

34.93

311.1

1983

$4,669

309

8

2,902

2.63

.58

49.27

298.4

1982

$4,213

244

13

2,785

2.23

.59

32.27

289.1

1981

$4,219

236

20

2,195

2.21

.63

22.75

272.4

28

Quarterly and Other Financial DataMotorola, Inc. and Consolidated Subsidiaries

The principal market for Motorola Common Stock is the New York Stock Exchange. The table below sets forth the high and lowsales price per share for Motorola Common Stock as reported by the New York Stock Exchange and the dividends declaredand paid for the periods indicated.

1985 1984(In millions of dollars, except per share data)

Net sales

1stQtr.

$1,322

2nd Qtr.

$1,372

3rd Qtr.

$1,301

4th Qtr.

$1,448

1st Qtr.

$1,256

2nd Qtr.

$1,416

3rd Qtr.

$1,377

4th Qtr.

$1,485

Gross profit before depreciation

Net earnings (loss)

Net earnings (loss) per share

Dividends:Declared and paid

Stock prices:HighLow

515

41

.35

.16

39.3831.00

519

26

.22

.16

35.2529.50

450

(39)

(.33)

.16

37.3832.38

552

44

.37

.16

40.7529.25

541

78

.66

.13

46.9235.33

615

98

.83

.16

41.7929.25

583

124

1.04

.16

44.2529.50

587

87

.73

.16

38.0031.00

The number of holders of record of Motorola Common Stock on January 30,1986 was 15,055.

Management's Discussion And Analysis Of Financial Condition And Results Of Operations

Operations: The Company's principal operations are theCommunications, Semiconductor, Information Systems, andGovernment Electronic Product segments. Note 8 to the consolidatedfinancial statements indicates each segment's relative contribution tothe Company's overall sales and operating profit for each of the pastthree years.

For the Company as a whole sales declined slightly, while operatingprofits were significantly lower. The Company's semiconductor andcomputer-related businesses suffered through a severe industrydownturn during 1985 that more than offset the record sales andoperating profits in the Communications Products segment. TheCompany carried back 1985 domestic losses to reduce taxes providedin prior years. This carryback is reflected in the 1985 tax benefit of $27million. Net earnings declined significantly and return on averageinvested capital decreased to 2.4 percent compared to 14.5 percentin 1984.

Sales in the Communications Products segment rose 13 percent.Operating profits improved as demand grew for advanced systems.The state and local government and cellular telephone markets led theincrease in demand.

The Semiconductor Products segment sales were 23 percent lowerand the segment had an operating loss compared with record profitsin 1984. The loss was caused by lower selling prices, expensesassociated with workforce reductions, and elimination of certainproduct lines while maintaining high investments in strategic programs.

Information Systems Products segment sales rose 14 percent. Thesegment had an operating loss compared with a small profit in 1984.The loss reflects an industry slowdown, as well as special costsassociated with the restructuring of Four-Phase Systems, Inc.

Government Electronic Products segment sales increased13 percent and operating profits declined because of temporaryperformance shortfalls on some programs and additional costsconnected with U.S. government audits and performance reviews.

Liquidity and Capital Resources: Total debt of the Companyincreased to $996 million from $642 million at yearend 1984 resultingprimarily from the lower earnings coupled with continued highinvestment in strategic fixed assets. Fixed asset expenditures for theyear were $641 million compared with record expenditures of $783million in 1984. Net of short-term investments, the debt to debt plusequity ratio increased to 26.9 percent from 18.0 percent at the end of1984. Note 3 to the consolidated financial statements details thechanges in the Company's long-term debt and Note 8 presents themajority of fixed asset expenditures by segment.

The current ratio decreased from 1.83 in 1984 to 1.78 in 1985.Working capital decreased by $77 million to $924 million, principallydue to the $136 million reduction in inventories reflecting a betterinventory turnover in 1985, as the increase in notes payable was offsetby reductions in other current liabilities.

Management believes the Company continues to have sufficientcapital resources to meet the needs of its businesses.

29

Directors of Motorola, Inc. Elected Officers of Motorola, Inc.

ROBERT W.GALVINWILLIAM J. WEISZJOHN F. MITCHELL

WALLACE C. DOUDRetired; formerly Vice President,International Business Machines Corporation

JOHN T. HICKEYRetired; formerly Executive Vice President andChief Financial Officer, Motorola, Inc.

LAWRENCE HOWERetired; formerly Vice Chairman,Jewel Companies, Inc.

ANNE P. JONESPartner, Sutherland, Asbill & Brennan law firm

M. JOSEPH LAMBERTRetired; formerly Senior Vice President andChief Financial Officer, Kraft, Inc.

STEPHEN L LEVYWALTER E. MASSEYVice President for Research and for Argonne NationalLaboratory, The University of Chicago

ARTHUR C.NIELSEN, JR.Retired; formerly Chairman of the Board and ChiefExecutive Officer, A.C. Nielsen Company

WILLIAM G. SALATICHBusiness consultant and commodity trader,Chicago Mercantile Exchange; formerly ViceChairman, Gillette Company

WALTER B. SCOTTRetired; formerly Vice President, Motorola, Inc.

GARDINER L TUCKERRetired; formerly Vice President for Science andTechnology, International Paper Company

B.KENNETH WESTChairman of the Board and Chief Executive Officer,Harris Bankcorp, Inc.

DIRECTOR EMERITUSELMER H. WAVERINGFormerly Vice Chairman andChief Operating Officer, Motorola, Inc.

CORPORATERobert W.GalvinChairman of the Board andChief Executive Officer 63 45William J.WeiszWee Chairman of the Board andChief Operating Officer 58 37John F. MitchellPresident and Assistant ChiefOperating Officer 57 32Stephen L. LevyExecutive Vice President and GeneralManager, Japanese Operations 64 21Levy KatzirSenior Vice President andGeneral Manager, New Enterprises 53 29

FINANCE'Donald R.JonesExecutive Vice President andChief Financial Officer 55 35

*David W.HickieSenior Vice President andAssistant Chief Financial Officer 52 23

'Richard H.WeiseSenior Vice President and GeneralCounsel . 50 17Kenneth J. JohnsonCorporate Vice President andController 50 14H. Richard KlotzCorporate Vice President and Directorof Taxes 59 10Victor R. KopidlanskyCorporate Vice President andAssistant General Counsel 54 20

INTERNATIONAL OPERATIONS*Carl E. LindholmExecutive Vice President, InternationalOperations 56 18

*C. Travis MarshallSenior Vice President and MotorolaDirector of Government Relations 59 15

PERSONNEL•James DonnellySenior Vice President and MotorolaDirector of Personnel 46 16James D. BurgeCorporate Vice President and MotorolaDirector of Personnel, United States 51 27Joseph F. MiragliaCorporate Vice President and MotorolaDirector of Human Resources 49 7

STAFF•Robert N.SwiftExecutive Vice President andChief Corporate Staff Officer 62 33Jack GermainSenior Vice President andMotorola Director of Quality 59 35

30

Years ofWilliam G. Howard, Jr. Age ServiceSenior Vice President and MotorolaDirector of Research and Development 44 16Keith J. BaneCorporate Vice President andMotorola Director of Strategy 46 12

Toni DeweyCorporate Vice President and MotorolaDirector of Public Relations andAdvertising 57 9

R. James HarringCorporate Vice President and MotorolaDirector of Planning 61 34

Vincent J.RaunerCorporate Vice President forPatents, Trademarks and Licensing 58 15

COMMUNICATIONS SECTORRhesa S. Farmer, Jr.Executive Vice President and GeneralManager, Communications Sector 59 28

George M.C. FisherSenior Vice President andAssistant General Manager,Communications Sector 45 9

'David K. BartramSenior Vice President and GeneralManager, CommunicationsInternational Group 49 25

'Arnold S. BrennerSenior Vice President and Chief,Sector Staff Operations 48 26

'Theodore SaltzbergSenior Vice President and Director,Research and New Businesses 58 30

Arthur P. SundrySenior Vice President and GeneralManager, CommunicationsDistribution Group 57 28

"Morton L. TopferSenior Vice President and GeneralManager, Land Mobile ProductGroup 49 14

*lra W.WalkerSenior Vice President and AssistantGeneral Manager, CommunicationsDistribution Group 62 30

'Raymond S. BalzerCorporate Vice President andGeneral Manager, Special MarketsDivision 59 29

*R. LaVance CarsonCorporate Vice President andGeneral Manager, National MarketsDivision 56 31

Gordon ComerfordCorporate Vice President and SectorDirector of Business Management 49 11

Robert L. HammerCorporate Vice President and SectorDirector of Personnel 50 12

Years of"Kenneth R. Hessler Age ServiceCorporate Vice President andGeneral Manager, DistributionService Group 52 28

'Bradford K. KrohaCorporate Vice President andDirector of Sector Sourcing 59 31

'Jerome C. LeonardCorporate Vice President andGeneral Manager, Paging ProductsDivision 48 24

'Wil l iam J.Mil lonCorporate Vice President andGeneral Manager, Mobile ProductsDivision 52 26

Lawrence R. PaggeotCorporate Vice President andGeneral Manager, Portable ProductsDivision 45 18

'Robert L.WasniCorporate Vice President andGeneral Manager, CommunicationsManufacturing Group 53 29

SEMICONDUCTOR PRODUCTSSECTORGary L. TookerExecutive Vice President and GeneralManager, Semiconductor ProductsSector 46 23

"James A. NorlingSenior Vice President and AssistantGeneral Manager, SemiconductorProducts Sector 43 20

'Thomas D. GeorgeSen/or Vice President and GeneralManager, Integrated Circuits WaferManufacturing Group 45 6

'Gary M. JohnsonSenior Vice President and GeneralManager, Standard Logic and AnalogIntegrated Circuits Group 41 18

Geno OhSenior Vice President and GeneralManager, Discrete and SpecialTechnologies Group 48 23

Charles E. ThompsonSenior Vice President and SectorDirector of World Marketing 56 16

"Andre BorrelCorporate Vice President andGeneral Manager, InternationalSemiconductor Group 49 18

"Gordon C. ChiltonCorporate Vice President andGeneral Manager, AssemblyManufacturing and EquipmentEngineering Division 46 5

William B. DimitroCorporate Vice President and SectorDirector of Personnel 56 18

Years ofWeldon D. Douglas Age ServiceCorporate Vice President andGeneral Manager, SpecialTechnologies 48 25Murray A. GoldmanCorporate Vice President andGeneral Manager, MicroprocessorProducts Group 48 16

"Brian O. HiltonCorporate Vice President andDirector, Geographic and DistributorSales 43 18

"Michael J.PollakCorporate Vice President andGeneral Manager, Bipolar Logic andMemory Integrated Circuits Division 40 17

"Dedy SabanCorporate Vice President andGeneral Manager, Logic, ASIC andMicrosystems Products Division,European Semiconductor Group 54 8

Frederick T. TuckerCorporate Vice President andGeneral Manager, Bipolar AnalogIntegrated Circuits Division 45 20

Kenneth G. WolfCorporate Vice President andGeneral Manager, ApplicationSpecific Integrated Circuits Division 45 20

GENERAL SYSTEMS GROUP"Edward F. StaianoSenior Vice President and GeneralManager, General Systems Group 49 12

GOVERNMENT ELECTRONICSGROUPJames R. LincicomeExecutive Vice President and GeneralManager, Government ElectronicsGroup . 60 35

Edward H.Lange, Jr.Corporate Vice President andDirector of Group Staff 59 28

Robert J.SolemCorporate Vice President andDirector of Group Operations 56 27

AUTOMOTIVE AND INDUSTRIALELECTRONICS GROUP

"Gerhard SchulmeyerSenior Vice President and GeneralManager, Automotive and IndustrialElectronics Group 47 5

"Philip D. GundersonCorporate Vice President andDirector, Group Operations andServices 47 17

'Assumed new title or advanced in ranksince previous annual report.

31

Quality and Productivity

Motorola is dedicated to serving its cus-tomers with products and services ofexcellent value and quality. We buildquality into products, which is preferableto the more costly, less efficient method ofinspecting rejects out. We have been sosuccessful that many of our largest cus-tomers accept our parts at their plantswithout incoming inspections.

Many of our operations have improvedproductivity and exceeded quality goalsseveral times. Here are some examplesof our success:• In the Semiconductor Products Sector,

quality levels improved by 50 percentyear-to-year, with many product linesconsistently recording defect levelslower than 50 parts per million, or lessthan one in 20,000.

• The International Semiconductor Groupinstalled an advanced order entry sys-tem for its European, Japanese andAsia Pacific regions to provide real-time,

New automated test facility in Austin, Texas,enables Motorola to improve microprocessorquality and productivity and reduce overalltesting cycle time through robotics.

global order entry and inventory track-ing capability. The East Kilbride, Scot-land, facility achieved a threefold cycletime improvement for read-only memoryprototype units of microprocessors.

• In the Automotive and Industrial Elec-tronics Group, several assembly andfinal test processes were completelyautomated using state-of-the-art robot-ics and software control, resulting inproductivity, quality and reliabilityimprovements.

• Research and Development magazinehonored the Government ElectronicsGroup as a major contributor to one ofthe 100 most significant technologicalproducts of the year, the AdvancedCommunications Technology Satellite.

• Consumer's Digest magazine selectedMotorola as the 1985 Hall of FameGrand Winner in Electronics/Communi-cations "for pioneering the developmentand implementation of cellular tele-phone technology, which dramaticallyreduced the cost and increased theavailability of mobile communications."

CEO Quality AwardsMotorola recognized the achievements ofits employees by giving eight Chief Exec-utive Office Quality Awards during 1985.Winners were:• Employees of the Communications

Sector, for the design, production andinstallation of the most advanced com-munications system in the history of theOlympic Games.

• Employees of the Military ProductsOperations of the Semiconductor Prod-ucts Sector, for achieving outstandinglevels of quality.

• Communications Sector's NTT PagingTeam in Boynton Beach, Fla., for excel-lence in Pocket Bell pager fieldreliability.

• The Automotive and Industrial Electron-ics Group's Regulator Production Qual-ity Team in Angers, France, forachieving a significant reduction in thelevel of defects.

Mary Jefferson and Steve Kroll, winners of aChief Executive Office Quality Award.

• The statistical process control teams atAlEG's Arcade, N.Y., plant, for helpingto increase quality tenfold and yieldsfivefold in one year.

• The Government Electronics Group'sM735 Projectile Fuze Team, for perfectfinal test results for one year.

• Mary Jefferson and Steve Kroll of GEG'sRadar Operations, for perfect workman-ship on the Mini-Ranger® satellite sur-vey and positioning system program.

• Joan Whiteaker, of the Bipolar I waferfabrication area of the SemiconductorProducts Sector, for 78 weeks of perfectmask alignments.We also recognized the achievements

of our suppliers through the CorporateQuality Supplier Award for Excellence.Winners in 1985 were Air Products andChemicals Inc., which supplies industrialand specialty gases to the semi-conductor industry, and AVX Corp., asupplier of multilayer ceramic capacitors.

New Management magazine summa-rized our dedication to quality when itgave Motorola its annual award as "thebest-managed company in America"because of "unswerving dedication toproduct quality, customer service,employee development and a steadfastcommitment to innovative and creativerisk-taking."

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Motorola Worldwide Motorola Products

Major facilities in:Australia

MelbourneCanadaOntario

Brampton; North YorkCosta Rica

GuadalupeFrance

Angers; ToulouseHong Kong

KowloonIsrael

Tel AvivJapan

Aizu Wakamatsu; TokyoKorea

SeoulMalaysia

Kuala Lumpur; Penang;Seremban

MexicoGuadalajara; Leon;Mexico City

PhilippinesManila

SingaporeSwitzerland

GenevaTaiwan

Chung-LiUnited Kingdom

Basingstoke; East Kilbride;Stotfold

United StatesAlabama

HuntsvilleArizona

Chandler; Mesa;Phoenix; Scottsdale;Tempe

CaliforniaCupertino; Novato

FloridaBoynton Beach;Fort Lauderdale

IllinoisArlington Heights; FranklinPark; Schaumburg

IowaMount Pleasant

MassachusettsCanton; Mansfield

MissouriJoplin

New MexicoAlbuquerque

New YorkArcade

TexasAustin; Fort Worth;Seguin

Puerto RicoVega Baja

West GermanyMunich; Taunusstein

Communications SectorBase stationsClosed-circuit television systemsCommunications control centersComponent productsDigital voice-protection systemsElectronic command and control systemsHealth care communications systemsInformation display systemsMicrowave communications systemsMobile and portable FM two-way radio communications

systemsMobile/portable data communications systemsPortable data terminalsRadio paging systemsSignaling and remote control systemsTest equipment

Semiconductor Products SectorControl circuitsCustom and semicustom semiconductors

Macrocell Arrays, standard cellsData conversion circuitsFiber optic active componentsField effect transistorsIndustrial control circuitsInterface circuitsManufacturing Automation Protocol (MAP) productsMicrocomputer board-level productsMicrocomputer systemsMicroprocessors and microcomputersMicrowave devicesMOS and bipolar analog ICsMOS and bipolar digital ICsMOS and bipolar memoriesMotor control circuitsMPU development system hardware and softwareOEM operating systems (SYSTEM V/68,™

VERSA™dos)Operational amplifiersOptoelectronics componentsPower supply circuitsPressure and temperature sensorsRectifiersRF power and small signal transistorsSMARTpower™ productsTelecommunications circuitsThyristorsTMOS™ and bipolar power productsVoltage regulator circuitsZener and other diodes

Information Systems GroupCommunications processorsData network analyzers/emulatorsDigital service/channel service unitsElectronic data switchesIntelligent terminalsLeased-line modemsLimited distance modemsLocal area networksModemsMultiplexersNetwork control and management systemsOEM modem cardsSwitched network modemsSystem processorsTechnical control facilitiesVideo operator stations

General Systems GroupCellular mobile and portable telephone systemsConventional car telephone systemsCellular mobile and portable subscriber productsElectronic Mobile Exchanges (EMX)High-density cellular base stationsIMTS car telephones

Low-density cellular base stationsMicrocomputer systems and peripheralsMinicomputer systems and peripheralsSoftware for distributed data processing and office

information applications;Application developmentCommunicationsData entryElectronic mailGraphicsHost-emulationInquiry retrievalInteractive communications to multiple

mainframesMicro-to-mainframe linksOffice support servicesPC connectivityRelational data base managementReport generationSpreadsheet analysisTransaction processingWord processing

Government Electronics GroupAntenna and microwave systemsBattlefield management systems (Joint STARS)C3I systemsCountermeasures systemsDrone command and control systemsElectronic defense systemsElectronic fuze systemsElectronic positioning and tracking systemsFixed and satellite communications systemsIntelligent display terminals and systemsMissile and aircraft instrumentationMissile guidance systemsSatellite data systemsSatellite power electronicsSatellite survey and positioning systemsSecure communicationsSurveillance radar systemsSurvival transceiversTactical communicationsTracking and command transponder systemsVideo processing systems and products

Automotive and IndustrialElectronics GroupAutomotive and industrial sensorsCRT display monitors, color and monochrome (5" to

23")Data and graphics terminals and subsystemsElectronic appliance controlsElectronic and electromechanical instrumentationElectronic engine controls (gasoline and diesel)Electronic motor controlsIgnition systemsTelecommunications equipmentTransmission controlsVehicle charging systemsVehicle monitoring and recording systemsVehicle theft deterrent systemsVoltage regulators

New EnterprisesDeposition equipment for the semiconductor industryEtching equipment for the semiconductor industryFactory automation computer systemsSemiconductor wafer fabrication automation

equipmentSoftware and hardware for automation of hard disk

factoriesSoftware and hardware for hospital intensive care unitsSupervisory Control Data Acquisition (SCADA)

systems

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(M) MOTOROLA INC.

Corporate OfficesMotorola Center1303 E. Algonquin Rd.Schaumburg, 111.60196Phone:(312)397-5000

Motorola is an Equal EmploymentOpportunity/Affirmative Action Employer

Motorola and @)are registeredtrademarks of Motorola, Inc.