Consolidated Results of Operations

Net sales for the three and six months ended July 4, 2009, compared with the three and six months ended June 28, 2008, decreased 26.0% and 24%, respectively. Both decreases were due to global economic conditions. Sales in each geographic region were down by comparable percentages for both periods for the same reason. The decreases in sales were 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 for both the three and six month periods 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 $2,104,000 and exit, restructuring and integration costs decreased $1,037,000 in the second quarter of 2009 as compared to the second quarter of 2008. Amortization of intangibles decreased $3,985,000 and exit, restructuring and integration costs decreased $1,974,000 in the first six months of 2009 as compared to the same period of 2008.

(Amounts in thousands, except percentages):

                                     Three Months Ended
                                    July 4,      June 28,     Percent          Percent of          Percent of
                                      2009         2008       Change        Net Sales - 2009    Net Sales - 2008
Net sales                          $  187,676    $ 253,782      (26.0 )                100.0               100.0
Cost of sales                         105,940      126,067      (16.0 )                 56.4                49.7

Gross profit                           81,736      127,715      (36.0 )                 43.6                50.3
Operating expenses                     69,351       90,746      (23.6 )                 37.0                35.7

Operating income                       12,385       36,969      (66.5 )                  6.6                14.6
Other income                              864        2,002      (56.8 )                  0.5                 0.8

Income before income taxes             13,249       38,971      (66.0 )                  7.1                15.4
Income taxes                            4,238       13,445      (68.5 )                  2.3                 5.3

Net income                         $    9,011    $  25,526      (64.7 )                  4.8                10.1

Diluted earnings per share         $     0.15    $    0.39


                                      Six Months Ended
                                    July 4,      June 28,     Percent          Percent of          Percent of
                                      2009         2008       Change        Net Sales - 2009    Net Sales - 2008
Net sales                          $  380,285    $ 500,059      (24.0 )                100.0               100.0
Cost of sales                         212,740      249,429      (14.7 )                 55.9                49.9

Gross profit                          167,545      250,630      (33.2 )                 44.1                50.1
Operating expenses                    140,986      174,307      (19.1 )                 37.1                34.8

Operating income                       26,559       76,323      (65.2 )                  7.0                15.3
Other income                              441        4,853      (90.9 )                  0.1                 0.9

Income before income taxes             27,000       81,176      (66.7 )                  7.1                16.2
Income taxes                            8,637       28,006      (69.2 )                  2.3                 5.6

Net income                         $   18,363    $  53,170      (65.5 )                  4.8                10.6

Diluted earnings per share         $     0.31    $    0.81

Sales by product category, percent change, and percent of net sales for the three and six months ended July 4, 2009, and June 28, 2008, were (amounts in thousands, except percentages):

                                         Three Months Ended
                                     July 4,            June 28,          Percent            Percent of          Percent of
Product Category                       2009               2008            Change          Net Sales - 2009    Net Sales - 2008
Hardware                            $  125,092         $  185,640           (32.6 )                   66.7                73.1
Supplies                                35,588             43,803           (18.8 )                   19.0                17.3
Service and software                    25,748             27,516            (6.4 )                   13.7                10.8
Shipping and handling                    1,265              1,832           (30.9 )                    0.6                 0.8
Cash flow hedging activities               (17 )           (5,009 )            NM                        0                (2.0 )

Total sales                         $  187,676         $  253,782           (26.0 )                  100.0               100.0


                                          Six Months Ended
                                     July 4,            June 28,          Percent            Percent of          Percent of
Product Category                       2009               2008            Change          Net Sales - 2009    Net Sales - 2008
Hardware                            $  251,019         $  365,821           (31.4 )                   65.9                73.3
Supplies                                73,607             85,706           (14.1 )                   19.4                17.1
Service and software                    51,673             52,695            (1.9 )                   13.6                10.5
Shipping and handling                    2,633              3,634           (27.5 )                    0.7                 0.7
Cash flow hedging activities             1,353             (7,797 )            NM                      0.4                (1.6 )

Total sales                         $  380,285         $  500,059           (24.0 )                  100.0               100.0

Sales to customers by geographic region, percent changes and percent of net sales for the three and six months ended July 4, 2009, and June 28, 2008, were (in thousands, except percentages):

                                         Three Months Ended
                                     July 4,            June 28,          Percent            Percent of          Percent of
Geographic Region                      2009               2008            Change          Net Sales - 2009    Net Sales - 2008
Europe, Middle East and Africa      $   69,044         $   92,112           (25.0 )                   36.8                36.3
Latin America                           15,005             21,367           (29.8 )                    8.0                 8.4
Asia-Pacific                            19,839             28,031           (29.2 )                   10.6                11.0

Total International                    103,888            141,510           (26.6 )                   55.4                55.7
North America                           83,788            112,272           (25.4 )                   44.6                44.3

Total sales                         $  187,676         $  253,782           (26.0 )                  100.0               100.0


                                          Six Months Ended
                                     July 4,            June 28,          Percent            Percent of          Percent of
Geographic Region                      2009               2008            Change          Net Sales - 2009    Net Sales - 2008
Europe, Middle East and Africa      $  143,664         $  187,620           (23.4 )                   37.8                37.5
Latin America                           28,076             37,350           (24.8 )                    7.4                 7.5
Asia-Pacific                            39,247             53,671           (26.9 )                   10.3                10.7

Total International                    210,987            278,641           (24.3 )                   55.5                55.7
North America                          169,298            221,418           (23.5 )                   44.5                44.3

Total sales                         $  380,285         $  500,059           (24.0 )                  100.0               100.0

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

                                                      Three Months Ended               Six Months Ended
                                                    July 4,        June 28,         July 4,        June 28,
                                                     2009            2008            2009            2008
Investment income                                  $   1,014       $   2,722       $   2,192       $   5,127
Foreign exchange gain (loss)                            (131 )           (69 )        (1,415 )           631
Other, net                                               (19 )          (651 )          (336 )          (905 )

Total other income                                 $     864       $   2,002       $     441       $   4,853


Rate of Return Analysis:
Average cash and marketable securities balances    $ 198,150       $ 288,216       $ 215,936       $ 275,664
Annualized rate of return                                2.0 %           3.8 %           2.0 %           3.7 %

Cash and marketable securities balances and resulting investment income for the second quarter of 2009 decreased compared to the second quarter of 2008 as a consequence of continuing stock repurchases since the second quarter of 2008, offset by reduced cash from operations. In addition, interest rates were more favorable in the first and second quarters of 2008 versus the first and second quarters of 2009, resulting in more investment income for the three and six month periods in 2008 versus 2009.

Specialty Printing Group



                                     Three Months Ended
                                    July 4,      June 28,     Percent          Percent of          Percent of
                                      2009         2008       Change        Net Sales - 2009    Net Sales - 2008
Net sales                          $  167,909    $ 228,762      (26.6 )                100.0               100.0
Cost of sales                          98,037      113,338      (13.5 )                 58.4                49.5

Gross profit                           69,872      115,424      (39.5 )                 41.6                50.5
Operating expenses                     39,784       55,861      (28.8 )                 23.7                24.4

Operating income                       30,088       59,563      (49.5 )                 17.9                26.1


                                      Six Months Ended
                                    July 4,      June 28,     Percent          Percent of          Percent of
                                      2009         2008       Change        Net Sales - 2009    Net Sales - 2008
Net sales                          $  338,677    $ 453,513      (25.3 )                100.0               100.0
Cost of sales                         195,132      226,151      (13.7 )                 57.6                49.9

Gross profit                          143,545      227,362      (36.9 )                 42.4                50.1
Operating expenses                     79,458      106,194      (25.2 )                 23.5                23.4

Operating income                       64,087      121,168      (47.1 )                 18.9                26.7

Net sales in our Specialty Printing Group (SPG) decreased 26.6% during the second quarter of 2009, with comparable percentage declines in all regions. Net sales for SPG decreased 25.3% for the year to date period of 2009 as compared to 2008, with comparable percentage 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 7.5% of printer sales in the second quarter of 2009, compared with 18.8% of printer sales in the second quarter of 2008, 7.1% for the first quarter of 2009 and 17.2% for the fourth quarter of 2008. New printer products accounted for 7.3% of printer sales during the first six months of 2009, compared with 18.9% of printer sales for the comparable six months 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 $3,415,000, net of hedges, on sales during the second quarter of 2009 compared with the second quarter of 2008, and a negative impact of approximately $10,154,000, net of hedges, on sales during the first six months of 2009 compared with the same period in 2008.

We currently hedge a portion of anticipated euro-denominated sales to partially protect Zebra against exchange rate movements. For the second quarter, this program resulted in a loss on hedges of $17,000. For the year to date period, this program resulted in a gain on hedges of $1,353,000.

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

                                            Three Months Ended                    Six Months Ended
                                       July 4,    June 28,    Percent       July 4,    June 28,    Percent
                                        2009        2008      Change         2009        2008      Change
Total printers shipped                  205,199     238,458     (13.9 )      404,417     480,859     (15.9 )
Average selling price of printers
shipped                               $     508   $     630     (19.4 )    $     512   $     622     (17.7 )

For the three and six month periods ended July 4, 2009, unit volumes decreased in nearly all printer product lines compared to the same periods 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 second quarter gross profit by $1,344,000, and year to date gross profit by $5,502,000. Lower volume, a less favorable product mix, and a lower overhead absorption due to lower volume 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 over time to constitute a greater portion of the units we sell.

Lower overall operating expenses resulted from decreases in payroll costs, outside commissions, project costs, professional service fees, travel and entertainment expenses, and offsite meetings. Much of the decreased payroll and benefit costs were a result of lower staffing levels and cost reduction initiatives, including a reduction in vacation accruals. Amortization of intangibles was reduced in the second quarter by $698,000 compared to the second quarter of 2008, and by $1,484,000 for the year to date period of 2009 as compared to the same period in 2008, due to asset write downs in the fourth quarter of 2008.

Zebra Enterprise Solutions



                                     Three Months Ended
                                  July 4,        June 28,        Percent          Percent of             Percent of
                                    2009           2008          Change        Net Sales - 2009       Net Sales - 2008
Net sales                         $ 19,767       $  25,020         (21.0 )                100.0                  100.0
Cost of sales                        7,903          12,729         (37.9 )                 40.0                   50.9

Gross profit                        11,864          12,291          (3.5 )                 60.0                   49.1
Operating expenses                  16,199          19,930         (18.7 )                 81.9                   79.7

Operating loss                      (4,335 )        (7,639 )       (43.3 )                (21.9 )                (30.6 )


                                      Six Months Ended
                                  July 4,        June 28,        Percent          Percent of             Percent of
                                    2009           2008          Change        Net Sales - 2009       Net Sales - 2008
Net sales                         $ 41,608       $  46,546         (10.6 )                100.0                  100.0
Cost of sales                       17,608          23,278         (24.4 )                 42.3                   50.0

Gross profit                        24,000          23,268           3.1                   57.7                   50.0
Operating expenses                  31,694          37,971         (16.5 )                 76.2                   81.6

Operating loss                      (7,694 )       (14,703 )       (47.7 )                (18.5 )                (31.6 )

Zebra Enterprise Solutions (ZES) sales decreased for the second quarter of 2009 compared to the second quarter of 2008 due to the effect of the challenging economy. Sales remained steady in hardware and services but were affected by decreases in license fees due to delays in customer implementation. Margins improved in services provided to customers due to reduced service costs. Net sales for ZES decreased 10.6% for the year to date period of 2009 as compared to 2008, with most of the decline related to the factors described for the second quarter of 2009.

ZES operating expenses for the second quarter of 2009 and the first six months of 2009 are lower than the comparable periods of 2008 due to lower staffing levels, cost containment efforts, collection of previously reserved accounts, reduced outside service costs, and lower amortization of intangibles due to asset write downs in the fourth quarter of 2008. Amortization of intangibles was reduced in the second quarter by $1,406,000 compared to the second quarter of 2008, and by $2,501,000 for the year to date period of 2009 as compared to the same period in 2008, due to asset write downs in the fourth quarter of 2008.

Liquidity and Capital Resources

As of July 4, 2009, Zebra had $206,988,000 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 six months of 2009 include the following (changes below include the impact of foreign currency):

• Operations provided cash in the amount of $32,428,000, primarily from net income, collection of receivables and reduced inventory levels as a result of reduced demand and printer manufacturing outsourcing.

• Accounts receivable decreased $17,512,000 because of lower sales and successful collection efforts.

• Accounts payable decreased $14,479,000, due to the timing of vendor payments and decreased purchasing as a result of reduced demand.

• Accrued liabilities decreased $21,855,000, due to the payment of payroll-related expenses and reduced foreign exchange forward contract liabilities associated with hedges.

• Income taxes payable decreased $2,773,000 because of the timing of tax payments and refunds.

• Purchases of property and equipment totaled $12,648,000.

• Net sales of investments totaled $55,750,000.

• Purchases of treasury shares totaled $41,600,000.

• Stock option exercises and purchases under the stock purchase plan contributed $2,027,000.

In February 2008, we announced that printer manufacturing was 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 July 4, 2009, consisted of the
following:



           U.S. Government and agency securities                 20.8 %
           Obligations of government sponsored enterprises (1)   10.4 %
           State and municipal bonds                             62.4 %
           Corporate bonds                                        1.6 %
           Certificates of deposit                                4.6 %
           Other investments                                      0.2 %

(1) Includes investments in notes issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Bank.

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 . . .