This commentary should be read in conjunction with the Consolidated Financial Statements and Notes, presented on pages F-12 - F-25 of this Proxy Statement, for a full understanding of Motorola's financial position and results of operations.

In accordance with Rule 14a-3(c) under the Securities Exchange Act of 1934 (the "Exchange Act"), as adapted to the "Summary Annual Report" procedure, the information contained in the following commentary and consolidated financial statements and notes is provided solely for the information of stockholders and the Securities and Exchange Commission. Such information shall not be deemed to be "soliciting material" or to be "filed" with the Commission or subject to Regulation 14A under the Exchange Act (except as provided in Rule 14a-3) or to the liabilities of Section 18 of the Exchange Act, unless, and only to the extent that, it is expressly incorporated by reference into the Form 10-K of Motorola, Inc. for its fiscal year ending December 31, 1996.

MOTOROLA, INC.
1996 COMPARED WITH 1995

Sales increased 3% to $28.0 billion from $27.0 billion in 1995. International market sales, as measured by the locale of the end customer after internal Motorola sales eliminations, represented 58% of total sales in 1996, compared with 59% in 1995. The highest regional growth rates were achieved in Latin America and the United States while declines occurred in the Japan, Europe, Asia Pacific and China markets. The Company believes the global economic outlook is healthy, especially in emerging markets such as Latin America and Asia. The Company also expects to see balanced growth in the developed world.

At the end of 1996, the Semiconductor Products segment began to experience an improved pattern of orders and sales versus the rest of 1996 as the worldwide semiconductor industry entered a cyclical rebound. However, improved year-over year financial results may not be evident until later in 1997. Many of the factors that affected certain Company businesses should continue to have an adverse impact early in 1997. During 1997, the Company plans to continue investing in programs that create platforms for future growth, such as IRIDIUM® and flat-panel displays, as well as in Motorola core technology businesses. It is expected that, as these new products enter the Company's revenue base, profit margins will be relatively lower until markets mature and manufacturing economies of scale develop to reduce unit costs.

Segment operating profits were $2.3 billion in 1996 compared with $3.2 billion in 1995. The main factor contributing to the decline in earnings and slowdown in sales growth in 1996 was the recession in the semiconductor industry. Other factors included product deficiencies in certain segments of the cellular telephone and modem businesses, slower sales in the U.S. paging business in the fourth quarter, and their impact on related component products such as rechargeable batteries.

In addition, restructuring costs and unusual charges, related to various asset writedowns and strategic decisions to end certain technology development programs that no longer offered the growth potential to justify further investment, resulted in a combined negative impact to pre-tax earnings of more than $150 million in the fourth quarter. These actions created a reinvigorated process to discontinue those development programs that have not lived up to their promise, while further reducing costs in existing businesses that are not achieving adequate profitability, and refocusing investments where Motorola possesses, or is cultivating leadership core competencies.

Net earnings in 1996 were $1.15 billion, or $1.90 per fully diluted common and common equivalent share, compared with $1.78 billion in 1995, or $2.93 per fully diluted common and common equivalent share. Net margin on sales was 4.1%, compared with 6.6% during 1995.

Motorola's selling, general and administrative expenses were 17% of sales both in 1996 at $4.7 billion and 1995 at $4.6 billion. By comparison to 1995, the difference in dollars resulted from increases in normal operating expenses and the restructuring and unusual charges mentioned earlier. These increases were largely offset by lower incentive compensation payments to employees that resulted from the decrease in Company profits.

Depreciation expense increased 20% for 1996 compared with 1995 due to increased depreciation associated with new semiconductor manufacturing capacity added primarily in 1995 and early 1996. Depreciation expense is expected to increase in 1997, but at a slower rate than in 1996. This reflects the reduction in fixed asset expenditures in 1996. Fixed asset expenditures for 1996 were $3.0 billion, compared with $4.2 billion in 1995. This decrease resulted primarily from selective deferral of manufacturing capacity expansion, primarily in the Semiconductor Products segment. Fixed asset expenditures for 1997 are expected to be flat.

The effective tax rate for 1996 of 35% compared favorably to the 1995 and 1994 rate of 36%. The Company currently expects an effective tax rate of 35% during 1997.

As of January 1, 1997, the Company adopted Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities" and Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SOP 96-1 provides authoritative guidance on specific accounting issues that are present in the recognition, measurement, display, and disclosure of environmental cleanup liabilities. Statement No. 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The impact of the adoption of these accounting standards on the Company's financial position and results of operations is not expected to be material.

In recent years, a large portion of the Company's net sales, operating profits and growth have come from its international operations. As a result, future Company business activities and financial results could be significantly affected by the stability and policies of non-U.S. governments, particularly as they relate to prevailing social and economic conditions, inflation rates, monetary fluctuations, balance of payments, non-U.S. exchange rates or trade restrictions and prohibitions.

1995 COMPARED WITH 1994

Sales increased 22% to $27.0 billion from $22.2 billion in 1994. International market sales, as measured by the locale of the end customer after internal Motorola sales eliminations, represented 59% of total sales in 1995, compared with 53% in 1994. The highest regional growth rates were achieved in China, Asia-Pacific, Europe, Japan, and Latin America.

Segment operating profits were $3.2 billion in 1995 compared with $2.9 billion in 1994. During 1995, the Company's results were principally influenced by three trends: increasing worldwide price competition in the Company's wireless communications businesses; a moderating growth rate in the United States cellular subscriber base and, to a lesser extent, in Europe; and costs and inefficiencies resulting from the Company's addition of major elements of new manufacturing capacity in its semiconductor business.

Motorola's selling, general and administrative expenses during 1995 were $4.6 billion or 17% of sales, compared with $4.4 billion or 20% of sales in 1994. By comparison with 1994, expenses during 1995 included a significantly lower level of costs resulting from the Company's ongoing evaluation of its operations, organizational structure and asset valuations.

Net earnings in 1995 were $1.78 billion, or $2.93 per fully diluted common and common equivalent share, compared with $1.56 billion in 1994, or $2.65 per fully diluted common and common equivalent share. Net margin on sales was 6.6%, compared with 7.0% during 1994.

MOTOROLA, INC. SEGMENTS

The following commentary should be read in conjunction with the 1996 financial results of each reporting segment as detailed in Note 7, "Information by Industry Segment and Geographic Region" of the Consolidated Financial Statements and Notes in this Proxy Statement.

GENERAL SYSTEMS PRODUCTS

The General Systems Products segment primarily designs, manufactures, distributes, installs, and services cellular infrastructure equipment and cellular telephone subscriber units. The Motorola Computer Group, within this segment, develops, manufactures, sells, and services multi-function computer systems and board level products, together with operating systems and system enablers.

Segment sales advanced 6% to $11.3 billion, orders rose 15% and segment operating profits were lower. Sales increased over 1995 due to increased unit volume, partially offset by declining sales prices, competitive pressures, and product deficiencies in certain market segments. Overall, sales also were affected by a slowing growth rate in the cellular subscriber base in the United States.

For 1996, the Cellular Subscriber Sector (CSS), formerly the Cellular Subscriber Group, sales were slightly lower but orders were higher. The Company began to see signs of improvement in the cellular phone business during the third and fourth quarters of 1996 primarily from the introduction of leadership digital phone products. Total unit volume shipments of the Global System for Mobile Communications (GSM) phone category rose steadily throughout each quarter in 1996.

Throughout 1996, CSS debuted a variety of new and innovative wireless communications products. In January, CSS unveiled the StarTACTM Wearable Cellular Telephone, the world's smallest and lightest Advanced Mobile Phone System (AMPS) cellular phone commercially available. Shortly after, an Extended Total Access Communication System (ETACS) version of the StarTAC phone was announced. Mid-year, CSS announced its StarTACTM 6000 Cellular Telephone, a mid-tier featured and lower priced addition to its AMPS wearable phone family. Later in the year, CSS followed with an announcement of its GSM StarTAC digital cellular telephone, the world's lightest and smallest phone for GSM networks.

Other product announcements included the first GSM cellular phone to provide Chinese character short messaging and the commercial availability of the Personal Phone Series® 2 cellular phone that can also be used as a cordless phone at home or at work. The latest version of the Easy Mobile Office data product debuted, which includes the MicroTAC® International 8700 GSM phone and the CELLectTM 2 PC (personal computer) card offering throughput of up to 36,000 bits per second. Using the Easy Mobile Office data solution, the phone may be conveniently connected to a user's laptop computer to send fax, data and e-mail messages.

Additional highlights included: commercial availability of the MicroTAC® SC-720 phone for Code Division Multiple Access (CDMA) networks. Also announced was the Micro Digital M75TM phone, the lightest phone available for Time Division Multiple Access (TDMA) networks in North America. This dual-mode phone supports short message services, a pager-like feature with a scrolling display, and can be used on TDMA digital systems or AMPS analog systems. CSS also announced development of a GSM cellular phone which enables consumers to send and receive cellular telephone calls and faxes, and e-mail messages and to access the Internet, all in a single, integrated unit.

The MicroTAC SelectTM 3000 phone, a new addition to Motorola's GSM digital product portfolio for the 1.9 gigahertz U.S. Personal Communication Service (PCS) market was unveiled in the third quarter.

The segment's Cellular Infrastructure Group (CIG) sales and orders were higher. In 1997, CIG will become part of the newly formed Cellular Networks and Space Sector. CIG sales and profit performance include large system orders which increase the potential for volatility in the timing of revenue, profit and order recognition during any particular period. Customers are looking to equipment vendors as one additional source of funding, and in some cases CIG is furnishing or guaranteeing some financing for customers.

CIG established itself as a leader in CDMA technology by deploying CDMA networks in Hong Kong and 14 other markets. Motorola became the first company to incorporate short message service in its CDMA digital networks and was the first to win a CDMA PCS contract internationally. CIG also deployed WiLL® systems in over 10 countries including Hungary where CIG has provided the capacity to support more than 100,000 subscribers on wireless local loop systems.

The Motorola Computer Group (MCG) sales and orders increased over the prior year. Growth was attributed to continuing strength in the Group's Embedded Computing Businesses and the successful launch of the StarMaxTM line of Mac-compatible desktop computers using PowerPC® 603e and 604e microprocessors compatible with the Mac OS® operating system. MCG reached an agreement with Apple Computer, Inc. to license the Mac OS® operating system. The agreement allows the group to sub-license the Mac OS software with its motherboards and private-label systems to the original-equipment manufacturing marketplace. Motorola began selling PowerPC Platform desktop systems based on Mac OS software, and used its joint venture with Panda Electronics Group to distribute systems compatible with Mac OS systems in China. The group also introduced a new generation of VME (Versa Module Eurobus) processor boards that use the PowerPC 603 and PowerPC 604 microprocessors. During December 1996, MCG also announced a shift in their product directions away from supporting Microsoft®'s Windows NTTM operating system on PowerPC, beginning with Windows NT version 5.0.

SEMICONDUCTOR PRODUCTS

The Semiconductor Products segment designs, manufactures and distributes a broad line of discrete semiconductors and integrated circuits, including microprocessors, RF (radio frequency) devices, microcontrollers, digital signal processors, memories and sensors.

Segment sales declined 8% to $7.9 billion, orders were down 22% and segment operating profits were lower primarily due to a recession in the semiconductor industry. Excess supply of semiconductors caused by lower demand and increased capacity drove average selling prices down in 1996. All businesses experienced declining prices, with DRAMs (dynamic random access memory) being the most severely impacted.

The segment's device portfolio includes integrated circuits and discrete products, with a 1996 sales mix of 30% logic and analog, 28% microcontrollers, 18% discretes, 13% microprocessors and 11% memories. The end market sales mix in 1996 was 33% to communications, 17% to automotive, 16% to industrial, 13% to personal computer/workstation, 11% to consumer electronics and 10% to computer (other than PC) and computer peripheral segments. The geographic sales mix in 1996 was 49% to the Pan-American region, 24% to the European region, 18% to the Asia-Pacific region and 9% to Japan. Motorola internal business units consumed 20% of the segment's product output in 1996.

During 1996, the business groups results within the segment were as follows: the Microcontroller Technologies Group experienced higher sales and lower orders; the Logic and Analog Technologies Group, the Communications, Power and Signal Technologies Group, the Communications and Advanced Consumer Technology Group and the Microprocessor and Memory Technologies Group all experienced lower sales and orders.

The Company believes that the semiconductor industry may have reached the bottom of this recessionary cycle as semiconductor products began to experience a sequential quarterly increase in orders and sales during the fourth quarter versus the third quarter of 1996. Year-to-year industry order growth and revenue growth comparisons are likely to remain negative during the first half of 1997. Although the rates of decline should lessen, this is expected to continue to place pressure on Motorola semiconductor profitability, as the backlog has decreased significantly from a year ago. Even when order and revenue growth begin to increase on a year-to-year basis, it is expected that significant underutilized capacity within the industry will remain. As a result, the Company does not expect any major improvement in average selling prices in 1997. This translates into an expectation of a modest recovery for both the industry and Motorola's semiconductor business in 1997. Given those expectations, a return to a double-digit operating margin for the full year of 1997 for the Semiconductor Products segment does not appear to be achievable.

The Semiconductor Products segment implemented a range of cost reduction and containment actions throughout 1996 to address the market slowdown. These actions included halting building expansion and new construction as well as reducing manufacturing equipment purchases, headcount, work schedules and manufacturing run rates. The segment phased down pilot production at the COM 1 start up facility in Phoenix and on one of the wafer production lines in East Kilbride, Scotland. Construction was postponed for the CMOS (Complementary Metal Oxide Semiconductor) wafer fabrication facility announced in 1995 for Richmond, Virginia.

The segment continues to make strategic investments, although at decreasing levels, in new capacity and advanced technologies to meet the projected long-term demand for semiconductors on a global scale. The segment believes that these investments are setting the stage for its long-term growth. Construction continues on the MOS 17 SMARTMOSTM facility in Tianjin, China. The segment also is gradually increasing production at an expansion at MOS 9 in East Kilbride, Scotland, for MOS (Metal Oxide Semiconductor) digital-analog and high performance microprocessor (MPU) products. Motorola and Siemens entered into an agreement to construct and operate a jointly owned facility in Richmond, Virginia to manufacture next generation 64-megabit DRAMs. First production is expected in mid-1998.

In 1996, the segment successfully used PowerPC® MPUs as the technology drivers for high performance computing applications, leveraging PowerPC and other core architectures to develop an array of embedded processors that address a wide variety of price/performance points and end uses. Eight new PowerPC chips were introduced, including the industry's highest performance MPUs for the volume desktop and portable computing markets, with Power PC 603e and 604e chips at speeds of 240 megahertz (MHz). Numerous design-ins for embedded applications of PowerPC cores included the communications, high-speed data internetworking and digital consumer/multimedia markets. A PowerPC-based MPC801 chip will power Mitsubishi's DiamondWebTM Internet TV. Bay Networks chose the MPC860 PowerQUICCTM chip for its next generation fast ethernet network management modules. Diba Inc. will use the MPC860 family to power information appliances, and Samsung chose it to power Internet televisions for Korean, Japanese and U.S. consumers. Telecom applications announced for the MPC860 family include asynchronous transfer mode (ATM) line cards, integrated services digital network (ISDN) protocol terminators, smart Ethernet hubs, and T1 and E1 line card controllers.

For wired communication networks, the segment announced Motorola's selection to provide a new cell processor to Newbridge Network Corporation for ATM switches, and debuted a single-chip ISDN transceiver for European markets. Motorola also introduced an Asymmetric Digital Subscriber Line (ADSL) transceiver that enables end users to use existing copper phone lines to access data 600 times faster than today's analog modems. New RF products included submicron bipolar technology for personal communication system base stations, and many new devices for cable television applications, such as optical fiber systems and amplifiers.

The ColdFireTM variable-length RISC (Reduced Instruction Set Computer) architecture also is contributing to the segment's focus on high-growth technologies for a variety of growing market segments. New ColdFire chips were introduced for high volume, cost-sensitive uses such as data storage, imaging, digital video disks, interactive cable set-top boxes and satellite systems. For imaging customers, the segment formed a strategic alliance with Peerless Systems Corporation to allow Motorola to integrate ColdFire microprocessors with Peerless imaging technology.

Shipments of nearly one-half billion 68HCO5 MCUs (microcontroller units) in 1996 helped Motorola remain the world's leading MCU supplier. The segment continued to expand its 8-, 16-, 32- and 64-bit portfolios. Introductions included a new family of 16-bit, high performance, low voltage MCUs and an erasable, programmable read-only-memory (ROM) capability on a one-time-programmable (OTP) 8-bit device for use in low-cost number storage and keyboard interrupt applications. In the digital signal processor (DSP) arena, the segment announced a new DSP architecture targeted for low-cost markets.

Smartcards also are a growing market for semiconductors, with applications ranging from financial (electronic purse), personal identification (health cards), communication (cellular phone access) and transportation (toll payment for public transportation). As a leading supplier of MCUs for smartcards, the segment unveiled new "fast crypto" chips that combine industry leading encryption speed and high levels of data security. The segment also announced the development of the first smart microcontroller that allows full implementation of both contact and contactless applications.

New products introduced in the fast static random access memories (FSRAMs) included four pipelined modules designed for level two (L2) cache applications in desktop systems using Intel Corp.'s Pentium® MPUs, two products for digital signal processor applications, and new high-performance BurstRAMTM chips for workstation, server, personal computing, high-speed networking and multimedia. A highlight for environmental and industrial applications was availability of the segment's first chemical sensor family. The carbon monoxide detection sensor was debuted in October and was the first silicon-based chemical sensor on the market.

The segment addressed energy-management opportunities and lowpower challenges in various market segments with a variety of power products. These included introduction of the VersaPowerTM family of hybrid power modules for use in motor drives, and PowerLuxTM insulated gate bipolar transistors (IGBTs) for use in compact fluorescent lamp converters. The segment also continued to be the world's number 1 semiconductor supplier to global automotive manufacturers and announced the TouCANTM series of MCUs for integrated Controller Area Network (CAN) capabilities.

LAND MOBILE PRODUCTS

The Land Mobile Products segment is primarily comprised of the following business groups: Radio Network Solutions, Radio Products, iDENTM, or Integrated Digital Enhanced Network, and Radio Parts and Services. The segment designs, manufactures and distributes analog and digital two-way radio and enhanced communication products and systems for applications worldwide, from on-site to wide area communications.

Segment sales rose 11% to $4.0 billion and operating profits were higher. Orders increased 16% and were higher for both the segment's traditional analog products and its newer digital systems products. Orders for iDEN equipment were up significantly as more than 250,000 subscribers were added to iDEN systems around the world during 1996. In the segment's other businesses, demand was greater for both large advanced systems and analog portable and mobile two-way radios.

The segment experiences worldwide competition for its products including factors such as price, product features, product performance, product quality, delivery, service, and systems quality and availability. Land Mobile Products segment sales and profit performance include large system orders which increase the potential for volatility in the timing of revenue, profit and order recognition during any particular period. Customers are looking to equipment vendors as one additional source of funding, and in some cases LMPS is furnishing or guaranteeing some financing for customers.

During 1996, the Radio Network Solutions Group (RNSG) experienced increased sales and orders. RNSG introduced its first conventional two-way radio system compliant with the Project 25 U.S. digital standard in 1996. The system will be configured for single site or wide area, and simulcast or voting systems. Also during 1996, on the Channel Island of Jersey in the United Kingdom, Motorola initiated the world's first trial of radio communications equipment compliant with the new Trans European Trunked Radio (TETRA) Standard. RNSG announced its line of TETRA products with the DimetraTM system family and was awarded the first contract for TETRA equipment for the new Gardermoen Airport in Oslo, Norway.

The LTS 2000TM portable and LCS 2000TM mobile two-way radios were introduced for SMARTNETTM II trunking systems. These new radios provide a variety of customers, including construction, utilities and public safety, with advanced trunking features. The new VRM600TM mobile packet radio modem contains both a data modem and radio in a compact package and provides the wireless connection between in-vehicle data terminals and an organization's host computer. The new XTS3000TM portable offers more functions and features in a more compact design than the prior generation. Featuring a full alphanumeric keypad, the XTS3000 portable operates in conventional, SMARTNETTM, SECURNET® and SmartZone® communication networks.

The new COMTEGRA® console also was introduced to provide customers in many market segments the ability to control communications functions such as two-way radio, paging and telephone from a compact work station.

In 1996, the Radio Products Group (RPG) experienced higher sales and orders. RPG announced the low-power Talk AboutTM portable two-way radio for consumer markets in the U.S. It operates on channels in the Family Radio Service, which does not require users to obtain a license.

New portable and mobile two-way radios meeting the market-specific requirements for different regions of the world were introduced for on-site and wide-area industrial, government and commercial applications. For European countries, the GP600 portable and GM600 mobile were introduced for use on shared trunking systems and the GP900 and 1200 series of portables meet more stringent industrial and government market specifications and requirements. The GTXTM portable was designed for use on shared trunking systems in the U.S. and Latin America.

The HandiCom portable for European markets and the PacerTM portable for Asian markets were designed to meet the unit-to-unit and on-site needs of small business users and operate on specially designated frequencies with simplified licensing. Other new products included the GP350TM and GM350 portable and mobile series for U.S. and European markets and the GP68 portable for Asian markets.

For 1996, iDEN sales and orders increased significantly. Nextel Communications, Inc. placed orders for more than $500 million of iDEN infrastructure and subscriber equipment as a part of the continued rollout of its U.S. network. Major orders for a new iDEN system were received from Movilink in Colombia and from Infocom, a wireless system operator in the Philippines. Southern Communications in the U.S., Clearnet Communications, Inc. in Canada, and Movicom in Argentina launched service in 1996 and have placed system expansion orders. IDEN service in Japan was expanded to include the Tokai region in addition to Tokyo and Osaka and the iDEN system in Israel also was expanded. Singapore Technologies launched commercial service on their iDEN system and construction commenced on the first iDEN system in Fujian, China.

Motorola introduced an optional software enhancement to its iDEN technology. Known as "iDEN 3 to l," it provides premium audio quality for telephone interconnect communications. Several new iDEN radios also were introduced during the year. The i370 pocket size portable integrates the instant conferencing and wireless intercom of two-way radio communications with telephone interconnect and alphanumeric paging. The r370 portable, designed to withstand extreme environmental conditions, such as blowing rain, humidity, dust, shock and vibration, integrates the same communications services as the i370 pocket phone. The i280 portable is a compact, flip handset that integrates full-duplex telephone interconnect and alphanumeric paging service.

For the Radio Parts and Services Group, sales declined slightly from 1995. The decline was attributed to the sale of Motorola-owned service shops.

MESSAGING, INFORMATION
AND MEDIA PRODUCTS

The Messaging, Information and Media Products segment businesses are primarily comprised of the Messaging Systems Products Group (formerly the Paging Products Group), the Information Systems Group, the Wireless Data Group, and also includes newer businesses such as the Multimedia Group, the Lexicus Division, and the Platform Software Division. The segment designs, manufactures and distributes a variety of messaging products including pagers, paging systems and services, wireless and wireline communication products, and handwriting, voice recognition, and other communications software.

Segment sales rose 8% to $4.0 billion, orders declined 3%, and operating profits were lower for the year due to pricing pressures in the paging and modem businesses, possible inventory reduction by paging operators, restructuring and unusual charges, and increased investments in new technologies.

In 1996, the Messaging Systems Products Group (MSPG), which represents a majority of this segment's revenues, experienced slower sales growth and a small decline in orders. The decline in orders was primarily attributable to the Asian markets. For the year in the North American market for paging products, sales growth was strong but orders were lower in the fourth quarter as MSPG believes paging operators reduced inventories in order to improve their financial positions and cash flow. MSPG also believes that sales by operators to consumers in North America during the fourth quarter continued to grow. In the U.S., the percentage of MSPG subscriber products distributed through retail channels continues to increase. For the year, there also was strong growth in pager sales in the South American and European markets. The European markets continued to expand at above-average rates due to consumer services added in both Western and Eastern Europe, particularly in Russia.

MSPG continues to be successful in its efforts to make the FLEXTM family of communication products, which includes FLEXTM, ReFLEXTM, and InFLEXionTM technologies, the de facto worldwide standard for high-speed messaging technology. More than 110 operators have adopted the FLEX protocol in over 33 countries, and more than 60 FLEX communication systems are in commercial use. ReFLEXTM systems provide both data messaging and two-way wireless messaging, while InFLEXionTM systems enable one-way voice capability as well as two-way high-speed data transmission. In September, the group also announced the PageWriterTM two-way pager. This is the world's first pager with a standard QWERTY-type keyboard, and is based on the Platform Software Division's MemosTM open operating system which was designed for wireless messaging devices. Also, the group began shipping the TenorTM advanced voice pager which accepts and stores voice messages and operates like a portable answering machine.

The segment's Information Systems Group (ISG) revenue increased, driven entirely by unit volume growth. ISG experienced significant pricing pressures in 1996, particularly in the consumer modem market.

ISG announced the first in a series of software-based communications products, a V.34 data/fax/voice host-base modem that uses a computer's central processing unit to perform modem functions. Also announced was a new Voice RelayTM option for the Vanguard® 100 Frame Relay Access Device (FRAD). ISG also began shipping the industry's first 33.6 kilobytes-per-second (Kbps) modem/fax/LAN (Local Area Network) PC Card. Additionally, ISG announced the Tidal Wave program for upgrading 28.8 or 33.6 Kbps modems to either 56 Kbps or ISDN (Integrated Services Digital Network) modem technology.

The Wireless Data Group (WDG) had modest growth in sales and orders versus a year ago as subscriber growth in the wireless data industry also grew at a modest rate in 1996. New product introductions included the Personal Messenger® 100C Wireless Modem Card for wide-area communications on the Cellular Digital Packet Data network. In December, WDG announced plans to discontinue sales of its Envoy® and Marco® personal digital assistants and refocus the technology toward the corporate market.

The segment's Multimedia Group, formed in early 1995, continues to enter a new marketplace made possible by the development of technology and products that enable hybrid fiber coax networks to expand their capacity to carry telephony and high-speed data traffic for residential and commercial marketplaces. This group is still very much in an early developmental phase and made increasingly greater investments in engineering, selling and general administrative functions than in 1995. The group announced its first major international purchase agreement for CableComm telephony products with Optus Vision of Australia. Motorola also signed contracts to supply the CyberSURFRTM cable modems to the top 6 cable operators in the U.S.

The Lexicus Division is a supplier of handwriting and speech recognition products which enable the input and retrieval of computer information without the use of a keyboard. Lexicus Division products are in the introduction stage. In 1996, the Lexicus Division announced that its QuickPrint® handwriting recognition software and CrystalTalkTM speech recognition software were ported to the OS-9® Real-Time Operating System from Microware Systems Corporation.

OTHER PRODUCTS

The Other Products segment primarily includes the Automotive, Energy and Components Sector (AECS), formerly the Automotive, Energy and Controls Group, and the Space and Systems Technology Group (SSTG), formerly the Government and Space Technology Group.

AUTOMOTIVE, ENERGY AND
COMPONENTS SECTOR

AECS manufactures and sells products in three major categories: automotive and industrial electronics; energy storage products and systems; and printed circuit boards, and ceramic and quartz electronic components.

For the year, sector sales declined 5%, orders were 5% lower, and operating profits were lower. Pricing pressures and reduced demand for components and rechargeable batteries for cellular telephones were the primary factors in the Sector's performance versus a year ago.

Automotive and Industrial Electronics Group (AIEG) sales and orders increased over the prior year. AIEG announced a joint venture with Shanghai Instrumentation Corporation of China. Called Motorola Automotive Electronics Company, it will help to build relationships with current and new automotive customers around the world.

Milestones during the year for AIEG included production of the group's 200,000th engine controller for Detroit Diesel, and its 10 millionth pressure sensor. AIEG's manufacturing facility in Angers, France received a national quality award from the Mouvement Francais pour la Qualite, the French equivalent of the Malcolm Baldrige National Quality Award.

The group began full production of Ford Motor Company's Lincoln RESCUTM system consisting of an emergency communication system employing sophisticated onboard vehicle electronics. The system is designed to provide improved safety and security for motorists and combines Global Positioning Satellite (GPS) location with voice communication via standard cellular technology to put the driver in touch with a public safety agency or roadside assistance program. In addition, Mercedes-Benz AG announced that it would offer Motorola's emergency messaging and mobile information services in vehicles for the European market.

The Energy Products Division (EPD) experienced lower sales and orders. EPD introduced the first single-cell lithium ion battery pack, enabling the StarTACTM cellular telephone to be the smallest, lightest cellular phone on the market. EPD also introduced the new Universal Travel Charger, which provides a small portable charging system for the MicroTAC® cellular telephone that can be used with all of the various electrical voltages and currents around the world. EPD expanded its notebook computing products with the introduction of the first "smart" computer battery. By enabling full communication between the battery and the notebook computer, the computer can both monitor and control its energy system to achieve maximum performance.

In the Components Products Group (CPG), sales and orders were lower. CPG shipped new Multilayer Ceramic Integrated Circuit (MCIC) products. The filters enable cellular telephone manufacturers to continue improving the talk time of their products. The group introduced a temperature compensated crystal oscillator with accepted industry standard packaging that provides higher reliability and reduced cost for digital radio applications.

The Sector established the Flat Panel Display Division which made significant progress in commercializing the next generation flat panel display technology. Engineering 5-inch Field Emission Displays were demonstrated and customer sampling is expected to begin in the second half of 1997.

SPACE AND SYSTEMS
TECHNOLOGY GROUP

The Space and Systems Technology Group (SSTG) is engaged in the design, development and production of advanced electronic communication systems and products for a host of international and domestic commercial and government users. The group changed its name from the Government and Space Technology Group to reflect its emphasis on becoming a premier systems developer and integrator. The group's Satellite Communications Group is developing the IRIDIUM® global communications system.

Group sales for the year rose 20% due to increased sales by the Satellite Communications Group to Iridium LLC, a Delaware limited liability company. Orders were 49% higher than a year ago and operating profits were higher. No orders from Iridium LLC were booked during the fourth quarter, because orders in previous quarters had reached the present total financing available to Iridium LLC. Development of the IRIDIUM global communications system continued on schedule, as Motorola met all contractual milestones during the year.

At the end of 1996, the Company was a 24% equity owner in Iridium LLC and, during the year, agreed to guarantee up to $750 million of bank financing for a short term credit facility that Iridium LLC is using during the initial technology deployment and regulatory approval phases of the IRIDIUM project.

Iridium LLC will require additional funding by May of 1997 to continue to make contractual payments to Motorola. Motorola is negotiating to increase its guarantee of Iridium LLC bank financing and Iridium LLC is negotiating to increase its credit facility. These negotiations are expected to be completed in the first half of 1997. Iridium LLC is expected to require other financial support from various sources in order to complete the global communications system, which is expected to take place over the next two years. There can be no assurances as to the outcome of these negotiations. There also can be no assurance that Motorola or any other person will provide funding or financial support. Motorola is the largest investor in Iridium LLC and a failure of Iridium LLC to obtain additional funding would have a material adverse effect on Motorola's investments in Iridium LLC, in several IRIDIUM Gateway companies and in ancillary products. In addition, the Company will have significant contractual and financial obligations remaining under several subcontracts in the event that Iridium LLC is unable to obtain additional funding.

The start of satellite launches is currently expected to begin in the second quarter of 1997. Depreciation expense for IRIDIUM satellites, which are expected to be depreciated over five years, will begin upon first launch and increase steadily as more of the 66 satellite constellation is placed into orbit. A significant increase in staffing and operating expenses for Iridium LLC also will be necessary in 1997 as the company proceeds toward the start of commercial service in the fourth quarter of 1998. As a result, Iridium LLC's losses are expected to increase by several hundred million dollars in 1997 versus 1996. While these expenses are reported by Iridium LLC, since Motorola is a 24% owner of the company, Motorola must use the equity method of accounting for its investment and record its 24% share of Iridium LLC's losses as a writedown against the investment in Iridium LLC. This writedown is expected to affect Motorola's selling, general and administrative expense.

The Company has executed three contracts with Iridium LLC for the construction and operation of the global communications system, providing for approximately $6.5 billion in payments to Motorola over a ten-year period which began in 1993. The Company has in turn entered into significant subcontracts for portions of the system, for which it will remain generally obligated even if Iridium LLC is unable to satisfy the terms of the contracts with the Company, including funding.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations reached a record $4.19 billion in 1996 compared with $3.29 billion in 1995 and $2.55 billion in 1994. The increase is primarily due to reductions in accounts receivable and inventory balances. The Company expects cash provided by operations to increase in 1997 but at a slower rate than in 1996.

The number of weeks that accounts receivable were outstanding was reduced to 6.7 for 1996 from 7.0 for 1995 and 6.8 for 1994. Inventory turns increased to 5.6 in 1996 from 4.7 in 1995.

The Company's ratio of net debt to net debt plus equity was 13.4% at December 31, 1996 compared with 19.9% in 1995 and 12.1% in 1994. The lower ratio for 1996 reflects improvements of results in receivable weeks outstanding, and a reduction in inventories and fixed asset expenditures.

The Company and its finance subsidiary have one- and five-year revolving domestic credit agreements with a group of banks for $2 billion. These agreements contain various conditions, covenants and representations. At December 31, 1996, the Company's total U.S. and non-U.S. credit facilities aggregated $4.5 billion, of which $461 million were used and the remaining $4.0 billion were not drawn, but were available to back up outstanding commercial paper which totaled $970 million at December 31, 1996.

Capital expenditures required to support current and long-term growth decreased to $3.0 billion from $4.2 billion in 1995 primarily because of decisions to halt or delay building expansion and new construction. The 1994 expenditures totaled $3.3 billion. The Semiconductor Products segment continues to comprise the largest portion of fixed asset expenditures, with approximately 50% of all such investments in 1996. The Company's capital expenditures for 1997 are expected to be flat.

A discussion of the Company's commitments and contingencies is detailed in Note 6 to the Consolidated Financial Statements and Notes in this Proxy Statement.

IRIDIUM® is a registered trademark of Iridium LLC. PowerPC® is a registered trademark of IBM Corporation. All other brand names mentioned are registered trademarks or trademarks of their respective holders, and are herein acknowledged.

OTHER MATTERS

Environmental Matters: A discussion of the Company's environmental matters is detailed in Note 6 to the Consolidated Financial Statements and Notes in this Proxy Statement.

Research and Development: Expenditures increased to $2.39 billion in 1996, up from $2.20 billion in 1995 and $1.86 billion in 1994. Over the past three years, the Company has invested 8% to 9% of every sales dollar in product development and technological advances, and continues to believe that a strong commitment to research and development is required to drive long-term growth.

SEC Discussions: The Securities and Exchange Commission (SEC) has recently contacted the Company about the accounting treatment by the Company for the sale in July 1995 of its 800 megahertz Specialized Mobile Radio businesses, systems and licenses to Nextel Communications, Inc. for shares of Nextel stock. The transaction was accounted for as an exchange of productive assets with no gain realized in the Company's 1995 Statement of Consolidated Earnings but with the Nextel Stock carried at its fair market value with the unrealized gain on the stock reported directly to stockholders' equity as part of the Company's holding of marketable securities. The SEC asserts that the Company should have recognized a gain by accounting for the transaction at fair value with income statement recognition. The gain recognition proposed by the SEC is not expected to materially impact the Company's 1995 or 1996 Consolidated Balance Sheet because the impact of unrealized gains and losses related to the Nextel stock was recorded in Stockholders' Equity during 1995 and 1996. The Company believes that its treatment of the transaction is appropriate, but is considering the SEC's position on the matter. If the Company adopts the SEC's position, the Company would have recorded a gain of approximately $429 million (net of taxes) in the third quarter of 1995. In that event, the Company believes it would have been necessary to recognize the decline in the share price of the Nextel stock between the time of the transaction and December 31, 1995 as a realized loss of approximately $157 million (net of taxes) in the fourth quarter of 1995. As a result, 1995 earnings before income taxes would have increased from $2,782 million to approximately $3,200 million and 1995 fully diluted net earnings per common and common equivalent share would have increased from $2.93 to approximately $3.38. The Company has not concluded that it will change the accounting treatment of the Nextel transaction, but if it decides to do so, will make all appropriate filings with the SEC to disclose the change.

BUSINESS RISK FACTORS

With the exception of historical facts, the statements contained in Management's Discussion and Analysis of Financial Conditions and Results of Operations are forward looking statements based on current expectations that involve risks and uncertainties. Forward looking statements in this commentary include, but are not limited to, statements about: (i) the global economic outlook and growth in the developed world; the cyclical rebound in the semiconductor business; the outlook for the communications businesses; investment plans in 1997 and the expected benefit from those investments; 1997 depreciation expenses and fixed asset expenditures; and the impact of certain accounting changes in the section "Motorola, Inc., 1996 Compared With 1995," (ii) the impact of large system orders on CIG in the discussion of General Systems Products, (iii) the recessionary cycle in the semiconductor business and 1997 order and revenue growth; underutilized capacity; average selling prices and likelihood of double-digit operating margins in 1997; the competitive impact of alliances between competitors; timing of the first production at the joint venture facility in Richmond, Va. and expected 1997 capital investments, in the Semiconductor Products discussion, (iv) the impact of large system orders in the Land Mobile Products discussion, and (v) Iridium LLC financings and 1997 staffing and operating expenses for Iridium LLC in the Space and Systems Technology discussion.

Motorola wishes to caution the reader that the following important factors, and those important factors described elsewhere in the commentary, or in other Securities and Exchange Commission filings, could affect (and in some cases have affected) Motorola's actual results and could cause such results to differ materially from those expressed in any forward looking statements made by, or on behalf of, Motorola:

€The trend towards increasingly large systems contracts for CIG and LMPS infrastructure equipment and the resulting reliance on large customers, the technological risks of such contracts, especially when the contracts involve new technology such as CDMA, and financial risks to Motorola under these contracts, including the difficulty of projecting costs associated with large contracts;

€Increasing demand for vendor financing of equipment sales particularly for infrastructure equipment sold by CIG, LMPS and MSPG and the ability of these businesses to provide financing on competitive terms with other vendors;

€Pricing pressure on digital cellular subscriber products and cellular infrastructure equipment and the impact on sales margins for those items;

€The ability of the semiconductor industry to sustain a rebound and the ability of Motorola's semiconductor business to capitalize on that rebound and compete in the highly competitive semiconductor business. Factors that could affect Motorola's ability to compete are production inefficiencies and higher costs related to underutilized facilities, both wholly-owned and joint venture facilities; shortage of manufacturing capacity; start-up expenses, inefficiencies and delays and increased depreciation costs in connection with the capital investments in 1997 for facilities in Korea, China, Arizona and Texas; competitive factors, such as rival chip architectures, mix of products, acceptance of new products and price pressures; risk of inventory obsolescence due to shifts in market demand; and the effect of lower orders from Motorola's other businesses such as the Cellular Subscriber Sector and the Automotive, Energy and Components Sector;

€The ability of the Company to develop the consumer paging market and success at making the FLEXTM family of communication protocols the de facto worldwide standard in high speed messaging technology;

€The risks related to the IRIDIUM® project including: the ability of investors to timely obtain licenses and sign agreements for, and to market, the service, to timely receive and, as appropriate, operate and sell telecommunications equipment and to otherwise timely finance and operate a successful telecommunications business; the successful and timely orbiting of the project's low-earth orbit satellites and the successful and timely operation of such satellites and related ground equipment; the ability of Iridium LLC to raise the significant funds it needs during at least the next few years to continue to make contractual payments to Motorola and to make debt payments and otherwise operate, including raising needed funds in early 1997; the outcome of Motorola's and Iridium LLC's negotiations to increase Iridium LLC's bank financing and Motorola's guarantee; the risks associated with the large IRIDIUM systems contracts and the financial risk to Motorola under those contracts, including the difficulty in projecting costs associated with those contracts; the market acceptance (both on its own and when compared to possible competitors) of what is expected to be the first worldwide global satellite-based communication service and of the related equipment; and the significant technological and other risks associated with the development and commercial operation of the project, including any software and support systems-related risks;

€The risks related to the Company's significant investment in developing and introducing new products such as two way and voice paging, CDMA for cellular and PCS systems, wireless local loop, flat panel display products, telephony and high-speed cable products, integrated digital radios and next generation DRAMS and other semiconductor products. Factors include difficulties and delays in the development, production, testing and marketing of products; customer acceptance of products, particularly as the Company's focus on the consumer market increases; and the ability of the Company to differentiate its products;

€Because more than half of the Company's sales are outside the U.S., the Company's results could be significantly affected by weak economic conditions in countries in which it does significant business and by changes in foreign currency exchange rates affecting those countries;

€The ability of the Company to predict the impact of new accounting positions and standards, particularly related to future environmental liabilities of the Company;

€The effect of, and change in, trade, monetary and fiscal policies, laws and regulations, other activities of U.S. and non U.S. governments, agencies and similar organizations, and social and economic conditions, affecting the Company's operations, including emerging markets in Asia and Latin America and other emerging markets; and

€The outcome of pending and future litigation and the protection and validity of patents and other intellectual property rights.