Motorola, Inc. and Consolidated Subsidiaries

1. Summary of Significant Accounting Policies Consolidation: The consolidated financial statements include the accounts of the Company and those majority-owned subsidiaries where the Company has control. All significant intercompany accounts and transactions are eliminated in consolidation. Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Marketable Securities: Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that the carrying value of certain investments be adjusted to their fair value. As of December 31, 1995, the Company recorded an increase to stockholders' equity, other assets and deferred taxes of $328 million, $543 million and $215 million, respectively, primarily due to the fair value recognition of the Nextel investment which was completed during July of 1995. As of December 31, 1994, the effects of SFAS No. 115 were immaterial. Revenue Recognition: The Company uses the percentage-of-completion method to recognize revenues and costs associated with most long-term contracts. For contracts involving certain technologies, revenues and profits, or parts thereof, are deferred until technological feasibility is established and customer acceptance is obtained. For other product sales, revenue is recognized at the time of shipment, and reserves are established for price protection and cooperative marketing programs with distributors. Inventories: Inventories are valued at the lower of average cost (which approximates computation on a first-in, first-out basis) or market (i.e., net realizable value or replacement cost), less progress payments on long-term contracts. Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is recorded principally using the declining-balance method, based on the estimated useful lives of the assets (buildings and building equipment, 5-50 years; machinery and equipment, 2-12 years). Foreign Currency Translation: The Company's European and Japanese operations use the respective local currencies, instead of the U.S. dollar, as the functional currency. For all other operations, the Company uses the U.S. dollar as the functional currency. The effects of translating the financial position and results of operations of local functional currency operations are included in stockholders' equity. The effects of foreign currency transactions are included in the statement of earnings. The Company uses financial instruments to hedge, and therefore attempt to reduce, its overall exposure to the effects of currency fluctuations on cash flows of foreign operations and investments in foreign countries. The Company's strategy is to offset the gains or losses of the financial instruments against losses or gains on the underlying operational cash flows or investments based on the operating business units' assessment of risk. Gains and losses on hedges of existing assets or liabilities are marked to market on a monthly basis. Other gains or losses on financial instruments that do not qualify as hedges are recognized immediately as income or expense. Gains and losses on financial instruments which hedge firm future commitments are deferred until such time as the underlying transactions are recognized or immediately when the transaction is no longer expected to occur. The Company does not speculate in these financial instruments for profit on the exchange rate price fluctuation alone. The Company does not trade in currencies for which there are no underlying exposures, nor enter into trades for any currency to intentionally increase the underlying exposure. Many of the Company's non-functional currency receivables and payables denominated in major currencies which can be traded on open markets are hedged. Some of the Company's exposure is to currencies which are not traded on open markets, such as those in Latin America and China, and these are addressed, to the extent reasonably possible, through managing net asset positions, product pricing, and other means, such as component sourcing. Currently, the Company primarily hedges firm commitments. The Company expects that there could be hedges of anticipated transactions in the future. Stock Options: The Company has evaluated the effects of the recent accounting pronouncement, SFAS No. 123, "Accounting for Stock-Based Compensation," which will be effective for the Company's fiscal year 1996. Based on an initial evaluation, the effects are not expected to have a material effect on the Company's consolidated financial position, liquidity or results of operations. Disclosure of Certain Significant Risks and Uncertainties: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's periodic filings with the Securities and Exchange Commission include, where applicable, disclosures of estimates, assumptions, uncertainties and concentrations in products, sources of supply and markets which could affect the financial statements and future operations of the Company. Reclassifications: Certain amounts in prior years' financial statements and related notes have been reclassified to conform to the 1995 presentation. 2. Commitments and Contingencies Financial: In July 1995, the Company completed the sale of its 800 megahertz specialized mobile radio businesses, systems and licenses in the continental United States to Nextel Communications, Inc. for approximately 59 million shares of Nextel stock. The transaction was accounted for as an exchange of productive assets with no gain realized in the Statement of Consolidated Earnings. Nextel agreed to purchase, subject to specified conditions, substantial quantities of equipment from Motorola over a five-year period which began in 1994 for use on its specialized mobile radio systems. Motorola has agreed to provide up to $685 million of secured vendor financing for such equipment and related services to Nextel and certain of its subsidiaries, subject to certain lending conditions. As of December 31, 1995, Nextel had drawn $225 million of such financing commitments. Nextel will require financing in addition to Motorola's vendor financing to complete its currently planned networks and acquisitions. Nextel's failure to obtain additional financing or to meet the conditions for any financing could adversely affect future sales and orders of the Company's iDEN® equipment. There can be no assurances that such additional financing will be obtained or such conditions met.

The Company further advanced its strategic investment in the IRIDIUM® global communications system. At December 31, 1995, the Company's equity investment in and commitments to make equity investments in Iridium, Inc. was approximately $400 million; additionally, it has committed, subject to action by the Iridium, Inc. Board of Directors, to additional equity investments totaling approximately $60 million. In February 1996, the Company has committed to purchase approximately $160 million of securities to be issued by Iridium, Inc. during 1996. Iridium, Inc. will require additional funding and, quite possibly, other financial support from various sources in order to complete the global communications system, which is expected to take place over the next three years. There can be no assurance that Motorola or any other person will provide such funding or financial support. Motorola is the largest investor in Iridium, Inc. and a failure of Iridium, Inc. to obtain additional funding or financial support would materially adversely affect Motorola's investment in Iridium, Inc. and in ancillary products. The Company's investment in Iridium, Inc. is included in the Consolidated Balance Sheet category "Other Assets." The Company has executed three contracts with Iridium, Inc. for the construction and operation of the global communications system, providing for approximately $6.5 billion in payments by Iridium, Inc. 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 generally remain obligated even if Iridium, Inc. is unable to satisfy the terms of the contracts with the Company, including funding. Separately, the Company is making significant investments to produce ancillary products for the system, such as subscriber units. The Federal Communications Commission (FCC) has issued a license to a Motorola subsidiary to construct, operate and launch the IRIDIUM system. However, other authorizations are still required for the IRIDIUM system to begin commercial service in the U.S. and in other countries in which service will be provided. Except as noted above, the Company had no significant concentrations of credit risk as of December 31, 1995. The Company has entered into arrangements with non-consolidated affiliates whereby the Company may increase, for an amount up to approximately $250 million, its percentage interest in these affiliates at the option of each respective affiliate or Motorola at various dates which are not to extend beyond June 1997. Other off-balance-sheet commitments to extend or guarantee financing and recourse obligations under receivable sales arrangements which represent firm obligations at December 31, 1995 and 1994, aggregated approximately $173 million and $273 million, respectively. Commitments to extend or guarantee financing include commitments for customer financing and for the financing of non-consolidated affiliates. Customer financing commitments require the customer to meet certain conditions established in the financing arrangements. Commitments represent the maximum amounts available under these arrangements and may not be completely utilized. Environmental and Legal: Under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (CERCLA, or Superfund), the Company has been designated as a potentially responsible party by the United States Environmental Protection Agency with respect to certain waste sites with which the Company may have had direct or indirect involvement. Such designations are made regardless of the extent of the Company's involvement. These claims are in various stages of administrative or judicial proceedings. They include demands for recovery of past governmental costs and for future investigations or remedial actions. In many cases, the dollar amounts of the claims have not been specified, and have been asserted against a number of other entities for the same cost recovery or other relief as was asserted against the Company. The Company accrues costs associated with environmental matters when they become probable and reasonably estimable, which totaled $86 million and $70 million as of December 31, 1995 and 1994, respectively. The amount of such charges to earnings was $24 million, $20 million and $36 million in 1995, 1994 and 1993, respectively. However, due to their uncertain nature, the amounts accrued could differ, perhaps significantly, from the actual costs that will be incurred. These amounts assume no substantial recovery of costs from any insurer. The remedial efforts include environmental cleanup costs and communication programs. These liabilities represent only the Company's share of any possible costs incurred in environmental cleanup sites, since in most cases, potentially responsible parties other than the Company may exist. The Company is a defendant in various suits, including environmental and product-related suits, and is subject to various claims which arise in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the consolidated financial position, liquidity or results of operations of the Company. IRIDIUM® is a registered trademark and service mark of Iridium, Inc. 3. Information by Industry Segment and Geographic Region Information for 1994 and 1993 has been reclassified to reflect the realignment of various business units. Messaging, Information and Media Products segment includes the Paging Products and Wireless Data Groups (formerly reported as part of the Communications segment) and the Information Systems Group (formerly reported as part of the Other Products segment). Land Mobile Products (formerly reported as part of the Communications segment) is a separate reportable segment. The Government and Space Technology Group is reported as part of the Other Products segment. Operating profit (revenues less operating expenses) excludes general corporate expenses, net interest and income taxes. Intersegment and intergeographic transfers are accounted for on an arm's length pricing basis. Identifiable assets (excluding intersegment receivables) are the Company's assets that are identified with classes of similar products or operations in each geographic area. Corporate assets primarily include cash, marketable securities, equity investments and the administrative headquarters of the Company.