UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

For the transition period from                      to                     

Commission File Number:  000-19406

Zebra Technologies Corporation

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (847) 634-6700

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).   Yes  ýNo o

As of July 30, 2004, there were the following shares outstanding:

Class A Common Stock, $.01 par value                                                      47,782,170

ZEBRA TECHNOLOGIES CORPORATION

QUARTER ENDED JULY 3, 2004

INDEX

2

PART I - FINANCIAL INFORMATION

Item 1.                                   Consolidated Financial Statements

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

See accompanying notes to consolidated financial statements.

3

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Amounts in thousands, except per share data)

(Unaudited)

See accompanying notes to consolidated financial statements.

4

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

5

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

6

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Basis of Presentation

Management prepared these unaudited interim consolidated financial statements for Zebra Technologies Corporation and subsidiaries (Zebra) according to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information required in full-year audited financial statements is omitted, as allowed by SEC rules and regulations. These omissions relate to required annual disclosures, which have not materially changed since our Form 10-K was filed with the SEC. See our Form 10-K for the year ended December 31, 2003, for these additional disclosures.

The consolidated balance sheet as of December 31, 2003, in this Form 10-Q is taken from the audited consolidated balance sheet in our Form 10-K. These interim financial statements include all adjustments necessary to present fairly Zebra’s consolidated financial position as of July 3, 2004, the consolidated results of operations for the three and six months ended July 3, 2004 and June 28, 2003, and cash flows for the six months ended July 3, 2004 and June 28, 2003. These results, however, are not necessarily indicative of results for the full year.

Note 2—Stock-Based Compensation

As of July 3, 2004, we had three stock-based compensationplans available for future grants. We account for these plans under the principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,and related interpretations. No stock-based compensation cost is reflected in net income, because all options granted under these plans had grant prices equal to the market value of the underlying common stock on the date of grant. The following table shows the effect on net income and earnings per share if we had used the alternative fair value recognition provisions of Statement of Financial Standards (SFAS) No. 123,Accounting for Stock-based Compensation(in thousands, except per share data):

Note 3 – Inventories

The components of inventories are as follows (in thousands):

7

Note 4 – Investments and Marketable Securities

We classify the majority of our investments and marketable securities as available-for-sale in accordance with the classifications defined in SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.

SFAS No. 115 requires that changes in the market value of available-for-sale securities are reflected in the accumulated other comprehensive income caption of stockholders’ equity in the balance sheet, until we dispose of the securities. Once these securities are disposed of, either by sale or maturity, the accumulated changes in market value are transferred to investment income. On the cash flow statements, changes in the balances of available-for-salesecurities are shown as purchases, sales and maturities of investments and marketable securities.

Changes in market value of tradingsecurities are recorded in investment income as they occur, and the related cash flow statement includes changes in the balances of trading securities as operating cash flows.

Unrealized gains and losses on investment securities are included in these financial statements as follows (in thousands):

Note 5—Stockholders’ Equity

Share count and par value data related to stockholders’ equity are as follows:

Note 6—Other Comprehensive Income (Loss)

Stockholders’ equity includes certain items classified as other comprehensive income, including:

•                  Foreign currency translation adjustment relates to our non-U.S. subsidiary companies that have designated a functional currency other than the U.S. dollar. We are required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, month-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of other comprehensive income.

•                  Unrealized gains (losses) on foreign currency hedging activities relate to derivative instruments used to hedge the currency exchange rates for forecasted euro sales. These hedges are designated as cash flow hedges, and we have deferred income statement recognition of gains and losses until the hedged transaction occurs. See Note 9 for more details.

•                  Unrealized gains (losses) on investments classified as available-for-saleare deferred from income statement recognition until the gains or losses are realized. See Note 4 for more details.

8

The components of other comprehensive income (loss) included in the Consolidated Statements of Comprehensive Income are as follows (in thousands):

The components of other comprehensive income (loss) included in the Consolidated Balance Sheets are as follows (in thousands):

9

Note 7—Earnings Per Share

Earnings per share were computed as follows (in thousands, except per share amounts):

Potentially dilutive securities that were excluded from the earnings per share calculation consist of stock options with an exercise price greater than the average market price of the Class A common stock. These options were as follows:

Note 8—Goodwill and Other Intangible Asset Data

Intangible asset data are as follows (in thousands):

10

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 last assessment during June 2004.

We evaluate the impairment of long-lived assets including identifiable intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Factors considered that might trigger an impairment review consist of:

•                  Significant underperformance relative to 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

•                  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 measure impairment based on a projected discounted cash flow methodology using a discount rate that incorporates the risk inherent in the cash flows.

Note 9—Derivative Instruments

In the normal course of business, portions of Zebra’s operations are subject to fluctuations in currency values. We manage these risks using derivative financial instruments.

Hedging of Net Assets

We use forward contracts and options to manage exposure related to our pound and euro denominated net assets and designate these contracts and options as fair value hedges. We record gains and losses on these contracts and options in income each quarter along with the translation gains and losses related to our net euro asset position, which would ordinarily offset each other to a large extent. Summary financial information related to these activities follows (in thousands):

11

Hedging of Anticipated Sales

We manage the exchange rate risk of anticipated euro denominated sales using forward contracts and designate these contracts as cash flow hedges. Gains and losses on these contracts are deferred in other comprehensive income until the contracts are settled and the hedged sales are realized, at which time the deferred gains or losses will be reported as an increase or decrease to sales. Summary financial information related to the cash flow hedges of future revenues follows (in thousands, except percentages):

Note 10—Costs associated with Exit or Disposal Activities

During the third quarter of 2003, we initiated a plan to close our engineering site in Varades, France. This plan was announced in October 2003 and is accounted for under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. All exit costs associated with this activity are identified on a separate line of our income statement, as part of operating expenses. Our consolidation plan is intended to reduce costs and improve manufacturing efficiency.

Our Varades facility conducted the product development for our line of card imaging printers and included the European service center for these printers. We transferred the product development activities to Camarillo, California, where we have manufactured these printers since 2001. We transferred the European card imaging printer service operation to our Preston, United Kingdom, facility where the Europe, Middle East and African distribution of these printers already occurs. To date, we eliminated most of the Varades administrative functions including finance, information systems and human resources support. At the completion of the plan, the Varades facility will be closed and no employees will remain. As of July 3, 2004, we expect the following exit costs to be incurred for the entire project (in thousands):

12

During January 2004, we announced plans to consolidate our Warwick, Rhode Island, printer manufacturing and repair service into our Camarillo, California and Vernon Hills, Illinois locations. This transition was expected to take 12 to 18 months to complete. The Warwick facility will continue to manufacture and distribute bar code label printer supplies, as well as house engineering, product management, and the key account sales functions for mobile products. As of July 3, 2004, we expect the following exit costs:

Liabilities and expenses related to exit activities for the three and six months ended July 3, 2004 were as follows:

The accrued liability at July 3, 2004 was reduced from the amount at December 31, 2003 by the excess of the amounts paid during the quarter over the expenses incurred.

Note 11—Contingencies

On April 24, 2003, Paxar Americas, Inc. (Paxar Americas) filed a patent infringement lawsuit in the United States District Court for the Southern District of Ohio against Zebra and certain of its subsidiaries. Paxar Americas’ Complaint alleges that certain of Zebra’s products infringe on one or more of eight identified Paxar Americas patents, although not each product is accused of infringing each patent. Zebra has filed an Answer to Paxar Americas’ Complaint, denying Paxar Americas’ allegations of infringement and asserting several affirmative defenses, including the invalidity of Paxar Americas’ asserted patent claims. Paxar has moved to amend its complaint to add other allegations of infringement and a trademark-based claim. Zebra has opposed Paxar’s Motion to Amend, and the parties are awaiting the Court’s ruling on the Motion.

On November 21, 2003, ZIH Corp. (ZIH) filed a Complaint in the United States District Court for the District of Massachusetts against Paxar Corporation, alleging that Paxar Corporation printers infringe ZIH’s U.S. Patent Nos. 5,813,343 and 5,860,753. Paxar Corporation answered ZIH’s Complaint, denying infringement and seeking a declaratory judgment that ZIH’s patents-in-suit are not infringed and are invalid and/or unenforceable. Paxar Corporation filed a motion to transfer ZIH’s Massachusetts suit to Ohio federal court. ZIH opposed Paxar Corporation’s motion to transfer, and the parties are awaiting the Court’s ruling on the transfer motion.

On November 25, 2003, Paxar Americas filed a Complaint against ZIH in the United States District Court for the Southern District of Ohio, seeking a declaratory judgment that the patents asserted by ZIH in its Massachusetts Complaint are not infringed and are invalid and unenforceable. On December 17, 2003, Paxar Americas amended its complaint to add Zebra Technologies Corporation as a defendant. The Court has granted the parties’ motion to stay this action pending the Massachusetts District Court’s ruling on Paxar Corporation’s motion to transfer. The parties have

13

agreed to file a motion to transfer this action to the Massachusetts District Court if the Massachusetts District Court denies Paxar Corporation’s pending motion to transfer.

We do not believe a liability is probable and are unable at this time to estimate the range of the potential liability that would result from an unsuccessful defense, and consistent with the requirements of SFAS No. 5, Accounting for Contingencies, no liability has been recorded in Zebra’s consolidated financial statements as of July 3, 2004.

Note 12—Subsequent Events

On July 15, 2004, the Board of Directors authorized a fifty percent (50%) Class A common stock dividend on each issued share of Class A common stock payable before the close of business on August 25, 2004, to the holders of record of all such shares at the close of business on July 29, 2004.

14

Item 2.                                   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations: Second Quarter of 2004 versus Second Quarter of 2003, Year-to-date 2004 versus Year-to-date 2003

Sales

Sales by product category, percent change, and percent of total sales for the three and six months ended July 3, 2004, and June 28, 2003, were (in thousands, except percentages):

Sales to customers by geographic region, percent changes and percent of total sales for the three and six months ended July 3, 2004, and June 28, 2003, were (in thousands, except percentages):

We believe that our sales growth for the second quarter of 2004 reflects the overall increase in economic activity as well as the success of sales and marketing programs to improve demand for Zebra products, strengthen distribution channel relationships and increase the awareness of Zebra products and the Zebra brand in targeted end markets. The growth in Zebra’s business was well balanced across geographies, products, and channels. New printer products (defined as printers released within 18 months prior to the end of the applicable fiscal period) accounted for 27.8% of printer sales in the

15

second quarter of 2004 and 25.2% of printer sales in the second quarter of 2003. Year to-date, new printer products accounted for 28.3% of printer sales in 2004, compared with 23.3% for the corresponding period in 2003.

In North America, we introduced a new marketing and channel program during 2003, intending to strengthen the quality of our channel relationships and expand the number of resellers selling Zebra products. We believe that this program is succeeding. Over the past year, we substantially increased the number of new reseller partners in North America and increased demand for solutions incorporating Zebra products.

We also believe that a new organizational structure in Europe helped achieve sharper business focus and contributed to the sales growth in that region. Zebra representatives added to Asia-Pacific and Latin America in the past two years also had a positive impact on the second quarter sales.

Our international sales are denominated in multiple currencies, primarily the dollar, pound and euro, which cause our reported sales to be subject to fluctuations in currency rates. When significant currency rate fluctuations occur, we review our product pricing and make appropriate changes to maintain our competitive position. We estimate that favorable foreign exchange movements of the euro and the pound versus the dollar, offset by product pricing adjustments, had a net positive effect of $1,238,000 on sales during the second quarter.

We currently hedge a portion of anticipated euro-denominated sales to protect Zebra against exchange rate movements. For the second quarter, this program resulted in a gain of $12,000 and a year-to-date loss of $631,000. See note 9 to the financial statements for a more detailed discussion of this hedging program.

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

For the second quarter of 2004, unit volumes increased in all product lines and all regions.

Gross Profit

Gross profit information is summarized below (in thousands, except percentages):

Gross margin improved by 0.6 percentage points over last year due to: cost reduction programs, higher rates of capacity utilization and favorable foreign exchange rates. The relatively modest gain over last year speaks primarily to the fact that last year’s margins were quite strong and increases from this level are more difficult to attain. We anticipate that gross margins will fluctuate in the range of 51.0% to 53.0% for the balance of the year.

Selling and Marketing Expenses

Selling and marketing expenses are summarized below (in thousands, except percentages):

We continue to invest heavily in demand-generating activities to build brand equity in our core product lines as well as in the emerging area of radio frequency identification (RFID). During the second quarter of 2004, selling and marketing expenses increased due to higher payroll costs from increased staffing and higher market development funding. Much of

16

the additional headcount related to placing more Zebra representatives in high-growth international regions as part of our geographic expansion activities. We also increased staff for better coverage of strategic accounts. For the first six months of 2004, advertising costs also increased over the corresponding period of 2003.

Research and Development Costs

The development of new products and enhancement of existing products are important to Zebra’s business and growth prospects. To maintain and build our product pipeline, we made investments in research and development, summarized below (in thousands, except percentages):