Consolidated Results of Operations

Net sales for the first quarter of 2009, compared with the first quarter of 2008, decreased 21.8% due to global economic conditions. Sales in each geographic region were down comparably for the same reason. The decrease in sales was largely attributable to a decline in hardware sales volume. Hardware sales declined proportionally more for our high-performance and mid-range tabletop printers. Gross profit decreased because of lower sales volume, unfavorable product mix and unfavorable movements in foreign exchange. Lower overall operating expenses resulted from decreases in several categories including payroll costs primarily from lower staffing levels, outside commissions, project costs, professional service fees, and travel and entertainment expenses. In addition, amortization of intangibles decreased $1,880,000 and exit costs decreased $938,000 in the first quarter of 2009 as compared to the first quarter of 2008.

                                     Three Months Ended
                                  April 4,       March 29,     Percent         Percent of            Percent of
                                    2009            2008       Change       Net sales - 2009      Net sales - 2008
Net sales                         $ 192,609      $  246,277      (21.8 )               100.0                 100.0
Cost of sales                       106,800         123,362      (13.4 )                55.4                  50.1

Gross profit                         85,809         122,915      (30.2 )                44.6                  49.9
Operating expenses                   71,635          83,561      (14.3 )                37.2                  33.9

Operating income                     14,174          39,354      (64.0 )                 7.4                  16.0
Other income (expense)                 (423 )         2,851         NM                  (0.3 )                 1.1

Income before income taxes           13,751          42,205      (67.4 )                 7.1                  17.1
Income taxes                          4,399          14,561      (69.8 )                 2.2                   5.9

Net income                        $   9,352      $   27,644      (66.2 )                 4.9                  11.2

Diluted earnings per share        $    0.16      $     0.42

Sales by product category, percent change, and percent of net sales for the three months ended April 4, 2009, and March 29, 2008, were (in thousands, except percentages):

                                     Three Months Ended
                                   April 4,     March 29,       Percent         Percent of          Percent of
Product Category                     2009          2008         Change       Net sales - 2009    Net sales - 2008
Hardware                          $  125,865    $  180,181        (30.1 )                65.3                73.2
Supplies                              38,081        41,902         (9.1 )                19.8                17.0
Service and software                  25,925        25,180          3.0                  13.5                10.2
Shipping and handling                  1,368         1,802        (24.1 )                 0.7                 0.7
Cash flow hedging activities           1,370        (2,788 )         NM                   0.7                (1.1 )

Total sales                       $  192,609    $  246,277        (21.8 )               100.0               100.0

Sales to customers by geographic region, percent changes and percent of net sales for the three months ended April 4, 2009, and March 29, 2008, were (in thousands, except percentages):

                                      Three Months Ended
                                    April 4,     March 29,     Percent         Percent of          Percent of
Geographic Region                     2009          2008       Change       Net sales - 2009    Net sales - 2008
Europe, Middle East and Africa     $   74,620    $   95,509      (21.9 )                38.7                38.8
Latin America                          13,071        15,983      (18.2 )                 6.8                 6.5
Asia-Pacific                           19,409        25,639      (24.3 )                10.1                10.4

Total International                   107,100       137,131      (21.9 )                55.6                55.7
North America                          85,509       109,146      (21.7 )                44.4                44.3

Total sales                        $  192,609    $  246,277      (21.8 )               100.0               100.0

Zebra's non-operating income and expense items are summarized in the following table (in thousands):

                                                           Three Months Ended
                                                        April 4,      March 29,
                                                          2009           2008
      Investment income                                 $   1,178     $    2,405
      Foreign exchange gain (loss)                         (1,284 )          700
      Other, net                                             (317 )         (254 )

      Total other income                                $    (423 )   $    2,851


      Rate of Return Analysis:
      Average cash and marketable securities balances   $ 207,098     $  293,732
      Annualized rate of return                               2.3 %          3.3 %

Cash and marketable securities balances and resulting investment income for the first quarter of 2009 decreased compared to the first quarter of 2008 due to reduced cash flow from operating activities and payments for stock repurchases. Foreign exchange rates were more favorable in the first quarter of 2008 versus the first quarter of 2009 resulting in gains for the three month period in 2008 versus losses for the comparable period in 2009.

Specialty Printing Group

                                      Three Months Ended
                                    April 4,     March 29,     Percent         Percent of          Percent of
                                      2009          2008       Change       Net sales - 2009    Net sales - 2008
Net sales                          $  170,768    $  224,752      (24.0 )               100.0               100.0
Cost of sales                          97,096       112,814      (13.9 )                56.9                50.2

Gross profit                           73,672       111,938      (34.2 )                43.1                49.8
Operating expenses                     39,673        50,333      (21.2 )                23.2                22.4

Operating income                       33,999        61,605      (44.8 )                19.9                27.4

Net sales in our Specialty Printing Group (SPG) decreased 24.0% during the first quarter of 2009, with comparable declines in all regions. New printer products (defined as printers released within 18 months prior to the end of the applicable fiscal period) accounted for 7.1% of printer sales in the first quarter of 2009, compared with 19.1% of printer sales in the first quarter of 2008 and 17.2% for the fourth quarter of 2008.

Our international SPG sales are denominated in multiple currencies, primarily the U.S. dollar, British pound and euro. This diversity causes our reported sales to be subject to fluctuations based on changes in currency rates. The stronger U.S. dollar to the euro and the pound had a negative impact of approximately $6,739,000, net of hedges, on sales during the first quarter of 2009 compared with the first quarter of 2008.

We currently hedge a portion of anticipated euro-denominated sales to partially protect Zebra against exchange rate movements. For the first quarter, this program resulted in a gain on hedges of $1,370,000.

Printer unit volumes and average selling price information is summarized below:

                                                        Three Months Ended
                                                 April 4,    March 29,    Percent
                                                   2009         2008      Change
     Total printers shipped                        199,218      242,401     (17.8 )
     Average selling price of printers shipped   $     517   $      614     (15.8 )

For the first quarter of 2009, unit volumes decreased in nearly all printer product lines compared to the first quarter of 2008, with notable volume decreases in high-performance tabletop and mid-range printers.

Gross profit margin for SPG was affected by unfavorable foreign currency movements, which decreased first quarter gross profit by $3,658,000. Lower volume and a less profitable product mix also drove down gross margins. Over the foreseeable future, we expect

international sales to increase as a percentage of total sales because of the relative under penetration of our technology and the high rates of economic growth in those regions. Some customers in Asia Pacific, Latin America and other emerging international regions have demonstrated a preference for our lower priced products, which we expect to become a greater portion of the products we sell.

Lower overall operating expenses resulted from decreases in payroll costs, outside commissions, project costs, professional service fees, travel and entertainment expenses, recruiting and relocation costs, and offsite meetings. Much of the decreased payroll and benefit costs were a result of lower staffing levels.

Zebra Enterprise Solutions

                                      Three Months Ended
                                   April 4,        March 29,       Percent         Percent of            Percent of
                                     2009            2008          Change       Net sales - 2009      Net sales - 2008
Net sales                         $   21,841      $    21,525          1.5                 100.0                 100.0
Cost of sales                          9,704           10,548         (8.0 )                44.4                  49.0

Gross profit                          12,137           10,977         10.6                  55.6                  51.0
Operating expenses                    15,496           18,040        (14.1 )                70.9                  83.8

Operating loss                        (3,359 )         (7,063 )       52.4                 (15.3 )               (32.8 )

Zebra Enterprise Solutions (ZES) group sales remained stable in a challenging economy. Sales remained firm in hardware and licensing. Margins improved in services provided to customers due to reduced service costs.

ZES operating expenses for the first quarter of 2009 are lower than the first quarter of 2008 due to lower staffing levels, reduced outside service costs, and lower amortization of intangibles due to asset write downs in the fourth quarter of 2008.

Liquidity and Capital Resources

As of April 4, 2009, Zebra had $189,311,000 in cash, restricted cash, investments and marketable securities, compared with $224,886,000 at December 31, 2008. Factors affecting cash and investment balances during the first three months of 2009 include (note that changes discussed below include the impact of foreign currency):

• Operations consumed cash in the amount of $1,214,000, primarily from lower net income and using cash to pay liabilities and taxes.

• Accounts receivable decreased $13,018,000 because of lower sales.

• Accounts payable decreased $6,539,000, due to the timing of vendor payments and decreased purchasing as a result of reduced demand.

• Accrued liabilities decreased $23,946,000, due to the payment of payroll-related expenses and forward contract liabilities.

• Taxes payable decreased $8,055,000 because of the timing of tax payments.

• Purchases of property and equipment totaled $6,802,000.

• Net sales of investments totaled $37,511,000.

• Purchases of treasury shares totaled $28,593,000.

• Stock option exercises and purchases under the stock purchase plan contributed $1,168,000.

In February 2008, we announced that printer manufacturing is being transferred to a third-party manufacturer. This transition is expected to be complete by the end of 2009.

Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements.

Critical Accounting Policies and Estimates

Management prepared the consolidated financial statements of Zebra Technologies Corporation under accounting principles generally accepted in the United States of America. These principles require the use of estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we used are reasonable, based upon the information available.

Our estimates and assumptions affect the reported amounts in our financial statements. The following accounting policies comprise those that we believe are the most critical in understanding and evaluating Zebra's reported financial results.

Revenue Recognition

Product revenue is recognized once four criteria are met: (1) we have persuasive evidence that an arrangement exists; (2) delivery has occurred and title has passed to the customer, which happens at the point of shipment provided that no significant obligations remain; (3) the price is fixed and determinable; and
(4) collectability is reasonably assured. Other items that affect our revenue recognition include:

Customer Returns

Customers have the right to return products that do not function properly within a limited time after delivery. We monitor and track product returns and record a provision for the estimated future returns based on historical experience and any notification received of pending returns. Returns have historically been within expectations and the provisions established, but Zebra cannot guarantee that it will continue to experience return rates consistent with historical patterns. Historically, our product returns have not been significant. However, if a significant issue should arise, it could have a material impact on our financial statements.

Growth Rebates

Some of our channel program partners are offered incentive rebates based on the attainment of specific growth targets related to products they purchase from us over a quarter or year. These rebates are recorded as a reduction to revenue. Each quarter, we estimate the amount of outstanding growth rebates and establish a reserve for them based on shipment history. Historically, actual growth rebates have been in line with our estimates.

Price Protection

Some of our customers are offered price protection by Zebra as an incentive to carry inventory of our product. These price protection plans provide that if we lower prices, we will credit them for the price decrease on inventory they hold. We estimate future payments under price protection programs quarterly and establish a reserve, which is charged against revenue. Our customers typically carry limited amounts of inventory, and Zebra infrequently lowers prices on current products. As a result, the amounts paid under these plans have been minimal.

Software Revenue

We sell four types of software and record revenue as follows:

• ZES has fixed fee software implementation projects, for which we use the percentage of completion method for revenue recognition. Under this method of accounting, we recognize revenue based on the ratio of costs incurred to total estimated costs. If increases in projected costs-to-complete are sufficient to create a loss contract, the entire estimated loss is charged to operations in the period the loss first becomes known.

• Our printers contain embedded firmware, which is part of the hardware purchase. We consider the sale of this firmware to be incidental to the sale of the printer and do not attribute any revenue to it.

• We sell a limited amount of prepackaged, or off-the-shelf, software for the creation of bar code labels using our printers. There is no customization required to use this software, and we have no post-shipment obligations on the software. Revenue is recognized at the time this prepackaged software is shipped.

• We sometimes provide custom software as part of a printer installation project. We bill custom software development services separate from the related hardware. Revenue related to custom software is recognized once the custom software development services have been completed and accepted by the customer.

Maintenance and Support Agreements

We enter into post-contract maintenance and support agreements. Revenues are recognized ratably over the service period and the cost of providing these services is expensed as incurred.

Shipping and Handling

We charge our customers for shipping and handling services based upon our internal price list for these items. The amounts billed to customers are recorded as revenue when the product ships. Any costs incurred related to these services are included in cost of sales.

Zebra enters into sales transactions that include more than one product type. This bundle of products might include printers, current or future supplies, and services. When this type of transaction occurs, we allocate the purchase price to each product type based on the fair value of the individual products determined by vendor specific objective evidence. The revenue for each individual product is then recognized when the recognition criteria for that product is fully met.

Investments and Marketable Securities

Investments and marketable securities at April 4, 2009, consisted of the
following:



                        U.S. government securities   18.9 %
                        State and municipal bonds    79.4 %
                        Corporate bonds               1.7 %

We classify our debt and marketable equity securities in one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those debt securities that Zebra has the ability and intent to hold until maturity. All investments in marketable securities are classified as available-for-sale securities.

Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of discounts or premiums. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. As of April 4, 2009, Zebra's investments in marketable debt securities are classified as available-for-sale. In addition, as of April 4, 2009, all of our investments in marketable debt securities with maturities greater than one year are classified as long-term in the balance sheet due to our ability and intent to hold them until maturity.

Accounts Receivable

We have standardized credit granting and review policies and procedures for all customer accounts, including:

• Credit reviews of all new customer accounts,

• Ongoing credit evaluations of current customers,

• Credit limits and payment terms based on available credit information,

• Adjustments to credit limits based upon payment history and the customer's current credit worthiness,

• An active collection effort by regional credit functions, reporting directly to the corporate financial officers, and

• Credit insurance on the majority of our international receivables.

We reserve for estimated credit losses based upon historical experience and specific customer collection issues. Over the last three years, accounts receivable reserves varied from 0.6% to 3.3% of total accounts receivable. Accounts receivable reserves as of April 4, 2009, were $2,405,000, or 1.7% of the balance due. Accounts receivable reserves as of December 31, 2008, were $2,734,000, or 1.8% of the balance due. We believe our reserve level is appropriate considering the quality of the portfolio as of April 4, 2009. While credit losses have historically been within expectations and the provisions established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience.

Inventories

We value our inventories at the lower of the actual cost to purchase or manufacture using the first-in, first-out (FIFO) method, or the current estimated market value. We review inventory quantities on hand and record a provision for excess and obsolete inventory based on forecasts of product demand and production requirements for the subsequent twelve months.

Over the last three years, our reserves for excess and obsolete inventories have ranged from 5.9% to 14.2% of gross inventory. As of April 4, 2009, inventory reserves were $8,641,000, or 7.9% of gross inventory compared to inventory reserves of $8,537,000, or 7.9% of gross inventory as of December 31, 2008. We believe our reserve level is appropriate considering the quantities and quality of the inventories as of April 4, 2009.

Valuation of Long-Lived and Intangible Assets and Goodwill

We test the impairment of goodwill each year or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We completed our annual assessment during June 2008 and determined that our goodwill was not impaired as of the end of May 2008.

Goodwill of a reporting unit should be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include:

• Adverse action or assessment by a regulator,

• Unanticipated competition,

• Loss of key personnel,

• More-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of,

• Testing for recoverability under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, of a significant asset group within a reporting unit,

• Recognition of a goodwill impairment loss in the financial statement of a subsidiary that is a component of a reporting unit, or

• Allocation of a portion of goodwill to a business to be disposed of.

We evaluate the impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered that may trigger an impairment review consist of:

• Significant underperformance relative to expected historical or projected future operating results,

• Significant changes in the manner of use of the acquired assets or the strategy for the overall business,

• Significant negative industry or economic trends,

• Significant decline in Zebra's stock price for a sustained period, and

• Significant decline in market capitalization relative to net book value.

If we believe that one or more of the above indicators of impairment have occurred, we perform an impairment review in accordance with SFAS No. 142.

During the fourth quarter of 2008, we determined that certain impairment indicators existed related to identified intangible assets and conducted a special impairment test of intangibles. Due to the deterioration of the economy and a significant reduction in the price of our stock, we determined that our goodwill and other intangible assets were impaired requiring total impairment charges of $157,600,000. As of December 31, 2008 and April 4, 2009, these amounts are estimates and may be adjusted during 2009 upon completion of a detailed second step impairment analysis.

Net intangible assets, long-lived assets and goodwill amounted to $291,160,000 as of April 4, 2009 and $293,078,000 as of December 31, 2008.

Income Taxes

On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109. According to FIN No. 48, we identified, evaluated, and measured the amount of income tax benefits to be recognized for all of our income tax positions. During 2008, we recognized an increase of approximately $4,000,000 in the liability for unrecognized tax benefits related to a recent Zebra acquisition. This benefit remained unchanged as of April 4, 2009.

Zebra's continuing practice is to recognize interest and/or penalties related to income tax matters as part of income tax expense. For the quarter ended April 4, 2009 and March 29, 2008, we did not accrue any interest or penalties into income tax expense.

Zebra has concluded all U.S. federal income tax audits for years through 2006. The tax years 2004 through 2008 remain open to examination by multiple state taxing jurisdictions. Tax authorities in the United Kingdom have completed income tax audits for tax years through 2006.

Included in deferred tax assets are amounts related to federal and state net operating losses that resulted from our acquisition of WhereNet Corp. As of April 4, 2009, we had approximately $59,887,000 of federal net operating loss carryforwards available to offset future taxable income which expire in 2012 through 2022. As of April 4, 2009, we also had approximately $19,283,000 of state net operating loss carryforwards which expire in 2012 through 2022. Zebra's intention is to utilize these net operating loss carryforwards to offset future income tax expense. Under the United States Tax Reform Act of 1986, the amounts of benefits from net operating loss carryforwards may be impaired or limited in certain circumstances, including significant changes in ownership interests.

The effective income tax rate for the first quarter of 2009 was 32.0% compared with an income tax rate of 34.5% for the first quarter of 2008. The effect of lower income and a higher proportion of permanent tax adjustments contributed to the rate reduction in 2009.

Contingencies

We record estimated liabilities related to contingencies based on our estimates of the probable outcomes. Quarterly, we assess the potential liability related to pending litigation, tax audits and other contingencies and confirm or revise . . .