摩托羅拉 (MSI) 2003 Q2 法說會逐字稿

Good day everyone.

Thank you for holding, and welcome to today's Symbol conference call. (OPERATOR INSTRUCTIONS).

At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Mark Greenquist.

Please go ahead, Mark.

Thank you.

Thank you for joining us for today's teleconference and online conference.

Some of you may be having difficulty locating the presentation on our Website.

You should go to www.Symbol.com/investors and then click on Webcast.

Then you should scroll down to the line, Supporting Materials, and click on the words at the left -- not on the PDF icon.

Hopefully, that will help you that are having some difficulties.

Okay.

So with us on the call today are Richard Bravman, Symbol Vice Chairman and CEO, and William Nuti, President and COO.

The primary purpose of our call today is to bring you up-to-date on Symbol's operating results and the status of the Company's internal investigation.

We will also provide you with some news of some key customer wins, as well as progress on our organizational buildup.

We have opened up the conference line for two and half hours to allow us to thoroughly explain to you this information and also to allow ample time for Q&A.

Before we start, a brief disclaimer reflecting the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

For those of you not on WebX (ph), I am now on slide two.

Displayed on the screen is the customary Safe Harbor provision.

Beyond that, let me caution that the numbers we are providing on today's call and in today's news release are unaudited.

We believe, however, that these reported results accurately reflect in all material respects the results that will be reported in our 2002 annual report on Form 10-K, as well as Forms 10-Q for the first and second quarters of this year.

As you are all aware, we have not filed our December 31st, 2002 year-end results with the SEC, as we are finalizing the document and our external auditors are completing their audit.

We are working extremely hard with our external auditors to bring these matters to a close as soon as possible.

Upon approval of the 10-K, as well as the 10-Qs, by Symbol's Board of Directors, we will file them with the commission.

However, at this point, we are not in a position to provide a timetable for those filings, and until the audit is complete and the documents are filed, these results are subject to change.

During the course of this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company.

Such statements are just projections, and actual events or results may differ materially.

Likewise, as we previously disclosed and reiterate here, while we are comfortable with the accuracy of the numbers we are presenting today, these numbers are subject to change as a result of the audit.

Any forward-looking statements are further qualified by risks and uncertainties identified in filings Symbol makes periodically with the SEC.

Copies of our SEC filings are available upon request, or by accessing our company Website, www.Symbol.com.

Now I will turn the mike over to Rich.

Thank you, Mark, and thank you all for joining us.

I am now on slide three, the agenda.

First this afternoon I will cover the status of our internal investigation and related matters.

Then I will outline for you our progress toward our financial re-statement and briefly discuss some recent key additions to our leadership team.

Following my update, Mark will come back with a drill-down on the unaudited, restated financials, both the restated numbers for 1998 through 2002, as well as results for this year's first and second quarters.

Then Bill will provide detail on progress in our various markets, updates on some Symbol products and programs, several key customer wins, and a look at third quarter guidance.

Then, of course, we will open the line for your questions.

While we believe we are in the final stages of the re-statement process, it is not yet complete.

Nevertheless, we felt it important to hold this conference now to give as much visibility as possible to the current state of our business.

We have approached the investigation and re-statement processes with urgency and a commitment to thoroughness and accuracy.

Details of our efforts will be included in my later remarks.

I can assure you, however, that during the time they have been underway, the vast majority of the Company has been focused on laying the organizational groundwork to allow Symbol to scale for future growth -- planning and developing innovative solutions for our customers going forward and bringing new products to market, and importantly, booking orders for our products and enterprise mobility solutions.

Bill will tell you about some of those wins today, and in this quarter and next, you can anticipate the introduction of some exciting new products.

The earlier reported Securities and Exchange Commission and Department of Justice investigations are continuing, and we will continue to provide updates on the course of these investigations as events warrant.

My remarks today, as well as those made by Mark, are intended to comprehensively cover what we have learned as a result of our internal investigation and re-statement process, and I believe we will be able to answer all of your questions regarding what happened, the re-statements causes and its impact on our numbers.

However, as the SEC and DOJ investigations are ongoing, we cannot, and will not, discuss specific transactions or the role of specific individuals involved in past inappropriate or illegal activities, and we will not be able to be elaborate on those details in today's Q&A.

Now, on slide four.

As this slide depicts, there previously existed in the Company an atmosphere and culture that we believe allowed for and fostered a working environment that ultimately lead to the difficulties we are now working so hard to correct.

The admission of fraud by two former company financial executives underscores the serious nature of the problems that existed at the Company.

In short, company executives during that time period were overly aggressive in setting sales and earnings growth targets, which lead to increased pressure to achieve results and an exceedingly short-term focus.

In addition to this quarterly pressure, poor integrity and the execution of accounting activities and a range of operational deficiencies, such as poorly integrated processes and systems infrastructure, combined to result in the introduction of a wide array of errors and irregularities in the Company's books and records.

A combination of these and other factors resulted in a range of inappropriate activities in sales, services, operations and finance.

In that period, and in that environment it seems, when the facts did not support the immediate objective, the facts were interpreted to achieve the desired outcome.

And during that time frame, the environment was such that individuals who may have spoken out against these practices, likely were ignored, overwhelmed or driven out of the Company by certain former senior executives.

There was a pattern of learned bad behavior in the ranks.

This is what our work of the past year and half discovered.

Now, let me turn to a brief description of how.

Slide five.

Symbol learned in early 2001 that the SEC was initiating an inquiry into the company, triggered by an anonymous letter they received earlier.

The Board ordered an investigation of revenue recognition practices related to this inquiry.

We learned much later that as a result of the apparently intentional actions of one or more former company officers during this initial internal investigation, it was rendered superficial and ineffective and that the Board was misled regarding its conduct and findings.

Late in 2001, the Senior VP for Worldwide Sales exited the Company.

Later, in February of 2002, the board asked for and accepted the resignation of then CEO and President Tomo Rusmilavich (ph).

I was appointed President;

Jerry Swartz reassumed the role of CEO, and plans to recruit an executive partner for me were set in motion by the Board.

These efforts resulted in William Nuti being reported to the post of President and COO in August 2002, and my assumption of the duties of COO and Vice Chairman at that same time.

Let's look back again to the first quarter of 2002 when the Board hired a second external independent legal firm to undertake a complete and autonomous investigation.

They, in turn, brought on board a forensic team from an external auditing firm to assist that investigation.

While this investigation ultimately proved to be effective in revealing the problems I summarized earlier, its early progress was initially hindered by an apparent cover-up effort by a former senior officer of the company.

That officer and others were subsequently exited from the Company.

As the second investigation progressed, we fully and extensively cooperated with the SEC and the U.S. attorney's office, accumulated the data toward the eventual statement of our financials and simultaneously took steps to exit from the Company those individuals found responsible for inappropriate activities, correct internal procedures and methodologies, build a culture of integrity and lay down the processes and systems infrastructure required to scale Symbol for growth.

Slide six.

The investigation has been an enormous undertaking, involving hundreds of people, tens of thousands of hours of effort and tens of millions of dollars of expense.

Here, you can see the scope of the undertaking.

The outside counsel conducted more than 200 interviews with current and former employees, and hundreds of thousands of e-mails, documents and invoices were examined.

We reviewed and evaluated Symbol's historical business with more than 200 channel partners, and examined and analyzed tens of thousands of accounting entries, including a substantial portion of the entries related to the recognition of revenue and the booking and releasing of reserves.

In specific accounts that the investigation had flagged as problem areas and where prior management had inappropriately applied its discretion in judgment, we literally reconstructed activity in those accounts, entry by entry.

It has been thorough, and yes, it has taken considerably more time than any of us would have imagined when it got underway 17 months ago.

I regret that I did not fully anticipate the extent to which this would be a process of discovery and that we have had to change our estimates for completion of our work on several occasions.

I take full responsibility for this and appreciate your patience.

Throughout this process, we have endeavored to deal aggressively with issues as they emerged while simultaneously working on a foundation for a strong Symbol going forward.

Let me assure you that the Company's board, the current leadership team and I personally, are very committed to setting this right, definitively putting the issues uncovered through our investigation behind us, and realizing the potential that we know is inherent in Symbol.

Slide seven.

During the last year, with the support of the Board, Bill and I have been building out our new leadership team with some key senior executives, most recently the additions of Philip Juliano as Chief Marketing Officer -- he joins us after seven years in key marketing positions at IBM and a wealth of experience in technology marketing -- and Peter Lieb as General Counsel.

Peter choices us from International Paper, a $25 billion company where he was Deputy General Counsel and Chief Counsel for Litigation.

Earlier in his career, he served as a federal prosecutor, as well as a law clerk to Supreme Court Chief Justice Warren Burger.

His experience spans the facets of corporate governance, intellectual property, M&A and both criminal and civil litigation.

This chart shows the current new leadership team that the Board and I are extremely proud to have assembled here at Symbol.

Of the 14 key management positions shown here, eight are occupied by executives recently recruited to Symbol.

These appointments have been made not only with the immediate goal of corrective action where required, but also with the objective of today building the Symbol they will take us securely, confidently, proudly and profitably into the future.

In addition to building out the executive leadership team, in the last 18 months, we have also significantly supplemented the management ranks at the next level.

Installed the fundamentally new management system and planning process.

Used them to create a compelling new vision for Symbol's role as a leader in enterprise mobility and to drive significant gains in operational excellence and financial performance.

Installed a new go-to-market strategy, anchored by a scalable channel partnership program.

Received and initiated new technology and product development programs aimed at realizing our vision for end-to-end enterprise mobility.

Made significant gains in our supply chain performance.

Restructured our services for productivity and our global products group around a more responsive market-facing model, and articulated and drove a new culture, focused on integrity, excellence, innovation, commitment and customer success.

Beyond driving these strategic initiatives, we are working with the Board to strengthen its structure, membership and procedures to effectively play its crucial role in our future development and governance.

Now, on to slide eight.

Now Mark will provide a closer look at the pending restated financials, as well as results to date in 2003.

Bear in mind, that this is the first occasion in which we are reporting the results reflecting the impact of the pending re-statement.

Although the investigation was well underway at the time of our last conference call in April, the characterization of the Q1 results discussed at that time did not include any of the impact of the pending re-statement that you will see today.

That said, I will turn it over to Mark.

Thanks, Rich, and to all of you for joining us today.

As you might imagine, we have had discussions at many levels around the decision to report unaudited numbers, and because we believe that transparency and frank disclosure are the right way to go, we felt it was the right move in order to help you understand the current state of the business.

As Rich mentioned earlier, this re-statement was a process of discovery, and the more we peel back the onion, the more the Company realized the pervasiveness of the accounting issues that needed to be addressed and rectified.

With the advantage now of hindsight, I can characterize the re-statement this way.

First, we now understand that Symbol's accounting issues were more pervasive and reached further back in the Company's history than originally thought.

That said, while the issues were extensive, they were nevertheless pretty straightforward, mostly involving the exhilaration of revenue recognition and the deferral of costs and expenses.

Second, because of the wide range, pervasiveness, long duration of the issues involved, the task of unraveling everything was more complicated and complex than originally thought.

And third, the task of investigating such a large number of transactions over such a long period of time was further complicated by the fact that the records had not been kept with the thought in mind that someday we would have to reconstruct and analyze, end-to-end, all of these transactions.

Just to give you some perspective on the breadth of the impact of our work to date, ultimately the re-statement process affected substantially all line items of the Company's financial statements from 1998 through 2002.

Now, moving to slide nine.

That being said, I can essentially categorize the impact into six key areas of focus.

They are revenue recognition; inventory; accruals, reserves and prepayments; acquisitions and investments; restructuring, and stock options.

Let me take a moment to briefly discuss each of those.

Number one is revenue recognition.

An investigation showed that the Company consistently recognized revenue earlier than appropriate and recorded erroneous revenue during the re-statement period.

Re-stated numbers you are seeing today reflect the proper recognition of revenue, in accordance with SAB-101.

Second, the investigation uncovered numerous errors and irregularities in the area of inventory, including reserves for excess and obsolete inventory.

In order to correct these, we re-stated E&O reserves using a consistent and objective method, which has resulted in generally higher levels of E&O reserves throughout the period covered by the re-statement.

I should also note that the inventory write-downs that were previously recorded in the fourth quarter of 2000, as well as the third quarter of 2001, have been reversed and therefore don't appear in the re-stated numbers.

Third, accruals, reserves and pre-payments are areas of judgment where we found numerous problems.

As part of the re-statement, we have reviewed all of these areas and made appropriate changes to the previous accounting.

Fourth, we found errors and irregularities related to the accounting of the Company's various acquisitions and investments.

We have reviewed these transactions one by one, and as part of the re-statement, made the appropriate changes.

Fifth, restructurings.

We encountered numerous problems in the accounting for the Company's various restructurings throughout the time period.

As part of the re-statement, we have reviewed all of these restructurings and made appropriate changes, and lastly, the issue of stock options, as reported in our August 29th news release, we discovered errors and irregularities in the administration of our Executive Stock Option program.

These irregularities have triggered variable or marked-to-market accounting for a certain portion of the options, which is reflected in the re-stated numbers.

Before we jump right into the full income statement, I would like to review some of the key line items, starting with revenue.

Moving to slide 10.

As you can see on this chart, during the five-year period, 1998 through 2002, the Company generated just over 6 billion in revenue.

However, the re-stated revenue for the period is cumulatively 223 million less than previously reported, with fiscal year 2000 being the most troublesome period.

In 2000, previously reported revenue was $234 million higher than the re-stated revenue.

There were a number of primary drivers to these changes to revenue.

First, we analyzed our service revenue over the re-statement period, and when we applied SAB-101, the recognition of that revenue, we encountered many difficulties in determining if persuasive evidence and an arrangement actually existed.

As a result, we have adopted a bill and collected approach to recognizing service revenue, which essentially means that revenue is not recognized or deferred contract revenue does not begin to amortize until cash has been collected from the customer.

Second, as we analyzed and evaluated our channel partners, we discovered that many did not have sufficient economic substance such that we would be reasonably assured of payment.

In short, they could not pay for product acquired from Symbol without re-selling it to an end-user.

As such, for sales through these channel partners, we have also adopted a bill and collected approach to revenue recognition, hence deferring the recognition of this revenue until payment is received from the channel partner.

Third, for sales through our distribution partners here in North America, we have adopted a sales out approach to revenue recognition.

Going forward, we intend to have all sales through distribution on a sales out basis starting in 2004.

Fourth, there were numerous timing-related adjustments for items like extended payment terms, FOB destination transactions, staging transactions, as well as bill and hold transactions.

And finally, the other line represents adjustments to revenue-related reserves such as credit memo reserves, as well as adjustments to correct for inappropriate transactions, such as the candy deals referred to in the SEC complaints, or investment-related revenue transactions, such as the Air-Click (ph) transaction which was entered into in the second half of 2000.

As you can see, these sorts of transactions were primarily concentrated in fiscal year 2000.

Now, moving to slide 11.

Now, let's turn to gross margin.

As you can see in this chart, in the cumulative five-year period, the Company generated just over 2 billion of gross margin.

However, the restated gross margin is cumulatively 101 million less than the previously reported gross margin.

There are four main causes for this reduction in gross margin.

First, the re-timing of more than 200 million of revenue caused a 226 million reduction in gross margin over the re-statement period.

The very high flowthrough of revenue loss to gross margin is explained by the relatively high margin impact from the revenue losses in 1998 through 2000, only being partially offset by the relatively low margin on the revenue pickup in 2001 and 2002.

Also, as we mentioned previously, we re-evaluated the levels of inventory reserves and generally increased inventory reserves across the re-statement period.

As you can see in this chart, these incremental charges for inventory reserves adversely impacted gross margins in those periods.

Offsetting the negative impact of revenue pre-timing and inventory reserves, we have reversed the amortization of previously capitalized engineering expenses.

In this regard, the company had inappropriately capitalized period engineering expenses and then amortized those capitalized expenses through gross margin in later periods.

The reversal of this practice has a beneficial impact to gross margin in every year of the re-statement period.

As you'll see on the next slide, though, there is an offsetting increase to operating expenses from this change.

Finally, as we also mentioned previously, we have analyzed the accounting for the Company's previous restructuring charges, and we have made numerous adjustments to the accounting for these charges.

Here, you see the impact of those adjustments on gross margin, the cumulative increase of $35 million over the re-statement period.

Now, moving to slide 12.

Now, let's turn to operating expenses.

As you can see on this slide, during the five-year period, the Company incurred just over 2 billion of operating expenses, excluding the impact of variable accounting for stock options, which I will address on the next slide.

The re-stated operating expenses are cumulatively 237 million higher than the previously reported expenses, which could be attributed primarily to three factors.

First, as we discussed on the previous slide, the effective expensing of period engineering expenses, rather than capitalizing them, and amortizing them in later periods as a part of cost to sales.

Second, the impact from the adjustments made to the accounting for the Company's previous restructuring charges.

And third, a number of other adjustments that showed the highest impact in fiscal 2002, due primarily to changes in the timing and amounts of entries to accrual accounts.

Now, moving to slide 13.

Now, let's turn to the full income statement.

We have already discussed revenue, gross margin and operating expense in detail.

Below the Operating Expense line, you can see the impact of variable accounting on the Stock Option program.

To summarize, about 42 million options, representing roughly 52 percent of the total of 81 million stock options granted, are subject to variable accounting during the re-statement period.

In July 2002, variable accounting for options ceased when irregularities in the administration of the exercise of options was stopped.

The cumulative pre-tax charge to expense during the period 1998 through July 31st, '02 is $230 million.

One result of these changes to prior period accounting is that re-stated earnings before taxes were lower than previously reported in 1998 through 2000 and slightly higher than previously reported pre-tax earnings in 2001 and 2002.

However, it should be noted that the 2001 and 2002 improvement was due to the impact of stock option accounting.

Excluding that impact, re-stated earnings before taxes were lower than previously reported numbers in each period.

Re-stated earnings after-tax in EPS tracked the same trend as the pre-tax numbers.

That means that, excluding the swings caused by the stock option accounting, the re-stated numbers are lower than the previously reported numbers in each year, 1998 through 2002.

Now, moving to slide 14.

Now, let's turn to the impact of the pending re-statement on the balance sheet.

However, before we get into the full balance sheet, let's look at the impact to receivables and inventory.

As you can see on this chart, we stated receivables are considerably lower than the previously reported numbers, largely because of the adoption of bill and collected accounting for certain channel partners, as well as for service revenue.

As a result, you also see a significant improvement in DSOs in each period.

The primary factor in packing receivables was the re-timing and reversal of revenue.

However, partially offsetting revenue-related impacts was the reversal of a number of balance sheet reclassifications that had been done to give the appearance of lower receivable balances and improved working capital performance.

In addition, other adjustments, such as adjustments to various reserve accounts, also partially offset the revenue-related reductions to receivables.

Now, let's move to inventory, and that is slide 15.

Of note here, the re-stated inventory is lower than 1998, 1999 and 2002, but higher in 2000 and 2001.

In addition, you will see that inventory turns have improved versus the previously reported numbers in '98 and '99, as well as 2002, but were worse in 2000 and 2001.

The two main drivers of these changes are the reversal and re-timing of revenue, hence product returning to inventory, as well as the adjustments made to inventory accounts, in particular reserves for access and obsolete inventory.

Now, let's turn to slide 16 -- the full balance sheet.

As you can see on this slide, in addition to the divergence between re-stated and previously reported receivables and inventory, you will note significant changes in other current assets and other assets, with the differences primarily driven by changes in deferred taxes resulting from the stock option accounting change.

Those are the major changes to the asset side of the balance sheet.

On the other side of the balance sheet, re-stated liabilities are roughly in line with previously reported numbers.

The main impact of the pending re-statement is seen in shareholders' equity, which at the end of 2002 was 956 million, representing a 255 million drop from the previously reported 1.211 billion of shareholders' equity.

That is a greater drop than we had previously expected.

However, it is important to note that, as you'll see shortly, at the end of the June 2003 quarter, shareholders' equity returned to approximately $1 billion, in line with our prior disclosures regarding the impact of the re-statement.

Now, slide 17.

I know that is a lot to absorb.

We will be happy to answer your question's during the Q&A period.

And be aware that these charts are posted to the Symbol Investor Relations Website, so you can go there to take a closer look at the 1998 through 2002 numbers.

Now, we will move on to results for the first and second quarters of '03.

These next few charts are also posted on the Investor Website.

Turning to slide 18.

First, let's take a moment to update Q1 2003 results and the impact of re-statement on the previously reported numbers.

First quarter revenue of 379 million is 22 million higher than the previously reported 357 million, due primarily to better collections of product revenue from channel partners who are now on a bill and collected basis.

In short, we collected more cash from, and as a result, recognized revenue deferred from prior periods, with these channel partners than we had sold into them in Q1 which was our prior revenue recognition basis.

As restated, this represents a sequential 7 million or 2 percent increase from Q4 '02, and a year-over-year increase of $60 million or 19 percent versus the year ago quarter.

Primarily as a result of this increase in revenue, gross margin, gross margin increased 21 million to 160 million from the previously reported gross margin of 139 million with sequential and year-over-year increases of $10 and $81 million, respectively.

Gross margins expanded to 42.2 percent from 40.3 percent in the fourth quarter of '02 and 24.8 percent in the first quarter of '02.

Now, let's turn to operating expenses.

Re-stated operating expenses increased 5 million to 136 million from the previously reported 131 million.

The increase is due to the change in how we account for engineering expenses.

As we mentioned previously, the Company is no longer capitalizing period engineering expenses (technical difficulty) -- and subsequently amortizing that capitalized engineering through cost of sales in later periods.

Of note, included in operating expenses is 5.3 million of expense related to the re-statement activities in the first quarter.

As a result of these changes to previously reported revenue, gross margin, and operating expenses, net earnings increased $13 million to $18 million from a previously reported 5 million.

And EPS increased 6 cents to 8 cents per share from a previously reported 2 cents per share.

Now, we will move to this year's second quarter results.

Second quarter revenue of 375 million was 4 million lower than Q1 revenue of 379 million.

This sequential decrease was driven by a 14 million reduction in product revenue, partially offset by a 10 million increase in services revenue.

Driving these sequential changes are lower collections from channel partners on a bill and collected revenue basis, partially offset by better sales outperformance from distribution.

As you will recall, the first quarter this year had been a very strong collection quarter for channel partners on a bill and collected basis.

Also of note, there was a year-over-year increase of 48 million or 15 percent with a $39 million or 16 percent increase in product revenue and a $9 million or 12 percent increase in services revenue.

The lower revenue drove a sequential decrease of 6 million in gross margin to 154 million.

Year-over-year gross margin increased by $57 million.

Gross margins shrank 1 percentage point to 41.1 percent from 42.2 in Q1 '03, but expected more than 11 percentage points from 29.7 percent in Q2 '02.

Operating expenses in the quarter increased 10 million to 146 million from Q1 OpEx of 136 million.

Driving the increase was 14.5 million of expense related to re-statement activities in Q2 '03, an increase of 9 million from the Q1 '03 level of re-statement expenses.

This resulted in a net earnings decrease of $9 million to $9 million from 18 million in Q1 '03.

And a decrease in EPS of 4 cents to 4 cents per share from 8 cents per share in Q1.

Now, let's take a look at the '03 balance sheet.

This is slide 20.

Of note here is the Company's continuing progress in managing receivables and inventory, both of which trended lower during the first half of the year.

We ended the second quarter with 124 million in receivables, representing DSOs of 30 days, and down from 153 million at year-end '02.

And we have 207 million in inventory, down from 261 million at the close of '02.

Inventory turns rose above 4 in the second quarter, continuing the positive trend that we have seen over the last few quarters.

On the liability side of the balance sheet, current liabilities continue to drop in the second quarter as a result of the further paydown of bank debt.

We ended the second quarter with about 15 million in bank debt.

But currently we have nothing drawn against our bank credit facility.

Finally, as I stated earlier, shareholders' equity at the end of Q2 was roughly $1 billion.

In short, Symbol's balance sheet is in excellent condition with nearly 100 net cash, debt at near zero, reduced capital tied up in receivables and inventory, and substantial shareholders' equity.

Before handing it over to Bill, let me comment briefly on Symbol's financial performance for 1998 through the second quarter of '03 in light of the breadth of the impact of the re-statement, as well as the significant reduction in earnings in the re-stated numbers over 1998 through the 2002 period.

Basically, the Company made modest amounts of money in 1998 and 1999, and then lost money in 2000, 2001 and 2002.

However, I don't believe that this happened because the Company's business model was flawed.

Rather, this was a result of some extraordinarily poor operating decisions, namely, over-producing to meet extremely aggressive sales targets and then trying to mask that over-production by stuffing the channel.

Absent that sort of behavior, we believe that this can be an extremely successful company.

You can see this in the improving financial performance over the past few quarters as Rich, Bill and team have implemented our management system, bringing improved rigor and discipline to the operations of the Company and moving closer to our goal of operational excellence.

In addition, I personally believe we have made significant changes to the culture and environment here at Symbol that will ensure a high degree of integrity and reliability in our financial numbers going forward.

We are looking forward to providing you regular updates on our progress towards operational excellence and its positive impact on the performance and financial results of the Company.

With that, I will turn things over to Bill, who will provide commentary on the current state of Symbol's business.

Bill?

Thank you, Mark.

We are on slide 21.

On the back end of what has been an improved operational performance by the Symbol team, let me extend our sincerest thanks and appreciation to all Symbol associates worldwide for their hard work, dedication and results over the past year.

Our Company has been faced with tough internal and external challenges, and yet, has made solid organizational, cultural and operational progress.

Today, I will provide some texture and color on the business from a geographic and product mix perspective, a status report on the progress we are making in transforming our services organization into a world-class operation, and an update on the implementation and rollout of our channel program, Partner Select.

Additionally, I will introduce some of our newer products, discuss significant customer wins, and close with guidance.

Throughout today's talk, I will also make reference to Q3 bookings performance, so as to provide further clarity on business trends.

You will notice that we have not included information about our vertical market and application area splits in today's presentation.

We will return to vertical and application reporting when we have greater confidence in the accuracy of our sales out data, most likely in the second half of 2004.

I am now on slide 22.

This chart shows first and second quarter revenue split by geographic theater.

Quarter-to-quarter, we saw revenue growth in the Americas expand slightly to 65 percent of sales from 64 percent.

The drivers were our core retail business, as well as strong OEM sales.

The Americas, which has been challenged due to lackluster macroeconomic conditions, and a weak business investment environment experienced solid sequential bookings growth in Q3.

Improved earnings, a moderate upswing in IT investment, and the management system discipline we have instilled throughout the Americas has had a positive impact on sales velocity.

But more importantly, the quality of our bookings and backlog.

Asia-Pacific also saw improved performance, as revenue grew to 8 percent of Q2 sales from 7 percent in Q1.

Of particular note, is the trend of our business in Japan, a traditionally challenging market for Symbol.

There, we experienced roughly 15 percent sequential revenue growth, almost 50 percent year-over-year growth and good booking velocity into Q3.

The countertrend was EMEA, where revenue declined to 27 percent of total in Q2, down from 29 percent in Q1.

In Europe, Q2 sales were impacted by necessary and important operational changes.

In particular, the full implementation of our management system, as well as significant changes in organization, particularly sales leadership, finance and channel management.

We expect that the re-building of our EMEA leadership team, combined with the full implementation of our management system and focus on our growth strategy, will yield improved results in the coming quarters.

Although there is more work to be done in EMEA, we look forward to reporting on our progress in the future.

I am now on slide 23.

This chart, depicting a simple revenue breakdown by major product area, illustrates a relatively consistent sequential product mix.

However, our wireless networking business unit did experience a solid quarter-over-quarter revenue growth in Q2, expanding to 11 percent of total revenue from 9 percent in Q1.

As discussed on previous calls, our award-winning Wireless Switching System has been selected by several Fortune 500 companies as their wireless networking standard, particularly when rolling out enterprise mobility applications, or when the need to support portability and mobility are key decision factors.

As wireless switching technology continues to mature, it is quickly being adopted by many of our customers over that of earlier generation wireless technologies, such as traditional access points.

Q2 saw a relatively flat sequential quarter out of our Advanced Data Capture Business Unit, which combined our scanning and scan engine businesses.

As you can see on this slide, scanning was down a bit as a percent of sales due to new product transition within the line of discrete scanner products.

However, it was offset by an uptick in our scan engine OEM business.

Mobile computing, the largest of our three core businesses, also expressed a flat sequential revenue performance in Q2.

Revenue in mobile computing represented 59 percent of Q2 revenue, basically unchanged from 60 percent in Q1.

Q2, along with our most recent quarter, Q3, were also product transition quarters for Symbol and our mobile computing business unit.

We experienced several product transitions across our key platforms, while also completing the beta testing process on our newest mobile computing system, code-named Gemini.

Gemini, announced publicly on Monday as our new MC 9000-G product line, is a groundbreaking product in the world of enterprise mobility.

I will talk more about this product later on in my presentation.

We are now moving to slide 24.

We, as a company, are committed to bringing the services area of our business up to world-class status.

Key to this effort was the addition of Art O'Donnell, a twenty-year veteran of services management, to our senior leadership team.

In the three months that Art has been on-board, he has already had a positive impact.

In particular, he is addressing the transition issues that emerged in the move of our repaired depot center from Chicago to Mexico, as well as shoring up our help desk and technical assistance call centers.

This chart indicates some of the progress, as well as challenges and corrective actions, that we have faced and/or have aggressively underway, as we speak, to drive greater customer satisfaction and correspondingly increase the effectiveness of this sector of the business and to boost its revenue and profit contribution.

As you saw in Mark's slides, the services contribution was up both sequentially and year-on-year.

However, we are still not happy with the services attach rates, and we are tackling that from several angles.

It is also important to note that most of the progress in services revenue we are reporting is due to the re-timing of revenue based on the re-statement impact, not improved core services performance.

While services realized a topline improvement, service margins are also starting to benefit from cost savings related to repair depot consolidation and the opening last month of our new centralized international repair center in the Czech Republic.

Over time, the restructuring work we will continue to do in services, coupled with the introduction of new services products, and much-improved attach rates, should provide us with an opportunity to enhance customer satisfaction, unlock trapped value and expand overall revenue growth.

Now, a quick snapshot of progress in our Partner Select program, introduced during Q2 in the Americas and EMEA with the Asia-Pacific rollout set for 2004.

We are now going to slide 25.

Partner Select is going well.

We are pleased with the uptick of qualified partners, the reaction of our end-users to our program, the excitement of our authorized partners, and the effect our channel policies are having on selecting quality partners.

The count, as of last month, was more than 5000 partners approved into the program, including solutions providers, business partners and authorized re-sellers.

A positive for Symbol customers, the new channel authorization and certification programs have resulted in slightly fewer, but more committed and technically capable partners.

And because of our new channel policies, our two-tier distributors are reporting increased Symbol revenues.

As we have really just implemented this new channel strategy in the first half of 2003, it is too early to see its impact on sales.

However, preliminary indications from sales outnumbers for July and August show an improving trend and give us increased confidence that our high touch channel-centric approach is starting to gain traction.

In addition, we have made good progress toward managing inventory in the channel, where inventories and two-tier distribution apart down roughly 30 percent since year-end 2002 and feel that we are approaching optimum inventory balances in two-tier distribution.

We feel that progress such as this, combined with improving sales out data, demonstrates that the program is trying to show solid improvement and tangible benefits.

Lastly, it is important to re-emphasize that we are in the early stages of Partner Select, and although we are pleased with our progress to date, we know that it will require diligence to make it successful.

That said, building a healthy, vibrant channel requires talented people, and we certainly have that in our new Leader of Global Channels, Jan Burton.

It also requires courage; the guts to say no to certain channels, who do not meet our criteria for authorization.

You will inevitably hear from both constituents as this program matures.

In the course of building a disciplined, high-quality channel, the loudest voices will probably be of the latter group versus those that are most satisfied.

We are now moving to slide number 26.

Before I get into some recent customer wins, I would like to comment on this week's product announcement, a follow-on to significant product launches earlier in the year and in the vanguard of a number of new products this quarter and next that are setting the stage for our enterprise mobility systems and solutions growth in the future.

Here, from the top left, is what we call the Information Station, MK 2000 microkiosk, capable not only of scanning, but also ready to display interactive full-color video and audio messages.

This product is useful for the many burgeoning CRM applications going into the retail space -- CRM being Customer Relationship Management.

And top right, is the LS 2208.

Introduced in March, incorporating a range of new design ideas, the LS 2208 is the price performance leader in the scanning market today.

It is already enjoying strong customer acceptance and is ramping nicely in unit volume.

At the lower right is the Compaq LS 9208 omnidirectional scanner, which because of its high-performance decode capability, increases productivity at checkout.

The LS 9208 is our product line replacement for the popular LS 9100, the de facto standard in the projection scanning category for almost ten years.

The LS 9208's greatly enhanced features and performance make it a winner.

In May, we announced the introduction of advanced imaging and voiceover Wi-Fi in the PDT 8100 Xscale (ph), ideal for data capture, data management and communications, in the growing enterprise mobility workforce.

The PDT 8100, a force in our enterprise mobility lineup of mobile products, is ramping well and achieved solid revenue growth in the latest quarter, Q3.

That brings us to today.

We are now on slide 27.

This week Symbol introduced the MC 9000-G, an Advanced Ruggedized Mobile Computer that enables Plug-and-Play Customization and convenient expandability for greater customer satisfaction.

The MC 9000-G feature range resets the bar in the industry.

The modularity is customer, developer and supply chain friendly.

The Ruggedization reflects the long lifecycle customers expect.

The battery performance is unparalleled.

The display is bigger and brighter, and it ships as a full system, including software, accessories and options.

The MC 9000-G is designed around an innovative standards-based modular platform that is important for two reasons.

It lets customers select feature sets for their specific tactical and strategic supply chain application needs and it provides our customers with an investment protection technology foundation for future solutions sets from Symbol.

Of particular note, is that the MC 9000 has been in pilot with a number of customers.

In the UK, both Royal Mail (ph) and leading food retailer, Wattros (ph), and here in the states, HDB, one of the largest independently owned food retailers.

Early response from customers has been very positive, with HDB's Shawn Sidi (ph) Vice President of the company's Supply Chain Systems, commenting, "We selected the Symbol MC 9000-G due to its multiple configurations and support of a wide variety of application architectures that make deploying it enterprise-wide much easier than other products."

We will be ramping up production of the MC 9000 next month and will keep you posted on its progress.

Now, some highlights of a few customer wins in the last few months.

Moving to slide 28.

As we have discussed on previous calls, expanding our wireless LAN infrastructure business is an important objective for Symbol.

On our April call, we had said three of the top 10 U.S. retailers were beginning to deploy our wireless switch.

One such noteworthy deployment here in the U.S. is J.C. Penney.

With more than 1000 department stores coast-to-coast, J.C.

Penney is standardizing on the Symbol wireless switch for its in-store enterprise mobility applications.

Moving to slide 29.

Another area of focus that we have discussed previously is the whole area of mobile customer relationship management, which includes route accounting, salesforce automation and field service automation.

Here is an example of the progress we are making in that business.

In the UK, Allied Bakeries, where with our partner, Microlise (ph), we are rolling out a real-time logistics solution covering its nearly 1000 vehicle fleet, operating from 21 bakeries and distribution centers.

Slide number 30.

Albert Hine, the Dutch-based retailer, has standardized on a Symbol end-to-end enterprise mobility solution.

Albert Hine is deploying the unique value-added combination of our Symbol wireless switch and our mobile computers for rollout in both its Albert Hine food stores, which comprises 700 locations and Acos (ph), a chain of 430 health and beauty care stores.

The two chains, in aggregate, are installing 700 Symbol wireless switches, more than 1300 access ports and access points, and 3600 of our mobile computers, both the PPT 8800 and the PPT 2800.

This is a great example of how we are transforming Symbol into a provider of end-to-end solutions, instead of just a seller of discrete devices.

Slide 31.

Another key emerging vertical that we have discussed previously, and have targeted as a vertical area focus going forward, is government.

In our state and local government vertical, we have logged bi-coastal wins in Los Angeles and New York City.

The Los Angeles Police Department is providing Symbol PDT 8100 handheld computers to its officers to automate and improve the accuracy of pedestrian stop, traffic stop and citation reporting application.

Symbol worked with channel partner, Vitek (ph), to develop the application and deploy the solution.

You will see the press release announcing this tomorrow.

And, here in New York, the Metropolitan Transit Authority is using the Symbol PDT 8100 mobile computer at bridge and tunnel toll plazas.

When a vehicle is stopped at a toll plaza because of a defective EZ-Pass, an MTA officer, armed with our handheld, is able to scan the EZ-Pass and record the information to the city's system so that the driver's account can be debited and the defective EX-Pass replaced.

And the system paid for itself in less than a year of deployment.

You may also have heard the recent news that New York City is deploying our mobile computers to decrease errors associated with issuing parking violations.

It is estimated that the Symbol solution will help the city recoup 17 million of lost revenue because of errors associated with hand-written citations.

New York City Mayor Michael Bloomberg told the New York Times that this would help solve a 20-year-old problem. "When parking agents make a mistake, we bill the wrong people, and a lot of fines never get collected.

Using the technology is an idea whose time has come.

Finally, I think we've got it right."

We are now on to slide 32.

I will close with guidance today.

I will look a few new metrics we plan to share with you on an ongoing basis and a perspective on our initial FY '03 guidance of 15 to 20 percent revenue growth, against the previously reported 2002 revenue of 1.32 billion.

Before I get into guidance, let me explain the chart in front of you.

The first bar, in red, illustrates product backlog scheduled for the current quarter on the first day of the quarter.

Let me go off script here for a moment.

I just want to be clear that you understand that is not total backlog; it just is product backlog scheduled for the current quarter on the first day of the quarter.

The second blue-colored bar, shows gross product bookings for the quarter, and the third yellow-colored bar illustrates product revenue for the quarter.

Net net, we are going to provide to you, each quarter, with our incoming current quarter backlog as well as our previous quarter bookings.

As you can see from the chart, product revenues have been outpacing product bookings for the past three quarters.

Going forward, our goal will be to generate product bookings at or above the level of product revenues for the purposes of building backlog and deriving the subsequent operational and financial benefits of backlog visibility.

In contrast to Q2, you can see that Q3 bookings growth of 20 percent over Q2 afforded us the opportunity to build a Q4 opening backlog of approximately $148 million scheduled for Q4 shipment, which is $29 million of improvement over the opening Q3 backlog of $119 million, $46 million larger than our Q2 opening backlog of 102 million, and $15 million larger than our Q4 '02 opening backlog of 133 million.

Opening quarter backlog only tells some of the story as to the underlying product revenue performance of our company.

You will note that a significant portion of our quarterly revenue represents same quarter sales turns in a range of 50 to 65 percent in any given quarter.

This represents both a risk, as well as additional supply chain challenges.

More importantly, as you work on your financial models, it will be important to understand that the relationship of incoming backlog, quarterly sales turns, and linearity of bookings all play an integral role in our overall revenue performance.

For example, it would not be appropriate to expect Q3 revenues to be 20 percent over Q2 simply because Q3 bookings were up 20 percent sequentially.

That said, you can now better appreciate our focus on backlog growth and visibility to our revenue pipeline.

Fiscal 2003 guidance needs to be adjusted based on our re-stated 2002 revenue results versus the previously reported 2002 results.

Without all of the changes required as a result of the re-statement, we most likely would have achieved 12 to 13 percent year-over-year revenue growth versus our 15 to 20 percent guidance against the previously reported 2002 revenue of 1.32 billion.

However, against our re-stated fiscal year 2002 revenue performance of 1.398 billion, we now anticipate year-over-year 2003 revenue growth of approximately 10 percent.

As is always the case, our guidance may not be a predictor of the actual results that we may achieve.

Thank you.

We will come back to you in a few weeks to give more detail around our Q3 performance, and thanks for joining us today.

We will now open up the lines for questions.

(OPERATOR INSTRUCTIONS).

Your first question comes from Peter Barry with Bear Stearns.

Please go ahead.

I have one very brief question.

Given your assessment of the re-statements, as much as you have been able to do that to date, are you able to measure Symbol's real earning power?

And specifically, we know that in the best of times the Company was able to earn an operating margin in the neighborhood of 15 percent, which, I think, is still a long -- or was -- a long-term objective.

Could you speak to those elements, and are you able to unequivocally say this company has the capacity to generate margins in that neighborhood?

Peter, this is Bill.

First of all, it is good to hear your voice, Peter.

Let me give you a perspective based on the business model that we have provided to you in previous quarters, which we are very comfortable with going forward.

However, I want to give you a perspective on that, because with the termination of the amortization and consequently capitalized engineering, the business model that we described, Rich and I previously, of 45 percent gross margins, 30 percent operating expenses and 15 percent operating margins, change.

They change about 1.5 percent in either direction.

So, the new model would look like 46.5 percent gross margins, 31.5 percent operating expenses and the same 15 in terms of operating margins.

Both Rich and I and Mark feel strongly that we can achieve that model.

Now, in doing so, we think there is a bit more upside probably more on gross margin, and less so on operating expenses, in the short term.

However, longer-term, we remain committed to the 15 percent operating margins that we did describe earlier.

So that should give you a sense for the earnings power of the Company that we see longer-term.

Peter, this is Rich.

I think if you look year-over-year at the progress made going into Q1 and Q2 from the prior year periods, I think you see strongly trending direction that indicates progress against achievement of that model.

Just one final one for me.

Do you expect that audit and legal fees of the order of magnitude in Q2 will continue in Q3 and perhaps Q4 as well?

Peter, it is Mark.

I don't think that they will run at the same level as Q2, but they are going to be substantial.

Likely to end by year-end, do you think, Mark?

I think as soon as we can wrap up the audit and get current with the filings with the SEC, then they should tail off very quickly.

And any specific date on Q3 results?

We don't have a specific date yet, but I would like to think we could come back in three or four weeks and be able to give you those results.

So, you know, the intention here is to get back on, you know, the regular earnings release in line with the time that we have normally been doing after the close of a quarter.

Thank you all for a very comprehensive job.

We will move to Arindam Basu with Morgan Stanley.

I have one question for Mark and one for Bill.

Mark, once the filings are completed, your access to lines of credit will increase, but then they will be expiring in January -- correct -- and they will have to be renegotiated.

I am trying to assess, or get a sense of how you guys have assessed, how that is going to impact your interest expenses, as far as you can tell, given the types of financing opportunities you are seeing these days?

Well, first of all, with regard to the interest expense line, keep in mind that we do not currently have any drawings against the facilities.

So, that should help interest expense.

And then we have recently reduced the size of the facility in conjunction with the banks, and that helps the amount of undrawn fees that we are paying.

Although, I think, in the greater scheme of things, those are extremely minor numbers.

I would like to renew the credit facility, which I think should be very doable, going into next year.

But, you know, if we continue to operate like we are operating and generating cash, then I don't expect you are going to see a big increase in borrowings and, hence, interest expense.

So the lines will be re-done to give the company access to liquidity, but that does not necessarily mean that they are going to be drawn and, as such, you know, have us incur interest expense.

Right.

Just in general, do you think that terms of future lines of credit are going to be easier or harder than your current lines?

Well, since the time that line was actually negotiated, just terms in the bank market generally have become more expensive.

So I am assuming that will be the case here.

But I don't think that is going to be as a result of anything specific to the Company.

I think that is going to be driven more by just conditions in the bank credit markets.

Okay.

The second question is for Bill.

I was a little confused about the product (inaudible) side being difficult to define right now, because I am trying to figure out how you guys are going to do planning on the services side and obviously on the production side as well if the customer application pullthrough is not clearly definable for a year from now.

So could you kind of talk a little bit about the process for, you know, scaling and focusing on the service side, when you are still in this channel flux issue and the customer applications are not so clear?

Let me answer it this way.

First, we are going to be moving to 100 percent sales out throughout the course of 2004 through the channel.

And, in doing so, we are going to get very good high-quality data out of the channel with respect to vertical markets in terms of where our product is being placed in the market.

And, today, we decided that we were going to not provide vertical market and/or application data.

Although it is good trending information, it is not to the level of specificity we think will help either you or us internally manage toward that goal.

Over time, we will be getting more of the sales out information in '04.

We hope to begin to see early indications of that in Q1, but it is more likely a Q2 deliverable.

That has little to no bearing, however, on the services business and what we are doing on the services side of the company.

When we talk about services, we talk about two real main factors.

First is the repair depot services, which are day two support.

And then, of course, the help desk function, which is a combination of help desk and technical assistance center.

Today we have fairly basic services products that we offer our customers, but we are working on new products and services -- advanced services, if you will -- that when added to the current offerings, will provide us both with an opportunity to drive appreciable financial success, we hope, in the future, but more importantly, greater customer satisfaction out of the services business.

We don't count on vertical information today or application information today, as it relates to the channel, to really drive the services business.

Am I missing a piece of your question there, Arindam?

Actually, I was referring to the second part of the strategy where you are going to kind of get into more of a hand-holding consultative approach with customers.

And, you know, that is going to require some knowledge of the application mix, so you can kind of go into those customers and say -- I have idea A, B and C, and I can point out -- let's say, DS, GHO or or J.C.

Penney or this European grocery company as an example of somebody's going to have similar needs as yours, and this is what we did for them on a customized level.

So, first, before we make the decision to get into, if you will, the consulting business or that aspect of services, that is a fairly significant business model change for the Company, and we have to consider the fact that we also have partners in that business who are very successful and do a wonderful job for our company in that space.

So we are not going to be competing with our partners.

However, to your point, the one thing we will be doing is looking at advanced services that are more tailored to by vertical market to the needs of vertical customers, and that is exactly what we are working on right now which we hope to roll out in some form in 2004.

However, I would not be surprised if you don't see any of those new tailored products until 2005.

By that time, we will have been well down the track of sales out and the information we need to more target that audience.

Just one last point.

This is Rich.

The information we have internally does include, of course, good drilldown domain knowledge and information available, real-time, from the result of our business activities in each one of our verticals.

The reason that we held back this time on providing information is because of our concern that it statistically may not be meaningful; it might in fact be deceptive because it is built off of the base of incomplete reporting through our channel on the one hand, and on the other hand, since we are now talking about numbers on a re-stated basis, the re-statement is done in a way that does not always flowthrough the previous coding of application and vertical data.

So, we were concerned that we might represent a distorting view, and, rather than do that, we decided to hold off until we are confident that a trendline and a set of data points can be presented that is truly meaningful.

But, in terms of having the information internally to drive our business, we feel very confident we have that.

Okay, Rich, if you can put that on a floppy and drop it into the mail to me, I would really appreciate it.

Thanks a lot, guys.

I really appreciate it.

Paul Coster with J.P. Morgan.

Just a quick question for Mark if I may.

You previously talked about exiting 2004 with an operating expense base of under 130 million or thereabouts.

Is that still an objective?

Well, Paul, we're currently putting together the 2004 plan, as Bill mentioned, with the accounting for engineering expense different -- you know, being done differently now.

To be honest, I am not sure that that really is doable, and I am not even sure that it is wise, to be honest with you.

And I think we will be coming back once we do the 2003 year-end earnings.

I think, by then, we will have our '04 plan done.

And I think we're going to give you a much better view as to exactly what we believe the right mix is between growing revenue and maybe having to incur some incremental expense there versus, you know, perhaps, you know, holding back on expense.

So, I really cannot answer your question right now is the short wave of it. (multiple speakers)

Paul, just a further set of expectations, our practice will be to, at the beginning of each year at the appropriate point, provide guidance for that coming year with regard to a range of bottom line PS (ph) numbers and a range of topline growth.

And to the extent there would be an appropriate need to change the guidance that Bill spoke to a moment ago with regard to the income statement model, we would do so at that time.

I would just add, Paul, you have a group of people here that are very focused on improving operating margins and getting to that 15 percent operating margin model.

Now if we don't do exactly as we said before, you know, I am not particularly troubled by that, and that is basically, you know, what the shareholders pay us for -- is to make those decisions as to what the right balance is and when we need to step on the break a bit and when we should be stepping on the gas.

Okay.

Where do we stand in terms of the restructuring costs and the restructuring activity?

Can you give us some sense of sort of what percent is your completion where we stand out in 2003?

I believe that the costs were going to extend all the way through the year.

Yeah, and I don't really have an update, specifically, on what restructuring costs are likely to be through the remainder of the year.

But I do think that there will be some, because, as Bill mentioned in his talk, we are opening up a new service center over in Europe in the Czech Republic, and that will cause us to do some restructuring over there, and will likely, you know, have us incurring some restructuring charges.

I think, though, that that, right now, if I think about the timing, is probably going to be more backloaded.

Any charges that will be backloaded in the year will be in the fourth quarter as opposed to hitting the third quarter.

Yeah, Paul.

In terms of restructuring activity, they are ongoing in our global services organization.

They are ongoing in global sales referencing Mark's point on EMEA, and those are really the two organizations that we are focused on from a total restructuring perspective, and you are likely to see that move into first calendar quarter of '04, as well, particularly in EMEA on the sales side of the house.

As Mark said, we will get a lot more details to you on the coming call when we can drill down on Q3.

Relative to where you plan to be by this stage in the year, do you feel like you are on-track?

Yes, we are very much on-track.

If I had to put in percentage terms for you, Paul, I would say we are probably 40 percent through, 100 percent planned.

Okay.

Last question, which is on the litigation front.

In terms of shareholder losses, have you made any provisions for them, and do you see any implications from the re-statement, as thus far articulated, in terms of the impact that it has on them?

Well, with regard to your first question, we have not made provisions.

It is not possible to estimate what provisions will be required, and so it is not appropriate to take such provisions at this time.

That is the same as we have reflected in our earlier comments; it remains true today.

With regard to what impact our disclosures today will have on that, I think you can look at it as a step forward toward disclosure of the process and create the situation within which we can bring that matter -- the class-action suit -- to a close at the earliest possible point.

This was clearly a required step along the way, and we feel good in having taken it today.

Okay.

Thank you very much.

Next we will go to Jeff Kessler with Lehman Brothers.

Thank you.

A couple of questions.

First, could you just fill us in, again, perhaps elucidate a little bit on the revenue growth guidance that you gave?

I realize that you are talking about on a restated base of 2002 of 10 percent;

I understand that.

Why are you reducing previous guidance from the 15 percent area, down to the 12 to 30 percent area for 2003 guidance pre-re-statement of 2002?

Jeff, one thing you will notice in each of the quarters, both Q1 and Q2, re-statement impact on revenues was approximately 32 million, I believe, at the end of the second half.

So -- I am sorry -- the first half.

What we did not want to do is include any of the re-statement impact in terms of revenue timing with respect to the guidance that we gave earlier in the year, which was off of the $1.32 billion base, and so we just wanted to tell you the facts as they are.

Okay.

And the second is, you gave a presentation of -- a good one -- some of the various new products and the markets that these products are going to serve.

Noticing that a number of these are in non-retail -- we will call them even non-logistics -- areas, in fact, some areas would be considered manufacturing; some areas -- particularly the public safety area -- perhaps, other.

Without going into specifically what these new vertical market percentages may look like, because you are obviously not going to do that at this point until you get a better trendline, it seems to me that there is a trend to get some of these non -- a bigger percentage of your business -- looking forward, looks to be, in some of these non-traditional Symbol areas, areas that you would normally categorize as either other or perhaps manufacturing.

Yeah, that is true, Jeff.

If our Senior Vice President of Worldwide Sales were here -- Todd Abbott -- I am sure he would be explicit in telling you that we are very focused on six key vertical markets and getting coverage in those six key vertical markets and, in the future, penetrating them to the same extent that we have in retail.

They are retail; manufacturing; warehouse and distribution; healthcare; government; and I am missing one more -- Rich?

Transportation.

Transportation.

So that is where the current focus is from a vertical market point of view, and your point is correct.

We are getting greater focus in those vertical markets.

We are winning in vertical markets outside of retail.

But what is important for you to really understand is that, as part of our five phase growth strategy that Rich and I, I think, presented to you all two to three quarters ago, this was one of the items we told you we were going to focus on.

We have focused on it, and our worldwide sales team is executing extremely well.

On the flip side of that, if you take a look at what we are doing in Partner Select, our channel program, we are now aligning our channels by vertical market to get greater penetration by geography, so that we can get greater thrust -- not just into the Tier One space of each one of these verticals, but Tier Two and Tier Three, which would largely be served through distribution.

So we have had some greater success in sales in other vertical markets, particularly government and healthcare.

And as part of our five phase plan, you're going to hopefully see a better balance, over the longer-term into those six key vertical markets that we are focused on today.

Okay, one final question.

That is, there have been a number of, perhaps, articles out there about competition in your older space -- we will call the, perhaps, lower margin, scanner-based retail business -- competition from some other -- from obviously one of your most well-known companies, perhaps taking advantage of some of the dislocations in the Partner Select program as they originally started.

Can you talk about where you are in your -- we will call it core older scanner business -- and whether or not you have perhaps taken back some share that you may have lost earlier on in the beginning of the program?

Yeah, this is Rich.

Jeff, we think we are well-positioned with regard to what you heard described earlier as our Advanced Data Capture segment, which incorporates the scanning segment as you know from earlier reports.

The 2208 product that Bill described in his remarks, we think, in particular, is very strongly positioned to allow us to go after the lower end of the market.

It's a great entry-level product.

It has really tremendous performance and a great, great price point, really a breakthrough price point for the kind of performance that is there.

Combined with the channel program that Bill described, I think it ideally positions to go back and get that share, and it is something that is another one of our key growth initiatives, which is to use our channel, the growing channel share, to grow the revenue base of the business.

And further, I would just add that, connecting to your earlier question, that while we are very pleased to see that our plans to build growth in additional markets are bearing fruit, you should not underestimate the growth potential left in our most core markets -- in retailing, transportation and logistics.

There are, we believe, very strong opportunities remaining there.

You noted the rollout of our Wireless Switch product by J.C. Penney.

There are numerous other opportunities that we can talk about in the same vein that are happening real-time in retail in the other traditional core markets.

I just did not want to leave a misimpression that we are shifting away from them any way whatsoever. (multiple speakers)

Another remark I would make on that is we would hope to show you or give you some progress report on scanning or some scanning view during the upcoming Q3 call.

We did see in Q3, I think, good velocity in the space.

Okay.

One quick final question.

When are you going to be -- I know you said when you are able to talk about Partner Select, you will talk about it.

Do you have some idea of when you are going to be able to give us some better clarity on the success of Partner Select or lack of success, for that matter?

So, Jeff, what we are going to do is we are going to give you quarterly updates on how we're doing in Partner Select.

We know that this is something that is very interesting to you all, and by the way, it is extremely important to us.

So we monitor it daily, weekly, monthly, quarterly, but you can guarantee that every quarter we are going to give you Partner Select update.

Thank you very much, and thank you for the thorough presentation.

Reik Read (ph) with Robert Baird & Co..

Good afternoon.

Can you guys talk a little bit more about the maintenance service program?

And Bill as I understand the Partner select program, you guys are going to be taking more and more of that revenue in-house.

How much will be brought back in?

And can you talk a little bit more about some of the advanced areas you might be getting in and what type of growth you are expecting to get out of that kind of that day two services as you talk about it?

Sure.

Today it is mainly day two services -- repair center services.

Over the course of 2004, we are going to be introducing new products -- advanced services products -- that will hang off of the day two support.

If you consider it this way, we are going to try to do our very level best to take advantage of our fixed cost infrastructure to drive annuity-based advance services on top of that, both Symbol to the customer and Symbol through the channel where our channel can re-brand many of these services and also sell them through the channel.

Our real key challenge is attached rates.

Today, our attached rates in the channel are abysmal.

Meaning, when we talk about attached rates, we are talking about the fact that when our sales team goes out and sells hardware, that we sell services at the very same time.

At the point of invoice to product, there would be a point of invoice to service.

At the point of PO for hardware or product, there would be a point for PO for services against.

Today, we are really focused on two things.

One, restructuring our (inaudible) organization so we can yield that kind of benefit out of it, and that has got to be our fundamental focus.

For example, we are still very focused on our repair center consolidation.

Some of the challenges we have had with respect to the move from Chicago to El Paso.

The move we need to make from London to Czech Republic.

So, very much infrastructure-focused.

And, if you look at this way, we are focused on people, organization, process and tools.

Throughout 2004, I would expect us to make good progress with respect to day two support as our attach rates come up substantially, as well as when we announce more of these advanced services capabilities.

From the point of view of our partners, where we have some discipline in the channel now with respect to services and partners who were once competing against us, we will see some of that revenue flowthrough over time, but remember these are annuity-based -- these are annuity-based contracts that, in some cases, have not yet even come to closure with some of those partners, so we have not picked off that business as yet.

We will see that happen over the next several years.

This is not a three month transition or a one year transition.

It is a several year transition.

But, we hope to add, over the numbers of those years, substantially to our revenue and topline performance in services.

And as you look out, Bill, a couple of years, where will the services be as a percentage of revenues?

Have you looked at it that way?

We have, and we would like to maintain, as topline growth and product is now outpacing that of services, approximately an 18 to 22 percent range of the business in services.

As you have noticed over the last several quarters, services has been approximately 20 percent of our total.

We would like to keep it in that range, but in a world where topline is growing through greater hardware product traction.

Okay.

And I just wanted to ask, too, you just talked about the moves you're making, both the Mexico and the Czech Republic, can you talk a little bit about the savings that you guys expect?

And, maybe this is a broader question, as you guys talk about expense reduction, and I will ignore the expenses that you might be making with respect to the re-statement.

What are some of the savings that you will get from the move that you are talking about, as well as the last quarter, you talked about getting a greater focus on some of the discretionary expenses, as we move into '04, how much will be coming out of those expense categories?

So, on the services front, the best way I could describe it to you is the following.

On average, on a per-repair basis, when we were doing repairs in Chicago, the average cost per repair was approximately $27 to $28 U.S..

The move now down to El Paso/Juarez has got our average -- we expect to yield an average repair rate in the $17 to $18 dollar range -- approximately a $10 per unit per repair base.

The same can be said in the move from London to the Czech Republic, only it is more exacerbated, because the cost of both the land and the headcount in London were significantly higher than they were in Chicago.

In the move from London to the Czech Republic, we would expect to yield a $13 difference from London to the Czech Republic on a per-repair basis.

So it is substantial.

However, the costs associated with this -- from a restructuring point of view -- and the additional expenses, will continue to be incurred over the next several quarters.

So I want to balance your enthusiasm with what gross margin potentially gains with that of the operating expenses it takes to make some of these fundamental changes.

It should contribute a couple of points of gross margin to our topline once we have completed transition in total.

And that transition will be completed when again, Bill?

The end of next year.

Just a comment on discretionary spending?

Discretionary spending, actually improved quarter-on-quarter for us in all categories.

We've got a good focus across the company.

I don't have the specifics figures in front of me, but I do know that they have improved.

The area where they have not improved, of course, is in the area of the re-statement expenses where re-statement expenses as Mark pointed out earlier in Q2 were approximately 14.5 million, and that was related, I believe, re-statement expenses only to consulting and auditing fees, not to the legal side of that equation, which also, on top of the 14.5 million could be re-statement-related.

So, that is the area where it throws it off.

But, if you look at all of the other sub-categories of discretionary expenses, we have improved sequentially, and we continue to have a great focus around the Company.

You know, I unfortunately have the fate of being probably the sole area that was not able to improve discretionary spending.

So you can imagine I have many interesting conversations with Bill.

I don't doubt it.

Guys, thank you very much, and I would also like to add thank you for your candor in the presentation.

It is very helpful.

Thank you.

We will move to Chris Quilty with Raymond James and Associates.

Good evening gentlemen.

You are not actually going to stay on a full two and half, are you?

Whatever it takes.

A question for you on the EMEA region where it seems a lot of companies in the industry have actually been getting a lot of traction as of late.

Foreign exchange helping that situation somewhat.

Is there a fundamental -- is it just an organizational issue or is it a product issue that it seems you're losing some ground there?

There are a couple of things I want to point out here.

EMEA in Q2 was actually up year- on-year.

It was down quarter-on-quarter in terms of percentage of the business, but it was actually up year-on-year.

I would give you a range -- I don't have it in front of me.

The range was approximately 20 to 25 percent year-on-year, so I really want to make sure you understand from a balance point of view.

Now that being said, EMEA, we are doing some fundamental changes organizationally.

We have replaced the Head of EMEA.

We have brought in a gentleman by the name of Steve Pressley who is now running that operation.

We replaced our Head of Sales in the Germanic countries.

We replaced our Head of Sales in the North, and we replaced our Head of Sales in the South, so a complete shift.

We also brought in a brand-new channel leader into that team as well. (inaudible) unfortunately does not help Symbol all that much, quite honestly, because we do change our pricing locally in market, and we have a commitment to our channels and our customers to change pricing and adjust it based on the fluctuation of the Euro to the dollar.

So we don't see a lot of flowthrough benefit from foreign exchange as it relates to top line or gross margin, so we don't really benefit all that much because we do adjust our pricing.

The going forward plan for EMEA does involve yet more restructuring as we are going to be moving EMEA to a delayering; we are actually taking a full layer of the organization out, and we are also going to be looking at a shared services model there, moving to a regional shared services model which should drive further gains.

Today in EMEA, we only have approximately 50 sales headcount on the street carrying bags, carrying quotas.

We are going to hopefully double that over the course of the next six to eight months, simply out of some of this restructuring, self-funding a lot of this effort and, in fact, yielding better OpEx performance out of the team beyond the self-funding of an additional 30 or 40 headcount just through this one exercise.

Okay.

The addition of additional salespeople in Europe seems counterintuitive to Scan Source, which has created a very successful two-tier distribution model in the U.S., and I know they are fielding up an effort over there.

Would the direct salesforce be a complement to that initiative, or is that separate from your activity?

The issue is we just don't have enough salespeople covering the Tier One accounts.

Absolutely the high touch channel-centric go-to-market model is a worldwide focus that Todd Abbott has; this is not just a U.S. focus.

What we need are Tier One enterprise mobility salespeople out there covering the top accounts, driving demand, creating demand for our products that will be fulfilled through the channel.

In fact, if you look at Q2 as an example, although we did not to report this today, I want to give you some guidance on this; as well, I want to give you some information.

We saw a good solid shift to the channel in Europe where the channel in Europe was approximately 60 to 70 percent of our total top line and only approximately 30 to 40 percent went through direct.

So we've got to get greater coverage at the top, cover the Tier Ones more efficiently, create demand and drive demand for the channel and make sure that the demand is -- the preference is Symbol.

A final question here.

I want to circle back to something that has already been asked at least once on the internal revenue growth.

On the comparable numbers, we are looking at 12 to 13 percent over prior year as re-stated, and I know you have not given substantial guidance for '04 yet, but given the weight of your business being in the retailing segment which has not yet really shown a substantial pickup, is that a sustainable growth rate in the absence of a retail recovery going into '04 by some of the other initiatives, or do you really need a little bit of help from the retail segment?

First and foremost, we are going to come back to you with our guidance on the Q4 call.

We are currently going through our '04 planning process, which is going to out of that is going to fallout our go-to-market and business model into next year.

So we will come back you in terms of what we think the growth rate will look like in '04.

That being said, I just want to correct one thing that you said.

The 12 to 13 percent year-over-year guidance was on the reported 2002 1.3 billion, not the restated 1.398 billion, which is where we have re-stated guidance to 10 percent above the 1.398 million.

Too many numbers.

I misspoke.

That is okay.

No worries.

I just want to make sure we were clear on it.

Thank you very much.

Dick Davis with Richard W. Davis.

Congratulations on a very good presentation.

I think I mostly understand it, but on the revenue numbers, are you saying that the revenue estimates for this year should be in the neighborhood of 1,537,000,000, which is roughly 10 percent more then 1,398,000,000?

That is correct.

Exactly.

Okay.

That assumes that the third quarter will be north of the second quarter; is that correct, or am I incorrect?

I think what is fair to say there, Dick, is that in the second half we expect to generate enough revenue in the second half of the year to get to that 1.537.

We don't want to give you guidance on Q3 in this moment.

We are going to come back to Q3 in a few weeks.

But I think what is important to yield out of this discussion also is the fact that of the 1.537, a portion of that -- approximately $50 million -- is going to be derived from re-statement impact coming into the year (multiple speakers) revenue.

That is the difference I think you are struggling with, from the 1.537 to the 12 to 13 percent above the 1320.

Okay.

Last year, if you look at the re-stated versus reported, there is a $78 million pickup to 1398 from 1320.

And so what Bill is saying, is that when you look at the changes that were made, there is less of a pickup going forward, which is actually pretty logical if you are looking at the receivables as well because some of the pickup is due to better collections, and as a result with these bill and collected customers, it tends to increase the revenue over the prior way we were recognizing it.

But as we clean that up, as receivables come down, then really on a basis, it ends up being that the difference between how we are recognizing revenue now on an ongoing basis versus how we were doing it before becomes actually quite small.

It might bump around from quarter to quarter, but over time, it shouldn't really matter.

And lastly, Dick, I would just call your attention as you are trying to get a picture of what the second half looks like, call your attention to the information that Bill presented with regard to bookings and backlog.

That is the information that we will be providing on an ongoing basis to help answer those type of questions.

Very good.

One other question.

Relative to the new two-tier distribution system, does this mean that if we use, say, Avnet as an example, that you sell to Avnet and then Avnet may sell to some second and third-tier distributors, who might not be financially in as good as a condition as you might like, but Avnet, in itself, may offer them terms to sell your product?

Do I have that sense right, or am I wrong?

In those specific circumstances where there are dimly capitalized smaller value-added re-sellers that do business with distributors, our distributors have the choice obviously of how they want to work with those individual bars.

Whether or not they change their terms or how they do business with them is of their own volition.

However, your point in terms of how the two-tier actually works is correct.

Our two-tier distributors sell to a number of our re-sellers, which measure in the thousands, Dick.

And then in terms of sales out, what we get from an Avnet, if you will, to use them purely as an example, would be sales out in terms of where they actually sold that kit, where it landed at the end of the day.

Got you.

Thank you very much.

We will move to Scot Cicarelli with Harris, Nesbitt, Gerard.

Hey, Scott.

Are you there?

Scott?

Are you on mute, Scott?

His line is open.

He may have stepped away.

We will move to Ted Wheeler with Buckingham Research.

Good evening.

Again, great detail here.

Thanks.

Just on the numbers that are out here for the revenues, I guess I am just confused on one point here.

The backlog opening numbers, which you talk about, the shippable backlog entering the quarter, plus the bookings data for the third quarter that you have shown us, it would seem to me to indicate some sequential lift in revenues as we go through the year.

You really don't get much when you run through the numbers that you gave us for guidance.

Is there some change in the revenues that are not associated with that shippable opening backlog?

Is there some change in the rest of the year from what we have seen so far to account for that seeming discrepancy?

No.

On this chart, what you are really seeing in Q4 in the opening backlog is simply the effect of the 20 percent sequential bookings growth we had in Q3 over Q2, adding to our backlog position.

The other point I want to make, again, I want to really re-emphasize this.

It would be a mistake for you to assume that Q4 revenues or Q3 revenues would be 20 percent higher because we had a 20 percent sequential bookings growth in the quarter.

Remember our goal is to build backlog.

It really is important to us.

If you take a look at our supply chain today, the better backlog visibility we have for lower cost is for us to do business.

Now the con side of that equation is, you do grow leadtimes in terms of your ability to meet customer demand, and we've got to balance those two worlds.

That is what we're working on right now as a team to figure that out.

But the greater backlog we have, the more visibility we have, the lower-cost it is for our company to do business across our entire supply chain.

If we call that backlog the visible backlog, that you are just describing, wouldn't that be the backlog that is not shippable in the quarter that is coming up?

In other words --

I see what you are saying.

Here is what you're missing.

We have changed our bookings rules in the Company; we have tightened them up dramatically.

So backlog in the out quarters has come down fairly significantly.

We now have booking rules of six-month booking rules.

So basically what that means is, we have sharpened up our bookings rules.

Where we used to have bookings rules that would allow you to bring in a booking and we would actually slate it in backlog in the out years, what we now do is taking a booking only that can be realized in revenue over a six-month period.

So your out quarters of backlog will be smaller.

So we have a very solid six-month backlog with which what we are showing you here is the opening backlog for Q4.

What you're not seeing is the opening backlog for Q1.

We haven't backlogged in Q1.

That could be, I think, where the confusion is.

Okay.

So what you're showing us here is what you expect out of backlog to ship in that quarter?

That is correct.

So the 148 million we are showing in Q4 is all scheduled to ship in Q4. (multiple speakers).

That does not mean it is all going to ship.

It is scheduled only.

Okay.

Scheduled only.

A couple of things could be the case here.

A customer could push out a shipment.

That does happen when rollouts get delayed, and then we will simply move that backlog and adjust it to the next period.

The other thing that could happen with backlog is with respect to not just moving it out because customers decide they don't want to ship it, we could have supply chain challenges and not be able to meet the demand that that backlog suggests and that may move out because of our own inefficiencies and operational deficiencies.

Okay.

But assuming those things are linear and are comparable, the backlog that was shippable in the second quarter was suddenly north of 100 and for the (inaudible) approaching 150, (multiple speakers) which is getting to the question I started out with on sequential revenues.

They are seeming to be flat the rest of the year, and yet that shippable backlog is discernibly up.

Now there are other revenues I realize that don't flow through backlog, and you talked about that.

So that was part of my question.

The issue there, again, is we are consciously going to build backlog for the remainder of this fiscal year going into it.

We also have been running the business at a lower book-to-bill than they would have liked to run it, so we have some catch-up here to do as well.

And lastly, the effects of the re-statement were higher in the first half of the year than they will be in the second half of the year.

That explains the full situation as you described it, Ted.

Okay.

Just to nitpick.

On the second quarter, you had some other income and a very low tax rate.

What should we think about the rest of the year just in terms of the other income and the tax rate?

With regard to the other income, keep in mind that you have got -- between the operating expense stock options, I've got the interest in there as well, so the debt has been paid down.

So that might discontinue?

Yes.

You have got debt paid down, and unless we, as we were talking earlier on the call, unless we were going to ramp debt balances up, which I do not foresee, you would not have that interest expense going forward.

And then with regard to the tax rate, that is really an artifact of relatively low pre-tax book income.

You have still got the permanent differences between the statutory rate and the effective tax rate.

Those amounts really aren't driven by the amount of income, and therefore they have a bigger effect on the effective tax rate when you get to lower booking income numbers.

(multiple speakers).

I understand how -- (multiple speakers).

I understand how we got there.

My question would be, is that a good bogey for going forward for the rest of this year?

For the rest of this year?

I think it is, yes.

We will attempt to move back to Scot Cicarelli with Harris, Nesbitt, Gerard.

Can you guys hear me this time? (multiple speakers).

I guess this is following up on Ted's question a little bit.

Has there actually been a change in the accounting for your revenue recognition?

I guess I am still not clear as to why you are lowering what the revenue expectation is.

Let's forget the re-statements for a second.

But on a real current run-rate when the bookings are up -- what looks like on a relatively short basis -- maybe I am missing the point.

I guess the way I would characterize it is that, we have not changed our revenue recognition policies as much as what we have done is corrected what we think were errors in the past.

And we have gone and applied GAAP under SAB-101 to the revenue recognition, and that is really what has guided us through the re-statement.

So those rules were always there, so basically we should have been looking at channel partners and making sure that they did have the economic, the substance to pay, and that they were not only able to pay us when they sold it through, and if they were, then they should have been on this bill and collected basis all along.

And, for example, with these services as well, it is the same story.

So I don't want to characterize this as we have gone back and changed accounting policies, because that is not what we have done.

What we have gone back and done is created errors -- what we have gone back and done is reversed errors in the application of what the accounting policies are.

So that has recast these numbers.

Let me phrase it another way.

Has something changed on the fundamental side where business has slowed down a little bit, or is it now that you guys are properly recognizing revenue how you should have done it before, and on that basis, this is what the new revenue expectation is?

It is the latter.

Very much the latter.

That makes a lot more sense.

The second question is, as you guys try to move forward in terms of moving to that 15 percent operating margin structure, obviously the various re-statement fees and stuff -- let's call that one-timish nature -- what is a reasonable timeline to expect that?

I think over the next two to three years.

Okay.

What is a reasonable range for next year at this line?

I know you guys are still putting together your models, but what kind of ramp should we be looking for?

We are going to come back to you in Q4 and absolutely layout for you clearly what the guidance will be for 2004.

Right now we are going through the planning process.

The point I made earlier I want to reemphasize.

I think there is a bit more gross margin leverage than we originally anticipated in our business model we provided, but I also think there is a little bit less optimism or more downside on the operating expenses side.

So we have a model now that may adjust itself coming into Q4.

We will provide it to you then.

To give you a prediction today of when we get to 15 percent operating margins would be inappropriate.

But over the next two to three years, it is this team's intention to reach that business model, and we're going to continue along the way to provide you with transparency as to what the guidance is and how we are going to get there.

Okay.

Fair.

And the last question is, you made comments that you are going to move to a sell-through revenue recognition for your channel partners starting in '04.

Now what kind of impact should we expect to see in '04 when that occurs?

Actually as part of this re-statement, we are already on a sell-through for the two-tier distribution here in North America.

That is really probably the biggest impact that would have hit us from going to sell-through on two-tier (inaudible) in '04.

And we are going to do is, for the rest of the world, go to sell-through on two-tier (inaudible) at the beginning of '04.

So long story short, I don't know exactly what the impact is going to be.

I don't think it is going to be huge, and when we do it, we will certainly make that transparent to you.

But I think the bulk of that change is behind us because we have already done that as part of the re-statement for two-tier (inaudible) here in North America.

Okay.

So it's not like we wind up seeing a massive drop in revenue because now we have changed our -- we have already assumed all of that into the re-stated numbers?

Most of it, with the exception of EMEA, is two-tier distribution.

Thanks, guys.

We will go next to Lawrence Sorith (ph) with Granite Capital.

A question on taxes.

It looks like you probably overpaid your taxes from '98 to 2001 as a result of improperly requiring revenue and improper earnings.

Do you get any of that back, any type of refund from the government, or do you collect any NOLs going forward that may have a positive impact on your cash outlays over the next few years?

We do have NOLs going forward, so there should be some positive benefit.

But I don't believe that there is any ability to go back and get refunds.

Okay.

Patrick Channing (ph), Eastbourne.

A couple of quick questions.

Can you give us the cash flow from operations for the first and second quarters, as well as CapEx and depreciation for those quarters?

Patrick, you're going to see all of that when we file the 10-K and the 10-Qs.

I don't have that detail right now.

Once again, you saw the statements, and they were in summary format.

Once we go and finalize the audit and make sure we have got everything right, then you are going to -- you are absolutely right.

Then you're going to see those statements in those filings.

Fair enough.

How about re-stated revenue for Q3 '02 and Q4 '02?

Do you have those handy?

Hold on just one second.

I have given you Q1 and Q2.

Bear with me one moment, and I will get you that.

So the Q3 '02 revenue number was 380 million.

That was 302 product, 78 services, and what else did you want?

Q4 '02 revenue re-stated.

Yes.

That was 372 with 291 product and 81 services.

Fair enough.

So I will try and ask the same question a different way.

I am trying to understand how if we are looking at revenue on an apples-to-apples basis -- meaning the slight change in guidance from the 15 percent year-over-year revenue growth to the 12 to 13 -- if we are looking at the same accounting, how can accounting be the reason for the change?

I don't think that was what was said.

The change from 15 to 20 percent down to 12 to 13 percent is not driven by accounting.

What is driven by accounting is a 10 percent year-over-year growth on a re-stated basis versus the 12 to 13 percent.

Okay.

I got that.

So on an apples-to-apples basis, what is the change from the 15 to the 12 to the 13?

I am sorry.

On an apples-to-apples basis?

Prior guidance was for 15 percent; now it is 12 to 13.

I am trying to understand what that change is a result of.

I am sorry.

What the change is a result of in terms of why we have taken our growth slightly down?

Yes.

So there are few key reasons for this.

One, I think from a supply chain perspective we are a bit more inefficient as a company than we need to be on a go-forward basis.

Secondarily, we did experience some softness in the business in both the Q2 and to a lesser extent in Q1 because Q1 is a traditionally challenging quarter.

We undertook a tremendous amount of internal change in the company, some of which, as Mark and Rich both pointed out with discovery along the way, had an impact, no doubt, on the Corporation to the extent and the employee base, our customers and our partners, which had a small impact on this as well.

And economically from a business investment prospective, things did not pickup to the extent that I think we expected them originally to, both in Q3 and Q4.

And lastly on the sales front, we could have in the first half of the year executed a little bit better against our plan rates.

The difference of 2 percentage points is approximately -- I want to put this into perspective -- is approximately $26 million.

Fair enough.

In terms of the implementation of sales on accounting, as well as -- I guess I will rephrase.

The bill and collected revenue recognition which is now in place for service and product is actually a net positive in '02, right?

That is right.

That is correct.

And that looks like it was about $30 to $35 million?

Hold on just one second.

If we just go back to that revenue slide, you are right.

That is all I have got for now.

I appreciate it.

The only other point I want to make with respect to your question was, if you've got a $30 million revenue miss on the $1.32 billion base -- we just did a little quick math here -- that is the 15 to 13 percent, and the only other point I really want to drive home is our focus on building backlog.

That is not an excuse for missing, but it is an important element in this discussion.

Forgive me if this is a repetition, but if you did not mention CS, I think our plan coming into this year showed more CS growth coming into 2003 over 2002 than what we achieved.

Bill did make reference to that in his earlier remarks.

I am not sure if he included in his answer to your most recent question.

That was definitely a part of it as well.

Patrick, did you have another question on the bill and collected for '02 or not?

Did I misunderstand? (multiple speakers)

We will go to Arindam Basu for a follow-up question.

I just need to clarify something, the response to one of Patrick's questions.

So, Bill, you gave four reasons why the revenue guidance is modified.

First of all, it is softness in the second quarter.

The second was weakness in the distribution channel.

The third was you had a tremendous number of internal changes.

And the fourth was a weaker third and fourth quarter business environment.

Is that right?

Yes.

So the fourth point, you are judging -- when you made the comment about fourth quarter of '03, you're talking about because of your concern about pre-quarter shippable backlog going into the quarter?

No.

What I was talking about there was the fact that we had expected business investment and general IT investment to pick up in the second half of the year somewhat.

Now we are beginning to see some of that pickup, quite honestly with respect to the bookings rate that we showed you today in Q3.

But I was talking to the fact that this is still a little bit of a "show me" economy.

We have CapEx at our customer base that was baked in at the beginning of the year.

Those plan rates have not changed in our customer environment.

Some CapEx and IT investment spend is beginning to show its way to the forefront based on the backend of improved earnings in the corporate sector and an improved microeconomic set of conditions that we are working in.

But I was speaking specifically to the business environment in Q2 and in Q3 in general. (multiple speakers).

Back to Rich's point, I think Rich had a very important point that he made which was with respect to the CS revenue.

We had much higher expectations for customer services revenue coming into this year than we have actually achieved.

Partly that is our own fault because in the move from Chicago to El Paso/Juarez, we did not execute as well as we should have, and that did cost us some revenue.

And then, Bill, on the European question that you had answered earlier, there were some competitors or people in adjacent sectors talking about some strength in Europe.

You said two things.

You had many changes at the top of the sales organizations, and that generally tends to freeze people a little bit.

Then number two, that you guys don't really generally get the benefit of currency fluctuations because you are operating in local currencies, right?

That is correct.

So do you believe that the operating environment within Europe where other people are seeing success, do you think what they are seeing is only currency-related?

Do you think there is some inherent improvement in the European environment in and of itself to the extent that you know?

I think it is largely (inaudible) and currency benefits that you are seeing coming out.

That being said, we are also encouraged with respect to the forward-looking forecast in Europe.

I do think the business environment is improving somewhat, but you really are also talking about a set of macroeconomic conditions throughout the major countries in Europe, for example, Germany, where they are very very challenged.

So Europe has a number of recessionary threats and, in fact, deflationary threats that they are dealing with.

We, of course, have political instability in parts of that world that emanate into the business environment.

But in general, to answer your question, I think some of it is (inaudible) related, some of it is improved business environment related, and also marketshare.

It is fair to say we probably lost a few points of marketshare in some of our key markets in Europe last quarter, and we intend to win that back going forward.

Okay.

And then last question adjacent to that is the new sales leaders in those markets -- so you have already gotten a sense of a plan from them?

They have been in place long enough to give you some sense of a forecast already?

You bet.

We've got wonderful sales leaders there.

We are really pleased.

Steve Pressley who now heads up Europe for us.

We have brought on just great leaders across the board in channel and also in finance.

We've made some sweeping changes organizationally in Europe.

By the way, as we have in all of the sales areas, Todd Abbott has done a spectacular job in restructuring the entire worldwide sales organizations and at the same time keeping the business going in the right direction.

We really proud of his efforts and his whole team.

So basically what you're saying is, I don't really have to model in some modest momentum build.

I can basically say that these guys are now on the ground and running?

No, I would not do that.

I would say that we have made progress quarter-on-quarter with respect to restructuring.

We've got more restructuring taking place this quarter at Q4 and a bit more in Q1.

We are basically re-leveling the organization in Q3, taking out a layer of the organization and re-investing those money in feet on the street salespeople, both in the channel and high touch.

In Q1, you're likely going to see us re-organize around a shared services model, regional structure, which is going to allow us to get much more productive in terms of the way we do business and much more OpEx efficient from the prospective that as an example, we won't have discrete finance organizations in each and every country.

That will be centralized, if you will, in a regional area.

We won't have many of the G&A functions that are shared services be replicated in terms of overlap and redundancies in each country.

We are going to have it in a shared services methodology regionalized, and will be much more quick to market and much more nimble and agile as a company because of it.

We may also inherently get some tax benefits from this in forward-looking years.

Okay.

Alright.

Well, thanks for repeating everything.

I appreciate your doing that for me.

We will take a follow-up from Dick Davis.

Just one question.

What are your direct sales as a percent of revenues in the prior area right now versus channel?

Dick, it is approximately 40 percent.

It is in that range.

It is between 40 and 45 percent.

You're going to see that number come down quarter-on-quarter if we are doing our job right.

If we're doing our job right and Partner Select is rolling out the way we expect it, you're going to see a much greater percentage of our business flow through the channel and less of our business flow through direct.

Now I don't want you to interpret that as we are moving to a channel-based model.

When we talk about high touch channel-centric, our a high touch salesforce does everything a direct salesperson would do with the exception at the end of the day of taking the order.

We actually expect a higher level of sales professionalism and sales preference building in the Tier One market through a high touch salesforce than we do a direct salesforce.

Thank you.

Our final question in the queue today is a follow-up from Chris Quilty.

Actually my question had been asked about three times since I entered the queue, but since I have the last question, I will leave you with a product question since nobody has asked anything on that end.

The MC 9000, as I understand the product offering, it looks like the main feature set that you are bringing to market here is really -- is it a modular design, is it a cost savings, or are there extra feature sets in there that I am missing as something new in the marketplace?

It is both, Chris.

It turns out that there is a set of richer features.

I think in Bill's remarks he listed some of them.

For example, a bigger, brighter display and so on.

But in addition, you are correct to focus on the modularity.

That is a key going forward.

In fact, it anticipates an architectural direction that we are taking across our mobile computing line that you will see even more strongly featured in products rolling out into next year.

It is a way to allow us to scale the business, gain cost efficiencies, gain development efficiencies, gain support engineering cost efficiencies, and it will have a strong contributing role ultimately to the operational excellence goal that you heard us talk about before.

But from a customer's prospective, we have had enough feedback now from the early field trials in which we have placed this unit to gain a strong level of confidence that the feature set that we targeted as we conceived the product about a year and a half ago or so, is really proving to be very attractive to customers.

So it is new features today and architecturally-derived leverage tomorrow.

For a product area that has become certainly the bulk of your revenues, is it correct in assessing that that marketplace has become much more competitive in the last two years?

What do you do to stay out in front of the competition?

I am not sure I would agree it has become much more competitive.

We faced strong competition from Telxon in earlier years.

We face competition from any number of players today.

We have to be on our best game to win.

That best game involves not only doing the kind of thing as I mentioned with the 9000, which is building feature advantage at the product level, but also building the end-to-end enterprise mobility advantage as a result of delivering features that uniquely link our mobile computing products, our wireless infrastructure products, and software connective tissue in a way that our competition can not match.

So we are really attacking on both of those fronts.

We have seen very strong traction of that strategy out in market, and we are confident it is the basis for maintaining a competitive advantage in mobile computing and, in fact, the other business units in the Company going forward.

Okay.

Thank you and thanks for not doing the full two and a half.

Thank you.

And did any of our speakers have any additional comments today?

No.

I just wanted to thank all of you, and, again, thank you for your patience throughout this process.

We genuinely appreciate it, and thank you for your continuing interest in the Company.

Take care.

We will talk to you in a few weeks.

That will conclude today's audio conference.

Again, we do thank everyone for their participation.