Falling handset market share sent Motorola’s revenues into their first decline in four years, leading to Q1 loss of $181 million, but the harried vendor managed to beat Wall Street expectations and its own projections, sending its shares up 2%.

Motorola this morning reported revenues of $9.43 billion, a 1.8% dip from 2006 Q1 sales of $9.61 billion. Profits fell from $656 million in the first three months of 2006 to its $181 million loss last quarter. But the news was positive to investors as Motorola’s own March restated sales estimates would be between $9.2 billion and $9.3 billion.

Its handset division suffered the most as price slashing begun last year and falling market share sent Moto’s revenues down 15% to $5.4 billion. The once-unstoppable mobile phone juggernaut estimated its 45.4 million shipments led to a global market share of 17.5% for the quarter, a drastic fall from its 23.3% market share in Q4 of 2006 and overall full-year market share of 22.7%. That loss in share will likely be reflected as gains in Nokia, Samsung, Sony Ericsson and LG Electronics’ global volumes as they report earnings this month.

At today’s earnings call, CEO Ed Zander said that Moto’s Q1 performance was unacceptable, but projected a bounce back for the ailing handset division in the latter half of the year and said that Motorola would be profitable for the full year. Though Moto projected sales would be flat for the current quarter, earnings would be positive after restructuring charges were eliminated from the mix.

Zander also sought to redirect some of the negative attention on the mobile devices unit toward its networks division, which reported a 20% increase in sales. Revenues topped $3 billion for networks in the first quarter, resulting in an operating profit of $307 million, a 68% increase over the same quarter in 2006 and an operating margins increase from 11.4% to 13.0%. Motorola’s formerly suffering Networks and Enterprise transformed itself practically overnight into a WiMAX powerhouse, landing deals for the new wide-area network technology with Sprint, Clearwire and numerous international carriers. Moto also reported double-digit sales growth in its public safety and enterprise mobility group. It also completed the acquisition of Symbol Technologies, which gives potentially huge exposure to vertical markets.

Motorola, however, seems to rise and fall by the success of its handset division. Motorola has been desperately searching for a follow-up to its RAZR product line, the most successful handset ever released, just as it used the StarTac line in the late '90s to recover its handset fortunes. But TowerGroup chief analyst Bob Egan said it was a mistake to focus too much on the handset division. Mobile phones are rapidly becoming a commoditized product, and even innovation can be easily replicated by the aggressive moves of the Asian vendors.

“Motorola’s future growth is not about handsets,” Egan said. “The next ‘Wow’ around Motorola should be in services and networks.”